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OFFON

NEUROMETRIX, INC.

(NURO)
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NEUROMETRIX : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/22/2021 | 10:40am EDT

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 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 in the United States and select overseas markets. They are cleared by the U.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 in the 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 generally 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. 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 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.


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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 the National 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 may 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 nearly 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 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 in the 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 Quarters Ended June 30, 2021 and 2020

Revenues

                 Quarters Ended June 30,
                   2021               2020         Change       % Change
                            (in thousands)

Revenues   $     2,213.5           $ 1,360.0      $ 853.5         62.8  %


Revenues include sales of our wearable technologies for chronic pain and our nerve conduction technologies to physician offices, clinics, hospitals, other healthcare providers and insurers, as well as domestic and international distributors. Revenues comprise sales of medical devices as well as aftermarket electrodes and other supplies. Revenues were approximately $2.2 million during the second quarter of 2021 compared with $1.4 million during the second quarter of 2020 which was adversely affected by the economic effects of the COVID-19 pandemic.



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Cost of Revenues and Gross Profit

                         Quarters Ended June 30,
                            2021                2020        Change       % Change
                                    (in thousands)
Cost of revenues   $        558.2             $ 495.1      $  63.1         12.7  %

Gross profit       $      1,655.3             $ 864.9      $ 790.4         91.4  %


Gross margin was 74.8% in the second quarter of 2021 versus 63.6% in the same period in the prior year. The margin improvement in 2021 was due to increased weighting of our nerve conduction testing technologies within total revenue.

Operating Expenses

                                   Quarters Ended June 30,
                                     2021               2020         Change       % Change
                                              (in thousands)
Operating expenses:
Research and development     $       641.5           $   660.3      $ (18.8)        (2.8) %
Sales and marketing                  269.5               379.1       (109.6)       (28.9) %
General and administrative         1,276.2               678.5        597.7         88.1  %
Total operating expenses     $     2,187.2           $ 1,717.9      $ 469.3         27.3  %



Research and Development

Research and development expense in the second quarter of 2021 decreased by 2.8% from the same period in the prior year due to a decrease of $35,000 in personnel costs and a decrease of $64,000 in consulting and professional services offset by an increase of $86,000 in clinical and development costs.

Sales and Marketing

Sales and marketing expense in the second quarter of 2021 decreased by 28.9% from the same period in the prior year due to a reduction of $61,000 in advertising spending and $40,000 in consulting costs.

General and Administrative

General and administrative expense in the second quarter of 2021 increased by 88.1% from the same period in the prior year due to an increase of $56,000 in consulting costs, an increase of $105,000 in outside professional service costs, $110,000 in sales tax and fee related costs and a $335,000 increase in non-cash personnel costs relating to executive officers who took significant compensation reductions in the prior year.

Other income

                                  Quarters Ended June 30,
                                      2021                 2020       Change      % Change
                                            (in thousands)


           Other income   $         0.4                   $ 1.1      $ (0.7)       (63.6) %


Other income primarily includes interest income.


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Comparison of Six Months Ended June 30, 2021 and 2020

Revenues

                 Six Months Ended June 30,
                    2021                 2020         Change       % Change
                             (in thousands)

Revenues   $      4,369.0             $ 3,532.0      $ 837.0         23.7  %


Revenues include sales of our wearable technologies for chronic pain and our nerve conduction technologies to physician offices, clinics, hospitals, other healthcare providers and insurers, as well as domestic and international distributors. Revenues comprise sales of medical devices as well as aftermarket electrodes and other supplies. Revenues in the six months ended June 30, 2021 were approximately $837,000 higher than the six months ended June 30, 2020, which was adversely affected by the economic effects of the COVID-19 pandemic.

Cost of Revenues and Gross Profit

                         Six Months Ended June 30,
                            2021                 2020         Change       % Change
                                     (in thousands)
Cost of revenues   $      1,134.5             $ 1,115.3      $  19.2          1.7  %

Gross profit       $      3,234.5             $ 2,416.7      $ 817.7         33.8  %



Gross margin was 74.0% in the six months ended June 30, 2021 versus 68.4% in the
same period in the prior year. The margin improvement in 2021 was due to
increased weighting of our nerve conduction testing technologies within total
revenue.

Operating Expenses

                                   Six Months Ended June 30,
                                      2021                 2020          Change       % Change
                                                (in thousands)
Operating expenses:
Research and development     $        874.8             $ 1,193.9      $ (319.1)       (26.7) %
Sales and marketing                   663.3                 803.5        (140.2)       (17.4) %
General and administrative          2,288.5               1,930.2         358.3         18.6  %
Total operating expenses     $      3,826.6             $ 3,927.6      $ (101.0)        (2.6) %



Research and Development

Research and development expense in the six months ended June 30, 2021 decreased by 26.7% from the same period in the prior year due to the reversal of a $450,000 technology fee accrual in the first quarter of 2021 offset by an increase of $50,000 in consulting and professional costs and $84,000 in clinical and development costs.

Sales and Marketing

Sales and marketing expense in the six months ended June 30, 2021 decreased by 17.4% from the same period in the prior year due to a $236,000 reduction in personnel spending offset by an increase in advertising spending of $116,000.


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General and Administrative

General and administrative expense in the six months ended June 30, 2021 increased by 18.6% from the same period in the prior year due to a reduction of $62,000 in consulting costs and a reduction of $50,000 in outside professional service costs. This was offset by a $372,000 increase in non-cash personnel costs relating to executive officers who took significant compensation reductions in the prior year and by $95,000 in sales tax and fee related costs.

Other income

                                 Six Months Ended June 30,
                                      2021                  2020       Change      % Change
                                            (in thousands)


          Other income   $         0.8                     $ 1.5      $ (0.8)       (51.6) %


Other income primarily includes interest income.

Liquidity and Capital Resources

Our principal source of liquidity is cash and cash equivalents of $8.4 million at June 30, 2021. In addition to our cash resources, funding for our operations largely depends on revenues from the sale of our commercial products. A low level of market interest in our products, a decline in our consumables sales, unanticipated increases in our operating costs, and the effects of the COVID-19 pandemic could have an adverse effect on our liquidity and cash.

                             June 30, 2021       December 31, 2020        Change        % Change
                                                (in thousands)

Cash and cash equivalents   $      8,364.2      $          5,226.2      $ 3,138.0         60.0  %


During the six months ended June 30, 2021, our cash and cash equivalents increased by $3,138.0 thousand reflecting $568.7 thousand in cash used in operating activities and $83.3 thousand in cash used in investing activities, offset by $3,785.0 thousand in cash provided by financing activities.

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

                                                                                 Year Ended
                                               Quarters Ended June 30,          December 31,
                                              2021                   2020           2020

Days sales outstanding (days)                  19                     26             15
Inventory turnover rate (times per year)       2.2                   1.7            1.9



Days sales outstanding (DSO) reflect customer payment terms which vary from payment on order to 60 days from invoice date. DSO decreased to 19 days during the quarter ended June 30, 2021 compared to 26 days in the prior year period. This was primarily attributable to the timing of sales within the respective quarters.

The inventory turnover rate increased to 2.2 turns in the second quarter of 2021 compared to 1.7 turns in the prior year period. The increase was due to higher sales in the second quarter of 2021 on approximately constant inventory levels.

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The following sets forth information relating to our sources and uses of our
cash:
                                                  Six Months Ended June 30,
                                                    2021                 2020
                                                       (in thousands)

Net cash used in operating activities       $      (568.7)           $ (1,831.8)
Net cash used in investing activities               (83.3)                (10.5)
Net cash provided by financing activities         3,790.0               4,151.0
Net cash provided                           $     3,138.0            $  2,308.7



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. This shelf registration statement gives 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.




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Cautionary Note Regarding Forward-Looking Statements

The statements contained in this Quarterly Report on Form 10-Q, including under the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, without limitation, statements regarding our or our management's expectations, hopes, beliefs, intentions or strategies regarding the future, such as our estimates regarding anticipated operating losses, future revenues and projected expenses, the effect of the COVID-19 pandemic on our operating capabilities, our future liquidity and our expectations regarding our needs for and ability to raise additional capital; our ability to manage our expenses effectively and raise the funds needed to continue our business; our belief that there are unmet needs for the management of chronic pain and in the diagnosis and treatment of diabetic neuropathy; our expectations surrounding 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 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 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.

© Edgar Online, source Glimpses

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