NEUROMETRIX : 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.

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.

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