NeuroMetrix, Inc.
NeuroMetrix, Inc. (Form: 10-Q, Received: 08/03/2012 16:22:00)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012  

 

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____ to ____  

 

Commission File Number 001-33351

________________________

 

NEUROMETRIX, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 04-3308180
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
62 Fourth Avenue, Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)

 

(781) 890-9989

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  x     No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer  o Accelerated filer  ¨ Non-accelerated filer  o Smaller reporting company  x
   

(Do not check if a smaller

reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨     No     x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

12,825,030 shares of common stock, par value $0.0001 per share, were outstanding as of July 20, 2012.

 

 
 

 

NeuroMetrix, Inc.

Form 10-Q

Quarterly Period Ended June 30, 2012

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
       
Item 1.   Financial Statements:  
       
    Balance Sheets (unaudited) as of June 30, 2012 and December 31, 2011 2
       
    Statements of Operations (unaudited) for the quarters and six months ended June 30, 2012 and 2011 3
       
    Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011 4
       
    Notes to Unaudited Financial Statements 5
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 18
       
Item 4.   Controls and Procedures 18
       
PART II – OTHER INFORMATION  
       
Item 1.   Legal Proceedings 18
       
Item 1A.   Risk Factors 18
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 19
       
Item 3.   Defaults Upon Senior Securities 19
       
Item 4.   Mine Safety Disclosures 19
       
Item 5.   Other Information 19
       
Item 6.   Exhibits 19
       
Signatures 20

 

1
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

NeuroMetrix, Inc.

Balance Sheets

(Unaudited)

 

    June 30,
2012
    December 31,
2011
 
             
Assets                
Current assets:                
Cash and cash equivalents   $ 13,324,824     $ 10,290,446  
Accounts receivable, net     518,674       909,718  
Inventories     1,077,150       1,763,700  
Prepaid expenses and other current assets     355,148       493,421  
Current portion of deferred costs     21,875       38,021  
Total current assets     15,297,671       13,495,306  
                 
Restricted cash           229,500  
Fixed assets, net     375,856       483,530  
Deferred costs and other long-term assets     8,920       12,447  
Total assets   $ 15,682,447     $ 14,220,783  
                 
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable   $ 464,942     $ 629,215  
Accrued compensation     811,346       929,117  
Accrued expenses     941,413       1,222,155  
Current portion of deferred revenue     180,994       212,108  
Current portion of capital lease obligation     20,964       20,321  
Total current liabilities     2,419,659       3,012,916  
                 
Deferred revenue, net of current portion     145,290       101,417  
Capital lease obligation, net of current portion     7,283       17,929  
Total liabilities     2,572,232       3,132,262  
                 
Commitments and contingencies (Note 8)                
                 
Stockholders’ equity:                
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none outstanding            
Common stock, $0.0001 par value; 50,000,000 shares authorized; 12,825,030 and 3,904,320 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively     1,283       390  
Additional paid-in capital     147,218,785       139,673,521  
Accumulated deficit     (134,109,853 )     (128,585,390 )
Total stockholders’ equity     13,110,215       11,088,521  
Total liabilities and stockholders’ equity   $ 15,682,447     $ 14,220,783  

 

The accompanying notes are an integral part of these interim financial statements.

 

2
 

 

NeuroMetrix, Inc.

Statements of Operations

(Unaudited)

 

    Quarter Ended
June 30,
    Six Months Ended
June 30,
 
    2012     2011     2012     2011  
                         
Revenues   $ 2,205,831     $ 2,571,840     $ 4,287,373     $ 5,476,686  
                                 
Cost of revenues     983,350       1,110,073       2,118,294       2,365,648  
                                 
Gross margin     1,222,481       1,461,767       2,169,079       3,111,038  
                                 
Operating expenses:                                
Research and development     1,020,726       1,123,509       1,998,792       2,220,331  
Sales and marketing     1,595,642       1,479,519       3,129,743       3,354,129  
General and administrative     1,382,268       1,301,476       2,573,332       2,683,571  
                                 
Total operating expenses     3,998,636       3,904,504       7,701,867       8,258,031  
                                 
Loss from operations     (2,776,155 )     (2,442,737 )     (5,532,788 )     (5,146,993
                                 
Interest income     4,027       6,019       8,325       13,018  
                                 
Net loss   $ (2,772,128 )   $ (2,436,718 )   $ (5,524,463 )   $ (5,133,975
                                 
Per common share data, basic and diluted:                                
                                 
Net loss   $ (0.22 )   $ (0.63 )   $ (0.53 )   $ (1.33 )
                                 
Weighted average number of common shares outstanding, basic and diluted     12,566,922       3,851,978       10,441,948       3,851,271  

 

The accompanying notes are an integral part of these interim financial statements.

 

3
 

 

NeuroMetrix, Inc.

Statements of Cash Flows

(Unaudited)

 

    Six Months Ended
June 30,
 
    2012     2011  
Cash flows from operating activities:                
Net loss   $ (5,524,463 )   $ (5,133,975 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     136,566       209,018  
Intangible asset impairment           192,500  
Stock-based compensation     157,586       338,002  
Inventory charges     258,848       45,648  
Changes in operating assets and liabilities:                
Accounts receivable     391,044       535,632  
Inventories     427,702       627,433  
Prepaid expenses and other current assets     30,474     188,451  
Accounts payable     (164,273 )     (84,285 )
Accrued expenses and compensation     (373,513 )     (188,508 )
Deferred revenue, deferred costs, and other     32,432     (192,033 )
Net cash used in operating activities     (4,627,597 )     (3,462,117 )
                 
Cash flows from investing activities:                
Purchases of fixed assets     (28,892 )     (85,272 )
Release of restricted cash     229,500       178,500  
Net cash provided by investing activities     200,608       93,228  
                 
Cash flows from financing activities:                
Net proceeds from stock offering     7,459,847        
Proceeds from issuance of common stock under employee stock purchase plan     11,523       15,534  
Payments on capital lease     (10,003 )     (11,009 )
Net cash provided by financing activities     7,461,367       4,525  
                 
Net increase (decrease) in cash and cash equivalents     3,034,378       (3,364,364 )
Cash and cash equivalents, beginning of period     10,290,446       16,986,809  
Cash and cash equivalents, end of period   $ 13,324,824     $ 13,622,445  
                 
Supplemental disclosure of cash flow information:                
Common stock issued in exchange for warrants   $ 127,885     $  

 

The accompanying notes are an integral part of these interim financial statements.

 

4
 

 

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements

June 30, 2012

 

1.     Business and Basis of Presentation

 

Our Business-An Overview

 

NeuroMetrix, Inc., or the Company, a Delaware corporation, was founded in June 1996. The Company is a medical device company focused on the diagnosis and treatment of the neurological complications of diabetes. It believes that its substantial experience in developing medical devices to stimulate and measure peripheral nerve function uniquely position it to address unmet medical needs related to diabetic neuropathy. Neuropathy is a common and serious, often painful, complication of diabetes that may lead to foot ulcers and limb amputation. The Company has over a decade of experience in neuropathy detection starting with approval in 1998 by the United States Food and Drug Administration, or FDA, of the NC-stat System, a point-of-care device for the performance of general purpose nerve conduction studies. The Company currently markets products for the detection, diagnosis, and monitoring of diabetic neuropathies such as diabetic peripheral neuropathy and median neuropathy (carpal tunnel syndrome).

 

In September 2011, the Company launched its initial diabetes product, NC-stat DPNCheck, a rapid, low cost, modified version of its NC-stat device designed to assess systemic neuropathies, such as diabetic peripheral neuropathy, or DPN, at the point-of-care. Sales efforts were initially focused on the endocrinology and podiatry markets and have been expanded into managed care and retail healthcare. The Company’s product development pipeline includes a pain management device, SENSUS , to treat chronic pain. SENSUS is currently in the regulatory process following the Company’s filing of a form 510(k) premarket notification with the FDA.

 

The Company’s established neurodiagnostic business is currently based on the ADVANCE™ NCS/EMG System, or the ADVANCE System, which is a comprehensive platform for the performance of traditional nerve conduction studies and invasive electromyography procedures and which is primarily used in physician offices and clinics. The ADVANCE System is comprised of: (1) various types of electrodes and needles, (2) the ADVANCE device and related modules, and (3) a communication hub that enables the physician’s office to network their device to the Company’s servers for data archiving, report generation, and other network services. As of March 31, 2012, the Company completed the consolidation of customers to the ADVANCE System, which generates the majority of the Company’s revenues.

 

The Company held cash and cash equivalents of $13.3 million as of June 30, 2012. The Company believes that these resources and the cash to be generated from expected product sales will be sufficient to meet its projected operating requirements for at least the next twelve months. 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 and delays in the FDA approval process for products under development; (e) changes in the Company’s research and development spending plans; and (f) other items affecting the Company’s forecasted level of expenditures and use of cash resources. Accordingly, the Company will need to raise additional funds to support its operating and capital needs. The Company may attempt to obtain additional funding through 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 financing in a timely manner and 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.

 

Certain prior period amounts have been adjusted to reflect the Company's 1-for-6 reverse stock split of its common stock completed on September 1, 2011.

 

5
 

 

Unaudited Interim Financial Statements

 

The accompanying unaudited balance sheet as of June 30, 2012, unaudited statements of operations for the quarters and six months ended June 30, 2012 and 2011, and the unaudited statements of cash flows for the six months ended June 30, 2012 and 2011 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 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the financial statements include all normal and recurring adjustments considered necessary for a fair statement of the Company’s financial position and operating results. Operating results for the quarter and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or the SEC, on February 24, 2012 (File No. 001-33351). The accompanying balance sheet as of December 31, 2011 has been derived from audited financial statements prepared at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

Revenues

  

Revenues associated with the sale of medical devices and consumables are recognized upon shipment provided that the selling price is fixed or determinable, persuasive evidence of an arrangement exists, collection of receivables is reasonably assured, product returns are reasonably estimable, and no continuing obligations exist. The revenues from the sale of an ADVANCE communication hub together with access to NeuroMetrix information systems are considered one unit of accounting and are deferred and recognized on a straight-line basis over the estimated period of time that the Company provides the service associated with the information systems of three years. The resulting deferred revenue and deferred costs are presented as separate line items on the accompanying balance sheet. Revenues related to extended service agreements for the devices are recognized ratably over the term of the extended service agreement.

 

When multiple elements are contained in a single arrangement, the Company allocates revenue between the elements based on their relative selling prices . The Company determines selling price using vendor specific objective evidence, or VSOE, if it is available, third-party evidence, or TPE, if VSOE is not available, and best estimate of selling price, or BESP, if neither VSOE nor TPE are available. The Company generally expects that it will not be able to establish TPE due to the nature of the markets in which it competes, and, as such, it will typically determine selling price using VSOE or if not available, BESP. The objective of BESP is to determine the selling price of a deliverable on a standalone basis . The Company’s determination of BESP involves a weighting of several factors based on the specific facts and circumstances of an arrangement. Specifically, the Company considers the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts, its ongoing pricing strategy, the value of any enhancements that have been built into the deliverable, and the characteristics of the varying markets in which the deliverable is sold.

 

Revenue recognition involves judgments, including assessments of expected returns, collectibility, and expected customer relationship periods. The Company analyzes various factors, including a review of specific transactions, its historical 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, the Company’s actual return or bad debt experience could exceed its estimate.

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Certain product sales are made with a 30-day right of return. Since the Company can reasonably estimate future returns, it recognizes revenues associated with product sales that contain a right of return upon shipment and at the same time it records a sales return reserve, which reduces revenue and accounts receivable by the amount of estimated returns.

 

6
 

 

Use of Estimates

 

The preparation of financial statements in conformity with United States generally accepted accounting principles 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.

 

Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2011-04 , “Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” , or ASU 2011-04. The amendments in ASU 2011-04 result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards, or IFRS. Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The new guidance was adopted prospectively by the Company beginning January 1, 2012. Adoption has not had a material effect on the Company’s financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) —Presentation of Comprehensive Income” , or ASU No. 2011-05. ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present other comprehensive income in the statement of changes in equity. Under either choice, items that are reclassified from other comprehensive income to net income are required to be presented on the face of the financial statements where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB issued ASU No. 2011-12, “ Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” , which defers the requirement within ASU No. 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. During the deferral, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the issuance of ASU No. 2011-05. The new guidance was adopted retrospectively by the Company beginning January 1, 2012. Adoption has not had a material effect on the Company’s financial statements.

 

2.     Comprehensive Loss

 

For the quarters and six months ended June 30, 2012 and 2011, the Company had no components of other comprehensive income or loss other than net loss itself.

 

3.     Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic net income per share. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding instruments such as options, warrants, and restricted stock. Because the Company has reported a net loss for all periods presented, diluted loss per common share is the same as basic loss per common share, as the effect of utilizing the fully diluted share count would have reduced the net loss per common share. Therefore, in calculating net loss per share amounts, shares underlying the following potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share because their effect was anti-dilutive for each of the periods presented:

 

    Quarters Ended June 30,     Six Months Ended June 30,  
    2012     2011     2012     2011  
Options     327,944       562,966       332,307       571,496  
Warrants     4,691,725       1,430,480       4,204,164       1,430,480  
Unvested restricted stock     232,904       31,365       147,738       28,408  
Total     5,252,573       2,024,811       4,684,209       2,030,384  

 

7
 

 

4.     Common Stock

 

On February 13, 2012, the Company completed a public offering of 8,530,410 Units at a price of $1.00 per Unit. Each Unit consists of one share of the Company’s common stock and one warrant to purchase one half of a share of the Company’s common stock. The Company issued 8,530,410 shares of common stock and warrants to purchase 4,691,725 shares of common stock and received offering proceeds, net of discounts, commissions and expenses, of approximately $7.4 million. See Note 12, Public Offering of Common Stock and Warrants , for further details.

 

In March 2012, the Company issued 138,763 shares of its common stock, $0.0001 par value per share, in satisfaction of the Company’s obligation to redeem certain warrants issued by the Company pursuant to Securities Purchase Agreements dated as of September 8, 2009.

 

5.      Inventories

 

Inventories consist of the following:

 

  June 30,
2012
    December 31,
2011
 
Purchased components   $ 407,606     $ 423,007  
Finished goods     669,544       1,340,693  
  $ 1,077,150     $ 1,763,700  

 

6.      Intangible Assets

 

In January 2009, the Company acquired certain technological and intellectual property assets from Cyberkinetics Neurotechnology Systems, Inc., or Cyberkinetics, and Andara Life Science, Inc., a wholly-owned subsidiary of Cyberkinetics, for $350,000 in cash. The Company had been amortizing these intangible assets using the straight-line method over their economic lives, which was estimated to be five years. Research and development expenses included amortization of this technological and intellectual property of $17,500 for the quarter ended March 31, 2011. Following its decision to terminate development work related to this technology, the Company recorded within research and development expense in the second quarter of 2011 an impairment charge of $192,500 for the remaining unamortized balance of these assets.

 

7.      Accrued Expenses

 

Accrued expenses consist of the following:

 

  June 30,
 2012
    December 31,
 2011
 
Technology fees   $ 472,916     $ 450,416  
Professional services     314,411       298,283  
Customer overpayments     40,135       48,623  
Sales taxes     38,657       65,217  
Supplier obligations           236,592  
Other     75,294       123,024  
    $ 941,413     $ 1,222,155  

 

8.      Commitments and Contingencies

 

Operating Lease

 

The Company leases office and engineering laboratory space in Waltham, Massachusetts. In June 2012, the lease term was extended through March 31, 2014. Base rent for the period July 2012 through September 2012 will be $63,750 per month and for the period October 2012 through March 2014 will be $52,917 per month.

 

8
 

 

9.        Fair Value Measurements

 

The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board Accounting Standards Codification , or the Codification, defines fair value, establishes a framework for measuring fair value in applying generally accepted accounting principles, and expands disclosures about fair value measurements. This Codification topic identifies two kinds of inputs that are used to determine the fair value of assets and liabilities: observable and unobservable. Observable inputs are based on market data or independent sources while unobservable inputs are based on the Company’s own market assumptions. Once inputs have been characterized, this Codification topic requires companies to prioritize the inputs used to measure fair value into one of three broad levels. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values identified by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values identified by Level 3 inputs are unobservable data points and are used to measure fair value to the extent that observable inputs are not available. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use at pricing the asset or liability.

 

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis for the periods presented and indicates the fair value hierarchy of the valuation techniques it utilized to determine such fair value.

 

          Fair Value Measurements at June 30, 2012 Using  
    June 30,
2012
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Assets:                                
Cash equivalents   $ 1,382,530     $ 1,382,530     $     $  
Total   $ 1,382,530     $ 1,382,530     $     $  

 

          Fair Value Measurements at December 31, 2011 Using  
    December 31,
2011
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Assets:                                
Cash equivalents   $ 559,427     $ 559,427     $     $  
Total   $ 559,427     $ 559,427     $     $  

 

10.   Credit Facility

 

In order to supplement the Company’s access to capital, on March 5, 2010, it entered into a Loan and Security Agreement, or the Credit Facility, with a bank, which permits the Company to borrow up to $7.5 million on a revolving basis. The Credit Facility was most recently extended on April 19, 2012, and will expire on January 31, 2013. Amounts borrowed under the Credit Facility will bear interest equal to the prime rate plus 0.5%. Any borrowings under the Credit Facility will be secured by the Company’s cash, accounts receivable, inventory, and equipment. The Credit Facility includes traditional lending and reporting covenants including that certain financial covenants applicable to liquidity are to be maintained by the Company. As of December 31, 2011 and June 30, 2012, the Company was in compliance with these covenants and had not borrowed any funds under the Credit Facility. In June 2012, $225,000 of the Credit Facility limit was restricted to support a letter of credit issued in favor of the Company’s landlord in connection with the lease extension of the Company’s facilities in Waltham, Massachusetts. Consequently, the amount available for borrowing under the Credit Facility as of June 30, 2012 was $7,275,000.

 

9
 

 

11.    Business Restructuring

 

In January 2011, the Company announced it had restructured its neurodiagnostic activities to more efficiently focus its efforts on its installed base of active accounts, to shift distribution to independent sales representatives, and to reduce cash consumption. Twenty-five positions were eliminated, primarily in sales. Charges totaled $2.2 million related to severance costs and inventory. Approximately $2.0 million, consisting of $0.2 million in severance and $1.8 million in inventory charges, was recorded as of December 31, 2010 and the balance of approximately $0.2 million in severance was recorded in the first quarter of 2011.

 

The table below provides a rollforward of the liability balance for restructuring actions taken in December 2010 and in January 2011, substantially all of which was recorded as sales and marketing expense in the Company’s Statement of Operations. The balance as of June 30, 2011 was paid out in semi-monthly installments through October 31, 2011. There were no restructuring charges or payments in the six months ended June 30, 2012.

 

    Quarter Ended     Six Months Ended  
    June 30, 2011     June 30, 2011  
             
Balance – beginning   $ 145,833     $ 208,333  
Accrual for severance           184,656  
Severance payments made     (62,499 )     (309,655 )
Balance at June 30, 2011   $ 83,334     $ 83,334  

 

12.    Public Offering of Common Stock and Warrants

 

On February 13, 2012, the Company completed a public offering of 8,530,410 Units at a price of $1.00 per Unit (the “Offering”). Each Unit consists of one share of the Company’s common stock and one warrant to purchase one half of a share of the Company’s common stock. The Company issued 8,530,410 shares of common stock and warrants to purchase 4,265,205 shares of common stock and received offering proceeds, net of discounts, commissions and expenses, of approximately $7.4 million. Each warrant entitles the holder to purchase at any time during the period commencing 180 days after the date of the Offering until the date five years following the closing date of the Offering, one half of a share of the Company’s common stock. Two warrants would need to be exercised to acquire one share of the Company’s common stock at an exercise price of $1.15 (115% of the aggregate offering price for a unit). In addition, the placement agent for the Offering was issued warrants to purchase 426,520 shares of common stock (equal to 5.0% of the number of shares of common stock included in the Units sold in the Offering) at an exercise price of $1.25 per share (125% of the aggregate offering price for a Unit). The placement agent’s warrants will be exercisable at any time beginning one year after the date of issuance and will expire on the fifth anniversary of the effectiveness of the registration statement related to the Offering.

 

The fair value of the warrants was estimated at $2.4 million using a Black-Scholes model with the following assumptions: expected volatility of 73.5%, risk free interest rate of 0.85%, expected life of five years, and no dividends. The volatility assumption is based on weekly historical volatility during the time period that corresponds to the expected option term, a review of comparable medical device companies, and expected future stock price volatility. The relative fair value of the warrants was recorded as equity.

 

13. Subsequent Event

 

On August 2, 2012, the Company adopted the Management Retention and Incentive Plan (the “Plan”), under which a portion of the consideration payable upon a change of control transaction, as defined in the Plan, would be paid in cash to certain executive officers and key employees and recorded as compensation expense within the Statement of Operations during the period in which the change of control transaction occurs. The Plan is structured to work in conjunction with, and not replace, the Company’s other incentive programs and is designed to provide market-based incentives which will be reduced over time by any future equity grants to participants.

 

10
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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

 

We are a medical device company focused on the diagnosis and treatment of the neurological complications of diabetes. People with diabetes do not effectively regulate their blood glucose, or sugar, levels leading to chronically high levels of glucose in the blood, called hyperglycemia, and occasionally bouts of low glucose in the blood, called hypoglycemia. The primary reason that glucose levels are not effectively regulated in people with diabetes is that those with the disease do not produce insulin (Type I diabetes) or are resistant to the normal physiological action of insulin (Type II diabetes). Many Type II diabetics eventually require insulin because production of the hormone by their pancreas decreases with time. Type I diabetes usually affects children and teenagers whereas Type II diabetes has typically been a disease of adults over the age of 50. However, over the past decade, Type II diabetes is occurring in younger adults, which can probably be attributed to higher levels of obesity in this age group.

 

As a medical device company with both unique and substantial experience in devices to stimulate and measure peripheral nerve function, we believe we are in the unique position to address the nerve-related complications of diabetes through the development of novel proprietary medical devices. Therefore, we are focused on developing and marketing medical devices for the diagnosis and treatment of diabetic neuropathies. We believe that we are the only medical device company with a strategic focus on the diabetic neuropathy vertical market and our goal is to be the dominant player in this field.

 

Our initial product for diabetic neuropathy, NC-stat DPNCheck, was launched in September 2011. NC-stat DPNCheck is a fast, accurate, and quantitative nerve conduction test that is used to evaluate systemic neuropathies such as DPN. It is designed to be used by primary care physicians, endocrinologists, podiatrists and other clinicians at the point-of-care to objectively detect, stage, and monitor DPN. The device measures nerve conduction velocity and response amplitude of the sural nerve, a nerve in the lower leg and ankle. These parameters are widely recognized as sensitive and specific biomarkers of DPN. Our initial target market was United States endocrinologists and podiatrists, which we believe consists of approximately 15,000 physicians who are viewed as leaders in the detection and management of DPN. Commercial launch of this product took place in the fourth quarter of 2011. We have subsequently expanded our sales efforts into the larger markets of managed care and retail health care using a corporate-to-corporate sales approach. Through June 30, 2012, we have placed over 570 devices with customers, including endocrinologists and podiatrists, primary care physicians, and other health care professionals.

 

Our diabetes product development pipeline includes SENSUS , a device to treat chronic pain. We filed a 510(k) application for SENSUS with the FDA in April 2012 and we are planning a commercial launch of this product during the fourth quarter of 2012 pending FDA clearance.

 

We also support a medical device cleared by the FDA, which is used for the assessment of a broad array of neuropathies such as carpal tunnel syndrome, diabetes, and sciatica. Our ADVANCE™ NCS/EMG System, or the ADVANCE System, is a comprehensive platform for the performance of traditional nerve conduction studies and invasive electromyography procedures. It is comprised of: (1) various types of electrodes and needles, (2) our ADVANCE device and related modules, and (3) a communication hub that enables the physician’s office to network their device to our servers for data archiving, report generation, and other network services.

 

Our neurodiagnostic equipment is used in approximately 2,600 physicians’ offices, clinics, and hospitals. Nearly 1.7 million patient studies have been performed with our neurodiagnostic devices since 1999. We manage our neurodiagnostic business to optimize its future cash contribution while maintaining a high standard of customer support.

 

11
 

 

Results of Operations

 

Comparison of Quarters Ended June 30, 2012 and 2011

 

Revenues

 

The following table summarizes our revenues:

 

    Quarters Ended June 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Revenues   $ 2,205.8     $ 2,571.8     $ (366.0 )     (14.2 )%

 

Revenues include sales during the second quarter of 2012 from our initial diabetes product, NC-stat DPNCheck, which was commercially launched in the fourth quarter of 2011. During the second quarter of 2012 we shipped 317 NC-stat DPNCheck devices plus consumable biosensors and recorded revenue from these products of approximately $648,000. This is an increase of $511,000 from the first quarter of 2012. NC-stat DPNCheck sequential quarter sales growth reflected broadening of our target markets from the launch market of endocrinology and podiatry into the larger markets of managed care and retail healthcare. We were successful in securing several significant new accounts in these new market sectors in the second quarter of 2012. Revenues also include medical device and consumables sales from our legacy neurodiagnostic products, specifically the ADVANCE System, totaling $1.5 million in the second quarter of 2012 and $2.6 million in the second quarter of 2011. The $1.1 million decline in legacy neurodiagnostics revenue reflects our declining neurodiagnostics active customer base following our decision in the first quarter of 2011 to eliminate our direct sales force and to manage this business for cash flow. We expect the legacy neurodiagnostics business to continue to decline as we focus our resources on more attractive opportunities in the diabetes market.

 

Cost of Revenues and Gross Margin

 

The following table summarizes our cost of revenues and gross margin:

 

    Quarters Ended June 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Cost of revenues   $ 983.4     $ 1,110.1     $ (126.7 )     (11.4 )%
                                 
Gross margin   $ 1,222.5     $ 1,461.8     $ (239.3 )     (16.4 )

 

Our cost of revenues decreased $126,700 to $983,400, or 44.6% of revenues, for the quarter ended June 30, 2012, compared to $1.1 million, or 43.2% of revenues for the same period in 2011. Our gross margin percentage of 55.4% of revenues for the quarter ended June 30, 2012 was slightly below the gross margin for the same period of 2011 which was 56.8% of revenues.

 

Operating Expenses

 

The following table presents a breakdown of our operating expenses:

 

    Quarters Ended June 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Operating expenses:                                
Research and development   $ 1,020.7     $ 1,123.5     $ (102.8 )     (9.1 )%
Sales and marketing     1,595.6       1,479.5       116.1       7.8  
General and administrative     1,382.3       1,301.5       80.8       6.2  
Total operating expenses   $ 3,998.6     $ 3,904.5     $ 94.1       2.4  

 

Research and Development

 

Research and development expenses for the quarters ended June 30, 2012 and 2011 were $1.0 million and $1.1 million, respectively. The comparative results included decreases of $192,500 related to an impairment charge to write off the remaining value of certain intangible assets in the second quarter of 2011, $97,200 in clinical and development costs, and $63,000 in licenses and fees. These decreases were partially offset by a $206,800 increase in personnel costs, which included increased salary expense for increased head count and a $33,300 increase in consulting services and temporary labor.

 

12
 

 

Sales and Marketing

 

Sales and marketing expenses increased to $1.6 million for the quarter ended June 30, 2012 from $1.5 million for the quarter ended June 30, 2011. The comparative results included increases of $107,900 for consulting services and temporary labor, and $79,000 for travel costs. These increases were partially offset by decreases of $22,900 for stock-based compensation, $20,700 for trade shows, and $19,700 for personnel costs.

 

General and Administrative

 

General and administrative expenses increased to $1.4 million for the quarter ended June 30, 2012 from $1.3 million for the quarter ended June 30, 2011. This increase included $103,900 for legal fees and consulting services, $35,000 for property taxes, and $59,800 for other costs. These increases in general and administrative expenses were partially offset by decreases of $81,300 for stock-based compensation and $36,600 for personnel costs.

 

Interest Income

 

Interest income was $4,000 and $6,000 for the quarters ended June 30, 2012 and 2011, respectively. Interest income was earned from investments in cash equivalents.

 

Comparison of Six Months Ended June 30, 2012 and 2011

 

Revenues

 

The following table summarizes our revenues:

 

    Six Months Ended June 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Revenues   $ 4,287.4     $ 5,476.7     $ (1,189.3 )     (21.7 )%

 

During the first six months of 2012 we shipped 469 NC-stat DPNCheck devices plus consumable biosensors and recorded revenue from these products of $784,600. Revenues also include medical device and consumables sales from our legacy neurodiagnostic products, totaling $3.5 million in the six months ended June 30, 2012 and $5.5 million in the six months ended June 30, 2011. The $2.0 million decline in our legacy neurodiagnostics revenue reflects our declining neurodiagnostics active customer base following our decision in the first quarter of 2011 to eliminate our direct sales force and to manage this business for cash flow. We expect the legacy neurodiagnostics business to continue to decline while we focus our resources on more attractive opportunities in the diabetes market.

 

Cost of Revenues and Gross Margin

 

The following table summarizes our cost of revenues and gross margin:

 

    Six Months Ended June 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Cost of revenues   $ 2,118.3     $ 2,365.6     $ (247.3 )     (10.5 )%
                                 
Gross margin   $ 2,169.1     $ 3,111.0     $ (941.9 )     (30.3 )

 

13
 

 

Our cost of revenues decreased $247,300 to $2.1 million, or 49.4% of revenues, for the six months ended June 30, 2012, compared to $2.4 million, or 43.2% of revenues for the same period in 2011. Included in cost of revenues in the first six months of 2012 is a $258,800 non-cash charge for excess inventory primarily related to the consolidation of our neurodiagnostics installed customer base on a single technology platform, the ADVANCE System. Accounting for this consolidation also resulted in recognition of $36,900 in revenue, which had been previously deferred, providing a net decrease in gross margin in the first six months of 2012 of $221,900. Our gross margin percentage of 50.6% of revenues for the six months ended June 30, 2012 decreased from 56.8% of revenues for the same period in 2011. The $221,900 net charge against our margin reduced our gross margin percentage for the six months ended June 30, 2012 by 5.7%.

 

Operating Expenses

 

The following table presents a breakdown of our operating expenses:

 

    Six Months Ended June 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Operating expenses:                                
Research and development   $ 1,998.8     $ 2,220.3     $ (221.5 )     (10.0 )%
Sales and marketing     3,129.7       3,354.1       (224.4 )     (6.7 )
General and administrative     2,573.3       2,683.6       (110.3 )     (4.1 )
Total operating expenses   $ 7,701.8     $ 8,258.0     $ (556.2 )     (6.7 )

 

Research and Development

 

Research and development expenses for the six months ended June 30, 2012 and 2011 were $2.0 million and $2.2 million, respectively. The comparative results included decreases of $192,500 related to an impairment charge to write off the remaining value of certain intangible assets in the second quarter of 2011, $166,400 in clinical and development costs, $119,500 in licenses and fees, $45,200 in recruiting costs, $37,400 for depreciation and amortization, $32,800 for the cost of parts used in research and development, and $29,100 for stock-based compensation. These decreases were partially offset by a $332,300 increase in personnel costs, which included increased salary expense for increased headcount, and a $72,900 increase in professional fees.

 

Sales and Marketing

 

Sales and marketing expenses decreased to $3.1 million for the six months ended June 30, 2012 from $3.4 million for the six months ended June 30, 2011. The comparative results included decreases of $251,000 for personnel costs, which included $184,700 in severance costs related to the restructuring of the Company’s neurodiagnostic activities in the quarter ended March 31, 2011, $87,500 for consulting services and temporary labor, $48,600 for recruiting costs, and $25,900 for trade shows. These decreases were partially offset by increases of $158,300 for travel costs, largely for the NC-stat DPNCheck sales force, and $37,100 for advertising and promotion costs.

 

General and Administrative

 

General and administrative expenses decreased to $2.6 million for the six months ended June 30, 2012 from $2.7 million for the six months ended June 30, 2011. This decrease included $137,200 for stock-based compensation and $107,100 for personnel costs. These decreases were partially offset by a $128,300 increase in consulting services and temporary labor.

 

Interest Income

 

Interest income was $8,300 and $13,000 for the six months ended June 30, 2012 and 2011, respectively.

 

14
 

 

Liquidity and Capital Resources

 

Our principal source of liquidity is our cash and cash equivalents. As of June 30, 2012, cash and cash equivalents totaled $13.3 million. On February 13, 2012, we completed a public offering of equity securities. We issued 8,530,410 shares of common stock and warrants to purchase 4,265,205 shares of common stock and received offering proceeds, net of discounts, commissions and expenses, of approximately $7.4 million. In addition, the placement agent for the offering was issued warrants to purchase 426,520 shares of common stock. See Note 12, Public Offering of Common Stock and Warrants , of our Notes to Unaudited Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q for further information regarding this transaction. Our ability to generate revenue will largely depend on the success of our diabetes business initiative and our ability to manage our neurodiagnostic business to optimize cash flow. A lower than expected level of market interest in NC-stat DPNCheck, and/or an accelerating decline in our neurodiagnostics consumables sales, or unanticipated increases in our operating costs would have an adverse effect on our liquidity and cash generated from operations. The following table sets forth information relating to our liquidity:

 

    June 30,
 2012
    December 31,
 2011
    Change     % Change  
    ($ in thousands)        
                                 
Cash and cash equivalents   $ 13,324.8     $ 10,290.4     $ 3,034.4       29.5 %

 

In order to supplement our access to capital, on March 5, 2010, we entered into a Loan and Security Agreement, or the Credit Facility, with a bank, which permits us to borrow up to $7.5 million on a revolving basis. The Credit Facility was most recently extended on April 19, 2012, and will expire on January 31, 2013. Amounts borrowed under the Credit Facility will bear interest equal to the prime rate plus 0.5%. Any borrowings under the Credit Facility will be secured by our cash, accounts receivable, inventory, and equipment. The Credit Facility includes traditional lending and reporting covenants including the requirement to maintain certain financial covenants applicable to liquidity. As of December 31, 2011 and June 30, 2012, we were in compliance with these covenants and had not borrowed any funds under the Credit Facility. In June 2012, $225,000 of the Credit Facility limit was restricted to support a letter of credit issued in favor of the Company’s landlord in connection with the lease extension of the Company’s facilities in Waltham, Massachusetts. Consequently, the amount available for borrowing under the Credit Facility as of June 30, 2012 was $7,275,000.

 

During the first six months of 2012, our cash and cash equivalents increased by $3.0 million, primarily due to our public offering in February 2012, which yielded net proceeds of approximately $7.4 million, as described above. This increase in cash and cash equivalents was largely offset by net cash used in operating activities of $4.6 million.

 

In managing our working capital, two of the financial measurements we monitor are days sales outstanding (DSO), and inventory turnover rate, which are presented in the table below for the quarters ended June 30, 2012 and 2011, and the year ended December 31, 2011:

 

    Quarter Ended
June 30,
    Year Ended
 December 31,
 
    2012     2011     2011  
                   
Days sales outstanding (days)     28       38       40  
Inventory turnover rate (times per year)     3.4       2.4       2.3  

 

The decrease in DSO reflects increased up-front payments on sales of NC-stat DPNCheck. The increase in the inventory turnover rate reflects our inventory management practices and non-cash charges for excess inventory, primarily related to the consolidation of our neurodiagnostics installed customer base on a single technology platform, the ADVANCE System.

 

The following table sets forth information relating to the sources and uses of our cash:

 

    Six Months Ended
 June 30,
 
    2012     2011  
    (in thousands)  
                 
Net cash used in operating activities   $ (4,627.6 )   $ (3,462.1 )
Net cash provided by investing activities     200.6       93.2  
Net cash provided by financing activities     7,461.4       4.5  

 

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Our operating activities used $4.6 million in the six months ended June 30, 2012. The primary driver for the use of cash in our operating activities during the first six months of 2012 was our net loss of $5.5 million , which included a net non-cash charge against our gross margin of $221 ,900, primarily for excess inventory associated with the consolidation of our legacy neurodiagnostics customer accounts on a single technology platform, $157,600 for stock-based compensation, and $136,600 for depreciation and amortization. In addition, cash used in operating activities included a $373,500 decrease in accrued expenses and compensation, and a $164,300 decrease in accounts payable. These cash outflows were partially offset by a $427,700 decrease in inventories and a $391,000 decrease in accounts receivable.

 

During the first six months of 2012, our investing activities included a $229,500 increase in cash resulting from a release of restricted cash related to an amendment to our facility lease, partially offset by $28,900 used for the acquisition of fixed assets.

 

Our financing activities included $7.4 million provided from our public offering of equity securities in February 2012.

 

We held cash and cash equivalents of $13.3 million as of June 30, 2012. We believe that these resources and the cash to be generated from expected product sales will be sufficient to meet our projected operating requirements for at least the next twelve months. We continue to face significant challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to (a) decreases in sales from our legacy neurodiagnostics products and the uncertainty of future revenues from our new diabetes products; (b) changes we may make to the business that affect ongoing operating expenses; (c) changes we may make in our business strategy; (d) regulatory developments affecting our existing products and delays in the FDA approval process for products under development; (e) changes we may make in our research and development spending plans; and (f) other items affecting our forecasted level of expenditures and use of cash resources. Accordingly, we will need to raise additional funds to support our operating and capital needs. We may attempt to obtain additional funding through 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, we may not be able to secure such financing in a timely manner and on favorable terms, if at all. Furthermore, if we issue equity or debt securities to raise additional funds, 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.

 

Our common stock is quoted on the NASDAQ Capital Market under the symbol “NURO.” One of the requirements for continued listing on the NASDAQ Capital Market is maintenance of a minimum closing bid price of $1.00 per share. The closing bid price of our common stock on the NASDAQ Capital Market was $0.62 per share on June 29, 2012.

 

On March 22, 2012, we received a notice from the Listing Qualifications Department of the NASDAQ Stock Market indicating that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share required for continued inclusion on The NASDAQ Capital Market under NASDAQ Listing Rule 5550(a)(2). The notification letter states that pursuant to NASDAQ Listing Rule 5810(c)(3)(A) we will be afforded 180 calendar days, or until September 18, 2012, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of our common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of ten consecutive business days. If we do not regain compliance by September 18, 2012, NASDAQ will provide written notification to us that our common stock will be delisted. At that time, we may appeal NASDAQ’s delisting determination to a NASDAQ Listing Qualifications Panel. Alternatively, we may be eligible for an additional 180 day grace period if we satisfy all of the requirements, other than the minimum bid price requirement, for listing on The NASDAQ Capital Market set forth in NASDAQ Listing Rule 5505. The notification letter has no effect at this time on the listing of our common stock on The NASDAQ Capital Market.

 

We intend to actively monitor the bid price for our common stock between now and September 18, 2012 while demonstrating progress in our diabetes focused business plan, particularly our commercial diagnostic product, NC-stat® DPNCheck™, and our pain management device under development, SENSUS™. We believe, although we cannot assure you that this will improve investor confidence and increase the market valuation of our common stock.

 

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Off-Balance Sheet Arrangements, Contractual Obligation and Contingent Liabilities and Commitments

 

As of June 30, 2012, we did not have any off-balance sheet financing arrangements.

 

See Note 8, Commitments and Contingencies, of our Notes to Unaudited Financial Statements for information regarding commitments and contingencies.

 

Recent Accounting Pronouncements

 

Refer to Note 1, Business and Basis of Presentation, of our Notes to Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

 

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 ; our 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 in the diagnosis and treatment of diabetic neuropathy and our expectations surrounding NC-stat DPNCheck; our plans to develop and commercialize 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; the rate and degree of market acceptance of any future products; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q or any document incorporated by reference herein or therein. 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” below and in our Annual Report on Form 10-K and our other Quarterly Reports on Form 10-Q. 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. 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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents. We consider investments that, when purchased, have a remaining maturity of 90 days or less to be cash equivalents. The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs, and maximize yields. To minimize our exposure to an adverse shift in interest rates, we invest mainly in cash equivalents and short-term investments with a maturity of twelve months or less and maintain an average maturity of twelve months or less. We do not believe that a notional or hypothetical 10% change in interest rate percentages would have a material impact on the fair value of our investment portfolio or our interest income.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures . Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2012, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Controls . There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not currently a party to any material legal proceedings, but are subject to legal proceedings in the ordinary course of business. We do not expect any such items to have a significant impact on our financial position.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 and Part II, Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 , which could materially affect our business, financial condition, or results of operations. The risks described in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are not the only risks that we face. In addition, risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or results of operations. T here have been no material changes in or additions to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2011 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.

 

18
 

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

We reacquired 176 shares of our common stock, at an average price of $0.74 per share, during the quarter ended June 30, 2012, in connection with the vesting of certain restricted shares issued pursuant to our Third Amended and Restated 2004 Stock Option and Incentive Plan. We reacquired these shares as part of the settlement of tax withholding obligations by participants under our Third Amended and Restated 2004 Stock Option and Incentive Plan. The following table sets forth the reacquisitions that we made during the quarter ended June 30, 2012 :

 

Period   Total
Number
of Shares
Purchased
    Average
Price Paid
per Share
    Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
    Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
       
April 1, 2012 – April 30, 2012     26     $ 0.79       N/A       N/A          
May 1, 2012 – May 31, 2012     143     $ 0.73       N/A       N/A          
June 1, 2012 – June 30, 2012     7     $ 0.64       N/A       N/A          
Total     176     $ 0.74       N/A       N/A          

 

Item 3.    Defaults Upon Senior Securities

 

None.

 

Item 4.    Mine Safety Disclosures

 

Not applicable.

 

Item 5.    Other Information

 

On June 6, 2012, we entered into a second amendment, or the Amendment, to our lease agreement with Fourth Avenue LLC, dated October 18, 2000. The Amendment extends the term of the Company’s existing lease of its principal facility at 62 Fourth Avenue, Waltham, Massachusetts for an additional year until March 2014 and reduces the annual base rent to $635,004 per year from October 1, 2012 through March 31, 2014. The description of the Amendment contained herein does not purport to be complete and is qualified in its entirety by reference to the full text of the Amendment, a copy of which is set forth as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

 

On August 2, 2012, our board of directors approved the Management Retention and Incentive Plan (the “Plan”), under which a portion of the consideration payable upon a change of control transaction, as defined in the Plan, would be paid to our executive officers and certain other key employees. The Plan is designed to retain these individuals during the critical, early commercialization phase of the Company’s diabetes initiative while providing management with an incentive to rapidly build corporate value potentially leading to a change of control transaction. The Plan has been structured to work in conjunction with, and not replace, the Company’s other incentive programs such as its equity plans, severance arrangements, compensation and bonus plan, and other benefits. The Plan is designed to provide an appropriate, market-based incentive to our executive officers and key employees which will be reduced over time as a result of any future equity grants to participants. Effectively, the Plan has an embedded self-liquidation feature. The description of the Plan contained herein does not purport to be complete and is qualified in its entirety by reference to the full text of the Plan, a copy of which is set forth as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

 

In the event of a change of control transaction, subject to the participant’s continued employment or service with the Company, the participant shall receive cash consideration equal to a fixed percentage of the value of the change of control transaction to be received by the Company or our stockholders, net of expenses and liabilities assumed. Each participant’s payment shall be reduced by (i) any payments to be made to the participant in the change of control transaction as a result of securities issued pursuant to our equity plans, (ii) the value then held by the participant of securities previously issued to the participant under our equity plans; and (iii) the then current value of shares issued to the participant under our equity plans and previously sold by the participant, excluding any founders shares. In addition, the percentage interest of each participant under the Plan shall be further reduced, from and after the first equity offering by the Company after the date of the Plan that results in net proceeds sufficient to finance the Company for at least one year (an “Equity Offering”), by each stock issuance by the Company, including the issuance of stock upon the exercise of options or warrants that are both granted and exercised after the Equity Offering in order to reflect the dilutive effect of such issuances.

 

The following table presents the target percentage interests in the change of control consideration for our executive officers under the Plan as well as their approximate percentage interest, after adjustment for current ownership from our equity plans, that would be paid to them under a qualifying change of control transaction that occurred on June 30, 2012.

 

Name   Target
Percent Interest
  Less: Current Ownership from our Equity Plans (1)   Adjusted Interest (June 30, 2012)
Shai N. Gozani, M.D.,Ph.D   5.00%   0.61%   4.39%
Thomas T. Higgins   1.25%   0.24%   1.01%
K. Balachandran   1.25%   0.23%   1.02%
Michael Williams, Ph.D.   1.00%   0.23%   0.77%
Guy Daniello   0.85%   0.18%   0.67%

 

(1) Excludes options with exercise prices above $3.00 per share.

 

Item 6.    Exhibits

 

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report, which Exhibit Index is incorporated herein by this reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    NEUROMETRIX, INC.
   
   
Date: August 3, 2012 /s/ SHAI N. GOZANI, M.D., PH. D.  
    Shai N. Gozani, M.D., Ph. D.
    Chairman, President and Chief Executive Officer
   
   
Date: August 3, 2012 /s/ THOMAS T. HIGGINS  
    Thomas T. Higgins
    Senior Vice President, Chief Financial Officer and Treasurer

 

20
 

 

EXHIBIT INDEX

 

Exhibit No.   Description  
       
      10.1   Amendment Number Two to Lease, dated June 6, 2012, between Fourth Avenue LLC and NeuroMetrix, Inc.  
      10.2+    Management Retention and Incentive Plan, dated August 2, 2012.  
      31.1   Certification of Principal Executive Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.  
      31.2   Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.  
      32   Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350. Furnished herewith.  
      101   The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter and six months ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets at June 30, 2012 and December 31, 2011, (ii) Statements of Operations for the three and six months ended June 30, 2012 and 2011, (iii) Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and (iv) Notes to Financial Statements.**  

 

** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
     
  + Indicates management contract or any compensatory plan, contract or arrangement.

 

 

 

Exhibit 10.1

 

AMENDMENT NUMBER TWO

TO LEASE BETWEEN

FOURTH AVENUE LLC

AND

NEUROMETRIX, INC.

 

THIS AMENDMENT made this June 6, 2012 (this “Amendment”) between Fourth Avenue LLC, a Massachusetts limited liability company having offices at One Gateway Center, Newton, Massachusetts (“Landlord”) and NeuroMetrix, Inc., a Massachusetts corporation, with offices located in Waltham, Massachusetts (“Tenant”).

 

WITNESSETH THAT,

 

WHEREAS, by Lease dated October 18, 2000, (as may be amended from time to time, the “Lease”), Landlord demised and leased to Tenant approximately 30,000 rentable square feet in Landlord’s single-story office building commonly referred to as 62 Fourth Avenue in Waltham, Massachusetts (the “Building”).

 

WHEREAS, by an Amendment Number One to Lease dated February 1, 2008 (“Amendment Number One”), the Term was extended through March 31, 2013.

 

WHEREAS, the Landlord and Tenant desire to amend the Lease as follows.

 

NOW THEREFORE, in consideration of the mutual covenants contained herein, the Landlord and Tenant agree that the Lease shall be and hereby is amended in the following respects:

 

1. All capitalized terms not otherwise modified or defined herein shall have the same meanings as are ascribed to them in the Lease. All references in the Lease to the “Lease” or “this Lease” or “the Lease” or “herein” or “hereunder” or similar terms or to any section thereof shall mean the Lease, or such section thereof, as amended by Amendment Number One and this Amendment.

 

2. The definition of the defined term “Term Expiration Date:” in Article 1.0, “REFERENCE DATA” shall be amended to read as follows:

 

“March 31, 2014”

 

3. With respect to the period of time beginning October 1, 2012 and ending March 31, 2014, the Annual Base Rent shall be in accordance with the following table:

 

Period   Annual Base
Rent:
    Monthly
Installment:
 
October 1, 2012 through March 31, 2013   $ 635,004.00     $ 52,917.00  
April 1, 2013 through March 31, 2014   $ 635,004.00     $ 52,917.00  

 

4. The following sentence shall be added at the end of Section 6.2 of the Lease, “Security Deposit.”,

 

“Notwithstanding anything to the contrary contained in this Lease, any letter of credit provided by Tenant in place of a cash deposit shall expire no sooner than 60 days following the later to occur of the Term Expiration Date or the date Tenant has vacated the Premises in accordance with all applicable terms and conditions of the Lease.” Within 30 days of execution of this Amendment, Tenant shall provide and an amendment to the existing letter of credit or a replacement letter of credit providing for a final expiration date no sooner than as proved for in the immediately preceding sentence.

 

 
 

 

Page 2

 

5. Tenant and Landlord each represent and warrant to each other that, with respect to this Amendment, neither party has directly or indirectly dealt with any broker other than McPherson Corporation to which Landlord agrees to pay a fee of $36,000.00. Tenant and Landlord each agree to save harmless and indemnify the other against any claims for a commission or other fee by any other broker, person or firm with whom the indemnifying party has dealt in connection with this Amendment.

 

6. Except as herein amended, all terms, conditions, covenants, agreements and provisions of the Lease shall remain in full force and effect and are hereby ratified and confirmed.

 

7. This Amendment may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Landlord and Tenant each warrant to the other that the person or persons executing this Amendment on its behalf has or have authority to do so and that such execution has fully obligated and bound such party to all terms and provisions of this Amendment.

 

IN WITNESS WHEREOF the parties have hereunto set their hands and seals on the day and year first written above.

 

FOURTH AVENUE LLC   NEUROMETRIX, INC.
       
BY: COMMONWEALTH DEVELOPMENT LLC, MANAGER      
    By /s/ Thomas T. Higgins
    Name:   Thomas T. Higgins
By /s/ James A. Magliozzi   Title: CFO, duly authorized
James A. Magliozzi, Manager      
         

 

 

 

Exhibit 10.2

 

NEUROMETRIX, INC.

 

Management Retention and Incentive Plan

 

1.           Purpose of the Plan . The purpose of this Management Retention and Incentive Plan (the “ Plan ”) is to provide the executive officers and certain other key employees of NeuroMetrix, Inc., a Delaware corporation (the “ Company ”), listed on Schedule A hereto (the “ Participants ,” and each, a “ Participant ”) with consideration in the event of a Change of Control Transaction (as defined below) involving the Company and another entity (the “ Successor Company ”) based on the allocations listed on Schedule A hereto and as such allocations may be adjusted pursuant to Section 7 hereof (the “ Percentage Interest ”). These allocations relate to the Total Consideration (as defined below) to be received in the Change of Control Transaction by the Company and/or its stockholders. The Plan is designed to retain the Company’s executive officers and certain key employees while providing an incentive to continue to build corporate value. The Plan has been structured to work in conjunction with, and not replace, the Company’s other incentive programs such as its equity plans, severance arrangements, compensation and bonus plan, and other benefits. As described further herein, the consideration to be paid to each Participant will be reduced over time as a result of any issuances of future equity grants to Participants. The Plan shall be effective as of August 2, 2012.

 

2.           Definitions . For the purposes of this Plan, capitalized terms not defined in Section 1 above shall have the following meanings:

 

(a)           Additional Plan Consideration shall mean, for any Participant, the portions of the Contingent Consideration to be received by the Participant pursuant to the Plan as calculated pursuant to Section 6 of the Plan.

 

(b)           Board shall mean the Board of Directors of the Company.

 

(c)           Change of Control Transaction shall mean the first to occur of the following events:

 

(i)           Ownership Change through Company Stock Sale or Third Party Tender Offer : any “person” or “group” as such terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the “ Act ”), becomes a beneficial owner, as such term is used in Rule 13d-3 promulgated under the Act, of securities of the Company representing more than 50% of the combined voting power of the outstanding securities of the Company having the right to vote in the election of directors; or

 

(ii)           Merger Transaction: a merger or consolidation of the Company other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or the parent of such corporation) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or parent of such corporation, as the case may be, outstanding immediately after such merger or consolidation; or

 
 

 

 

(iii)           Sale of Assets: the sale or disposition by the Company of all or substantially all of the Company’s assets in a transaction requiring stockholder approval;

 

provided that a Change of Control Transaction shall be interpreted, in a manner, and limited to the extent necessary, so that it will not cause adverse tax consequences under Section 409A of the Code.

 

(d)           Code shall mean the Internal Revenue Code of 1986, as amended including any successor statute, regulation and guidance thereto.

 

(e)           Common Stock shall mean the common stock, $0.0001 par value per share, of the Company.

 

(f)           Common Stock Equivalents shall mean rights, options, or other instruments to subscribe for, purchase or otherwise acquire Common Stock pursuant to any equity plan of the Company.

 

(g)           Contingent Consideration shall mean the portion of the Total Consideration to be received after the date of the closing of the Change of Control Transaction, the receipt of which will be contingent upon the passage of time or the occurrence or non-occurrence of some event(s) or circumstance(s), including, without limitation, amounts of Total Consideration subject to an escrow, a purchase price adjustment, an earn-out, or indemnity claims.

 

(h)           Equity Financing shall mean the first offering by the Company of its equity securities occurring after the effective date of the Plan that results in net proceeds sufficient to finance the Company for at least one year from the date of closing of such offering.

 

(i)           Equity Plan Issuances shall mean with respect to a Participant any shares of Common Stock issued by the Company pursuant to any equity plan of the Company and any Common Stock Equivalents issued to a Participant, excluding Founder Shares.

 

(j)           Founder Shares shall mean any shares of Common Stock of the Company issued to a Participant prior to July 22, 2004.

 

(k)           Initial Consideration shall mean the amount of the Total Consideration that is not Contingent Consideration.

2
 

 

 

(l)           Initial Plan Consideration shall mean, for any Participant, the portion of the Initial Consideration to be received by the Participant pursuant to the Plan as calculated pursuant to Section 6 of the Plan.

 

(m)           Plan Consideration shall mean, for any Participant, the portion of the Total Consideration to be received by the Participant pursuant to the Plan as calculated pursuant to Section 6 of the Plan which shall be comprised of the Initial Plan Consideration and any Additional Plan Consideration.

 

(n)           Representative shall mean one or more members of the Board or persons designated by the Board prior to, or in connection with the Change of Control Transaction.

 

(o)           Total Consideration shall mean the total amount of cash and the fair market value of all other consideration paid or payable including Contingent Consideration by the Successor Company or any other person to the Company or its securityholders in connection with the Change of Control Transaction, including amounts paid or payable in respect of convertible securities, warrants, stock appreciation rights, option or similar rights, whether or not vested and any additional amounts paid by the Successor Company in connection with this Plan, less (i) transaction fees incurred in the course of the Change of Control Transaction (such as fees related to legal services, accounting services, financial advisory services, investment banking services or other professional services), (ii) any debt or other liabilities of the Company that are paid off, satisfied or otherwise assumed by the Successor Company, specifically including, but not limited to, any bank debt or line of credit and accounts payable (excluding any liabilities under this Plan), and (iii) any taxes payable by the Company (but not those payable by the stockholders) as a result of the Change of Control Transaction. The fair market value of any securities (whether debt or equity) or other property shall be determined as follows:

 

(i)          the value of securities that are freely tradable in an established public market will be determined by the method or methods set forth in the applicable contract or contracts concerning the Change of Control Transaction; and

 

(ii)          the value of securities that are not freely tradable or have no established public market, and the value of aggregate consideration that consists of other property, shall be the fair market value as determined in good faith by the Board.

 

3.           Interpretation and Administration of the Plan . Prior to the Change of Control Transaction, the administrator of the Plan will be the Compensation Committee of the Board. After the Change of Control Transaction, the administrator of the Plan will be the Representative. The administrator will be responsible for interpreting and administering all provisions hereof. All actions taken by the administrator in interpreting the terms of the Plan and administration of the Plan will be final, binding and conclusive on all Participants. The administrator shall not be personally liable by reason of any contract or other instrument related to the Plan executed by an individual or on its or their behalf in its or their capacity as the administrator, or for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each individual to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including legal fees) or liability arising out of any act or omission to act in connection with the Plan unless arising out of such person’s own fraud or bad faith.

3
 

 

 

4.           Eligibility to Earn Plan Consideration . Except as otherwise provided in Section 9 below, each Participant will have the right to receive Plan Consideration, subject to the Participant’s continued employment or service with the Company through the date of the closing of the Change of Control Transaction unless terminated by the Company other than for cause within 90 days prior to the announcement of the Change of Control Transaction. If a Participant’s service to the Company in all capacities (whether as an employee, consultant, advisor, director or any other service provider) terminates for any reason prior to the date of the closing of the Change of Control Transaction (other than by the Company not for cause within 90 days of the announcement of the Change of Control Transaction), whether initiated by the Company or the Participant, and with or without cause, then such Participant shall no longer be considered a “Participant” thereafter for purposes of the Plan, and such Participant will not be entitled to receive any Plan Consideration hereunder. The Company in its sole discretion will determine whether a Participant’s service relationship has terminated for this purpose.

 

5.           Type of Plan Consideration . Pursuant to this Plan, the Participants who are employed by the Company on the date of the closing of a Change of Control Transaction shall receive their Plan Consideration from the Successor Company in cash and at the times set forth in Section 8 of the Plan.

 

6.           Calculation of Plan Consideration . Each Participant’s Plan Consideration shall be calculated as follows:

 

The Initial Plan Consideration shall be calculated on the date of the closing of the Change of Control Transaction by multiplying the Participant’s Percentage Interest (as adjusted pursuant to Section 7 below) by the Initial Consideration and the resulting product shall then be reduced by (i) the amount of Initial Consideration paid or payable to the Participant in the Change of Control Transaction as a result of ownership of Equity Plan Issuances (without regard to any tax withholding requirements of the Company or the Successor Company); (ii) the value of any Common Stock Equivalents assumed by the Successor Company in the Change of Control Transaction; (iii) the value of any shares of Common Stock issued to a Participant by the Company pursuant to any Equity Plan Issuances that were sold by the Participant after the date of this Plan and prior to the Change of Control Transaction; and (iv) the value of any shares of Common Stock or Common Stock Equivalents issued to a Participant by the Company pursuant to any Equity Plan Issuances that are retained by the Participant after the Change of Control Transaction. The value of the amounts set forth in (ii), (iii) and (iv) above shall be calculated by determining the deemed price per share of the Common Stock in the Change of Control Transaction as determined by the Board in its sole discretion based on the method or methods set forth in the applicable contract or contracts concerning the Change of Control Transaction and after subtracting any exercise price or purchase price paid or to be paid by the Participant in connection with such issuances and, in the case of Common Stock Equivalents, shall be valued using a Black Scholes calculation of such Common Stock Equivalents immediately prior to the closing of the Change of Control Transaction using the same deemed price per share of Common Stock in such calculation.

4
 

 

 

For avoidance of doubt the Participant’s Plan Consideration shall not be reduced by any shares of Common Stock purchased on the open market or in a financing pursuant to which the Participant paid the same purchase price for such shares as third party investors.

 

The Additional Plan Consideration shall be calculated by multiplying the Contingent Consideration to be received by a fraction the numerator of which is each Participant’s Initial Plan Consideration and the denominator of which is the Initial Consideration.

 

7.           Adjustments to the Percentage Interest . From and after the closing of an Equity Financing, the Company shall upon each issuance of at least 25,000 shares of stock, in the aggregate, by the Company, including the issuance of stock upon the exercise of options or warrants granted and exercised after the closing of an Equity Financing but not from options or warrants granted prior to the closing of an Equity Financing, automatically adjusted downward the Participant’s Percentage Interest (and amend Schedule A in accordance therewith) in order to reflect the dilutive effect of such issuance.

 

8.           Payment of Plan Consideration. If the conditions for earning the Plan Consideration set forth herein are satisfied, each Participant will be entitled to earn and be paid his or her Plan Consideration as follows:

 

(a)          Each Participant will be paid by the Successor Company from the Initial Consideration the Participant’s Initial Plan Consideration in a lump sum by no later than the thirtieth (30 th ) day following the date of the closing of the Change of Control Transaction.

 

(b)          Each Participant will be paid by the Successor Company from the Contingent Consideration the Participant’s Additional Plan Consideration in lump sums, as, if and when the Contingent Consideration is paid or released to the Company or its stockholders. However, if a condition (as described in Treasury Regulation Section 1.409A-1(d)), when applied to any Contingent Consideration, would not constitute a “substantial risk of forfeiture” (as defined in Treasury Regulation Section 1.409A-1(d)), such that the Additional Plan Consideration related to such Condition would not be reasonably likely to be payable in compliance with either Treasury Regulation Section 1-409A-1(b)(4) or Treasury Regulation Section 1.409A-3(i)(5)(iv)(A), or the Board determines that any Additional Plan Consideration is not otherwise payable under the regular payment schedule of this Plan in compliance with or under an exemption from Section 409A of the Code, then the Participant instead will be paid the fair market value (as of the date of the closing of the Change of Control Transaction), as determined by the Board, of the Additional Plan Consideration related to such Condition (that is, the present value of the Additional Plan Consideration that may be earned upon satisfaction of the Condition), in a lump-sum on the thirtieth (30 th ) day following the date of the closing of the Change of Control Transaction.

5
 

 

 

(c)          It is intended that each installment of the payments provided under the Plan is a separate “payment” for purposes of Section 1.409A-2(b)(2)(i) of the Treasury Regulations. For the avoidance of doubt, it is intended that the Plan Consideration satisfy, to the greatest extent possible, the exemption from the application of Section 409A of the Code and the Treasury Regulations and other guidance issued thereunder and any state law of similar effect (collectively “ Section 409A ”) provided under Treasury Regulations Section 1.409A-1(b)(4) and, to the extent not so exempt, that the Plan Consideration comply, and the Plan be interpreted to the greatest extent possible as consistent, with Treasury Regulations Section 1.409A-3(i)(5)(iv)(A) – that is, as “transaction-based compensation.” Accordingly, any Plan Consideration will only be paid pursuant to this transaction-based exemption from Section 409A in the case of a Change of Control Transaction that is also a “change in ownership of a corporation” or “change in ownership of a substantial portion of a corporation’s assets” defined in Treasury Regulation Sections 1.409A-3(i)(5)(v) and (vii). Additionally, no Plan Consideration that is being paid in reliance on the transaction-based exemption from Section 409A will be earned or paid after the fifth (5th) anniversary of the date of the closing of the Change of Control Transaction and the Participants will not be entitled to any payments under the Plan with respect to any Contingent Consideration after such date.

 

9.           Release . As a further condition to earning any Plan Consideration, a Participant must execute and allow to become effective a general release of claims in substantially the form of Exhibit A hereto prior to the thirtieth (30 th ) day following the date of the closing of the Change of Control Transaction, and if the form of release is provided to the Participant sooner than the date of the closing of the Change of Control Transaction, within thirty (30) days of the date the Participant receives the form of release. If any Participant refuses to execute such release and allow it to become effective within such time period, then such Participant will not be eligible to earn Plan Consideration, and the Participant’s rights under this Plan to receive any consideration will be forfeited.

 

10.          Withholding of Compensation . The Successor Company will withhold from any payments under the Plan any amount required to satisfy the income and employment tax withholding obligations arising under applicable federal, state and local laws in respect of the Plan Consideration. Each Participant should contact his or her personal legal or tax advisors with respect to the benefits provided by the Plan. Neither the Company nor any of its employees, directors, officers or agents are authorized to provide any tax advice to Participants with respect to the benefits provided under the Plan.

6
 

 

 

11.          Adjustments for Excess Parachute Payments . In the event that (A) any consideration to be received by the Participant in connection with a Change of Control Transaction (whether pursuant to the terms of the Plan or any other plan, arrangement, or agreement with the Company, any person whose actions result in a Change of Control Transaction, or any person affiliated with the Company or such person) (collectively “ Parachute Payments ”) would not be deductible by the Successor Company, an affiliate or other person making such payment or providing such benefit (in whole or part) as a result of Section 280G of the Code; and (B) it is determined in good faith by the administrator that the net after-tax amount of the Parachute Payments retained by the Participant after deduction for any excise tax imposed by Section 4999 of the Code and any federal, state, and local income and employment taxes would not exceed the net after-tax amount of the Parachute Payments retained by the Participant after limiting the Parachute Payments to an amount that is 2.99 times the Participant’s “base amount” (as such term is defined by Section 280G of the Code), then the Parachute Payments shall be reduced until no portion of the Parachute Payments is not deductible.

 

For purposes of this provision,

 

(i)                no portion of the Parachute Payments the receipt or enjoyment of which the Participant shall have effectively waived in writing prior to the date of payment of the Parachute Payments shall be taken into account;

 

(ii)              no portion of the Parachute Payments shall be taken into account which in the opinion of the Company’s or the Successor Company’s independent auditors or tax counsel serving as such immediately prior to the Change of Control Transaction (or other tax counsel selected by the administrator) does not constitute a “parachute payment” within the meaning of Section 280G(b)(2) of the Code;

 

(iii)            the Parachute Payments shall be reduced only to the extent necessary so that the Parachute Payments (other than those referred to in the immediately preceding clause (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the auditor or tax counsel referred to in such clause (ii); and

 

(iv)            the value of any non-cash benefit or any deferred payment or benefit included in the Parachute Payments shall be determined by the Company’s or the Successor Company’s independent auditors or tax counsel based on Sections 280G and 4999 of the Code and the regulations for applying those Code Sections, or on substantial authority within the meaning of Section 6662 of the Code.

      

 

12.           Amendments . This Plan may be amended by the Compensation Committee or the Board, as applicable at any time to amend Schedule A of this Plan to add additional Participants and to make the adjustments to each such Participant’s Percentage Interest as set forth in Section 7 above. In addition, the Plan may also be amended at any time by the Compensation Committee or the Board, as applicable, provided that no amendment shall adversely affect the rights of a Participant hereunder without the written consent of such Participant. Notwithstanding anything herein to the contrary, the Board reserves the right to equitably adjust the Percentage Interest of a Participant if, in the context of an actual Change of Control Transaction, the definitions or calculations herein do not fairly represent the parties’ understanding regarding the amount, allocation or payment of the sale proceeds to Participants.

7
 

 

 

13.           Not a Condition of Employment; No Guarantee of Employment . The Plan is not a term or condition of any individual’s employment and no Participant shall have any legal right to payments hereunder except to the extent that all conditions required by a Participant have been satisfied in accordance with the terms set forth herein. The Plan is intended to provide a financial incentive to Participants and is not intended to confer upon Participants any rights to continued employment, consultancy or other service provider relationship other than those set out in any separate agreement between the Company and such individuals governing such relationship. Each such Participant’s service may be terminated by the Company, the Successor Company or the Participant at any time for any reason, subject to any agreements then in effect regarding such Participant’s service or the termination thereof.

 

14.           No Equity Interest; Status as Creditor . Neither the Plan nor the Percentage Interest hereunder creates or conveys any equity or ownership interest in the Company or any rights commonly associated with any such interest, including, but not limited to, the right to vote on any matters put before the Company’s stockholders. A Participant’s sole right under the Plan will be as a general unsecured creditor of the Company and the Successor Company.

 

15.           No Assignment or Transfer by Participant . None of the rights, benefits, obligations or duties under the Plan may be assigned or transferred by any Participant except by will or under the laws of descent and distribution. Any purported assignment or transfer by any such Participant will be void.

 

16.           Assumption by Successor Company . As a condition to the consummation of a Change of Control Transaction, in addition to any obligations imposed by law upon the Successor Company, the Company shall require the Successor Company to expressly assume the Plan and agree to perform obligations hereunder. All payments under this Plan shall be made by the Successor Company. Neither the Company nor any former or current director, officer, employee or consultant of the Company, nor any agent of any such person or of the Company, shall be personally liable in the event the Company is unable to make payments under this Plan.

 

17.           Severability . If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability will not affect any other provision of the Plan, and the Plan will be construed and enforced as if such provision had not been included.

8
 

 

 

18,           Governing Law . This Plan and the rights and obligations of a Participant under the Plan will be governed by and interpreted, construed and enforced in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The parties hereby submit to the jurisdiction of the state and federal courts of the Commonwealth of Massachusetts for the resolution of any claims, disputes or other proceedings arising under this Plan.

 

19.           Entire Agreement . The Plan sets forth all of the agreements and understandings between the Company and the Participants with respect to the subject matter hereof, and supersedes and terminates all prior agreements and understandings between the Company and the Participants with respect to the subject matter hereof.

 

 

 

9
 

 

 

 

SCHEDULE A

 

NAME PERCENTAGE INTEREST
   
Gozani 5.0%
Higgins 1.25%
Balachandran 1.25%
Williams 1.0%
Daniello 0.85%
[Non-executive officer] 0.80%
[Non-executive officer] 0.80%
[Non-executive officer] 0.50%
[Non-executive officer] 0.25%

 

 

 

10
 

 

 

Exhibit A

 

FORM OF GENERAL RELEASE

 

I understand that I am a Participant in the Management Retention and Incentive Plan (the “ Plan ”) of NeuroMetrix, Inc. (the “ Company ”). In consideration of receiving certain benefits under the Plan, I have agreed to sign this Release. I understand that I am not entitled to benefits under the Plan unless I sign this Release on or before ___________. 1/

 

In consideration for the benefits I am receiving under the Plan, I hereby release (i) the Company; (ii) the [name of Successor Company will be inserted at time of the Change of Control Transaction] (the “ Successor Company ”); and (iii) each of the foregoing person’s respective current and former officers, directors, agents, attorneys, employees, shareholders, parents, subsidiaries, and affiliates (collectively, the “ Releasees ”) from any and all claims, liabilities, demands, causes of action, attorneys’ fees, damages, or obligations of every kind and nature, whether or not arising from contract, intentional or negligent tort, fraud, fraud in the inducement, breach of fiduciary duty or duty of loyalty, local, state or federal ordinance, rule, regulation or statute, or any other matter and whether known or unknown, (collectively, “ Claims ”) arising at any time prior to and including the date I sign this Release (the “ Release Date ”). This general release includes, but is not limited to, any Claims related to or arising out of: (i) my employment with the Company; (ii) my rights as a shareholder of the Company, including my entitlement to receive any stock, option or any other equitable interest or right convertible into an equity interest in the Company; (iii) any contract, whether express or implied, written or oral; (iv) any tort, including tort of wrongful termination; and (v) the United States Constitution, any State Constitution, or any federal, state or other governmental statute, regulation or ordinance, including, without limitation, the National Labor Relations Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Older Workers’ Benefit Protection Act of 1990, the Americans with Disabilities Act of 1990, the Civil Rights Act of 1871, the Civil Rights Act of 1991, the Equal Pay Act of 1963, the Worker Adjustment and Retraining Notification Act of 1988, the Employee Retirement Income Security Act of 1974, and the Massachusetts Fair Employment Practices Act, the Massachusetts Wage and Hour Laws, [all other applicable state law statutes for employees employed in states other than Massachusetts], all as amended.

 

I understand and expressly agree that this Release extends to all claims prior to the Release Date of every nature and kind whatsoever, known or unknown, suspected or unsuspected, past or present.

 

I warrant that as of the Release Date, I have not commenced, initiated or made any Claim and that I will not at any time thereafter commence, initiate or make any Claim whatsoever, whether direct or indirect, express or derivative, against the Company, the Successor Company or any of the Releasees, in respect of any Released Matter. Notwithstanding the above, I understand that I am not releasing any of the following rights and may after the Release Date initiate an action to enforce the following rights: (1) any Claim that cannot be waived under applicable state or federal law, (2) any rights that I have to be indemnified (including any right to reimbursement of expenses), arising under applicable law, the Certificate of Incorporation or by-laws (or similar constituent documents of the Company) or any indemnification agreement between me and the Company, or any directors’ and officers’ liability insurance policy of the Company, for any liabilities arising from my actions within the course and scope of my employment with the Company or within the course and scope of my role as a member of the Board of Directors of the Company, (3) claims for any amounts due to me under the Plan, (4) claims for vested retirement benefits under any tax-qualified retirement plan of the Company, or (5) claims for any compensation or bonuses that have been earned and accrued for periods ending on or prior to the Release Date, but which have not yet been paid. I am not releasing and nothing in this Release will prevent me from filing, cooperating with, or participating in any proceeding before the Equal Employment Opportunity Commission, or the Department of Labor, except that I hereby acknowledge and agree that I will not recover any monetary benefits in connection with any such proceeding with regard to any Claim released in this Release. Nothing in this Release will prevent me from challenging the validity of my general release in a legal or administrative proceeding.

 

 

 

 

 


1/           Insert date that is 30 days from date of Participant’s receipt.

 

11
 

 

 

By signing and returning this Agreement, I acknowledge that:

 

(1) I have carefully read and fully understand the terms of the Plan and this Release;

 

(2) I have entered into this Release voluntarily and I knowingly release all Claims that I may have against the Company, the Successor Company and the Releasees; and

 

(3) The Company advised me that I have the right to and that I should consult with an attorney of my choosing prior to signing this Release.

 

I may review and consider this Release for a period of up to twenty-one (21) days from the date that I receive it. I agree and understand that my failure to execute and deliver this Release on or before twenty-one (21) days after the date I receive it will release the Company and the Successor Company from any obligation under the Plan to provide any benefits to me. To the extent I execute this Release within less than twenty-one (21) days after the date I receive it, I acknowledge that my decision was entirely voluntary and that I waive the balance of my time.

 

I will be entitled to revoke this Release at any time within seven (7) days, provided I timely execute and deliver to the Company a written revocation of this Release. Such revocation must be delivered in writing, by certified mail, by hand or courier service (signature of receipt required) within the time permitted to the Chief Executive Officer of the Company at his or her office. If I elect to exercise this right to revoke this Release, I understand that I will forfeit any and all rights to receive any benefits that might otherwise be due to me under the Plan following my revocation.

 

12
 

 

 

I acknowledge that the Company may be required to withhold taxes on amounts to be paid to me under the Plan.

 

I understand and accept that the final decision as to the amounts that I have earned under the Plan will be made by the Board of Directors of the Company in accordance with the Plan.

 

 

Dated:     By:    
      Name:    

 

 

 

 

13

 

EXHIBIT 31.1

 

CERTIFICATION

 

I, Shai N. Gozani, M.D., Ph.D., certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of NeuroMetrix, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

  

Date: August 3, 2012 /s/ SHAI N. GOZANI, M.D., PH.D.
  Shai N. Gozani, M.D., Ph.D.
  Chairman, President and Chief Executive Officer

 

 

EXHIBIT 31.2

 

CERTIFICATION

 

I, Thomas T. Higgins, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of NeuroMetrix, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

  

Date: August 3, 2012 /s/ THOMAS T. HIGGINS
  Thomas T. Higgins
  Senior Vice President, Chief Financial Officer and Treasurer

 

 

 

EXHIBIT 32

 

CERTIFICATION

 

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of NeuroMetrix, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

 

The Quarterly Report for the quarter ended June 30, 2012 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

  /s/ SHAI N. GOZANI, M.D., PH.D.
  Shai N. Gozani, M.D., Ph.D.
  Chairman, President and Chief Executive Officer
   
  /s/ THOMAS T. HIGGINS
  Thomas T. Higgins
  Senior Vice President, Chief Financial Officer and Treasurer

 

Date: August 3, 2012

 

This certification is being furnished and not filed, and shall not be incorporated into any document for any purpose, under the Securities Exchange Act of 1934 or the Securities Act of 1933.