Business and Basis of Presentation

Our Business-An Overview

NeuroMetrix, Inc., or the Company, is a commercial stage, innovation driven healthcare company combining neurostimulation and digital medicine. The Company has two primary products. Quell is an over-the-counter wearable therapeutic device for chronic pain. DPNCheck® is a point-of-care test for diabetic neuropathy which is the most common long-term complication of Type 2 diabetes.

In the second quarter of 2019 the Company implemented a business restructuring to reduce operating costs and preserve cash while continuing to support its DPNCheck® product line, manage its existing Quell® business, maintain its strategic collaboration with GlaxoSmithKline, and attempt to negotiate a settlement of the Federal Trade Commission (FTC) investigation which is centered on Quell advertising. The second quarter restructuring encompassed a reduction in force, a consolidation of its operations in a single location, and a write-down of excess Quell inventory. The Company recorded a restructuring charge of $2,345,657 (See Note 7.). It is likely that the Company will incur future costs associated with settlement of the FTC matter; however, the amount of such costs cannot be reasonably estimated at this time (See Note 8.). The Company also announced the retention of an investment bank to explore strategic alternatives to enhance shareholder value, including the potential sale or merger of the Company.

The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has suffered recurring losses from operations and negative cash flows from operating activities. At September 30, 2019, the Company had an accumulated deficit of $193.7 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the one-year period from the date of issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company held cash and cash equivalents of $3.2 million as of September 30, 2019. The Company believes that these resources, future GSK collaboration milestone payments, and the cash to be generated from future product sales will be sufficient to meet its projected operating requirements through 2019. Accordingly, the Company will need to raise additional funds to support its operating and capital needs in 2020. The Company continues to face significant challenges and uncertainties and, as a result, the Company’s available capital resources may be consumed more rapidly than currently expected due to (a) decreases in sales of the Company’s products and the uncertainty of future revenues from new products; (b) changes the Company may make to the business that affect ongoing operating expenses; (c) changes the Company may make in its business strategy; (d) regulatory developments affecting the Company’s existing products; (e) changes the Company may make in its research and development spending plans; (f) delays in the anticipated timing of achievement of GSK milestones; (g) the final outcome of the FTC civil investigative demand enforcement action involving Quell; and (h) other items affecting the Company’s forecasted level of expenditures and use of cash resources. The Company may attempt to obtain additional funding through achievement of milestones under the GSK collaboration, public or private financing, collaborative arrangements with strategic partners, or through additional credit lines or other debt financing sources to increase the funds available to fund operations. However, the Company may not be able to secure such funding in a timely manner or on favorable terms, if at all. Furthermore, if the Company issues equity or debt securities to raise additional funds, its existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of the Company’s existing stockholders. If the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to its potential products or proprietary technologies, or grant licenses on terms that are not favorable to the Company. Without additional funds, the Company may be forced to delay, scale back or eliminate some of its sales and marketing efforts, research and development activities, or other operations and potentially delay product development in an effort to provide sufficient funds to continue its operations. If any of these events occurs, the Company’s ability to achieve its development and commercialization goals would be adversely affected.

Unaudited Interim Financial Statements

The accompanying unaudited balance sheet as of September 30, 2019, unaudited statements of operations for the quarters and nine months ended September 30, 2019 and 2018, unaudited statements of changes in stockholders' equity for the quarters and nine months ended September 30, 2019 and 2018 and the unaudited statements of cash flows for the nine months ended September 30, 2019 and 2018 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying balance sheet as of December 31, 2018 has been derived from audited financial statements prepared at that date and adjusted for the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the financial statements include all normal and recurring adjustments considered necessary for a fair presentation of the Company’s financial position and operating results. Operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or the SEC, on January 24, 2019 (File No. 001-33351), or the Company’s 2018 Form 10-K.

Revenues

Revenues include product sales, net of estimated returns. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product transferred. Revenue is recognized when contractual performance obligations have been satisfied and control of the product has been transferred to the customer. In most cases, the Company has a single product delivery performance obligation. Accrued product returns are estimated based on historical data and evaluation of current information.

Accounts receivable are recorded net of the allowance for doubtful accounts which represents the Company’s best estimate of credit losses. Allowance for doubtful accounts was $70,000 and $25,000 as of September 30, 2019 and December 31, 2018, respectively.

One customer accounted for 19% and 20% of total revenues in the quarter and nine months ended September 30, 2019, respectively. One customer accounted for 16% and two customers accounted for 28% of total revenues in the quarter and nine months ended September 30, 2018, respectively. Three customers accounted for 53% and two customers accounted for 45% of accounts receivable as of September 30, 2019 and December 31, 2018, respectively.

Collaboration income

Collaboration income is recognized within Other income when contractual performance obligations, outside the ordinary activities of the Company, have been satisfied and control has been transferred to a collaboration partner. Collaboration income for each performance obligation is based on the fair value of such performance obligation relative to the total fair value of all performance obligations multiplied by the overall transaction price. A deferred collaboration income liability is recorded when payments are received prior to satisfaction of performance obligations. A collaboration receivable is recorded when amounts are owed to the Company under the collaboration agreements and related support services. The Company recognized Collaboration income net of costs, within Other income in the Statement of Operations of $7,116,667 and $12,255,704, for the nine months ended September 30, 2019 and 2018, respectively.

Stock-based Compensation

Total compensation cost related to non-vested awards not yet recognized at September 30, 2019 was $25,629. The total compensation costs are expected to be recognized over a weighted-average period of 1.8 years.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during reporting periods. Actual results could differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 required that lessees recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The Company adopted ASU 2016-02, using the modified retrospective method, upon its effective date of January 1, 2019. The impact of adoption was an increase to long-term assets and total liabilities of approximately $1.9 million as of January 1, 2019.

The following table summarizes the effects of adopting ASU 2016-02 on the Company's balance sheet as of September 30, 2019:



	As reported		Adjustments			Amounts under prior GAAP
Assets
Prepaid expenses and other current assets	$	672,487	$	23,902		$	696,389
Total current assets	$	6,635,857	$	23,902		$	6,659,759
Right of use asset	$	1,541,975	$	(1,541,975	)	$	—
Other long-term assets	$	29,650	$	38,872		$	68,522
Total assets	$	8,506,777	$	(1,479,201	)	$	7,027,576

Liabilities
Accrued expenses	$	2,612,907	$	(460,693	)	$	2,152,214
Total current liabilities	$	3,914,759	$	(460,693	)	$	3,454,066
Lease obligation - net of current portion	$	1,018,508	$	(1,018,508	)	$	—
Total liabilities	$	4,933,267	$	(1,479,201	)	$	3,454,066

The following table summarizes the effects of adopting ASU 2016-02 on the Company's balance sheet as of December 31, 2018:



	As reported		Adjustments			Amounts under prior GAAP
Assets
Prepaid expenses and other current assets	$	860,915	$	44,852		$	905,767
Total current assets	$	11,586,165	$	44,852		$	11,631,017
Right of use asset	$	1,968,062	$	(1,968,062	)	$	—
Other long-term assets	$	30,314	$	44,578		$	74,892
Total assets	$	13,991,880	$	(1,878,632	)	$	12,113,248

Liabilities
Accrued expenses	$	2,236,633	$	(577,460	)	$	1,659,173
Total current liabilities	$	6,592,897	$	(577,460	)	$	6,015,437
Lease obligation - net of current portion	$	1,301,172	$	(1,301,172	)	$	—
Total liabilities	$	7,894,069	$	(1,878,632	)	$	6,015,437

Adoption of ASU 2016-02 had no impact on the Company's statements of operations, statements of changes in stockholders' equity and statements of cash flows.