NeuroMetrix, Inc.
NeuroMetrix, Inc. (Form: 10-Q, Received: 10/25/2012 16:23:08)

 

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 September 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  ¨

 

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 ¨

 

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 ¨ Accelerated filer ¨ Non-accelerated filer ¨  Smaller reporting company S
  (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 o 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 October 19, 2012.

 
 

 

NeuroMetrix, Inc.

Form 10-Q

Quarterly Period Ended September 30, 2012

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
       
Item 1.   Financial Statements:
     
    Balance Sheets (unaudited) as of September 30, 2012 and December 31, 201 1 2
       
    Statements of Operations (unaudited) for the quarters and nine months ended September 30, 2012 and 20 11 3
       
    Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 201 1 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 17
       
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 18
       
Item 3.   Defaults Upon Senior Securities 18
       
Item 4.   Mine Safety Disclosures 18
       
Item 5.   Other Information 18
       
Item 6.   Exhibits 18
       
Signatures 19

 

1
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

NeuroMetrix, Inc.

Balance Sheets

(Unaudited)

 

    September 30,
2012
    December 31,
2011
 
             
Assets                
Current assets:                
Cash and cash equivalents   $ 10,925,643     $ 10,290,446  
Accounts receivable, net     611,435       909,718  
Inventories     787,828       1,763,700  
Prepaid expenses and other current assets     532,492       493,421  
Current portion of deferred costs     13,791       38,021  
Total current assets     12,871,189       13,495,306  
                 
Restricted cash           229,500  
Fixed assets, net     312,191       483,530  
Deferred costs and other long-term assets     16,448       12,447  
Total assets   $ 13,199,828     $ 14,220,783  
                 
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable   $ 405,376     $ 629,215  
Accrued compensation     1,023,289       929,117  
Accrued expenses     931,223       1,222,155  
Current portion of deferred revenue     147,161       212,108  
Current portion of capital lease obligation     21,293       20,321  
Total current liabilities     2,528,342       3,012,916  
                 
Deferred revenue, net of current portion     83,006       101,417  
Capital lease obligation, net of current portion     1,835       17,929  
Total liabilities     2,613,183       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 September 30, 2012 and December 31, 2011, respectively     1,283       390  
Additional paid-in capital     147,305,469       139,673,521  
Accumulated deficit     (136,720,107 )     (128,585,390 )
Total stockholders’ equity     10,586,645       11,088,521  
Total liabilities and stockholders’ equity   $ 13,199,828     $ 14,220,783  

 

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

2
 

   

NeuroMetrix, Inc.

Statements of Operations

(Unaudited)

  

    Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
    2012     2011     2012     2011  
                         
Revenues   $ 1,764,764     $ 2,560,226     $ 6,052,137     $ 8,036,912  
                                 
Cost of revenues     793,990       1,156,119       2,912,284       3,521,767  
                                 
Gross margin     970,774       1,404,107       3,139,853       4,515,145  
                                 
Operating expenses:                                
Research and development     980,361       829,556       2,979,153       3,049,887  
Sales and marketing     1,457,079       1,810,653       4,586,822       5,164,782  
General and administrative     1,147,075       1,199,676       3,720,407       3,883,247  
                                 
Total operating expenses     3,584,515       3,839,885       11,286,382       12,097,916  
                                 
Loss from operations     (2,613,741 )     (2,435,778 )     (8,146,529 )     (7,582,771 )
                                 
Interest income     3,487       4,936       11,812       17,954  
                                 
Net loss   $ (2,610,254 )   $ (2,430,842 )   $ (8,134,717 )   $ (7,564,817 )
                                 
Per common share data, basic and diluted:                                
                                 
Net loss   $ (0.21 )   $ (0.63 )   $ (0.73 )   $ (1.96 )
                                 
Weighted average number of common shares outstanding, basic and diluted     12,591,602       3,859,682       11,163,732       3,854,106  

 

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

3
 

   

NeuroMetrix, Inc.

Statements of Cash Flows

(Unaudited)

 

    Nine Months Ended
September 30,
 
    2012     2011  
Cash flows from operating activities:                
Net loss   $ (8,134,717 )   $ (7,564,817 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     255,692       299,754  
Intangible asset impairment           192,500  
Stock-based compensation     244,269       471,043  
Inventory charges     234,848       77,881  
Changes in operating assets and liabilities:                
Accounts receivable     298,283       599,521  
Inventories     741,024       332,135  
Prepaid expenses and other current assets     (146,871 )     15,832  
Accounts payable     (223,839 )     201,758  
Accrued expenses and compensation     (171,760 )     302,864  
Deferred revenue, deferred costs, and other     (63,129 )     (264,281 )
Net cash used in operating activities     (6,966,200 )     (5,335,810 )
                 
Cash flows from investing activities:                
Purchases of fixed assets     (84,352 )     (116,043 )
Release of restricted cash     229,500       178,500  
Net cash provided by investing activities     145,148       62,457  
                 
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     (15,121 )     (14,208 )
Net cash provided by financing activities     7,456,249       1,326  
                 
Net increase (decrease) in cash and cash equivalents     635,197       (5,272,027 )
Cash and cash equivalents, beginning of period     10,290,446       16,986,809  
Cash and cash equivalents, end of period   $ 10,925,643     $ 11,714,782  
                 
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

September 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 late 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. A 510(k) premarket notification on the SENSUS device was cleared by the FDA in August 2012 and a form 510(k) premarket notification on the accompanying SENSUS biosensor was filed and is under review by 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 $10.9 million as of September 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.

5
 

 

Unaudited Interim Financial Statements

 

The accompanying unaudited balance sheet as of September 30, 2012, unaudited statements of operations for the three months and nine months ended September 30, 2012 and 2011, and the unaudited statements of cash flows for the nine months ended September 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 nine months ended September 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.

 

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.

6
 

 

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 nine months ended September 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 September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
Options     320,064       536,917       328,196       559,955  
Warrants     4,691,725       1,430,480       4,367,870       1,430,480  
Unvested restricted stock     233,747       30,169       176,614       28,443  
Total     5,245,536       1,997,566       4,872,680       2,018,878  

 

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 11, Public Offering of Common Stock and Warrants , for further details.

7
 

 

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:

 

    September 30,
2012
    December 31,
2011
 
             
Purchased components   $ 224,498     $ 423,007  
Finished goods     563,330       1,340,693  
    $ 787,828     $ 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:

 

    September 30,
 2012
    December 31,
 2011
 
             
Technology fees   $ 450,000     $ 450,416  
Professional services     268,656       298,283  
Sales taxes     74,301       65,217  
Customer overpayments     39,963       48,623  
Supplier obligations           236,592  
Other     98,303       123,024  
    $ 931,223     $ 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 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 September 30, 2012 Using  
    September 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   $ 1,072,911     $ 1,072,911     $   —     $  
Total   $ 1,072,911     $ 1,072,911     $     $  

 

          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 September 30, 2012, the Company was in compliance with these covenants and had not borrowed any funds under the Credit Facility. At September 30, 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 September 30, 2012 was $7,275,000.

9
 

 

11. 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.

 

12. Management Retention and Incentive Plan

 

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 late 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 September 30, 2012, we have placed nearly 780 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. Our 510(k) application for the SENSUS device was cleared by the FDA in August 2012 and our 510(k) application for the SENSUS biosensor is currently under review by the FDA. We are planning a limited commercial launch of this product late in 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 2,300 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 September 30, 2012 and 2011

 

Revenues

 

The following table summarizes our revenues:

 

    Quarters Ended September 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Revenues   $ 1,764.8     $ 2,560.2     $ (795.4 )     (31.1 )%

 

Revenues include sales during the third quarter of 2012 from our initial diabetes product, NC-stat DPNCheck, which was commercially launched late in 2011. During the third quarter of 2012 we shipped 206 NC-stat DPNCheck devices plus consumable biosensors and recorded revenue from these products of approximately $305,000. NC-stat DPNCheck sales declined as compared to the second quarter, which included large managed care and retail healthcare sales that were not repeated in the third quarter. However, we remain focused on expanding our sales in these areas. Revenues also include medical device and consumables sales from our legacy neurodiagnostic products, specifically the ADVANCE System, totaling approximately $1.5 million in the third quarter of 2012 and $2.6 million in the third quarter of 2011. The $1.1 million decline in legacy neurodiagnostics revenue reflects our declining neurodiagnostics active customer base following our decision in early 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 September 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Cost of revenues   $ 794.0     $ 1,156.1     $ (362.1 )     (31.3 )%
                                 
Gross margin   $ 970.8     $ 1,404.1     $ (433.3 )     (30.9 )

 

Our cost of revenues decreased $362,100 to $794,000, or 45.0% of revenues, for the quarter ended September 30, 2012, compared to $1.2 million, or 45.2% of revenues for the same period in 2011. Our gross margin percentage of 55.0% of revenues for the quarter ended September 30, 2012 increased slightly from the gross margin for the same period of 2011, which was 54.8% of revenues.

 

Operating Expenses

 

The following table presents a breakdown of our operating expenses:

 

    Quarters Ended September 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Operating expenses:                                
Research and development   $ 980.3     $ 829.5     $ 150.8       18.2 %
Sales and marketing     1,457.1       1,810.7       (353.6 )     (19.5 )
General and administrative     1,147.1       1,199.7       (52.6 )     (4.4 )
Total operating expenses   $ 3,584.5     $ 3,839.9     $ (255.4 )     (6.7 )

 

12
 

 

Research and Development

 

Research and development expenses for the quarters ended September 30, 2012 and 2011 were $980,300 and $829,500, respectively. The comparative results included increases of $104,900 in clinical and development costs related to our diabetes products, $90,400 in personnel costs, $24,200 in consulting and outside services, and $23,900 in legal costs relating to patents. These increases were partially offset by a $91,600 decrease in technology licenses and fees.

 

Sales and Marketing

 

Sales and marketing expenses decreased to $1.5 million for the quarter ended September 30, 2012 from $1.8 million for the quarter ended September 30, 2011. The comparative results included decreases of $247,800 for personnel costs, reflecting a shift in headcount in the third quarter of 2012 compared to the third quarter of 2011 and $92,000 in severance costs incurred in the third quarter of 2011 , $148,300 for advertising and promotions costs largely related to the launch of NC-stat DPNCheck in the third quarter of 2011, and $116,300 for recruiting costs largely related to the hiring in the third quarter of 2011 of the direct sales force for NC-stat DPNCheck. These decreases were partially offset by an increase of $113,100 for consulting and outside services .

 

General and Administrative

 

General and administrative expenses of $1.1 million for the quarter ended September 30, 2012 were down slightly compared with the quarter ended September 30, 2011. The comparative results included decreases of $43,700 for stock-based compensation costs, $39,100 for insurance and outside administration expense, and $39,100 for bad debt expense. These decreases in general and administrative expenses were largely offset by increases of $35,800 for consulting and outside services, $32,300 for travel costs, and $29,100 for professional fees.

 

Interest Income

 

Interest income was $3,500 and $4,900 for the quarters ended September 30, 2012 and 2011, respectively. Interest income was earned from investments in cash equivalents.

 

Comparison of Nine Months Ended September 30, 2012 and 2011

 

Revenues

 

The following table summarizes our revenues:

 

    Nine Months Ended September 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Revenues   $ 6,052.1     $ 8,036.9     $ (1,984.8 )     (24.7 )%

 

During the first nine months of 2012 we shipped 675 NC-stat DPNCheck devices plus consumable biosensors and recorded revenue from these products of $1.1 million. Revenues also include medical device and consumables sales from our legacy neurodiagnostic products, totaling $5.0 million in the nine months ended September 30, 2012 and $8.0 million in the nine months ended September 30, 2011. The $3.0 million reduction in our legacy neurodiagnostics revenue reflects our declining neurodiagnostics active customer base following our decision in early 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:

 

    Nine Months Ended September 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Cost of revenues   $ 2,912.3     $ 3,521.8     $ (609.5 )     (17.3 )%
                                 
Gross margin   $ 3,139.9     $ 4,515.1     $ (1,375.2 )     (30.5 )

 

13
 

 

Our cost of revenues decreased $609,500 to $2.9 million, or 48.1% of revenues, for the nine months ended September 30, 2012, compared to $3.5 million, or 43.8% of revenues for the same period in 2011. Included in cost of revenues in the first nine months of 2012 is a $234,800 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, resulting in an overall net decrease in gross margin in the first nine months of 2012 of $197,900. Our gross margin percentage of 51.9% of revenues for the nine months ended September 30, 2012 decreased from 56.2% of revenues for the same period in 2011. The $197,900 net charge against our margin reduced our gross margin percentage for the nine months ended September 30, 2012 by 3.6%.

 

Operating Expenses

 

The following table presents a breakdown of our operating expenses:

 

    Nine Months Ended September 30,        
    2012     2011     Change     % Change  
    (in thousands)        
Operating expenses:                                
Research and development   $ 2,979.2     $ 3,049.9     $ (70.7 )     (2.3 )%
Sales and marketing     4,586.8       5,164.8       (578.0 )     (11.2 )
General and administrative     3,720.4       3,883.2       (162.8 )     (4.2 )
Total operating expenses   $ 11,286.4     $ 12,097.9     $ (811.5 )     (6.7 )

 

Research and Development

 

Research and development expenses for the nine months ended September 30, 2012 and 2011 were both approximately $3.0 million. The comparative results included decreases of $211,200 in technology licenses and fees, $192,500 related to an impairment charge to write off the remaining value of certain intangible assets in the second quarter of 2011, $61,500 in clinical and development costs, $57,100 in recruiting costs, and $53,300 for depreciation and amortization. These decreases were partially offset by a $396,600 increase in personnel costs, reflecting increased headcount to support development of our diabetes products, and a $96,800 increase in professional fees.

 

Sales and Marketing

 

Sales and marketing expenses decreased to $4.6 million for the nine months ended September 30, 2012 from $5.2 million for the nine months ended September 30, 2011. The comparative results included decreases of $512,900 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, $164,900 for recruiting costs, and $111,200 for advertising and promotion costs . These decreases were partially offset by an increase of $158,300 for travel costs, largely for the NC-stat DPNCheck sales force.

 

General and Administrative

 

General and administrative expenses decreased to $3.8 million for the nine months ended September 30, 2012 from $3.9 million for the nine months ended September 30, 2011. This decrease included $180,900 for stock-based compensation, $116,200 for personnel costs and $62,100 for insurance and outside administration costs. These decreases were partially offset by increases of $164,100 for consulting services and temporary labor and $64,700 for travel costs.

 

Interest Income

 

Interest income was $11,800 and $18,000 for the nine months ended September 30, 2012 and 2011, respectively.

14
 

 

Liquidity and Capital Resources

 

Our principal source of liquidity is our cash and cash equivalents. As of September 30, 2012, cash and cash equivalents totaled $10.9 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 11, 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 more information on the public offering of equity securities. 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:

 

    September 30,
 2012
    December 31,
 2011
    Change     % Change  
    ($ in thousands)        
                                 
Cash and cash equivalents   $ 10,925.6     $ 10,290.4     $ 635.2       6.2 %

 

To supplement our access to capital we maintain 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 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 September 30, 2012, we were in compliance with these covenants and had not borrowed any funds under the Credit Facility. At September 30, 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 September 30, 2012 was $7,275,000.

 

During the first nine months of 2012, our cash and cash equivalents increased by $635,200, primarily due to our public offering in February 2012, which yielded net proceeds of approximately $7.4 million offset by the use of cash in our operating activities of $7.0 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 September 30, 2012 and 2011, and the year ended December 31, 2011:

 

    Quarter Ended
September 30,
    Year Ended
 December 31,
 
    2012     2011     2011  
                   
Days sales outstanding (days)     29       36       40  
Inventory turnover rate (times per year)     3.4       2.5       2.3  

 

The improvement in DSO reflects up-front payments on sales of NC-stat DPNCheck and ongoing collection efforts on older accounts. The improvement in the inventory turnover rate reflects ongoing attention to inventory management.

 

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

 

    Nine Months Ended
September 30,
 
    2012     2011  
    (in thousands)  
Net cash used in operating activities   $ (6,966.2 )   $ (5,335.8 )
Net cash provided by investing activities     145.1       62.5  
Net cash provided by financing activities     7,456.2       1.3  

 

15
 

 

Our operating activities used $7.0 million in the nine months ended September 30, 2012. The primary driver for the use of cash in our operating activities during the first nine months of 2012 was our net loss of $8.1 million. This net loss included non-cash charges of $255,700 for depreciation and amortization, $244,300 for stock-based compensation, and $ 234,800 for excess inventory. In addition, cash used in operating activities reflected working capital changes including a $741,000 decrease in inventories, a $298,300 decrease in accounts receivable, a $223,800 decrease in accounts payable, a $171,800 decrease in accrued expenses and compensation, and a $146,900 increase in prepaid expenses and other current assets .

 

During the first nine 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 $84,400 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 $10.9 million as of September 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 $0.58 per share on October 11, 2012.

 

On March 22, 2012, we received a notice from the Listing Qualifications Department of the NASDAQ Stock Market indicating that the bid price for our common stock had not met the minimum $1.00 per share requirement for continued inclusion on The NASDAQ Capital Market under NASDAQ Listing Rule 5550(a)(2). The notification letter from NASDAQ indicated that we had 180 calendar days, or until September 18, 2012, to regain compliance. On September 19, 2012, NASDAQ notified us that the grace period to regain compliance was further extended until March 18, 2013. During this grace period extension, our common stock will continue to be listed on The NASDAQ Capital Market. We cannot be sure that our share price will comply with the requirements for continued listing of our common stock on the NASDAQ Capital Market in the future or that we will comply with the other continued listing requirements. If our common stock lose their status on the NASDAQ Capital Market, our common stock would likely trade in the over-the-counter market.

 

We intend to actively monitor the bid price for our common stock between now and March 18, 2013 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 cannot assure you that this will improve investor confidence and increase the market valuation of our common stock. On October 10, 2012, our Board of Directors approved a proposal authorizing the reverse stock split of our common stock. This proposal, if approved by our stockholders, permits the Board of Directors in their discretion to effect a reverse stock split of our common stock at a ratio between 1:2 to 1:6, such number consisting of only whole shares, to be selected by the Board of Directors following stockholder approval. To accomplish this, on October 25, 2012, we filed a definitive proxy statement with the SEC to provide our stockholders with notice of a special meeting of our stockholders to be held on December 7, 2012 to approve the potential reverse stock split.

16
 

 

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

 

As of September 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 and our SENSUS product; 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.

 

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.

17
 

 

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 September 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 September 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 these 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 .

 

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

 

None.

 

Item 3.    Defaults Upon Senior Securities

 

None.

 

Item 4.    Mine Safety Disclosures

 

Not applicable.

 

Item 5.    Other Information

 

None.

 

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.

18
 

 

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: October 25, 2012 /s/ SHAI N. GOZANI, M.D., PH. D.  
    Shai N. Gozani, M.D., Ph. D.  
    Chairman, President and Chief Executive Officer  
     
Date: October 25, 2012 /s/ THOMAS T. HIGGINS  
    Thomas T. Higgins  
    Senior Vice President, Chief Financial Officer and Treasurer  

  

19
 

 

Exhibit No.   Description  
       
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 nine months ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets at September 30, 2012 and December 31, 2011, (ii) Statements of Operations for the three and nine months ended September 30, 2012 and 2011, (iii) Statements of Cash Flows for the nine months ended September 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.

 

 

 

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: October 25, 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: October 25, 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 September 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: October 25, 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.