ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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
As of June 30, 2013, the last business day of the registrants most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $4,743,950 based on the closing sale price of the common stock as reported on the NASDAQ Capital Market on June 30, 2013.
As of February 3, 2014, there were 5,945,581 shares of Common Stock outstanding.
The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information required by Item 11 in Part III of this Annual Report on Form 10-K is incorporated from the Registrants Proxy Statement for the Annual Meeting of Stockholders to be held on May 6, 2014, or the 2014 Annual Meeting of Stockholders.
Unresolved Staff Comments
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Managements Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Directors, Executive Officers and Corporate Governance
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedule
NEUROMETRIX, NC-STAT, ADVANCE, SENSUS, and NC-stat DPNCHECK are the subject of either a trademark registration or application for registration in the United States. Other brands, names and trademarks contained in this Annual Report on Form 10-K are the property of their respective owners.
The statements contained in this Annual Report on Form 10-K, including under the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual 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 managements 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 SENSUS and NC-stat DPNCheck; our plans to develop and commercialize our products; the success and timing of our studies; our ability to obtain and maintain regulatory approval of our existing products and any future products we may develop; regulatory and legislative developments in the United States and foreign countries; the performance of our third-party manufacturers; our ability to obtain and maintain intellectual property protection for our products; the successful development of our sales and marketing capabilities; the size and growth of the potential markets for our products and our ability to serve those markets; the rate and degree of market acceptance of any future products; our reliance on key scientific management or personnel; the payment and reimbursement methods used by private or governmental third-party payers; and other factors discussed elsewhere in this Annual Report on Form 10-K 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 annual 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. 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 Annual Report on Form 10-K refer to NeuroMetrix, Inc.
We are a medical device company focused on the 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.
Diabetes is a worldwide epidemic. Recent studies estimate the worldwide prevalence of diabetes to be over 350 million people, of which approximately 90% have the Type II variety. Within the United States, there are over 25 million people with diabetes and another 80 million people with pre-diabetes, which represents a constellation of conditions such as obesity and high triglyceride levels that are likely to progress to diabetes. In the United States, the annual cost of treating diabetes is over $100 billion. Although there are dangerous acute manifestations of diabetes, the primary burden of the disease is in the long term
complications of chronic hyperglycemia. These complications include, among other things, cardiovascular disease, nerve disease and resulting pathological conditions such as foot ulcers and amputation, eye disease leading to blindness, and kidney failure.
The most common long-term complication of diabetes, which affects over 50% of the diabetic population, is nerve disease or diabetic neuropathy. There are different forms of diabetic neuropathy; the most common are diabetic peripheral neuropathy, or DPN, carpal tunnel syndrome, or CTS, and autonomic neuropathy. DPN is a systemic nerve disease that is worse in the feet and lower legs. It may lead to loss of sensation in the feet, severe pain in the feet and legs, and increased risk of falling. DPN is the primary trigger for diabetic foot ulcers which may progress to the point where amputation is required. People with diabetes have a 15% to 25% lifetime risk of developing a foot ulcer and approximately 15% of foot ulcers lead to amputation. Foot ulcers are among the most expensive complications of diabetes, with a typical cost of $5,000 to $50,000 per episode. In addition, between 16% and 26% of people with diabetes suffer from pain of the feet and lower legs due to painful diabetic neuropathy, or PDN, which is a condition caused by DPN. In addition to causing pain that is often severe, PDN may interfere with sleep and is also associated with anxiety and depression. Loss of sleep is particularly concerning because sleep deprivation is associated with insulin resistance and worse glycemic control, and thereby exacerbates diabetes severity. CTS is caused by focal damage to the median nerve as it passes from the forearm into the hand, through the wrist. When the median nerve is compressed it can lead to symptoms in the hand including pain, numbness, and loss of strength. Autonomic neuropathy is a systemic disease of the autonomic nerves, which regulate the heart, digestion, sexual function, and other essential bodily functions. Damage to these nerves leads to a host of clinical complications that include an increased risk of sudden death, elevated risk of stroke, digestion difficulties and impotence.
Most people with diabetes receive health care attention in primary care settings where physicians have limited access to sophisticated diagnostic tools to detect diabetic neuropathy early and monitor its progress and response to treatment. As a result, these physicians rely primarily on clinical examination of patients which, although it is an important part of the evaluation of a patient with diabetes, has limited sensitivity and specificity and can usually only detect later stage disease where treatment options and efficacy are compromised.
Early detection of DPN is particularly important because there are no treatment options once the nerves have degenerated. At the present time, the most widely used and recommended diagnostic method for DPN is the 5.07/10-g monofilament test. This test assesses the patients ability to detect focal pressure application in the foot. The inability to detect a monofilament indicates that the patient lacks adequate sensation to protect their feet from mechanical insults that can lead to foot ulcers; a condition known as loss of protection sensation, or LOPS. Although the monofilament is an important clinical test, it is insensitive to early DPN where interventions may slow or even halt further nerve damage. Nerve conduction studies, or NCS, are objective electrical tests of nerve function. They are considered the gold standard diagnostic method for DPN and can detect mild nerve damage before it is expressed as clinical symptoms. NCS have typically been provided by specialists using expensive equipment and therefore access has been limited, particularly for common conditions such as DPN.
Currently, there are limited treatment options for diabetic neuropathies. There are no approved disease-modifying treatments for DPN, although a few pharmacological candidates are in clinical trials. One such drug is Ranirestat, an aldose reductase inhibitor being developed in the United States by Eisai Co., Ltd., which has recently completed a large scale Phase III clinical trial. If trial results are successful, Eisai could submit to the FDA a new drug application as early as 2014. If Ranirestat becomes commercially available, it may expand the demand for early detection and monitoring of DPN. In the absence of targeted therapies, several large studies have shown that reducing hyperglycemia lowers the risk of developing DPN and decreases its severity. There is also observational data that suggests that a reduction in triglyceride levels slows the progression of DPN. Several drugs, such as duloxetine and pregabalin, have been approved to provide pain relief in patients with PDN. Unfortunately, these drugs, which are also anti-depressants or anti-seizure medications, have systemic effects and are therefore often associated with side effects. In the case of PDN and/or DPN, it is essential to intervene before extensive nerve degeneration has occurred.
We believe that there are large and important unmet needs in the treatment of diabetic neuropathies. As a medical device company with both unique and substantial experience in devices to measure and alter peripheral nerve function, we believe we are in the unique position to address these unmet needs 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 market and our goal is to be the dominant player in this field.
Our key business strategies for 2014 by which we intend to advance our objectives in the diabetic neuropathy market include:
Driving Commercial Adoption of Our Proprietary Products for Diabetic Neuropathy in the United States. Our two primary products that target the diabetic neuropathy market are the following:
|||SENSUS , our therapeutic device for relief of chronic, intractable pain, was launched in January 2013. SENSUS revenues for the fiscal year ended December 31, 2013 were approximately $200,000. SENSUS is a convenient and wearable non-invasive device that offers physicians and their patients a non-narcotic pain relief option as a complement to medications. The device is lightweight and can be worn during the day while remaining active, or at night while sleeping. We believe SENSUS is the only transcutaneous electrical nerve stimulator designed specifically for people with diabetes that suffer from chronic pain. We believe this product is attractive to pain medicine physicians, neurologists, endocrinologists, podiatrists, primary care physicians, and other physicians that are challenged with trying to manage pain in their patients with PDN and other forms of neuropathic pain. We believe that PDN impacts 3 to 5 million people in the United States alone. We estimate the wholesale market for SENSUS is characterized by the 50% of patients with either severe pain or sleep interference due to PDN. This represents an annual revenue potential in excess of $300 million. We also believe that there are international market opportunities, particularly in Europe and Japan. In the United States, SENSUS is a prescription product and our initial challenge has been and will continue to be to obtain broad, national exposure and acceptance among physicians as well as a broad distribution channel to fulfill prescriptions. We are working to create demand in several distinct channels: independent regional and national durable medical equipment, or DME, suppliers that employ sales representatives who detail physicians, large direct sale customers such as orthotic and prosthetic clinics and chronic pain treatment centers, and national diabetes mail order DMEs. We believe there may be future opportunities to expand our SENSUS revenue and gross margin potential by developing an over-the-counter version of SENSUS and a direct sales channel.|
|||NC-stat DPNCheck , our diagnostic test for DPN was launched in late 2011. NC-stat DPNCheck revenues for the fiscal years ended December 31, 2013 and 2012 were approximately $1.3 million and $1.4 million, respectively. We have tested product acceptance for NC-stat DPNCheck in several domestic market segments and focused on the managed care market as the most attractive revenue opportunity. Within managed care, we target Medicare Advantage providers and those companies that provide diagnostic testing services. Medicare Advantage providers assume financial responsibility and the associated risks for the health care costs of their patients. For Medicare Advantage providers, we believe that NC-stat DPNCheck presents an attractive clinical case that provides early detection of diabetic neuropathy, allowing for earlier clinical intervention to help mitigate the effects of diabetic neuropathy on both patient quality of life and cost of care. Also, the diagnosis and documentation of diabetic neuropathy provided by NC-stat DPNCheck helps clarify the patient health profile which, in turn, may have a direct, positive effect on the Medicare Advantage premium received by the provider. We also believe that attractive international market opportunities for this product are developing in Japan, China, the Middle East and Mexico. These are being addressed by local distributors with support from our corporate office. We are currently|
|involved in seven studies that use NC-stat DPNCheck in the evaluation of neuropathy in persons with diabetes under various study conditions. We anticipate that these studies will expand the clinical foundation for use of NC-stat DPNCheck which, in turn, should support future adoption by customers.|
Continuing the Productivity of Our Research and Development Pipeline. During the past three years we have established a new presence in DPN and PDN through the launch of NC-stat DPNCheck in late 2011 followed by the SENSUS launch in early 2013. We believe that the potential market penetration by SENSUS has been enhanced with the recent addition of unique functionality related to use of the device during nighttime sleep, as half of people with PDN report that the condition interferes with their sleep. Sleep impairment is associated with insulin resistance, worsening of glycemic control, and exacerbation of the severity of diabetes. We are developing a second generation version of SENSUS that will have a lower profile and features to enhance patient use. We believe there is a market opportunity for a non-prescription, over-the-counter version of SENSUS and we have a development program underway.
Commercializing NC-stat DPNCheck in Select International Markets Using a Distribution Network. We are targeting select international markets where we believe that the combination of a high prevalence of diabetes plus support from the local payer system will support sales of NC-stat DPNCheck and, eventually, SENSUS. This includes countries in Asia, the Middle East, Mexico, and potentially Western Europe where we have both CE marking for NC-stat DPNCheck and established distribution. We have entered into distribution partnerships with Omron Healthcare Company, Ltd. for Japan and China and with master distributors for the Middle East and Mexico. Our resources committed to this effort are modest; however, we believe that this approach could contribute meaningful revenue in 2014 and subsequent years.
Leveraging an Efficient Operating Structure with Future Revenue Growth . Our operating structure has been developed to focus on the high-value opportunities for SENSUS and NC-stat DPNCheck that can be pursued via independent distributors with support from our corporate office. This provides the benefit of low operating expenses combined with the flexibility to generate increased sales volume without the cost of adding sales representatives and field clinical support. Our operating expenses during 2013 totaled $10.4 million. We believe we can maintain and leverage this operating structure over the next several years as we aim to grow our diabetes business.
Managing Our Legacy Neurodiagnostics Business to Optimize Cash Flow. Our historical neurodiagnostics business is managed for its cash contribution and not growth. It operates in a challenging reimbursement environment where there are few practical alternatives. The business has limited direct cash operating expenses and generated $3.8 million and $6.1 million in revenue during the years ended December 31, 2013 and 2012, respectively, with gross margins exceeding 50% in both periods. We see the legacy business continuing to decline in the future. See Legacy Neurodiagnostics Business.
We develop and market neurodiagnostic systems which typically consist of a medical device plus single patient-use biosensors or electrodes. Other accessories are also offered to our customers. Our goal for these systems is to build an installed base of active customer accounts and distributors that regularly reorder consumables to meet their needs. We successfully implemented this model when we started our business with the NC-stat system and applied it to subsequent product generations and, more recently, to the ADVANCE NCS/EMG System. The planning for our diabetes care pipeline, including SENSUS, NC-stat DPNCheck, and other products in development, is based on the device plus consumables business model.
The SENSUS pain therapy device is a transcutaneous electrical nerve stimulator, or TENS, designed for relief of chronic, intractable pain, such as PDN. SENSUS is a convenient and wearable non-invasive device that offers physicians and their patients a non-narcotic pain relief option as a complement to medications. The device is lightweight and can be worn during the day while remaining active, or at night while sleeping. We believe it is the only transcutaneous electrical nerve stimulator designed specifically for people with diabetes that suffer from chronic pain and that SENSUS will be attractive to pain medicine physicians, neurologists,
endocrinologists, podiatrists, and primary care physicians that are challenged with trying to manage pain in their patients with PDN and other forms of neuropathic pain. We have used our unique expertise in peripheral nerve stimulation in the development of SENSUS which incorporates several proprietary features for ease of patient use and physician reporting. SENSUS is comprised of: (1) an electronic device with a strap that is worn on the upper calf and (2) an electrode which attaches to the device. We provide prescribing physicians with PC-based software that links to the device via a USB connection, thereby allowing them to download a record of the patients use of the device.
A recent evidence-based review by the American Academy of Neurology determined that TENS was a useful modality for managing pain associated with DPN. Our assessment of currently available TENS devices indicated that the devices currently on the market do not meet the needs of patients with PDN because they are not optimized for PDN but are instead targeted at low back pain, sports medicine, and rehabilitation applications. Furthermore, they are difficult to administer and tend to be complicated for clinicians and patients to use.
Our SENSUS device and electrodes have been cleared by the FDA for commercial distribution. When medically indicated and supported by proper documentation, TENS are generally reimbursed by Medicare and many commercial insurance companies under the DME benefit.
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.
NC-stat DPNCheck is comprised of: (1) an electronic hand-held device and (2) a single patient use biosensor. In addition, we provide users with PC-based software that links to the device via a USB connection. This PC software allows physicians to generate reports and manage their sural nerve conduction data.
NC-stat DPNCheck is a modified version of our previously marketed NC-stat nerve testing device, and has the same clinical indications with respect to DPN. The modified device has the same functionality with respect to sural nerve testing as the original device; however, the cost of the electronic hand-held unit and the consumable biosensors has been reduced by approximately 50%. More than 1.7 million patient studies have been performed using our NC-stat technology and there have been approximately 6.3 million nerve tests, including nearly 700,000 sural nerve tests. It has been the subject of many published studies, including several studies specifically addressing the accuracy and clinical utility of the device in assessment of DPN.
Our legacy neurodiagnostics business is 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. 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 their personal computers and our servers for data archiving, report generation, and other network services. The ADVANCE System is most commonly used with proprietary nerve specific electrode arrays. These electrode arrays combine multiple individual electrodes and embedded microelectronic components into a single patient-use disposable unit. We currently market seven different nerve specific electrode arrays.
Historically, the ADVANCE System has been marketed to a broad range of physician specialties including neurologists, orthopedic surgeons, primary care physicians, and endocrinologists, and utilized for a variety of different clinical indications including assessment of CTS, low back and leg pain, and DPN. It is most commonly used in the assessment of CTS. Numerous papers have been published on the use of this technology in this clinical application.
The following chart summarizes our previously marketed products and currently marketed products.
|Product||Time on Market||Technology||Primary Clinical Indications||No. Patients Tested/Treated|
|NC-stat*||Q2 1999 Q3 2010||Nerve Conduction||Diagnosis and evaluation of CTS, low back pain, peripheral neuropathies (including DPN)|
|ADVANCE||Q2 2008 present||Nerve Conduction Invasive Needle EMG||Diagnosis and evaluation of CTS, low back pain, peripheral neuropathies (including DPN)|
|NC-stat DPNCheck||Q3 2011 present||Nerve Conduction||Diagnosis and evaluation of peripheral neuropathies, such as DPN||> 200,000|
|SENSUS||Q1 2013 present||Transcutaneous Electrical Nerve Stimulation||Relief for chronic, intractable pain, such as PDN||> 1,000|
|*||Support was discontinued in the first quarter of 2012.|
Our customers include physicians, clinics, hospitals, managed care organizations, retail health businesses, independent distributors in the United States and abroad, and durable medical equipment (DME) suppliers. Our SENSUS device was launched in January 2013 and is being sold to DME suppliers and chronic pain treatment centers who, in turn, distribute the product along with consumables directly to patients. SENSUS customers purchased approximately 1,300 SENSUS devices during the fiscal year ended December 31, 2013. Our NC-stat DPNCheck device was launched in late 2011 and approximately 1,500 devices had been placed with customers through December 31, 2013. These customers include managed care organizations, retail health businesses, endocrinologists, podiatrists and primary care physicians. As of December 31, 2013, we had an installed base of approximately 830 active customers using our ADVANCE System. These customers include primary care, internal medicine, orthopedic and hand surgeons, pain medicine physicians, neurologists, physical medicine and rehabilitation, or PM&R, physicians, and neurosurgeons. At December 31, 2013, one customer accounted for 14.0% of accounts receivable and a second customer accounted for 12.1% of accounts receivable. For the years ended December 31, 2013, 2012, and 2011, no single customer accounted for more than 10% of revenue.
Substantially all of our assets, revenues, and expenses for the years ended December 31, 2013, 2012, and 2011 were located at or derived from operations in the United States. In addition, we have had limited sales through distributors in Europe, Asia, the Middle East and various regions. For each of the years ended December 31, 2013, 2012, and 2011, international revenues accounted for approximately 16%, 7%, and 6%, respectively, of our total revenues.
We believe SENSUS will be attractive to endocrinologists, podiatrists, and primary care physicians that are challenged with trying to manage pain in their patients with diabetes. The prevalence of PDN suggests that there is a significant market for SENSUS in the United States. Our goal is to develop broad national coverage during 2014. We also believe that there are international market opportunities, particularly in Europe and Japan. SENSUS distribution is managed by our corporate office.
In late 2011, we launched NC-stat DPNCheck into the United States market for endocrinology and podiatry, followed by market evaluations and/or sales efforts in primary care, retail health, and managed care.
While we believe that all of these segments hold potential, we have narrowed our focus to managed care, and specifically Medicare Advantage providers and patient screening services, which we believe represent an attractive opportunity. We also believe that there are attractive international market opportunities, particularly in Japan, China, the Middle East and Mexico. We are addressing the domestic opportunity using corporate-level resources and we are working through distributors to address international opportunities.
Our installed base of ADVANCE accounts is supported by our customer service department. We are not actively pursuing new ADVANCE customers. Interest expressed in new ADVANCE systems by potential customers is handled by our customer service department and our marketing department. Internationally, ADVANCE sales and account support is handled by our network of independent distributors.
Our marketing support for SENSUS, NC-stat DPNCheck and ADVANCE is provided by our Senior Vice President of Commercial Operations and staff in our corporate office.
We invest significant effort and expense in technical, clinical, and business practices training for our commercial operations team, marketing staff and independent sales representatives. We also require attendance at periodic sales and product training programs. Promotion and sales of medical devices are highly regulated not only by the FDA, but also by the U.S. Centers for Medicare and Medicaid Services, or CMS, and the Office of Inspector General, or OIG, and, outside the United States, by other international bodies, and are subject to federal and state fraud and abuse enforcement activities. See FDA and other Governmental Regulation below.
We perform final assembly and servicing of our SENSUS and NC-stat DPNCheck devices at our corporate headquarters facility. We rely on an outside contractor for the manufacture and servicing of our ADVANCE device and also for the components that we use in the buildup for SENSUS and NC-stat DPNCheck. We rely on outside contractors for the manufacture of our consumable biosensor/electrodes. With the exception of the biosensors for use with our NC-stat DPNCheck devices, which we acquire from two manufacturers, we do not currently maintain alternative manufacturing sources for our SENSUS, NC-stat DPNCheck or ADVANCE devices, communication hubs, biosensors/electrodes, or any other finished goods products. In outsourcing, we target companies that meet FDA, International Organization for Standardization, or ISO, and other quality standards supported by internal policies and procedures. Supplier performance is maintained and managed through a corrective action program ensuring all product requirements are met or exceeded. Following the receipt of products or product components from our third-party manufacturers, we conduct the necessary inspection, final assembly, kitting, packaging, and labeling at our corporate headquarters facility. We believe these manufacturing relationships minimize our capital investment, provide us with manufacturing expertise, and help control costs.
Sunburst EMS, Inc., or Sunburst, has been manufacturing our NC-stat devices since November 2005. We entered into a supply agreement with Sunburst during 2006 for the manufacturing and supply of our neurodiagnostic devices. Sunburst manufactures the current generation of our ADVANCE device as well as the NC-stat DPNCheck and SENSUS subassemblies at a facility in Massachusetts.
Polymer Flexible Circuits, Inc., or Parlex, has been manufacturing our nerve specific electrodes since early 1999. In 2011 Parlex began manufacturing the NC-stat DPNCheck biosensors. In August 2006, we entered into a manufacturing and supply agreement with Parlex pursuant to which Parlex will manufacture and supply to us, and we will purchase from Parlex, at agreed upon prices per unit, our requirements of nerve conduction testing electrodes for resale in the United States. Under the agreement, Parlex has agreed not to manufacture electrodes to be used to measure nerve conduction for any other company during the term of the agreement and, in some cases, for a period of one year thereafter. This agreement will continue indefinitely until terminated by either party upon not less than 18 months prior written notice to the other party. Parlex manufactures our electrodes at a facility in Massachusetts and also has the ability to perform certain manufacturing steps for our electrodes at a second site located in the United Kingdom.
Katecho, Inc., or Katecho, a full service original equipment manufacturer, or OEM, specializing in medical and cosmetic devices manufactures biosensors for use with our NC-stat DPNCheck devices and electrodes for use with our SENSUS devices under normal commercial terms contained in our purchase orders. Katecho manufactures electrodes at its facility in Iowa.
We and our third-party manufacturers are registered with the FDA and subject to compliance with FDA quality system regulations. We are also ISO registered and undergo frequent quality system audits by European agencies. Our ADVANCE System and NC-stat DPNCheck are cleared for marketing within the United States, Canada, and the European Union. In addition, our SENSUS Pain Management System is cleared for marketing in the United States. Our facility is subject to periodic inspections by regulatory authorities, and may undergo compliance inspections conducted by the FDA and corresponding state agencies. As a registered device manufacturer, we will undergo regularly scheduled FDA quality system inspections. However, additional FDA inspections may occur if deemed necessary by the FDA.
We believe that we have research and development (R&D) capability that is unique to the industry. Key members of our R&D management team have worked together for over a decade. This team includes the extensive involvement of our founder and Chief Executive Officer who holds both M.D. and Ph.D. degrees. The R&D group consists of 11 people, including one who holds an M.D. degree and three who hold Ph.D. degrees. The group has extensive experience in neurophysiology, biomedical instrumentation, signal processing, biomedical sensors, and information systems. The R&D group works closely with our marketing group and our customers to design new and modified products that are focused on improving clinical outcomes. Our clinical programs are led by our Chief Executive Officer, Shai N. Gozani, M.D., Ph.D.
Our research and development efforts are primarily focused in the following areas:
|||Enhancements to the SENSUS pain management device. We are developing a second generation version of SENSUS that will have a lower profile and features to enhance patient use. We believe there is a market opportunity for a non-prescription, over-the-counter version of SENSUS and we have a development program underway for this product. R&D initiatives to modify the core SENSUS technology for application in adjacent disease states are in the conceptual stages of development.|
|||Oversee our support to clinical studies that employ our NC-stat DPNCheck and SENSUS products. We presently are involved in seven studies that use NC-stat DPNCheck in the evaluation of neuropathy in persons with diabetes under various study conditions. Also, we are planning various SENSUS clinical studies to support our marketing and business plans. These studies will expand the clinical foundation for use of NC-stat DPNCheck and SENSUS which, in turn, should support future adoption of these products.|
In addition to these core areas of research and development focus, we are also exploring additional clinical applications within the diagnosis and treatment of diabetic neuropathy for our core technology and expertise.
Research and development expenses were approximately $3.4 million, $3.5 million, and $3.9 million for the years ended December 31, 2013, 2012, and 2011, respectively.
We maintain a clinical program under the direction of our Chief Executive Officer, Shai N. Gozani, M.D., Ph.D. Our clinical programs are comprised of internal, collaborative, and external clinical studies. Internal clinical studies are designed and implemented directly by us for the purposes of product design and early clinical validation. Collaborative studies are conducted together with leading researchers around the world to provide clinical validation and to explore the clinical utility of our products. External studies are entirely independent of us, although in many cases the researchers request unrestricted grants for financial and/or material support, such as for devices and consumables. External studies may examine the clinical performance and utility of our products or our products may be used as outcomes measures.
We actively seek to publish our clinical study results in leading peer-reviewed journals while also encouraging our clinical collaborators and clinical study grant recipients to do the same.
Following is a list of external studies involving the use of our products which are currently underway.
|Ipswich Diabetes Centre, Ipswich Hospital (UK)||Fall 2011||Evaluation of small fiber neuropathy in patients with diabetes||NC-stat DPNCheck||4 years||400|
|Royal Hallamshire Hospital University of Sheffield (UK)||Mid 2012||Evaluation of DPN based on severity of diabetes||NC-stat DPNCheck||3 years||120|
|Joslin Diabetes Center||Mid 2012||Effect of weight loss on DPN||NC-stat DPNCheck||3 years||50|
|Institute for Clinical Diabetology, Heinrich Heine University||Mid 2012||Assessment of DPNCheck in newly diagnosed Type 2 diabetes patients||NC-stat DPNCheck||3 year||200|
|Department of Diabetes, Poole Hospital (UK)||Fall 2012||Comparison of DPNCheck with Vibratory Perception Testing||NC-stat DPNCheck||1 year||100|
|Institute for Clinical Diabetology, Heinrich Heine University||Early 2013||Assessment of DPNCheck in an elderly population||NC-stat DPNCheck||2 years||700|
|First Vitals Health||Early 2013||Effect of aggressive intervention on foot disease for high risk patients||NC-stat DPNCheck||3 years||600|
With respect to SENSUS, there are numerous manufacturers of transcutaneous electrical nerve stimulation devices. We believe that the largest such company is Empi, Inc. which is part of DJO Incorporated. We further believe that most of the current manufacturers are focused on low back pain, sports medicine, and rehabilitation rather than on PDN. As a result, we are not aware of any devices that are uniquely optimized for use in treating PDN. There are a few companies that claim that their devices have specific utility for PDN; however, we do not believe that these claims have been widely validated through adequate clinical studies.
Other than NC-stat DPNCheck, we believe that there is currently no objective and standardized test for DPN widely available at the point-of-care. The American Diabetes Association, or ADA, and other organizations recommend at least annual evaluation of all people with diabetes for DPN. Due to cost and availability, this screen is typically performed with a simple (5.07/10g) monofilament. This subjective method identifies late stage neuropathy where intervention is generally limited to foot care. Experts in the field have indicated that there is a large unmet need for a practical, objective, and sensitive test for diabetic neuropathy that can be widely deployed in the regular care of all people with diabetes. Monofilaments (5.07/10g) are a commodity sold by a number of medical supply companies.
There are several companies that sell neurodiagnostic devices that compete with our ADVANCE System. These companies include Cadwell Laboratories, Inc. and Natus Medical Incorporated. Natus Medical Incorporated has substantially greater financial resources than we do. Natus Medical Incorporated and Cadwell Laboratories, Inc. have established reputations as having effective worldwide distribution channels for medical instruments to neurologists and PM&R physicians.
We rely on a combination of patents, trademarks, copyrights, trade secrets, and other intellectual property laws, nondisclosure agreements and other measures to protect our proprietary technology, intellectual property rights, and know-how. We hold issued utility patents covering a number of important aspects of our NC-stat, SENSUS, ADVANCE, and NC-stat DPNCheck products. We believe that in order to have a competitive advantage, we must develop and maintain the proprietary aspects of our technologies. We also require our employees, consultants and advisors, whom we expect to work on our products, to agree to disclose and assign to us all inventions conceived, developed using our property, or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.
As of December 31, 2013, we had 38 issued U.S. patents, two issued foreign patents, and 21 pending patent applications, including eight U.S. applications, five international PCT applications, and eight foreign national applications. We have filed a utility patent application for NC-stat DPNCheck and another utility patent application for SENSUS.
Our issued design patents begin to expire in 2015, and our issued utility patents begin to expire in 2017. In particular, seven of our issued U.S. utility patents covering various aspects of our current products will expire on the same date in 2017. Although the patent protection for material aspects of our products covered by the claims of the patents will be lost at that time, we have additional patents and patent applications directed to other novel inventions that will have patent terms extending beyond 2017.
The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Patent litigation can involve complex factual and legal questions, and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted against us may require us to pay substantial damages. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. Our success will also depend in part on our not infringing patents issued to others, including our competitors and potential competitors. If our products are found to infringe the patents of others, our development, manufacture, and sale of these potential products could be severely restricted or prohibited. In addition, our competitors may independently develop similar technologies. Because of the importance of our patent portfolio to our business, we may lose market share to our competitors if we fail to protect our intellectual property rights.
A patent infringement suit brought against us may force us or any strategic partners or licensees to stop or delay developing, manufacturing, or selling potential products that are claimed to infringe a third-partys intellectual property, unless that party grants us rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if we were able to obtain rights to the third-partys intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.
We hold domestic registrations for the marks NEUROMETRIX and NC-stat. We use a trademark for ADVANCE, NC-stat DPNCheck and SENSUS. We hold certain foreign trademark registrations for the marks NEUROMETRIX and NC-stat.
Procedures performed with our neurodiagnostic medical devices including ADVANCE and NC-stat DPNCheck may be paid for by third-party payers, including government health programs, such as Medicare, and private insurance and managed care organizations. The 2014 Physicians Fee Schedule published by CMS
includes CPT 95905 for nerve conduction studies performed with pre-configured electrode arrays such as are used with the NC-stat DPNCheck device and the ADVANCE System.
We believe that physicians are generally receiving reimbursement under CPT 95905 from Medicare for nerve conduction studies performed for carpal tunnel syndrome using pre-configured electrode arrays that meet the medical necessity requirements in their local Medicare region but that commercial insurers are generally not providing reimbursement. Reimbursement by third-party payers is an important element of success for medical device companies. We do not foresee a significant near-term improvement in reimbursement for procedures performed with ADVANCE and NC-stat DPNCheck.
In the United States, some insured individuals are receiving their medical care through managed care programs which monitor and often require pre-approval of the services that a member will receive. Some managed care programs are paying their providers on a per capita basis a predetermined annual payment per member which puts the providers at financial risk for the services provided to their members. This is generally the case under Medicare Advantage where contracting insurers receive a monthly capitated fee from CMS to provide all necessary medical care to participating members. These capitated fees are adjusted under CMSs risk-adjustment model which uses health status indicators, or risk scores, to ensure the adequacy of payment. Members with higher risk codes generally require more healthcare resources than those with lower risk codes. In turn, the insurer fully absorbs the risk of patient health care costs. Insurers may share a portion of the risk with provider organizations such as independent practice associations (IPAs) with whom they contract to provide medical services to their members. Proper assessment of each members health status and accurate coding helps to assure that insurers receive capitation fees consistent with the cost of treating these members. Nerve conduction testing can provide valuable, early identification of neuropathy leading to clinical interventions that can reduce health care costs. Also, these tests provide valuable input regarding each members health risk status which can result in more appropriate capitated payments from CMS. We believe that the clinical and economic proposition for NC-stat DPNCheck is attractive to Medicare Advantage insurers and risk bearing provider organizations. We are focusing our sales effort for NC-stat DPNCheck on the Medicare Advantage managed care market segment.
We believe that the SENSUS pain management therapeutic system is considered a durable medical equipment (DME) benefit and is reimbursed for chronic pain by Medicare and many commercial insurers under HCPCS code EO730 for the device and under HCPCS code A4595 for the consumable electrodes. These pre-existing codes apply to DME benefits employing transcutaneous electrical nerve stimulation equipment.
We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services.
Our success in selling the NC-stat DPNCheck and SENSUS devices and the ADVANCE System will depend upon, among other things, our customers receiving, and our potential customers' expectation that they will receive sufficient reimbursement or patient capitated premium adjustments from third-party payers for procedures or therapies using these products. See Item 1A, Risk Factors, If health care providers are unable to obtain sufficient reimbursement or other financial incentives from third-party health care payers related to the use of our products, the adoption of our products and our future product sales will be materially adversely affected.
Our products are medical devices subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act, or FDCA, and the regulations promulgated thereunder, as well as by other regulatory bodies in the United States and abroad. The FDA classifies medical devices into one of three classes on the basis of the amount of risk associated with the medical device and the controls deemed necessary to reasonably ensure their safety and effectiveness:
|||Class I, requiring general controls, including labeling, device listing, reporting and, for some products, adherence to good manufacturing practices through the FDAs quality system regulations and pre-market notification;|
|||Class II, requiring general controls and special controls, which may include performance standards and post-market surveillance; and|
|||Class III, requiring general controls and pre-market approval, or PMA, which may include post-approval conditions and post-market surveillance.|
Before being introduced into the market, our products must obtain market clearance or approval through the 510(k) pre-market notification process, the de novo review process or the PMA process, unless they qualify for an exemption from these processes. See Item 1A, Risk Factors, We are subject to extensive regulation by the FDA which could restrict the sales and marketing of the NC-stat DPNCheck and SENSUS devices and the ADVANCE System, as well as other products for which we may seek FDA clearance or approval, and could cause us to incur significant costs.
To obtain 510(k) clearance, we must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to a legally marketed Class I or II medical device or to a Class III device marketed prior to May 28, 1976 for which the FDA has not required the submission of a PMA application. In some cases, we may be required to perform clinical trials to support a claim of substantial equivalence. If clinical trials are required, we must submit an application for an investigational device exemption, or IDE, which must be cleared by the FDA prior to the start of a clinical investigation, unless the device and clinical investigation are considered non-significant risk by the FDA or are exempt from the IDE requirements. It generally takes three months from the date of the pre-market notification submission to obtain a final 510(k) decision, but it can be significantly longer.
After a medical device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires the submission of a new 510(k) clearance or could require de novo classification or PMA. The FDA allows each company to make this determination, but the FDA can review the decision. If the FDA disagrees with a companys decision not to seek FDA authorization, the FDA may require the company to seek 510(k) clearance or PMA. The FDA also can require the company to cease marketing and/or recall the medical device in question until its regulatory status is resolved.
If a previously unclassified new medical device does not qualify for the 510(k) pre-market notification process because there is no predicate device to which it is substantially equivalent, and if the device may be adequately regulated through general controls or special controls, the device may be eligible for de novo classification through what is called the de novo review process. In order to use the de novo review process, a company must receive a letter from the FDA stating that, because the device has been found not substantially equivalent to a legally marketed Class I or II medical device or to a Class III device marketed prior to May 28, 1976 for which the FDA has not required the submission of a PMA application, it has been placed into Class III. After receiving this letter, the company, within 30 days, must submit to the FDA a request for a risk based down classification of the device from Class III to Class I or II based on the devices moderate or low risk profile which meets the definition of a Class I or Class II medical device. The FDA then has 60 days in which to decide whether to down classify the device. If the FDA agrees that a lower classification is warranted, it will issue a new regulation describing the device type and, for a Class II device, publish a Special Controls guidance document. The Special Controls guidance document specifies the scope of the device type and the recommendations for submission of subsequent devices for the same intended use. If a product is classified as Class II through the de novo review process, then that device may serve as a predicate device for subsequent 510(k) pre-market notifications.
If a medical device does not qualify for the 510(k) pre-market notification process and is not eligible for clearance through the de novo review process, a company must submit a PMA application. The PMA requires more extensive pre-filing testing than is required in the 510(k) and is more costly, lengthy and uncertain. The FDA will decide within 45 days of receiving a PMA whether it is sufficiently complete to permit a substantive review and if the PMA is complete, the FDA will notify the applicant that the PMA has been filed. The PMA
process can take one to three years or longer, from the time the PMA application is filed with the FDA. The PMA process requires the company to prove that the medical device is safe and effective for its intended purpose. A PMA typically includes extensive pre-clinical and clinical trial data, and information about the device, its design, manufacture, labeling and components. Before approving a PMA, the FDA generally also performs an on-site inspection of manufacturing facilities for the product to ensure compliance with the FDAs quality system regulation, or QSR.
If FDA approves the PMA, the approved indications may be more limited than those originally sought. In addition, FDAs approval order may include post-approval conditions that the FDA believes necessary to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution and post-market study requirements. Failure to comply with the post-approval conditions can result in adverse enforcement or administrative actions, including the withdrawal of the approval. Approval of a new PMA application or a PMA supplement may be required in the event of modifications to the device, including to its labeling, intended use or indication, or its manufacturing process that affect safety and effectiveness.
After a device is placed on the market, numerous regulatory requirements continue to apply. These include:
|||the FDAs QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other good manufacturing practice and quality assurance procedures during all aspects of the manufacturing process;|
|||labeling regulations and FDA prohibitions against the promotion of products for uncleared or unapproved uses (known as off-label uses), as well as requirements to provide adequate information on both risks and benefits;|
|||medical device reporting regulations, which require that manufacturers report to FDA any device that may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;|
|||correction and removal reporting regulations, which require that manufacturers report to the FDA field corrections and device recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA caused by the device which may present a risk to health;|
|||post-market surveillance regulations, which apply to Class II or III devices if the FDA has issued a post-market surveillance order and the failure of the device would be reasonably likely to have serious adverse health consequences, the device is expected to have significant use in the pediatric population, the device is intended to be implanted in the human body for more than one year, or the device is intended to be used to support or sustain life and to be used outside a user facility;|
|||regular and for cause inspections by FDA to review a manufacturer's facilities and their compliance with applicable FDA requirements; and|
|||the FDAs recall authority, whereby it can ask, or order, device manufacturers to recall from the market a product that is in violation of applicable laws and regulations.|
The ADVANCE System received 510(k) clearance as a Class II medical device in April 2008 for its intended use by physicians to perform nerve conduction studies and needle electromyography procedures.
The NC-stat System is also a Class II medical device and has been the subject of several 510(k) clearances, the most recent in July 2006 (K060584). The NC-stat System is cleared for use to stimulate and measure neuromuscular signals that are useful in diagnosing and evaluating systemic and entrapment neuropathies. We believe our NC-stat DPNCheck device is a technical modification to the 510(k) cleared NC-stat device and has the same intended use, and therefore does not raise safety or effectiveness questions.
Under the FDAs published guidance on 510(k) requirements for modified devices, we do not believe that a 510(k) submission is required for NC-stat DPNCheck.
As a transcutaneous electrical nerve stimulator, the SENSUS pain therapy device is a Class II medical device which received 510(k) clearance from the FDA in August 2012. In November 2012, the FDA provided 510(k) clearance for the disposable electrode used in conjunction with the SENSUS device, and in July 2013, the FDA provided 510(k) clearance for the use of SENSUS during sleep. The intended use of the SENSUS pain management therapeutic system is the symptomatic relief and management of chronic intractable pain.
Our facility, and the facility utilized by Sunburst, our contract device manufacturer, have each been inspected by FDA in the past, and observations were noted. There were no findings that involved a significant violation of regulatory requirements. The responses to these observations have been accepted by the FDA and we believe that we and our contract manufacturer are in substantial compliance with the QSR. We expect that our facility will be inspected again as required by the FDA. If the FDA finds significant violations, we could be subject to fines, recalls, requirements to halt manufacturing, or other administrative or judicial sanctions.
In the United States, the federal Anti-Kickback Statute, as well as numerous state anti-kickback laws, prohibit the offer, payment, solicitation or receipt of kickbacks, bribes or other remuneration, whether direct or indirect, overt or covert, in cash or in kind, intended, among other things, to induce the purchase or recommendation of healthcare products and services. While the federal law applies only to products and services for which payment may be made by a federal healthcare program, the state laws may apply regardless of whether any public healthcare funds are involved. Violations of these laws can lead to severe civil and criminal penalties, including exclusion from participation in federal healthcare programs. These laws are potentially applicable to manufacturers of medical devices, such as us, and to hospitals, physicians and other potential purchasers of our products.
Also, the federal False Claims Act, as well as many state false claims statutes, provides civil and criminal penalties for presenting, or causing to be presented, to third-party payers for reimbursement, claims that are false or fraudulent, or which are for items or services that were not provided as claimed. Under the federal False Claims Act, in addition to actions initiated by federal law enforcement authorities, the statute authorizes qui tam actions to be brought on behalf of the federal government by a private party in certain circumstances and, if successful, that private party can share in any monetary recovery. Any challenge by federal or state enforcement officials or others under these laws, could have a material adverse effect on our business, financial condition, and results of operations.
We were founded in 1996 as a science-based health care company. Our focus had been the development of innovative products for the detection, diagnosis, and monitoring of peripheral nerve and spinal cord disorders, such as those associated with carpal tunnel syndrome, lumbosacral disc disease and spinal stenosis, and diabetes. Our NC-stat System for the performance of nerve conduction studies at the point-of-care was commercially launched in 1999. The second generation NC-stat was released in 2002. In 2008, we brought to market the more sophisticated ADVANCE System for nerve conduction testing and performance of invasive needle electromyography. These systems were general purpose with broad application in evaluating and diagnosing nerve disorders. Numerous studies demonstrating the clinical accuracy and utility of these devices have been conducted and published in high quality peer-reviewed journals. Furthermore, these devices have been used in FDA sanctioned clinical trials for pharmacological agents and large scale epidemiological studies sponsored by the NIH, Center for Disease Control, or CDC, and other governmental agencies. The products have been cleared by the FDA, field tested for over a decade and highly regarded for their ease of use, accuracy and reproducibility of results.
Following launch of NC-stat in 1999, we experienced rapid revenue growth, which led to our initial public offering in 2004. The health market, particularly the physician office segment, embraced the opportunity to perform nerve conduction tests which previously had always required referral to specialists. Point-of-care nerve testing was seen to provide a combination of improved patient care and patient convenience. The
success of point-of-care nerve testing, a market which we created, was met with resistance in some sectors of the medical community, particularly by neurologists and physical medicine and rehabilitation physicians, both of which had traditionally provided nerve testing services. As a consequence of successful lobbying by these specialists, physicians using our technology experienced increased denials of coverage by third party payers resulting in their discontinuing usage and our difficulty in accruing new customer accounts. In late 2009 CMS included in the Physician Fee Schedule a new Category I CPT Code, CPT 95905, for nerve conduction studies performed using preconfigured electrode such as those employed with our products. During 2010 most Medicare fiscal intermediaries assumed coverage for CPT 95905 for at least some clinical indications; however, the health care environment has been such that we have been unable to secure broad coverage among private payers, which is essential to the success of our ADVANCE System product. This experience was reflected in our revenues for the legacy Neurodiagnostics business, which peaked in 2006 at $55.3 million. We reported revenue for our legacy Neurodiagnostics business of $3.8 million, $6.1 million, and $10.3 million for the years ended December 31, 2013, 2012, and 2011, respectively.
As we managed our general purpose neurodiagnostic business to improve reimbursement and minimize customer erosion, we increasingly became aware of the unmet medical need for improved diagnostic tools and therapies in the specific area of diabetic neuropathy, or nerve damage caused by diabetes. Diabetes care is one of the faster growing sectors of health care as discussed above. We believe that our tools and therapies for addressing diabetic neuropathy represent a significant market opportunity. Consequently, in January 2011 we announced a shift to diabetes care as our primary business focus. We also restructured our neurodiagnostics business to consolidate functions and to eliminate our direct sales force. We emphasized our commitment to supporting our neurodiagnostic products and installed base of physician accounts. Our objective for our legacy neurodiagnostics business is to maintain a high standard of product support while managing the business to optimize cash flow.
As of December 31, 2013, we had a total of 30 full time employees. Of these employees, 11 were in research and development, seven in sales and marketing, five in production/distribution, and seven in general and administrative services. One employee holds both M.D. and Ph.D. degrees, one additional employee holds an M.D. degree, and three additional employees hold Ph.D. degrees.
Our employees are not represented by a labor union and are not subject to a collective bargaining agreement. We have never experienced a work stoppage. We believe that we have good relations with our employees.
Access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed with or furnished to the Securities and Exchange Commission, or SEC, may be obtained through the Investor Relations section of our website at www.neurometrix.com/investor as soon as reasonably practical after we electronically file or furnish these reports. We do not charge for access to and viewing of these reports. Information on our Investor Relations page and on our website is not part of this Annual Report on Form 10-K or any of our other securities filings unless specifically incorporated herein by reference. In addition, the public may read and copy any materials that we file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, our filings with the SEC may be accessed through the SECs website at www.sec.gov. All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the date of the document in which the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law.
NeuroMetrix was founded in June 1996 by our President and Chief Executive Officer, Shai N. Gozani, M.D., Ph.D. We originally were incorporated in Massachusetts in 1996, and we reincorporated in Delaware in 2001. Our principal offices are located at 62 Fourth Avenue, Waltham, Massachusetts 02451.
You should carefully consider the following risks and all other information contained in this Annual Report on Form 10-K and our other public filings before making any investment decisions with respect to our common stock. If any of the following risks occurs, our business, prospects, reputation, results of operations, or financial condition could be harmed. In that case, the trading price of our common stock could decline, and our stockholders could lose all or part of their investment. This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below and elsewhere in this Annual Report on Form 10-K.
We have incurred significant cumulative net losses since our inception. Our net losses for the years ended December 31, 2013, 2012, and 2011 were approximately $8.0 million, $10.0 million, and $10.0 million, respectively, reflecting a decline in revenues. At December 31, 2013, we had an accumulated deficit of approximately $146.6 million. The extent of our future operating income or losses is highly uncertain, and we cannot assure you that we will be able to achieve or maintain profitability.
We held cash and cash equivalents of $9.2 million as of December 31, 2013. We believe that these resources and the cash to be generated from expected product sales will be sufficient to meet our projected operating requirements through the first quarter of 2015. 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 of our products and the uncertainty of future revenues from new 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 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 for the second quarter of 2015 and beyond. 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 or 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.
We are focused on the treatment of the neurological complications of diabetes. Our initial diabetes care product, NC-stat DPNCheck, which was launched in late 2011, is a fast, accurate, and quantitative nerve conduction test for systemic neuropathies, such as DPN. In January 2013, we launched SENSUS, our pain management therapeutic device for relief of chronic, intractable pain including pain associated with diabetic neuropathy. We also have other product candidates addressing diabetes care in our development pipeline. Our
future prospects are closely tied to our success with our NC-stat DPNCheck and SENSUS devices which, in turn, depends upon market acceptance and growth in future revenues. We cannot assure you that our diabetes care strategy, including the sales and marketing of our current products and the commercialization of other product candidates in our development pipeline, will be successful. If our diabetes care strategy is not successful, it could materially affect our revenues and results of operations.
Our future success could be adversely affected by a number of factors, including:
|||inability to secure broad, national distribution for SENSUS among DME suppliers;|
|||inability to increase adoption of NC-stat DPNCheck within the Medicare Advantage market;|
|||decreased rates of patient visits to physicians;|
|||unfavorable changes to current Medicare and commercial payer payment policies;|
|||implementation of the Patient Protection and Affordable Care Act and consequent changes to payor policies;|
|||unfavorable experiences by patients and physicians using SENSUS and our other commercially available products; and|
|||physicians reluctance to alter their existing practices and adopt the use of our devices.|
If we are unable to expand exposure and penetrate the market for NC-stat DPNCheck and SENSUS, our ability to increase our revenues will be limited and our business prospects will be adversely affected.
We launched the ADVANCE System, our sophisticated nerve conduction testing system, in June 2008. For the years ended December 31, 2013 and 2012, 72% and 81%, respectively, of our total revenue was attributed to the ADVANCE System. We continue to derive a substantial portion of our revenues from sales of the products that comprise this system, particularly from electrodes. We expect that sales of ADVANCE System products will constitute about half of our sales during 2014. Accordingly, our ability to generate revenues in the short-term is dependent on our ability to market and sell the products that comprise the ADVANCE System, particularly electrodes. Our sales of these products may be negatively impacted by many factors, including:
|||changes in reimbursement rates or policies relating to our products by third-party payers;|
|||claims that our products infringe on patent rights or other intellectual property rights owned by other parties;|
|||adverse regulatory or legal actions relating to our products; and|
|||clinical trial results relating to our products or our competitors products.|
If any of these events occurs, our ability to generate revenues from the ADVANCE System could be significantly reduced.
Widespread adoption of our products by the medical community is unlikely to occur without a financial incentive from third-party payers for the use of these products. If health care providers are unable to obtain adequate reimbursement for procedures performed using our products, if managed care organizations do not receive improved capitated payments due to more accurate patient risk assessment using our products, and if DME suppliers are not adequately reimbursed for supplying our therapeutic products, we may be unable to
sell our products at levels that are sufficient to allow us to achieve and maintain profitability, and our business would suffer significantly. Additionally, even if these products and procedures are adequately reimbursed by third-party payers today, adverse changes in payers future policies toward payment would harm our ability to market and sell our products. Third-party payers include those governmental programs such as Medicare and Medicaid, private health insurers, workers compensation programs and other organizations.
Future regulatory action by CMS or other governmental agencies or negative clinical results may diminish reimbursement payments to physicians for performing procedures using our products. Medicaid reimbursement differs from state to state, and some state Medicaid programs may not cover the procedures performed with our products or pay physicians an adequate amount for performing those procedures, if at all. Additionally, some private payers do not follow the Medicare guidelines and may reimburse for only a portion of these procedures or not at all. We are unable to predict what changes will be made in the reimbursement methods used by private or governmental third-party payers. Importantly, we cannot predict the effects that implementation of the Patient Protection and Affordable Care Act will have on CMS, commercial insurers, health care providers, and ultimately on our business.
Our future revenues will be impacted by the CMS Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) Competitive Bidding Program. Under this program, Medicare will no longer reimburse suppliers for certain products and services, including transcutaneous electrical nerve stimulation (TENS), based on the Medicare fee schedule amount. Instead CMS will provide reimbursement for those products and services based on a competitive bidding process. Our SENSUS pain management system is presently classified within TENS. The DMEPOS Competitive Bidding Program will likely require us to sell SENSUS devices and related consumables subject to Medicare reimbursement at significantly lower prices which would have a material adverse effect on SENSUS profitability. In those regions of the country where DMEPOS Competitive Bidding was recently implemented in January 2014, low Medicare pricing is restricting our ability to sell SENSUS. As the DMEPOS program is expanded to other regions, a similar effect will likely be seen. The unique product features of SENSUS may provide an opportunity, which we intend to pursue, to segregate SENSUS from the generic TENS category. If successful, this could lessen the negative impact of DMEPOS competitive bidding on SENSUS Medicare reimbursement.
We sell medical devices that are subject to extensive regulation in the United States by the FDA with regard to manufacturing, labeling, sale, promotion, distribution, shipping and ongoing monitoring and follow-up. Before a new medical device, or a new use of or claim for an existing product, can be marketed in the United States, it must first be cleared or approved by the FDA. Medical devices may be marketed only for the indications for which they are approved or cleared. The regulatory review process can be expensive and lengthy. The FDAs process for granting 510(k) clearance typically takes approximately three to six months, but it can be significantly longer. The process for obtaining a pre-market approval, or PMA, is much more costly and onerous. By law, the time period designated for the FDAs review of a PMA is 180 days; however, this time is often extended and it is not uncommon for the PMA review process to take three years or longer from the time the application is filed with the FDA.
The FDA may remove our devices from the market or enjoin them from commercial distribution if safety or effectiveness problems develop. Further, we may not be able to obtain additional 510(k) clearances or pre-market approvals for new products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and future profitability. We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices. If any of these events occurs or if the FDA
takes other enforcement actions, we may not be able to provide our customers with the products they require on a timely basis, our reputation could be harmed, and we could lose customers and suffer reduced revenues and increased costs.
We also are subject to numerous post-marketing regulatory requirements, including the FDAs quality system regulations, which relate to the design, manufacture, packaging, labeling, storage, installation and servicing of our products, labeling regulations, medical device reporting regulations and correction and removal reporting regulations. Our failure or the failure by any manufacturer of our products to comply with applicable regulatory requirements could result in enforcement action by the FDA. FDA enforcement actions relating to post-marketing regulatory requirements or other issues, including any issues arising from the not substantially equivalent letter described above, may include any of the following:
|||warning letters, untitled letters, fines, injunctions, product seizures, consent decrees and civil penalties;|
|||requiring repair, replacement, refunds, customer notifications or recall of our products;|
|||imposing operating restrictions, suspension or shutdown of production;|
|||refusing our requests for 510(k) clearance or PMA approval of new products, new intended uses, or modifications to existing products;|
|||requesting voluntary rescission of 510(k) clearances or withdrawing PMA approvals that have already been granted; and|
If any of these events were to occur, they could harm our reputation, our ability to generate revenues and our profitability.
Also, from time to time, legislation is introduced into Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of medical devices. FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. The FDA has publicly stated that it is reevaluating its longstanding 510(k) review program. It is not clear when the program will be modified and what effect the modified review process will have on our ability to bring our product candidates to market.
We rely on third-party manufacturers to manufacture components of our NC-stat DPNCheck and SENSUS systems, and to fully manufacture the ADVANCE system. In the event that our manufacturers cease to manufacture sufficient quantities of our products or components in a timely manner and on terms acceptable to us, we would be forced to locate alternate manufacturers. Additionally, if our manufacturers experience a failure in their production process, are unable to obtain sufficient quantities of the components necessary to manufacture our products or otherwise fail to meet our quality requirements, we may be forced to delay the manufacture and sale of our products or locate an alternative manufacturer. We may be unable to locate suitable alternative manufacturers for our products or components for which the manufacturing process is relatively specialized, on terms acceptable to us, or at all. We have a manufacturing and supply agreement with Parlex Polymer Flexible Circuits, Inc. for the manufacture of the biosensors for nerve conduction testing for our domestic market. Katecho, Inc. manufactures biosensors for use with our NC-stat DPNCheck devices and manufactures electrodes for SENSUS, and Sunburst EMS, Inc. manufactures electronic boards and other components of our NC-stat DPNCheck and SENSUS products, which we assemble at our corporate headquarters facility to produce completed devices. Sunburst EMS, Inc. also manufactures our ADVANCE System monitors, docking stations, and communication hubs.
We have experienced transient inventory shortages on new products during the initial production ramp-up phase. If any materially adverse changes in our relationships with these manufacturers occur, our ability to supply our customers will be severely limited until we are able to engage an alternate manufacturer or, if applicable, resolve any quality issues with our existing manufacturer. This situation could prevent us from delivering products to our customers in a timely manner, lead to decreased sales or increased costs, or harm our reputation with our customers.
In order for us to successfully expand our business within the United States and internationally, our contract manufacturers must be able to provide us with substantial quantities of our products in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable cost and on a timely basis. Our potential future growth could strain the ability of our manufacturers to deliver products and obtain materials and components in sufficient quantities. Manufacturers often experience difficulties in scaling up production, including problems with production yields and quality control and assurance. If we are unable to obtain sufficient quantities of high quality products to meet customer demand on a timely basis, we could lose customers, our growth may be limited and our business could be harmed.
We and our contract manufacturers are required to comply with the FDAs quality system regulation, or QSR, which is a complex regulation that governs the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The FDA enforces the QSR through periodic inspections. We cannot assure you that our facilities or the facilities of the manufacturers of our products would pass any future inspection. If our facilities or any of the facilities of the manufacturers of our products fail an inspection, the manufacturing or distribution of our products could be interrupted and our operations disrupted. Failure to take adequate and timely corrective action in response to an adverse inspection could result in a suspension or shutdown of our packaging and labeling operations and the operations of the manufacturers of our products or a recall of our products, or other administrative or judicial sanctions. If any of these events occurs, we may not be able to provide our customers with the quantity of products they require on a timely basis, our reputation could be harmed, and we could lose customers and suffer reduced revenues and increased costs.
We are subject to the medical device reporting regulations, which require us to report to the FDA if our products may have caused or contributed to a death or serious injury, or have malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to occur. We are also subject to the correction and removal reporting regulations, which require us to report to the FDA any field corrections and device recalls or removals that we undertake to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug and Cosmetic Act, or FDCA, caused by the device which may present a risk to health. In addition, the FDA and similar governmental agencies in other countries have the authority to require the recall of our products if there is a reasonable probability that the products would cause serious adverse health consequences or death. A government-mandated or voluntary recall by us could occur as a result of manufacturing defects, labeling deficiencies, packaging defects or other failures to comply with applicable regulations. Any recall would divert management attention and financial resources and harm our reputation with customers and could have a material adverse effect on our financial condition and results of operations.
In January 2011, we shifted our strategy to focus on diabetes care, specifically unmet medical needs related to DPN which is the most common complication of diabetes. Since then, we have advanced SENSUS and NC-stat DPNCheck through our product development pipeline to the market and we plan to introduce improvements to SENSUS in future periods. We expect that advancing our pipeline products will require significant time and resources. We may not be successful in our commercialization efforts for any of the product candidates currently in our pipeline and we may not be successful in developing, acquiring, or in-licensing additional product candidates, to the extent we decide to do so. If we are not successful advancing new products through our development pipeline, the regulatory process and commercial launch, our business, financial condition, and results of operations will be adversely affected.
Our success will depend in part on our ability to develop or acquire commercially valuable patent rights and to protect these rights adequately. The risks and uncertainties that we face with respect to our patents and other related rights include the following:
|||the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents;|
|||the claims of any patents that are issued may not provide meaningful protection;|
|||we may not be able to develop additional proprietary technologies that are patentable;|
|||other parties may challenge patents, patent claims or patent applications licensed or issued to us; and|
|||other companies may design around technologies we have patented, licensed or developed.|
We also may not be able to protect our patent rights effectively in some foreign countries. For a variety of reasons, we may decide not to file for patent protection in the United States or in particular foreign countries. Our patent rights underlying our products may not be adequate, and our competitors or customers may design around our proprietary technologies or independently develop similar or alternative technologies or products that are equal or superior to our technology and products without infringing on any of our patent rights. In addition, the patents licensed or issued to us may not provide a competitive advantage. If any of these events were to occur, our ability to compete in the market would be harmed.
In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, confidentiality, nondisclosure and assignment of invention agreements and other contractual provisions and technical measures to protect our intellectual property rights. We rely on trade secrets to protect the technology and algorithms we use in our customer data processing and warehousing information system. While we currently require employees, consultants and other third parties to enter into confidentiality, non-disclosure or assignment of invention agreements or a combination thereof where appropriate, any of the following could still occur:
|||the agreements may be breached or not enforced in a particular jurisdiction;|
|||we may have inadequate remedies for any breach;|
|||trade secrets and other proprietary information could be disclosed to our competitors; or|
|||others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technologies.|
If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and our competitive position.
We rely on patents to protect a portion of our intellectual property and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in the medical device industry are generally uncertain. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to:
|||assert claims of infringement;|
|||enforce our patents;|
|||protect our trade secrets or know-how; or|
|||determine the enforceability, scope and validity of the proprietary rights of others.|
Any lawsuits that we initiate could be expensive, take significant time and divert managements attention from other business concerns. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events could harm our business, our ability to compete in the market or our reputation.
Substantial litigation over intellectual property rights exists in the medical device industry. We expect that our products could be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality of products and technology in different industry segments overlap. Third parties may currently have, or may eventually be issued, patents on which our products or technologies may infringe. Any of these third parties might make a claim of infringement against us. Any litigation regardless of its impact would likely result in the expenditure of significant financial resources and the diversion of managements time and resources. In addition, litigation in which we are accused of infringement may cause negative publicity, adversely impact prospective customers, cause product shipment delays or require us to develop non-infringing technology, make substantial payments to third parties, or enter into royalty or license agreements, which may not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our revenues may decrease substantially and we could be exposed to significant liability.
A federal law commonly known as the federal anti-kickback law, and several similar state laws, prohibit the payment of any remuneration that is intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of health care products or services. These laws constrain a medical device companys sales, marketing and other promotional activities by limiting the kinds of business relationships and financial arrangements, including sales programs we may have with hospitals, physicians or other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment to Medicare, Medicaid or other third-party payers that are false or fraudulent, or for items or services that were not provided as claimed. From time to time, we may provide coding and billing information as product support to purchasers of our products. Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance, which can be quite substantial including exclusion from participation in federal health care programs. A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report
payments, gifts and other remuneration made to physicians and other health care professionals and health care organizations. Some state statutes, such as the one in Massachusetts, impose an outright ban on gifts to physicians. These laws are often referred to as gift ban or aggregate spend laws and carry substantial fines if they are violated. Similar legislation, known as the Physician Payments Sunshine Act, has been introduced in Congress each year for the past several years but has not yet been enacted. In the event that we are found to have violated these laws or determine to settle a claim that we have done so, our business may be materially adversely affected as a result of any payments required to be made, restrictions on our future operations or actions required to be taken, damage to our business reputation or adverse publicity in connection with such a finding or settlement or other adverse effects relating thereto. Additionally, even an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to respond to, and thus could harm our business and results of operations
There are a number of federal and state laws protecting the confidentiality of individually identifiable patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. Although we do not believe that we are subject to the HIPAA rules, the exact scope of these rules has not been clearly established. If we are found to be in violation of the privacy rules under HIPAA, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business.
Our business exposes us to an inherent risk of potential product liability claims related to the manufacturing, marketing and sale of medical devices. The medical device industry historically has been litigious, and we face financial exposure to product liability claims if the use of our products were to cause or contribute to injury or death. Our NC-stat and ADVANCE systems, NC-stat DPNCheck, and SENSUS products may be susceptible to claims of injury because their use involves the electric stimulation of a patients nerves. Although we maintain product liability insurance for our products and other commercial insurance, the coverage limits of these policies may not be adequate to cover future claims. As sales and use of our products increase, we may be unable to maintain sufficient product liability or other commercial insurance on acceptable terms or at reasonable costs, and this insurance may not provide us with adequate coverage against potential liabilities. A successful claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on our financial condition and results of operations. A product liability claim, regardless of its merit or eventual outcome, could result in substantial costs to us, a substantial diversion of management attention and adverse publicity. A product liability claim could also harm our reputation and result in a decline in revenues and an increase in expenses.
We depend upon third parties for the manufacture of our products or components. Our products, particularly our electrodes, require a significant degree of technical expertise to produce. If these manufacturers fail to produce our products to specification, or if the manufacturers use defective materials or workmanship in the manufacturing process, the reliability and performance of our products will be compromised.
If our products contain defects that cannot be repaired quickly, easily and inexpensively, we may experience:
|||loss of customer orders and delay in order fulfillment;|
|||damage to our brand reputation;|
|||increased cost of our warranty program due to product repair or replacement;|
|||inability to attract new customers;|
|||diversion of resources from our manufacturing and research and development departments into our service department; and|
The occurrence of any one or more of the foregoing could harm our reputation and materially reduce our revenues and increase our costs and liabilities.
Our success largely depends on the skills, experience, and efforts of our officers, including Shai N. Gozani, M.D., Ph.D., our founder, Chairman, President and Chief Executive Officer; Thomas T. Higgins, our Senior Vice President and Chief Financial Officer; Guy Daniello, our Senior Vice President of Information Technology; and Michael Williams, Ph.D., our Senior Vice President of Engineering and Chief Technology Officer. We do not maintain key person life insurance policies covering any of our employees. The loss of any of our officers could weaken our management and technical expertise significantly and harm our business.
We are a small company with 30 employees as of December 31, 2013, and our ability to retain our skilled labor force and our success in attracting and hiring new skilled employees will be a critical factor in determining our future performance. We may not be able to meet our future hiring needs or retain existing personnel, particularly given the challenges our business has recently faced. We will face challenges and risks in hiring, training, managing and retaining engineering and sales and marketing employees. Failure to attract and retain personnel, particularly technical and sales and marketing personnel would materially harm our ability to compete effectively and grow our business.
Our future business and financial success will depend, in part, on our ability to effectively market our new products, such as SENSUS and NC-stat DPNCheck, and enhance these products in response to customer demand. Developing new products and upgrades to existing and future products imposes burdens on our research and development department and our management. This process is costly, and we cannot assure you that we will be able to successfully develop new products or enhance our current products. We also may not be able to enter into relationships with other companies to sell additional products. In addition, as we develop the market for our products, future competitors may develop desirable product features earlier than we do which could make our competitors products less expensive or more effective than our products and could render our products obsolete or unmarketable. If our product development efforts are unsuccessful, we will have incurred significant costs without recognizing the expected benefits and our business prospects may suffer.
We currently do, and in the future may need to, compete directly and indirectly with a number of other companies that may have competitive advantages over us. We compete with companies that sell traditional nerve conduction study and electromyography equipment including Cadwell Laboratories, Inc. and Natus Medical Incorporated. These companies enjoy significant competitive advantages, including:
|||greater resources for product development, sales and marketing;|
|||more established distribution networks;|
|||greater name recognition;|
|||more established relationships with health care professionals, customers and third-party payers; and|
|||additional lines of products and the ability to offer rebates or bundle products to offer discounts or incentives.|
As we develop the market for diagnosis and treatment of diabetic neuropathy, we may be faced with competition from these companies or others that decide and are able to enter this market. Some or all of our future competitors in the diabetes care market may enjoy competitive advantages such as those described above. If we are unable to compete effectively against existing and future competitors, our sales will decline and our business will be harmed.
In the ordinary course of our business, we collect and store sensitive data in our data centers, on our networks, including intellectual property, our proprietary business information, and that of our customers, suppliers and business partners, and personally identifiable information of our employees. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Future clinical studies or other articles regarding our existing products or any competing products may be published that either support a claim, or are perceived to support a claim, that a competitors product is more accurate or effective than our products or that our products are not as accurate or effective as we claim or previous clinical studies have concluded. Additionally, physician associations or other organizations that may be viewed as authoritative or have an economic interest in nerve conduction studies and in related electrodiagnostic procedures or other procedures that may be performed using our products could endorse products or methods that compete with our products or otherwise announce positions that are unfavorable to our products. We have experienced this with the professional societies representing the neurology community. Any of these events may negatively affect our sales efforts and result in decreased revenues.
Foreign markets represented approximately 16% of our revenues in 2013, compared to 7% of our revenues in 2012. We are working to expand market penetration, particularly in Europe and Asia. Any such expansion will subject us to the possibility of new business risks, including:
|||failure to fulfill foreign regulatory requirements, if applicable, to market our products;|
|||availability of, and changes in, reimbursement within prevailing foreign health care payment systems;|
|||adapting to the differing business practices and laws in foreign countries;|
|||difficulties in managing foreign relationships and operations, including any relationships that we establish with foreign distributors or sales or marketing agents;|
|||limited protection for intellectual property rights in some countries;|
|||difficulty in collecting accounts receivable and longer collection periods;|
|||costs of enforcing contractual obligations in foreign jurisdictions;|
|||recessions in economies outside of the United States;|
|||political instability and unexpected changes in diplomatic and trade relationships;|
|||currency exchange rate fluctuations; and|
|||potentially adverse tax consequences.|
If we are successful in introducing our products into foreign markets, we will be affected by these additional business risks, which may adversely impact our financial condition or results of operations. In addition, expansion into foreign markets imposes additional burdens on our executive and administrative personnel, research and sales departments, and general managerial resources. Our efforts to introduce our products into foreign markets may not be successful, in which case we may have expended significant resources without realizing the expected benefit.
Although we have not borrowed any funds under the credit facility, provisions in the credit facility impose restrictions on our ability to, among other things:
|||incur additional indebtedness;|
|||replace certain of our executive officers;|
|||enter into transactions with affiliates;|
|||pay dividends or make distributions on, or repurchase, our capital stock; and|
|||merge or consolidate.|
In addition, we are required to meet certain financial covenants customary with this type of credit facility, including maintaining a minimum specified tangible net worth. The credit facility also contains other customary covenants, which we may not be able to comply with in the future. Our failure to comply with these covenants may result in the declaration of an event of default and could cause us to be unable to borrow under the credit facility. In addition to preventing additional borrowings under the credit facility, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under the credit facility at the time of the default, which would require us to pay all amounts outstanding. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all.
From time to time we may seek to acquire or invest in businesses, products or technologies, instead of developing them ourselves. Acquisitions and investments involve numerous risks, including:
|||the inability to complete the acquisition or investment;|
|||disruption of our ongoing businesses and diversion of management attention;|
|||difficulties in integrating the acquired entities, products or technologies;|
|||difficulties in operating the acquired business profitably;|
|||the inability to achieve anticipated synergies, cost savings or growth;|
|||potential loss of key employees, particularly those of the acquired business;|
|||difficulties in transitioning and maintaining key customer, distributor and supplier relationships;|
|||risks associated with entering markets in which we have no or limited prior experience; and|
In addition, any future acquisitions or investments may result in one or more of the following:
|||issuances of dilutive equity securities, which may be sold at a discount to market price;|
|||the use of significant amounts of cash;|
|||the incurrence of debt;|
|||the assumption of significant liabilities;|
|||increased operating costs or reduced earnings;|
|||financing obtained on unfavorable terms;|
|||large one-time expenses; and|
|||the creation of certain intangible assets, including goodwill, the write-down of which may result in significant charges to earnings.|
Any of these factors could materially harm our stock price, our business, or our operating results.
Until we are profitable, we will need significant additional funds to develop our business and sustain our operations. We sold shares of our stock and warrants in February 2012 and June 2013 and any additional sales of shares of our common stock or other securities exercisable into our common stock are likely to have a dilutive effect on some or all of our then existing stockholders. Resales of newly issued shares in the open market could also have the effect of lowering our stock price, thereby increasing the number of shares we may need to issue in the future to raise the same dollar amount and consequently further diluting our outstanding shares.
The perceived risk associated with the possible sale of a large number of shares could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated issuances or sales of stock could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the price of our stock to decline.
If our stock price declines, we may be unable to raise additional capital. A sustained inability to raise capital could force us to go out of business. Significant declines in the price of our common stock could also impair our ability to attract and retain qualified employees, reduce the liquidity of our common stock and result in the delisting of our common stock from The NASDAQ Stock Market LLC, or NASDAQ.
The trading price of our common stock has been highly volatile. For the five year period ended February 3, 2014, our stock price has fluctuated from a low of $1.47 to a high of $129.60. The market price for our common stock will be affected by a number of factors, including:
|||the denial or delay of regulatory clearances or approvals for our products under development or receipt of regulatory approval of competing products;|
|||our ability to accomplish clinical, regulatory and other product development and commercialization milestones and to do so in accordance with our timing estimates;|
|||changes in policies affecting third-party coverage and reimbursement in the United States and other countries;|
|||changes in government regulations and standards affecting the medical device industry and our products;|
|||ability of our products to achieve market success;|
|||the performance of third-party contract manufacturers and component suppliers;|
|||actual or anticipated variations in our results of operations or those of our competitors;|
|||announcements of new products, technological innovations or product advancements by us or our competitors;|
|||developments with respect to patents and other intellectual property rights;|
|||sales of common stock or other securities by us or our stockholders in the future;|
|||additions or departures of key scientific or management personnel;|
|||disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;|
|||trading volume of our common stock;|
|||changes in earnings estimates or recommendations by securities analysts, failure to obtain or maintain analyst coverage of our common stock or our failure to achieve analyst earnings estimates;|
|||public statements by analysts or clinicians regarding their perceptions of our clinical results or the effectiveness of our products;|
|||decreases in market valuations of medical device companies; and|
|||general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors.|
The stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated to the operating performance of these companies. Periods of volatility in the market price of a companys securities can result in securities class action litigation against a company. If class action litigation is initiated against us, we may incur substantial costs and our managements attention may be diverted from our operations, which could significantly harm our business.
Currently, our common stock trades on the NASDAQ Capital Market. During 2012 and 2010 we received notifications from NASDAQ informing us of certain listing deficiencies related to the minimum bid price listing requirements. Although we have since cured these deficiencies, it is possible that we could fall out of compliance again in the future. If we fail to maintain compliance with any NASDAQ listing requirements, we could be delisted and our stock would be considered a penny stock under regulations of the Securities and Exchange Commission, or SEC, and would therefore be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of our common stock and your ability to sell our securities in the secondary market.
Although our common stock is listed on the NASDAQ Capital Market, our common stock has experienced low trading volume. The 50 day average trading volume through February 3, 2014 as reported by NASDAQ was approximately 536,000 shares. Limited trading volume may subject our common stock to greater price volatility and may make it difficult for investors to sell shares at a price that is attractive to them.
Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change of control of our company or changes in our Board of Directors that our stockholders might consider favorable. Some of these provisions:
|||authorize the issuance of preferred stock which can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of our common stock;|
|||provide for a classified Board of Directors, with each director serving a staggered three-year term;|
|||prohibit our stockholders from filling board vacancies, calling special stockholder meetings, or taking action by written consent;|
|||provide for the removal of a director only with cause and by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of our directors; and|
|||require advance written notice of stockholder proposals and director nominations.|
We have also adopted a shareholder rights plan that could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, us or a large block of our common stock. A third party that acquires 15% or more of our common stock could suffer substantial dilution of its ownership interest under the terms of the shareholder rights plan through the issuance of common stock to all stockholders other than the acquiring person.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our Board of Directors or initiate actions that are opposed by our then-current Board of Directors, including a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our Board of Directors could cause the market price of our common stock to decline.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of our credit facility precludes us from paying any dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders sole source of potential gain for the foreseeable future.
Our headquarters is located in an approximately 30,000 square foot facility in Waltham, Massachusetts, which we occupy under an office lease expiring in March 2015. We believe that our existing facilities are adequate for our current needs.
While we are not currently a party to any material legal proceedings, we could become subject to legal proceedings in the ordinary course of business. We do not expect any such potential items to have a significant impact on our financial position.
Our common stock is traded on the NASDAQ Capital Market under the symbol NURO. The price range per share reflected in the table below is the high and low sales prices of our common stock as reported by NASDAQ (rounded to the nearest penny) for the periods presented and has been adjusted to reflect a 1-for-6 reverse stock split of our common stock completed on February 15, 2013.
|Years ended December 31,|
On February 3, 2014, there were approximately 109 stockholders of record of our common stock. This number does not include stockholders for whom shares were held in a nominee or street name. On February 3, 2014, the last reported sale price per share of our common stock on the NASDAQ Capital Market was $2.53.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance the expansion and growth of our business and do not expect to pay any cash dividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, and plans for expansion. Additionally, the credit facility restricts our ability to pay dividends.
We reacquired 80 shares of our common stock, at an average price of $3.01 per share, during the quarter ended December 31, 2013, in connection with the vesting of certain restricted shares issued pursuant to our Fifth Amended and Restated 2004 Stock Option and Incentive Plan. We reacquired these shares as part of the settlement of minimum tax withholding obligations by participants under our Fifth Amended and Restated 2004 Stock Option and Incentive Plan. The following table sets forth these reacquisitions that we made during the quarter ended December 31, 2013:
|Period||Total Number of Shares Purchased||
|Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs||
(or Approximate Dollar Value) of Shares
that May Yet Be Purchased Under the Plans or Programs
|October 1, 2013 October 31, 2013||||||N/A||N/A|
|November 1, 2013 November 30, 2013||||||N/A||N/A|
|December 1, 2013 December 31, 2013||80||$||3.01||N/A||N/A|
The following selected financial data are derived from our audited financial statements, which have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. The selected financial data below should be read in conjunction with Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, Item 7A, Quantitative and Qualitative Disclosures About Market Risk and our financial statements and related notes for the years ended 2013, 2012, and 2011 appearing elsewhere in this Annual Report on Form 10-K:
|Years Ended December 31,|
|(In thousands, except share and per share data)|
Statement of Operations Data:
|Cost of revenues||2,194||3,589||4,722||7,050||7,536|
|Research and development||3,438||3,546||3,877||5,856||5,611|
|Sales and marketing||2,780||5,727||6,689||11,072||10,841|
|General and administrative||4,225||4,735||5,112||7,232||9,119|
|Total operating expenses||10,443||14,008||15,678||24,160||25,571|
|Loss from operations||(7,358||)||(10,022||)||(10,003||)||(17,310||)||(6,970||)|
|Interest and other income||5||14||22||298||227|
|Warrants offering costs||(376||)|||||||||
|Changes in fair value of warrant liability||(290||)||||||||(5,175||)|
|Loss before taxes||(8,019||)||(10,008||)||(9,981||)||(17,012||)||(11,918||)|
|Income tax benefit||||||||121|||
|Net loss per common share, basic and diluted||$||(3.07||)||$||(5.22||)||$||(15.53||)||$||(26.41||)||$||(25.56||)|
|As of December 31,|
Balance Sheet Data:
|Cash, cash equivalents, and short-term investments||$||9,196||$||8,699||$||10,290||$||16,987||$||30,432|
|Total stockholders equity||7,195||8,800||11,089||20,199||35,710|
You should read the following discussion of our financial condition and results of operations in conjunction with our selected financial data, our financial statements, and the accompanying notes to those financial statements included elsewhere in this Annual Report on Form 10-K. 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 section titled Risk Factors, contained in Item 1A of this Annual Report on Form 10-K.
We are a medical device company focused on the treatment of 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.
We believe that there are large and important unmet needs in the treatment of diabetic neuropathies. As a medical device company with both unique and substantial experience in devices to measure and alter peripheral nerve function, we believe we are in the unique position to address these unmet needs 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 market and our goal is to be the dominant player in this field.
Since we shifted our strategic focus to the diabetic neuropathy market in 2011, we have launched two products with the potential to change medical practice for the treatment of diabetes. SENSUS, our therapeutic device for relief of chronic, intractable pain, was launched in January 2013. SENSUS is a convenient and wearable non-invasive device that offers physicians and their patients a non-narcotic pain relief option as a complement to medications. The device is lightweight and can be worn during the day while remaining active, or at night while sleeping. We believe it is the only transcutaneous electrical nerve stimulator designed specifically for people with diabetes that suffer from chronic pain. We believe this product will be attractive to pain medicine physicians, neurologists, endocrinologists, podiatrists, primary care physicians, and other physicians that are challenged with trying to manage pain in their patients with painful diabetic neuropathy, or PDN and other forms of neuropathic pain. We believe that PDN impacts 3 to 5 million people in the United States alone. In the United States, SENSUS is a prescription product and our early challenge has been and will continue to be to obtain broad, national exposure and acceptance among physicians as well as a broad distribution channel to fulfill prescriptions. We are working to create demand in several distinct channels: independent regional and national durable medical equipment, or DME, suppliers that employ sales representatives who detail physicians, large direct sale customers such as orthotic and prosthetic clinics and chronic pain treatment centers, and national diabetes mail order DMEs. We believe there may be future opportunities to expand our SENSUS revenue and gross margin by developing an over-the-counter version of SENSUS and a direct sales channel.
NC-stat DPNCheck, our diagnostic test for diabetic peripheral neuropathy, or DPN, has been on the market since launch in late 2011. Revenues were approximately $1.4 million in 2012 and were $1.3 million for the year ended December 31, 2013. Our sales efforts in the U.S. market are focused on Medicare Advantage providers. Medicare Advantage providers assume financial responsibility and the associated risks for the health care costs of their patients. For Medicare Advantage providers, we believe that NC-stat DPNCheck presents an attractive clinical case that provides early detection of neuropathy allowing for earlier clinical intervention to help mitigate the effects of neuropathy on both patient quality of life and cost of care. Also, the diagnosis and documentation of neuropathy provided by NC-stat DPNCheck helps clarify the patient
health profile which, in turn, may have a direct, positive effect on the Medicare Advantage premium received by the provider. Attractive international market opportunities are developing in Japan, China, the Middle East and Mexico. These are led by our distributors with support from our corporate office.
We are currently involved in seven studies that use NC-stat DPNCheck in the evaluation of neuropathy in persons with diabetes under various study conditions. We anticipate that these studies will expand the clinical foundation for use of NC-stat DPNCheck which, in turn, should support future adoption by customers. We are also developing plans for clinical studies employing SENSUS.
We continue to manage our historical neurodiagnostics business which is centered on the ADVANCE System. This business generated $6.1 million in revenue during 2012 and $3.8 million in 2013. There are few direct cash operating expenses for this business which has been in decline for several years due to reimbursement challenges. We believe that revenue will continue to decline in this legacy business as we operate it for cash flow.
The following table summarizes our revenues:
|Years Ended December 31,|
Revenues include sales from SENSUS, our therapeutic device for relief of chronic, intractable pain launched in January 2013; NC-stat DPNCheck, our diagnostic test for DPN; and our legacy ADVANCE neurodiagnostics business. During the year ended December 31, 2013, we shipped approximately 1,300 SENSUS devices and recorded revenue of approximately $200,000. As we worked to develop distribution in several sales channels, including DME suppliers addressing pain physicians, primary care physicians and endocrinologists, large clinic organizations and direct mail diabetes suppliers. We recorded NC-stat DPNCheck revenue of $1.3 million compared to $1.4 million in the prior year when we had a direct sales force focused on the podiatry market. That sales force was disbanded at the end of 2012. Our market focus for NC-stat DPNCheck during 2013 was on the Medicare Advantage sector and on selected international opportunities in Asia, the Middle East and Mexico where we continue to believe that attractive near-term opportunities for NC-stat DPNCheck exist. ADVANCE revenues totaled $3.8 million in 2013 in comparison with $6.1 million in 2012. The decline in ADVANCE revenue continues the historical trend for this product line which has few direct operating expenses and is managed for cash flow.
The following table summarizes our cost of revenues and gross margin:
|Years Ended December 31,|
|Cost of revenues||$||2,194.3||$||3,588.8||$||(1,394.5||)||(38.9||)%|
Corresponding to our decrease in revenues, our cost of revenues decreased to $2.2 million for the year ended December 31, 2013, compared to $3.6 million for the year ended December 31, 2012. Our gross margin improved to 58.4% in 2013 from 52.6% in 2012 primarily attributable to the NC-stat DPNCheck product line which carries higher margins than ADVANCE and which contributed 23% of revenue in 2013 versus 19% of revenue in 2012. In addition, 2013 NC-stat DPNCheck revenue was more heavily weighted to sales of high margin consumable biosensors than the lower margin devices sales during 2012 when we were establishing an installed base of customers. SENSUS had a minor effect on 2013 margins given its small,
launch year revenue contribution. Inventory charges primarily related to excess ADVANCE inventory were approximately $152,000 in 2013 versus approximately $235,000 in 2012. This year-to-year decline contributed to the margin improvement.
The following table presents a breakdown of our operating expenses:
|Years Ended December 31,|
|Research and development||$||3,438.2||$||3,545.8||$||(107.6||)||(3.0||)%|
|Sales and marketing||2,779.7||5,727.5||(2,947.8||)||(51.5||)|
|General and administrative||4,225.5||4,735.2||(509.7||)||(10.8||)|
|Total operating expenses||$||10,443.4||$||14,008.5||$||(3,565.1||)||(25.5||)|
Research and development expenses for the years ended December 31, 2013 and 2012 were approximately about $3.4 million and $3.5 million, respectively. The comparative results largely reflect a $112,000 decrease in personnel costs, resulting from lower headcount and incentive compensation expense, partially offset by a $30,000 increase in the costs of clinical studies related to NC-stat DPNCheck. Personnel costs for 2013 include $137,000 for severance incurred in the second quarter of 2013. R&D spending should increase modestly during 2014 as SENSUS products move forward in the development pipeline and SENSUS clinical studies now in the planning phase are initiated during the second or third quarter of the year.
Sales and marketing expenses decreased to $2.8 million for the year ended December 31, 2013 from $5.7 million for the year ended December 31, 2012. During 2012, we reduced our dependence on field clinical educators to support our neurodiagnostic business and we shifted our NC-stat DPNCheck emphasis toward managed care, allowing us to eliminate our direct sales representatives. In addition, in 2013 we further reduced our sales staff, largely in support of NC-stat DPNCheck, resulting in severance cost of $382,900. As a result, total sales and marketing personnel costs in 2013 were $1.9 million lower than in the prior year. Personnel related travel costs decreased by $509,000, trade show costs decreased by $108,000, advertising and promotion costs decreased by $91,000, recruiting and retention costs decreased by $20,000, dues decreased by $50,000, and depreciation decreased by $44,000. Sales and marketing expenses for 2012 included $58,000 for the write-off of loaner and demo systems. Sales and marketing expense in 2014 has been planned with a baseline that is modestly below 2013; however, we intend to maintain spending flexibility related to product initiatives, particularly regarding SENSUS. Opportunities related to SENSUS channel development in the retail sector in the second half of 2014 may require us to increase spending beyond that baseline in order to build product awareness.
General and administrative expenses decreased to $4.2 million for the year ended December 31, 2013 compared to $4.7 million for the same period in 2012. This decrease included $317,000 for consultants and temporary staff, $166,000 for personnel costs, $83,000 for taxes and fees, $81,000 for travel costs, $55,000 for insurance and outside administration, and $43,000 for stock-based compensation. These spending reductions were partially offset by an unfavorable year over year increase of $255,000 in bad debt expense. During 2013 we recorded $111,000 in bad debt expenses compared to the recognition of a net credit to bad debt expense of $144,000 in 2012 due to favorable collection experience on old accounts. Looking forward to 2014, we expect that general and administrative expense will be in the range of 2013.
Interest income was approximately $5,700 and $14,500 for the years ended December 31, 2013 and 2012, respectively. Interest income was earned from investments in cash equivalents. In connection with an equity offering during 2013, we recognized costs related the issuance of common stock warrants of $376,000.
Outstanding warrants from that offering were valued at fair value at quarterly reporting periods and on warrant transaction dates. The total fair value adjustments to outstanding warrants during 2013 were $290,000.
The following table summarizes our revenues:
|Years Ended December 31,|
Revenues include sales from our initial diabetes product, NC-stat DPNCheck, which was commercially launched late in 2011, and our legacy neurodiagnostics business. During the year ended December 31, 2012 we shipped 836 NC-stat DPNCheck devices plus consumable biosensors and recorded revenue from these products of $1.4 million. This compares with NC-stat DPNCheck revenue of $84,800 for the year ended December 31, 2011. Revenues from medical device and consumables sales of our legacy neurodiagnostic products totaled $6.1 million in 2012, compared to $10.3 million in 2011. The $4.2 million reduction in neurodiagnostics revenue reflects the continuing decline of this business which we manage for cash flow and not growth. In addition, neurodiagnostic revenue in 2012 was adversely affected by our discontinuance of service to older NC-stat products linked to our onCall system. While many NC-stat accounts transitioned to the ADVANCE platform, we did experience a drop in testing accounts shortly after we shut down the onCall system.
The following table summarizes our cost of revenues and gross margin:
|Years Ended December 31,|
|Cost of revenues||$||3,588.8||$||4,722.1||$||(1,133.3||)||(24.0||)%|
Our cost of revenues decreased $1.1 million to $3.6 million, or 47.4% of revenues, for the year ended December 31, 2012, compared to $4.7 million, or 45.4% of revenues for the year ended December 31, 2011. Included in cost of revenues in 2012 was $234,800 in non-cash charges for excess inventory related to our neurodiagnostics business. Our gross margin percentage of 52.6% of revenues for 2012 decreased from 54.6% of revenues for 2011. The decreased gross margin percentage in 2012 reflected in part discounts and promotions aimed at expanding market penetration, as well as non-cash charges to write-off excess inventory.
The following table presents a breakdown of our operating expenses:
|Years Ended December 31,|
|Research and development||$||3,545.8||$||3,877.5||$||(331.7||)||(8.6||)%|
|Sales and marketing||5,727.5||6,688.6||(961.1||)||(14.4||)|
|General and administrative||4,735.2||5,111.6||(376.4||)||(7.4||)|
|Total operating expenses||$||14,008.5||$||15,677.7||$||(1,669.2||)||(10.6||)|
Research and development expenses for the years ended December 31, 2012 and 2011 were $3.5 million and $3.9 million, respectively. The comparative results included decreases of $214,100 in technology licenses and fees as we narrowed our product development focus, $192,500 related to intangible asset impairment charges, $120,000 in recruiting costs for new hires in 2011, $58,800 in stock-based compensation, and $54,000 in depreciation and amortization. These decreases were partially offset by a $187,000 increase in personnel costs as we increased headcount to support development of SENSUS and product modifications to NC-stat DPNCheck, plus a $136,300 increase in engineering fees related to these new products.
Sales and marketing expenses decreased to $5.7 million for the year ended December 31, 2012 from $6.7 million for the year ended December 31, 2011. During 2012, we reduced our dependence on field clinical educators to support our neurodiagnostic business and we shifted our NC-stat DPNCheck emphasis toward managed care allowing us to eliminate our endrocrinolgy/podiatry direct sales representatives. Total sales and marketing headcount was reduced by 18 positions as a result. Personnel costs, including compensation, benefits and recruiting costs in 2012 were $967,500 lower than in 2011. This spending reduction was partially offset by an increase of $101,100 for outside consulting support related to international markets and for U.S. distribution channel development for SENSUS.
General and administrative expenses decreased to $4.7 million for the year ended December 31, 2012 from $5.1 million for the year ended December 31, 2011. Personnel costs were reduced in 2012 with $348,100 attributable to stock compensation and $142,900 attributable to incentive compensation. Insurance costs were reduced by $90,300 due to a lower coverage amount and reduced insurance rates. Bad debt expense and customer credit processing fees were reduced by $98,300. We expanded investor outreach and publicity during 2012, which increased costs by $196,000.
Interest income was $14,500 and $21,900 for the years ended December 31, 2012 and 2011, respectively. Interest income was earned from investments in cash equivalents.
Our principal source of liquidity is our cash and cash equivalents. As of December 31, 2013, cash and cash equivalents totaled $9.2 million. On June 4, 2013, we entered into a Purchase Agreement providing for the issuance of (i) 248,147 shares of common stock at a price of $2.095 per share, (ii) 1,066.254 shares of Series A-1 Preferred Stock at a price of $1,000 per share, (iii) 3,370.510 shares of Series A-2 Preferred Stock at a price of $1,000 per share, and (iv) five year warrants to purchase up to 2,365,934 shares of common stock with an exercise price of $2.00 per share, which we collectively refer to as the 2013 Offering. The 2013 Offering resulted in approximately $4.5 million in net proceeds, after deducting placement agent fees and other expenses. During the second half of 2013, all of the Series A-1 Preferred Stock and Series A-2 Preferred Stock issued in the 2013 offering was converted at the election of the holder into a total of 2,117,787 shares of common stock. In addition, during the fourth quarter of 2013, we issued 1,308,611 shares of common stock as a result of the exercise of warrants issued in the 2013 Offering resulting in proceeds to us of $2.6 million. See Note 14, Stockholders Equity, of our Notes to Financial Statements contained elsewhere in this Annual Report on Form 10-K for further information regarding this transaction. Our ability to generate revenue to operate our business will largely depend on the success of our diabetes business initiative and our ability to manage our legacy neurodiagnostics business to optimize cash flow. A low level of market interest in NC-stat DPNCheck or SENSUS, an accelerated decline in our neurodiagnostics consumables sales, or unanticipated increases in our operating costs would have an adverse effect on our liquidity and ability to fund operations.
|December 31, 2013||December 31, 2012||Change||Change|
|Cash and cash equivalents||$||9,195.8||$||8,699.5||$||496.3||5.7||%|
In order to supplement our access to capital, we are party to an amended Loan and Security Agreement, with a bank which provides us with a credit facility in the amount of $2.5 million on a revolving basis. The amended credit facility expires on January 15, 2015. Under terms of the amended and extended Agreement the amount of the Credit Facility will remain at $2.5 million until December 31, 2014. Thereafter, until its expiry on January 15, 2015, the Credit Facility will be reduced to $750,000 if the Company has not yet completed an equity offering as defined in the Agreement. 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 collateralized by our cash, accounts receivable, inventory, and equipment. The credit facility includes traditional lending and reporting covenants. These include certain financial covenants applicable to liquidity that are to be maintained by us. As of December 31, 2013, we were in compliance with these covenants and had not borrowed any funds under the credit facility. Of the credit facility limit, $225,000 is restricted to support a letter of credit issued in favor of our landlord in connection with the lease of our facilities in Waltham, Massachusetts. Consequently, the amount available for borrowing under the credit facility as of December 31, 2013 was $2,275,000.
During the year ended December 31, 2013, our cash and cash equivalents increased by $496,300 due mainly to net cash provided by the 2013 Offering of $4.5 million and the $2.6 million received from the exercise of warrants, partially offset by $6.6 million of net cash used in operations.
In managing our working capital, two of the financial measurements we monitor are days sales outstanding and inventory turnover rate, which are presented in the table below for the years ended December 31, 2013 and 2012:
|Years Ended December 31,|
|Days sales outstanding (days)||32||33|
|Inventory turnover rate (times per year)||3.9||3.2|
Payment terms extended to our customers generally require payment within 30 days from invoice date. The inventory turnover rate has improved since December 31, 2012 as a result of reduced inventory balances.
The following sets forth information relating to sources and uses of our cash:
|Years Ended December 31,|
|Net cash used in operating activities||$||(6,554.9||)||$||(9,175.6||)||$||(6,778.4||)|
|Net cash (used in) provided by investing activities||(86.1||)||122.0||67.5|
|Net cash provided by financing activities||7,137.3||7,462.6||14.5|
Our operating activities used $6.6 million for the year ended December 31, 2013 primarily attributable to our net loss of $8.0 million. This loss included charges of $376,300 for offering costs allocated to warrants in the 2013 Offering, $289,700 for the change in fair value of the warrant liability, $245,800 for stock-based compensation, $151,600 for inventory charges, and $150,700 for depreciation and amortization.
During the year ended December 31, 2013, our investing activities reflected $86,000 spent for the acquisition of fixed assets.
Financing activities for the year ended December 31, 2013 included $4.5 million from the net proceeds of the 2013 Offering and $2.6 million of proceeds from the exercise of 1,308,611 common stock warrants. At December 31, 2013, there remain 1,057,323 outstanding common stock warrants from the 2013 Offering with an exercise price of $2.00 per share.
We held cash and cash equivalents of $9.2 million as of December 31, 2013. We believe that these resources and the cash to be generated from expected product sales will be sufficient to meet our projected operating requirements through the first quarter of 2015. 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 of our products and the uncertainty of future revenues from new 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 in the second quarter of 2015 and beyond. We will 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 or on favorable terms, if at all. We maintain a shelf registration statement on Form S-3 with the SEC covering shares of our common stock and other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate at prices and on terms to be determined at the time of any such offerings. However, pursuant to the instructions to Form S-3, we only have the ability to sell shares under the shelf registration statement, during any 12-month period, in an amount less than or equal to one-third of the aggregate market value of our common stock held by non-affiliates. As a result of the 2013 Offering, we will be limited in the use of this shelf registration statement until June 2014. We have also filed a registration statement for an equity offering on Form S-1, which has not yet been declared effective. If we raise additional funds by issuing equity or debt securities, either through the sale of securities pursuant to a registration statement or by other means, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. 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.
As of December 31, 2013, we have federal and state net operating loss, or NOL, carryforwards available to offset future taxable income of $97.1 million and $18.6 million, respectively, and federal and state tax credits of $1.1 million and $977,000, respectively, which may be available to reduce future taxable income and the related taxes thereon. The federal NOLs begin to expire in 2019 and the state NOLs begin to expire in 2014. The federal and state research and development credits both begin to expire in 2018. A full valuation allowance has been provided against our NOL carryforwards and research and development credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations if an adjustment were required.
As of December 31, 2013, we did not have any off-balance sheet financing arrangements.
The following table summarizes our principal contractual obligations as of December 31, 2013 and the effects such obligations are expected to have on our liquidity and cash flows in future periods.
|Payments due in|
|Contractual Obligations||Total||2014||1 3 years||3 5 years|
|Operating lease obligations||$||793,755||$||635,004||$||158,751||$|||
|Purchase order obligations||147,806||147,806|||||
|Total contractual obligations||$||941,561||$||782,810||$||158,751||$|||
As of December 31, 2013, we have no contractual obligations that extend beyond two years.
Our financial statements are based on the selection and application of generally accepted accounting principles, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ significantly from those estimates, and any such differences may be material to our financial statements. We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. Our significant accounting policies are presented within Note 2 to our Financial Statements.
The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred and risk of loss has passed, the sellers price to the buyer is fixed or determinable, and collection is reasonably assured.
Revenues associated with the sale of the ADVANCE devices to customers and distributors 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 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.
Revenues associated with the sale of the SENSUS and NC-stat DPNCheck devices 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.
Revenues also include sales of consumables, including single use nerve specific electrodes and other accessories. These revenues 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, and product returns are reasonably estimable.
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 Companys 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 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 Companys 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.
The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We review our allowance for doubtful accounts and determine the allowance based on an analysis of customer past payment history, product usage activity, and recent communications between us and the customer. Individual customer balances which are past due and over 90 days outstanding are reviewed individually for collectibility. Account balances are written-off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers.
The realizable value of inventories is based upon the types and levels of inventories held, forecasted demand, pricing, competition, and changes in technology. Our consumables have an eighteen-month shelf life. Should current market and economic conditions deteriorate, our actual recoveries could be less than our estimates.
There have been no recent accounting pronouncements or changes in accounting pronouncements since the recent accounting pronouncements described in the Company's 2012 Form 10-K that are of significance to the Company.
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.
The information required by this item may be found on pages F- 1 through F- 24 of this Annual Report on Form 10-K with the exception of the unaudited summarized quarterly financial data which is presented below. Net loss per common share is calculated independently for each of the periods presented. Therefore, the sum of the quarterly net loss per common share amounts will not necessarily equal the total for the full fiscal year. Per common share data and share amounts reflect a 1-for-6 reverse split of our common stock completed on February 15, 2013.
|Year Ended December 31, 2013|
|Second Quarter||Third Quarter||Fourth Quarter||Total|
|Cost of revenues||569,784||501,161||578,484||544,830||2,194,259|
|Net loss per common share, basic and diluted||$||(1.06||)||$||(0.92||)||$||(0.26||)||$||(0.87||)||$||(3.07||)|
|Year Ended December 31, 2012|
|Second Quarter||Third Quarter||Fourth Quarter||Total|
|Cost of revenues||1,134,944||983,350||793,990||676,522||3,588,806|
|Net loss per common share, basic and diluted||$||(1.99||)||$||(1.32||)||$||(1.24||)||$||(0.89||)||$||(5.22||)|
There have been no changes in or disagreements with accountants on accounting and financial disclosure matters in the last fiscal year.
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 the end of the period covered by this Form 10-K, 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 SECs 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.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013 based on the criteria in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control Integrated Framework (1992) issued by the COSO, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this Annual Report.
There have been no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The following table and biographical descriptions set forth information regarding our executive officers and directors, based on information furnished to us by each executive officer and director, as of December 31, 2013:
|Shai N. Gozani, M.D., Ph.D.||49||Chairman of the Board, Chief Executive Officer, President and Secretary|
|Thomas T. Higgins||62||Senior Vice President, Chief Financial Officer and Treasurer|
|Guy Daniello||69||Senior Vice President of Information Technology|
|Michael Williams, Ph.D.||57||
Senior Vice President Engineering, Chief
|David E. Goodman, M.D. (1) (2)||57||Director|
|Allen J. Hinkle, M.D. (2) (3)||63||Director|
|Nancy E. Katz (1)||54||Director|
|Timothy R. Surgenor (1) (3)||54||Director|
|David Van Avermaete||62||Director|
|(1)||Member of Audit Committee|
|(2)||Member of Compensation Committee|
|(3)||Member of Nominating and Corporate Governance Committee|
Shai N. Gozani, M.D., Ph.D. founded our company in 1996 and currently serves as Chairman of our Board of Directors and as our President, Chief Executive Officer and Secretary. Since founding our company in 1996, Dr. Gozani has served in a number of positions at our company including Chairman since 1996, President from 1996 to 1998 and from 2002 to the present, Chief Executive Officer since 1997 and Secretary since July 2008. Dr. Gozani holds a B.A. in computer science, an M.S. in Biomedical Engineering and a Ph.D. in Neurobiology, from the University of California, Berkeley. He also received an M.D. from Harvard Medical School and the Harvard-M.I.T. Division of Health Sciences at M.I.T. Prior to forming our company, Dr. Gozani completed a neurophysiology research fellowship in the laboratory of Dr. Gerald Fischbach at Harvard Medical School. Dr. Gozani has published articles in the areas of basic and clinical neurophysiology, biomedical engineering and computational chemistry. The Board has concluded that Dr. Gozani should serve as a director because Dr. Gozanis extensive knowledge of engineering and neurophysiology, combined with the unique understanding of our technology and business he has gained as our founder and as a key executive, provides invaluable insight to our Board and to the entire organization.
Thomas T. Higgins has served as our Senior Vice President, Chief Financial Officer and Treasurer since September 2009. Prior to joining NeuroMetrix, from January 2005 to March 2008, Mr. Higgins was Executive Vice President and Chief Financial Officer at Caliper Life Sciences, Inc, a provider of technology and services for life sciences research. Before Caliper, Mr. Higgins was Executive Vice President, Operations and Chief Financial Officer at V.I. Technologies, Inc. (Vitex), a biotechnology company addressing blood safety. Before Vitex, Mr. Higgins served at Cabot Corporation in various senior finance and operations roles. His last position at Cabot was President of Distrigas of Massachusetts Corporation, a subsidiary involved in the liquefied natural gas business, and prior to that he was responsible for Cabots Asia Pacific carbon black operations. Before joining Cabot, Mr. Higgins was with PricewaterhouseCoopers where he started his career. Mr. Higgins holds a BBA with honors from Boston University.
Guy Daniello has served as our Senior Vice President of Information Technology since July 2003 and, prior to that time, as our Vice President of Information Technology and Director of Information Technology since 1998. Prior to joining NeuroMetrix, Mr. Daniello was an independent software consultant, the Senior Vice President of Engineering at Shiva Corporation from 1996 to 1997, and the Chief Technology Officer and
Vice President of Product Development at Gandalf Technologies from 1993 to 1996. In 1991 he founded Network Architects, a software company. Prior to starting Network Architects, he served as President and Chief Executive Officer of Datamedia Corp. and the Director of Small Systems Development at Honeywell Information Systems. Mr. Daniello holds a B.S. in business administration from Northeastern University.
Michael Williams, Ph.D. has served as our Senior Vice President of Engineering and Chief Technology Officer since September 2011 and, prior to that time, as our Senior Vice President of Engineering since July 2003 and as Vice President of Engineering since May 2000. From March 1996 to January 2000, Dr. Williams served as Division President at Radionics, where he was responsible for all software-based products, including treatment planning and image-guided surgery. Prior to Radionics, he served as an engineer at Hughes Aircraft Space & Communications Group. Dr. Williams received a B.S. in physics and mathematics from University of Puget Sound and an M.S. and Ph.D. in Physics from Brown University.
David E. Goodman, M.D., M.S.E. has served as a member of our Board of Directors since June 2004. Since 2013, Dr. Goodman has served as CEO of FeetFirst, a technology-focused healthcare services company he co-founded with operations in California and Hawaii that is committed to preventing the devastating and expensive microvascular complications of diabetes. Since 2012, Dr. Goodman has served as CMO of FirstVitals, a healthcare services company focused on wellness and prevention. Since 2011, Dr. Goodman has also served as an independent consultant. During 2010, Dr. Goodman has served as President and Chief Executive Officer of SEDline, Inc., a research-focused company with the mission to expand the scope and applications for neuromonitoring. From 2008 to 2009, Dr. Goodman served as Executive Vice President of Business Development for Masimo Corporation, a manufacturer of non-invasive patient monitors. From 2006 to 2008, Dr. Goodman served as an independent consultant providing product design, regulatory and analytical consulting services to medical device and biopharmaceutical companies and also served in this capacity from 2003 to 2004 and from 2001 to 2002. From 2005 to 2006, Dr. Goodman served as President and Chief Executive Officer of BaroSense, Inc., a medical device company focused on developing minimally invasive devices for the long-term treatment of obesity. From 2004 to 2005, Dr. Goodman served as President and Chief Executive Officer of Interventional Therapeutic Solutions, Inc., an implantable drug delivery systems company. From 2002 to 2003, Dr. Goodman served as Chairman, President and Chief Executive Officer of Pherin Pharmaceuticals, a pharmaceutical discovery and development company. From 1994 to 2001, Dr. Goodman held various positions, including Chief Executive Officer, Chief Medical Officer and director, for LifeMasters Supported SelfCare, Inc., a disease management services company that Dr. Goodman founded. Dr. Goodman also served as a director of Sound Surgical Technologies LLC, a private manufacturer of aesthetic surgical tools from 2011 until its acquisition by Solta Medical (Nasdaq:SLTM) in 2013. Dr. Goodman holds a B.A.S. in applied science and bioengineering and a M.S.E. in bioengineering from the University of Pennsylvania. He also received an M.D. from Harvard Medical School and the Harvard-M.I.T. Division of Health Sciences and Technology. Dr. Goodman holds 18 patents and is a practicing physician with licenses in California and Hawaii. The Board has concluded that Dr. Goodman should serve as a director because Dr. Goodmans medical and engineering background and his many years of executive experience in the medical device industry provide important experience and expertise to the Board.
Allen J. Hinkle, M.D. has served as a member of our Board of Directors since January 2006. From December 2010 through the present, Dr. Hinkle has served as the Chief Medical Officer of MVP Health Care, a not-for-profit health insurer. Dr. Hinkle was the Chief Medical Officer and Senior Vice President for Tufts Health Plan in Massachusetts, a health insurance provider, where he was responsible for medical management programs and initiatives from 2004 to 2009. Prior to becoming the Chief Medical Officer of Tufts Health Plan, Dr. Hinkle was Senior Medical Director and Vice President of Health Care Quality, Policy and Innovations at Blue Cross Blue Shield of Massachusetts, a health insurance provider, from 2001 through September 2004. From 1995 to 2001, Dr. Hinkle was the Chief Medical Officer and Senior Vice President of Quality Healthcare Management for Anthem Blue Cross Blue Shield of New Hampshire and Matthew Thornton Plan, health insurance provider organizations. Dr. Hinkle has over 30 years of experience in the healthcare field. Dr. Hinkle received a B.S. from the University of Massachusetts at Amherst and an M.D. from Albert Einstein College of Medicine in New York. He is board certified in pediatrics and anesthesiology and is an Associate Professor of Anesthesiology and Pediatrics at Dartmouth Medical School. He also owns several U.S. patents on medical devices. The Board has concluded that Dr. Hinkle should serve
as a director because Dr. Hinkles years of experience as a physician and in executive positions in the health insurance industry provide the Board with valuable insights in the areas of product development and reimbursement.
Nancy E. Katz has served as a member of our Board of Directors since December 2010. Since May 2011, Ms. Katz has served as Vice President, Consumer Marketing at Medtronic, Inc., a medical technology company. From July 2005 to July 2010, Ms. Katz was Senior Vice President, Bayer Diabetes Care North America. Prior to this position, she was President and Chief Executive Officer of Calypte Biomedical Corporation, a manufacturer of HIV diagnostics, President of Zila Pharmaceutical, Inc, a manufacturer of oral care products, and held senior marketing positions with the Lifescan division of Johnson & Johnson (blood glucose diabetes products), Schering-Plough Healthcare Products, and with American Home Products. She has previously served on the Boards of Directors of Neoprobe Corporation (AMEX: NEOP), Calypte Biomedical Corporation, LXN Corporation and Pepgen Corporation. She received a B.S. in business from the University of South Florida. The Board has concluded that Ms. Katz should serve as a director because her experience in diabetes care and marketing into the diabetes sector provides valuable insight to the Board and management in our diabetes strategy.
Timothy R. Surgenor has served as a member of our Board of Directors since April 2009. Since April 2009, Mr. Surgenor has been a partner at Red Sky Partners, LLC, a provider of general management consulting services to the biotechnology and medical device industries. Since July, 2012 Mr. Surgenor has also served as a director of Precision Ventures, a developer of medical and consumer devices. From 2003 to 2009, Mr. Surgenor served as President, Chief Executive Officer and director of Cyberkinetics Neurotechnology Systems (OTC: CYKN.PK), a medical device company. From January 1999 to January 2003, Mr. Surgenor was Executive Vice President at Haemonetics Corporation, which is a medical device company. From 1994 to 1999, Mr. Surgenor was President of Genzyme Tissue Repair, the cell therapy division of Genzyme Corporation. Previously, Mr. Surgenor was Executive Vice President and Chief Financial Officer of BioSurface Technology, Inc. and also held various positions in operations at Integrated Genetics. Mr. Surgenor received a B.A. in Biochemistry from Williams College and an M.B.A. from Harvard Business School. The Board has concluded that Mr. Surgenor should serve as a director because Mr. Surgenors long career in the medical device and biotechnology business as both an entrepreneur and in senior executive positions in public companies provides the Board with important industry experience as well as valuable finance, accounting and executive management expertise.
David Van Avermaete has served as a member of our Board of Directors since September 2013. From April 2004 to February 2013, Mr. Van Avermaete served as Chief Executive Officer of VeraLight, Inc., a medical device company he founded, that focuses on non-invasive screening for type 2 diabetes. From 2000 to 2004, Mr. Van Avermaete served as Senior Vice President Non-Invasive Technology of InLight Solutions, a Johnson & Johnson company focused on transformational technology in the diabetes field. From 1998 to 2000, Mr. Van Avermaete served as U.S. President of the LifeScan division of Johnson & Johnson and, from 1990 to 1998, in various senior level positions at LifeScan concentrating in sales and marketing. Previously, Mr. Van Avermaete served as Vice President Sales and Marketing at Biotope, Director of Marketing at Roche Diagnostics, and Director of Marketing and Sales at Syntex Medical Diagnostics. Mr. Van Avermaete received a Master of Business Administration and a Master of Science Degree in Microbiology from the University of Arizona and a Bachelor of Science Degree in medical technology and chemistry from Ball State University. The Board has concluded that Mr. Van Avermaete should serve as a director because his executive level experience in the medical device and diabetes field, as well as in entrepreneurial ventures, provides the Board with a valuable perspective in commercializing diabetes products.
Our amended and restated certificate of incorporation, as amended, provides for a classified board of directors consisting of three staggered classes of directors (Class I, Class II and Class III). The members of each class of our Board of Directors serve for staggered three-year terms, with the terms of our Class I, Class II and Class III directors expiring upon the election and qualification of directors at the annual meetings of stockholders to be held in 2014, 2015, and 2016, respectively. Currently:
|||our Class I directors are Allen J. Hinkle, M.D. and Timothy R. Surgenor;|
|||our Class II directors are Shai N. Gozani, M.D., Ph.D. and David Van Avermaete; and|
|||our Class III directors are David E. Goodman, M.D. and Nancy E. Katz.|
Our Board of Directors has determined that Dr. Goodman, Dr. Hinkle, Mr. Surgenor, Ms. Katz, and Mr. Van Avermaete are independent directors for purposes of the corporate governance rules contained in the NASDAQ Marketplace Rules, or the NASDAQ rules.
Our Board of Directors has an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee.
The Audit Committee currently consists of Mr. Surgenor, Chairman, Dr. Goodman, and Ms. Katz. The Audit Committee operates pursuant to a charter that was approved by our Board of Directors, a copy of which is available on our website at http://www.neurometrix.com under the heading Investor Relations and subheading Corporate Governance. The purposes of the Audit Committee are to, among other functions, assist the Board of Directors in overseeing the operation of a comprehensive system of internal controls covering the integrity of our financial statements and reports, compliance with laws, regulations and corporate policies, and the qualifications, performance and independence of our registered public accounting firm. Mr. Surgenor, Dr. Goodman, and Ms. Katz are all independent as that term is defined in the rules of the SEC and the applicable NASDAQ rules relating to audit committee members. Our Board of Directors has determined that Mr. Surgenor qualifies as an audit committee financial expert as such term is defined in the rules of the SEC. The Audit Committee held five meetings during 2013.
There have been no changes to the procedures disclosed in our proxy statement for the 2013 annual meeting of stockholders by which stockholders may nominate directors.
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions. A current copy of the Code of Business Conduct and Ethics is available on our website at http://www.neurometrix.com under the heading Investor Relations and subheading Corporate Governance, and we intend to disclose on this website any amendment to, or waiver of, any provision of the Code of Business Conduct and Ethics applicable to our directors or executive officers that would otherwise be required to be disclosed under the SEC rules, to the extent permitted, by the NASDAQ rules. A current copy of the Code of Business Conduct and Ethics may also be obtained, without charge, upon written request directed to us at: NeuroMetrix, Inc., 62 Fourth Avenue, Waltham, Massachusetts 02451, Attention: Compliance Officer.
Section 16(a) of the Exchange Act requires our directors and executive officers and holders of more than 10% of our common stock (collectively, Reporting Persons) to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Such Reporting Persons are required by regulations of the SEC to furnish us with copies of all such filings. Our records reflect that all reports which were required to be filed pursuant to Section 16(a) of the Exchange Act were filed on a timely basis.
The information required by this Item will be contained in our definitive proxy statement for our 2014 Annual Meeting of Stockholders under the captions Compensation of Executive Officers and Director Compensation Table 2013 and is incorporated by reference herein.
The following table sets forth certain information concerning beneficial ownership as of February 3, 2014, except as noted below, of our common stock by:
|||each of our directors;|
|||each of our named executive officers;|
|||all of our directors and executive officers as a group; and|
|||each stockholder known by us to beneficially own more than five percent of our common stock.|
The number of common shares beneficially owned by each stockholder is determined under rules issued by the SEC regarding the beneficial ownership of securities. This information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership of common stock includes (1) any shares as to which the person or entity has sole or shared voting power or investment power and (2) any shares as to which the person or entity has the right to acquire beneficial ownership within 60 days after February 3, 2014, including any shares that could be purchased by the exercise of options or warrants on or within 60 days after February 3, 2014. Each stockholders percentage ownership is based on 5,945,581 shares of our common stock outstanding as of February 3, 2014 plus the number of shares of common stock that may be acquired by such stockholder upon exercise of options or warrants that are exercisable on or within 60 days after February 3, 2014.
Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under community property laws.
|Amount and Nature of Beneficial Ownership||Percent of Class of Total|
|Name and Address (1) of Beneficial Owner||Common Stock||Options (2)||Total|
Directors and Executive Officers
|Shai N. Gozani, M.D., Ph.D.||72,641||13,044||85,685||1.4||%|
|Thomas T. Higgins||24,319||1,759||26,078||*|
|Michael Williams, Ph.D.||17,194||6,284||23,478||*|
|Allen Hinkle, M.D.||834||1,937||2,771||*|
|David E. Goodman, M.D.||834||1,798||2,632||*|
|Timothy R. Surgenor||834||937||1,771||*|
|Nancy E. Katz||834||780||1,614||*|
|David Van Avermaete||||||||*|
|All Current Directors and Executive Officers as a group (9 persons)||133,042||32,476||165,518||2.8||%|
|Amount and Nature of Beneficial Ownership||Percent of Class of Total|
|Name and Address (1) of Beneficial Owner||Common Stock||Warrants (2)||Total|
Beneficial Owner of 5% or More Other than Directors and Executive Officers
|Sabby Management, LLC (3)||574,016||||574,016||9.7||%|
|*||Represents less than 1% of the outstanding shares of common stock.|
|(1)||Unless otherwise indicated, the address of each stockholder is c/o NeuroMetrix, Inc., 62 Fourth Avenue, Waltham, Massachusetts 02451.|
|(2)||Includes all options that are exercisable on or within 60 days from February 3, 2014 by the beneficial owner, except as otherwise noted.|
|(3)||Reflects 298,316 and 275,700 shares of common stock owned by Sabby Healthcare Volatility Master Fund, Ltd. and Sabby Volatility Warrant Master Fund, Ltd., respectively. The amount does not include 823,320 and 234,003 shares of common stock issuable upon exercise of warrants issued to Sabby Healthcare Volatility Master Fund, Ltd. and Sabby Volatility Warrant Master Fund, Ltd., respectively, all of which are subject to a 9.99% beneficial ownership limitation and related warrant exercise restriction. Sabby Management, LLC and Hal Mintz do not directly own shares of common stock, but are deemed to have beneficial ownership over these shares of common stock because Sabby Management, LLC is the investment manager for both Sabby Healthcare Volatility Master Fund, Ltd. and Sabby Volatility Warrant Master Fund, Ltd. and Hal Mintz is the manager of Sabby Management, LLC. The address for the reporting persons is 10 Mountainside Road, Suite 205, Upper Saddle River, New Jersey 07458.|
The following table sets forth information as of December 31, 2013 regarding the number of securities to be issued upon exercise, and the weighted average exercise price of outstanding options, warrants, and rights under our equity compensation plans and the number of securities available for future issuance under our equity compensation plans.
|Number of securities to be issued upon exercise of outstanding options, warrants and rights||Weighted average exercise price of outstanding options, warrants and rights||Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a)|
|Equity compensation plans approved by security holders (1)||310,146||$||13.20||119,778 (2)|
|Equity compensation plans not approved by security holders (3)||||N/A||400,000|
|(1)||Includes information related to our Amended and Restated 1996 Stock Option/Restricted Stock Plan, Amended and Restated 1998 Equity Incentive Plan, Fourth Amended and Restated 2004 Stock Option and Incentive Plan, and 2010 Employee Stock Purchase Plan.|
|(2)||As of December 31, 2013, there were 97,440 shares available for future grant under the Fifth Amended and Restated 2004 Stock Option and Incentive Plan and 22,338 shares available under the 2010 Employee Stock Purchase Plan. No new stock grants or awards will be made under the Amended and Restated 1996 Stock Option/Restricted Stock Plan or the Amended and Restated 1998 Equity Incentive Plan.|
|(3)||Includes information related to our 2009 Non-Qualified Inducement Stock Plan, which is designed to provide equity grants to new employees. Pursuant to this plan, we were authorized to issue Non-Qualified Stock Options, Restricted Stock Awards and Unrestricted Stock Awards.|
Pursuant to our audit committee charter currently in effect, the audit committee is responsible for reviewing and approving, prior to our entry into any such transaction, all transactions in which we are a participant and in which any parties related to us has or will have a direct or indirect material interest. As required under SEC rules, transactions that involve an amount in excess of $120,000, in which we are a participant and a related person is determined to have a direct or indirect material interest, are disclosed in our proxy statement.
See Item 10, Directors, Executive Officers and Corporate Governance Board Matters and Corporate Governance.
Aggregate fees for professional services rendered by PricewaterhouseCoopers LLP for the years ended December 31, 2013 and 2012 are as follows:
The audit fees for PricewaterhouseCoopers LLP for professional services rendered for the 2013 audit of our annual financial statements and the review of the financial statements included in our quarterly reports on Form 10-Q totaled $456,000, of which $350,000 was billed in 2013 and $106,000 was billed in 2014.
The audit fees for PricewaterhouseCoopers LLP for professional services rendered for the 2012 audit of our annual financial statements and the review of the financial statements included in our quarterly reports on Form 10-Q totaled $469,000, of which $340,000 was billed in 2012 and $129,000 was billed in 2013.
There were no audit-related fees for PricewaterhouseCoopers LLP in 2013 and 2012.
Fees for PricewaterhouseCoopers LLP for services other than audit-related services were $16,800 for 2013 and 2012, and included annual fees of $15,000 in both years in connection with our Corporate Integrity Agreement with the Office of Inspector General of the United States Department of Health and Human Services regarding the previously-disclosed investigation into certain of our past sales and marketing practices relating to our NC-stat System and $1,800 in both years for a software subscription used to review accounting literature.
There were no tax fees for PricewaterhouseCoopers LLP in 2013 and 2012.
The Audit Committee approved all audit and non-audit services provided to us by PricewaterhouseCoopers LLP during the 2013 and 2012 fiscal years.
|(a)||1. Financial Statements|
The consolidated financial statements are listed in the accompanying index to financial statements on page F-1.
2. Financial Statement Schedule
The Schedule on page S-1 is filed as part of this report. Other financial statement schedules required under this Item and Item 8 are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the footnotes thereto.
3. Exhibit Index
The following is a list of exhibits filed as part of this Annual Report on Form 10-K:
|3.1.1||Third Amended and Restated Certificate of Incorporation of NeuroMetrix, Inc. dated July 27, 2004 (6)|
|3.1.2||Certificate of Designations for Series A Junior Cumulative Preferred Stock, par value $0.001 per share, dated March 7, 2007 (4)|
|3.1.3||Certificate of Amendment to Restated Certificate of Incorporation of NeuroMetrix, Inc. dated September 1, 2011 (17)|
|3.1.4||Certificate of Amendment to Restated Certificate of Incorporation of NeuroMetrix, Inc. dated February 15, 2013 (18)|
|3.1.5||Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Convertible Preferred Stock, par value $0.001 per share, dated June 5, 2013 (25)|
|3.1.6||Certificate of Designation of Preferences, Rights and Limitations of Series A-2 Convertible Preferred Stock, par value $0.001 per share, dated June 5, 2013 (25)|
|3.2.1||Second Amended and Restated Bylaws of NeuroMetrix, Inc. (6)|
|3.2.2||Amendment No. 1 to Second Amended and Restated Bylaws of NeuroMetrix, Inc. (3)|
|4.1||Specimen Certificate for Shares of Common Stock (1)|
|4.2.1||Shareholder Rights Agreement, dated as of March 7, 2007, between NeuroMetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent (4)|
Amendment to Shareholder Rights Agreement, dated September 8, 2009, between
NeuroMetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent (11)
Amendment No. 2 to Shareholder Rights Agreement, dated June 5, 2013, between
NeuroMetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent (25)
|4.3||Form of Unit Warrant to purchase Common Stock (21)|
|4.4||Form of Placement Agent Warrant (21)|
|4.5||Form of Common Stock Purchase Warrant (26)|
|10.1.1||Lease Agreement, dated October 18, 2000, between Fourth Avenue LLC and NeuroMetrix, Inc. (1)|
|10.1.2||Amendment Number One to Lease, dated February 22, 2008, between Fourth Avenue LLC and NeuroMetrix, Inc. (14)|
|10.1.3||Amendment Number Two to Lease, dated June 6, 2012, between Fourth Avenue LLC and NeuroMetrix, Inc. (24)|
|10.1.4||Amendment Number Three to Lease, dated June 20, 2013, between Fourth Avenue LLC and NeuroMetrix, Inc. (27)|
|10.2.1||Loan and Security Agreement between NeuroMetrix, Inc. and Comerica Bank, dated March 5, 2010 (15)|
|10.2.2||First Modification to Loan and Security Agreement between NeuroMetrix, Inc. and Comerica Bank, dated March 1, 2011 (19)|
|10.3+||Amended and Restated 1996 Stock Option/Restricted Stock Plan (1)|
|10.4.1+||Amended and Restated 1998 Equity Incentive Plan (1)|
|10.4.3+||Second Amendment to Amended and Restated 1998 Equity Incentive Plan (1)|
|10.5+||Second Amended and Restated 2004 Stock Option and Incentive Plan (8)|
|10.6.1+||Third Amended and Restated 2004 Stock Option and Incentive Plan (10)|
|10.6.2+||Form of Restricted Stock Agreement pursuant to the Third Amended and Restated 2004 Stock Option and Incentive Plan (15)|
|10.7+||2010 Employee Stock Purchase Plan (16)|
|10.8+||2009 Non-Qualified Inducement Stock Plan (20)|
|10.9+||Form of Indemnification Agreement between NeuroMetrix, Inc. and each of its directors (1)|
Employment Agreement, dated June 21, 2004, by and between NeuroMetrix, Inc. and
Shai N. Gozani, M.D., Ph.D. (1)
|10.10.2+||First Amendment to Employment Agreement dated December 31, 2008, by and between NeuroMetrix, Inc. and Shai N. Gozani, M.D., Ph.D. (9)|
|10.10.3+||Indemnification Agreement dated June 21, 2004, by and between Shai N. Gozani, M.D., Ph.D., and NeuroMetrix, Inc. (1)|
|10.10.4+||NeuroMetrix, Inc. Non-Statutory Stock Option Agreement (pursuant to the Amended and Restated 1998 Equity Incentive Plan), dated as of June 21, 2004, by and between Shai N. Gozani M.D., Ph.D., and NeuroMetrix, Inc. (1)|
|10.11.1+||Letter Agreement, dated February 5, 2008 between NeuroMetrix, Inc. and Michael Williams, Ph.D. (13)|
|10.11.2+||First Amendment to Letter Agreement, dated December 31, 2008, between NeuroMetrix, Inc. and Michael Williams, Ph.D. (9)|
|10.12.1+||Letter Agreement, dated February 5, 2008, between NeuroMetrix, Inc. and Guy Daniello (13)|
|10.12.2+||First Amendment to Letter Agreement, dated December 31, 2008, between NeuroMetrix, Inc. and Guy Daniello (9)|
|10.13.1+||Letter Agreement, dated August 31, 2009, between NeuroMetrix, Inc. and Thomas T. Higgins (12)|
|10.13.2+||Indemnification Agreement, dated September 10, 2009, by and between NeuroMetrix, Inc. and Thomas T. Higgins (12)|
|10.14.1+||Letter Agreement, dated January 20, 2010, between NeuroMetrix, Inc. and Krishnamurthy Balachandran (15)|
|10.14.2+||Indemnification Agreement, dated April 19, 2010, by and between NeuroMetrix, Inc. and Krishnamurthy Balachandran (15)|
|10.15||Form of Securities Purchase Agreement, dated September 8, 2009 between the Company and each investor (11)|
|10.16||Manufacturing and Supply Agreement, dated as of August 2, 2006, by and between Parlex Polymer Flexible Circuits, Inc. and NeuroMetrix, Inc. (2)|
|10.17||Deferred Prosecution Agreement dated February 5, 2009 by and between NeuroMetrix, Inc and the United States Attorneys Office for the District of Massachusetts (5)|
|10.18||Settlement Agreement and Release dated February 9, 2009 by and among NeuroMetrix, Inc. and the United States of America acting through the United States Attorneys Office for the District of Massachusetts and the Office of Inspector General of the United States Department of Health and Human Services (5)|
|10.19.1||Engagement Letter by and between NeuroMetrix, Inc. and Dawson James Securities, Inc., dated December 30, 2011 (21)|
|10.19.2||First Amendment to Engagement Letter by and between NeuroMetrix, Inc. and Dawson James Securities, Inc., dated January 30, 2012 (21)|
|10.20||Engagement Letter by and between NeuroMetrix, Inc. and Dawson James Securities, Inc., dated June 4, 2013 (25)|
|10.21+||Fourth Amended and Restated 2004 Stock Option and Incentive Plan (22)|
|10.22+||Amended and Restated 2010 Employee Stock Purchase Plan (23)|
|10.23+||Management Retention and Incentive Plan, dated August 2, 2012 (24)|
|10.24||Securities Purchase Agreement by and between NeuroMetrix, Inc. and the purchasers named therein, dated June 4, 2013 (25)|
|10.25||Registration Rights Agreement by and between NeuroMetrix, Inc. and the purchasers named therein, dated June 4, 2013 (25)|
|10.26+||Separation Agreement and Release of Claims by and between NeuroMetrix, Inc. and Krishnamurthy Balachandran, dated June 27, 2013 (27)|
|10.27+||Fifth Amended and Restated 2004 Stock Option and Incentive Plan (7)|
|*23.1||Consent of PricewaterhouseCoopers LLP, an independent registered public accounting firm|
|*31.1||Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002|
|*31.2||Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from NeuroMetrix, Inc.s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language);
(i) Balance Sheets as of December 31, 2013 and 2012, (ii) Statements of Operations for the years ended December 31, 2013, 2012, and 2012, (iii) Statements of Changes in Stockholders Equity for the years ended December 31, 2013, 2012, and 2011, (iv) Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011, and (v) Notes to Financial Statements.
|+||Indicates management contract or any compensatory plan, contract or arrangement.|
|||Confidential treatment has been granted with respect to certain portions of this Exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Exchange Act of 1934, as amended.|
|(1)||Incorporated herein by reference to NeuroMetrix, Inc.s Registration Statement on Form S-1 filed on May 13, 2004, as amended (Registration No. 333-115440).|
|(2)||Incorporated herein by reference to NeuroMetrix, Inc.s Current Report on Form 8-K filed on August 2, 2006 (File No. 000-50856).|
|(3)||Incorporated herein by reference to NeuroMetrix, Inc.s Current Report on Form 8-K filed on September 17, 2007 (File No. 001-33351).|
|(4)||Incorporated herein by reference to NeuroMetrix, Inc.s Form 8-A12(b) filed on March 8, 2007 (File No. 001-33351).|
|(5)||Incorporated hereby by reference to NeuroMetrix, Inc.s Current Report on Form 8-K filed on February 10, 2009 (File No. 001-33351).|
|(6)||Incorporated herein by reference to NeuroMetrix, Inc.s Registration Statement on Form S-8 filed on August 9, 2004 (File No. 333-118059).|
|(7)||Incorporated herein by reference to Appendix A to NeuroMetrix, Inc.s Proxy Statement on Schedule 14A filed on April 8, 2013 (File No. 001-33351).|
|(8)||Incorporated herein by reference to Appendix A to NeuroMetrix, Inc.s Proxy Statement on Schedule 14A filed on April 25, 2008 (File No. 001-33351).|
|(9)||Incorporated herein by reference to NeuroMetrix, Inc.s Annual Report on Form 10-K filed on March 20, 2009 (File No. 001-33351).|
|(10)||Incorporated herein by reference to Appendix A to NeuroMetrix, Inc.s Proxy Statement on Schedule 14A filed on April 24, 2009 (File No. 001-33351).|
|(11)||Incorporated herein by reference to NeuroMetrix, Inc.s Current Report on Form 8-K filed September 14, 2009 (File No. 001-33351).|
|(12)||Incorporated herein by reference to NeuroMetrix, Inc.'s Current Report on Form 8-K filed September 15, 2009 (File No. 001-33351).|
|(13)||Incorporated herein by reference to NeuroMetrix, Inc.s Current Report on Form 8-K filed on February 6, 2008 (File No. 001-33351).|
|(14)||Incorporated herein by reference to NeuroMetrix, Inc.s Current Report on Form 8-K filed on February 27, 2008 (File No. 001-33351).|
|(15)||Incorporated herein by reference to NeuroMetrix, Inc.s Quarterly Report on Form 10-Q filed on May 14, 2010 (File No. 001-33351).|
|(16)||Incorporated herein by reference to Appendix A to NeuroMetrix, Inc.s Proxy Statement on Schedule 14A filed on April 8, 2010 (File No. 001-33351).|
|(17)||Incorporated herein by reference to NeuroMetrix, Inc.s Current Report on Form 8-K filed on September 1, 2011 (File No. 001-33351).|
|(18)||Incorporated herein by reference to NeuroMetrix, Inc.s Current Report on Form 8-K filed on February 15, 2013 (File No. 001-33351).|
|(19)||Incorporated herein by reference to NeuroMetrix, Inc.s Current Report on Form 8-K filed on March 3, 2011 (File No. 001-33351).|
|(20)||Incorporated herein by reference to NeuroMetrix, Inc.s Registration Statement on Form S-8 filed on June 3, 2009 (File No. 333-159712).|
|(21)||Incorporated herein by reference to NeuroMetrix, Inc.s Registration Statement on Form S-1 filed on November 23, 2011, as amended (Registration No. 333-178165).|
|(22)||Incorporated herein by reference to Appendix A to NeuroMetrix, Inc.s Proxy Statement on Schedule 14A filed on April 16, 2012 (File No. 001-33351).|
|(23)||Incorporated herein by reference to Appendix B to NeuroMetrix, Inc.s Proxy Statement on Schedule 14A filed on April 16, 2012 (File No. 001-33351).|
|(24)||Incorporated herein by reference to NeuroMetrix, Inc.s Quarterly Report on Form 10-Q filed on August 3, 2012 (File No. 001-33351).|
|(25)||Incorporated herein by reference to NeuroMetrix, Inc.s Current Report on Form 8-K on Form 8-K filed on June 6, 2013 (File No. 001-33351).|
|(26)||Incorporated herein by reference to NeuroMetrix, Inc.s Amendment No. 1 to its Current Report on Form 8-K filed on June 7, 2013 (File No. 001-33351).|
|(27)||Incorporated herein by reference to NeuroMetrix, Inc.s Quarterly Report on Form 10-Q filed on July 26, 2013 (File No. 001-33351).|
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ SHAI N. GOZANI, M.D., PH.D.
Shai N. Gozani, M.D., Ph.D.
Chairman, President and Chief Executive Officer
Date: February 24, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on February 24, 2014 in the capacities indicated below.
/s/ SHAI N. GOZANI, M.D., PH.D.
Shai N. Gozani, M.D., Ph.D.
|Chairman, President and Chief Executive Officer (Principal Executive Officer)|
/s/ THOMAS T. HIGGINS
Thomas T. Higgins
|Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)|
/s/ DAVID E. GOODMAN, M.D.
David E. Goodman, M.D.
/s/ ALLEN J. HINKLE, M.D.
Allen J. Hinkle, M.D.
/s/ NANCY E. KATZ
Nancy E. Katz
/s/ TIMOTHY R. SURGENOR
Timothy R. Surgenor
/s/ DAVID VAN AVERMAETE
David Van Avermaete
To the Board of Directors and Stockholders of NeuroMetrix, Inc.
In our opinion, the accompanying balance sheets and the related statements of operations, of changes in stockholders equity, and of cash flows present fairly, in all material respects, the financial position of NeuroMetrix, Inc. at December 31, 2013 and December 31, 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
February 24, 2014
|Cash and cash equivalents||$||9,195,753||$||8,699,478|
|Accounts receivable, net of allowances of $35,895 and $151,616 at December 31, 2013 and 2012, respectively||390,922||566,451|
|Prepaid expenses and other current assets||416,816||472,611|
|Total current assets||10,566,527||10,573,066|
|Fixed assets, net||229,313||293,897|
|Other long-term assets||923||10,484|
Liabilities and Stockholders Equity
|Current portion of deferred revenue||68,812||134,185|
|Current portion of capital lease obligation||||17,929|
|Total current liabilities||1,647,908||2,005,606|
|Deferred revenue, net of current portion||15,277||71,419|
|Common stock warrants||1,938,603|||
Commitments and contingencies (Note 10)
|Preferred stock, $0.001 par value, 5,000,000 shares authorized at December 31, 2013 and 2012; no shares issued and outstanding at December 31, 2013 and 2012|||||
|Common stock, $0.0001 par value; 50,000,000 authorized; 5,945,581 and 2,140,871 shares issued and outstanding at December 31, 2013 and 2012, respectively||595||214|
|Additional paid-in capital||153,806,460||147,393,151|
|Accumulated deficit||(146,612,080 )||(138,592,943 )|
|Total stockholders equity||7,194,975||8,800,422|
|Total liabilities and stockholders equity||$||10,796,763||$||10,877,447|
The accompanying notes are an integral part of these financial statements.
|Years Ended December 31,|
|Cost of revenues||2,194,259||3,588,806||4,722,069|
|Research and development||3,438,218||3,545,790||3,877,526|
|Sales and marketing||2,779,695||5,727,482||6,688,591|
|General and administrative||4,225,474||4,735,238||5,111,616|
|Total operating expenses||10,443,387||14,008,510||15,677,733|
|Loss from operations||(7,358,840||)||(10,022,027 )||(10,003,027 )|
|Warrants offering costs||(376,306 )|||||
|Change in fair value of warrant liability||(289,657||)|||||
|Net loss||$||(8,019,137||)||$||(10,007,553||)||$||(9,981,105 )|
|Net loss per common share applicable to common stockholders, basic and diluted (See Note 2, Summary of Significant Accounting Policies)||$||(3.07 )||$||(5.22 )||$||(15.53 )|
|Weighted average number of common shares outstanding, basic and diluted||2,862,094||1,918,723||642,513|
The accompanying notes are an integral part of these financial statements.
|Balance at December 31, 2010||||$||||||$||||644,376||$||65||$||138,803,192||$||(118,604,285||)||$||20,198,972|
|Issuance of common stock under employee stock purchase plan||||||||||4,002||||33,614||||33,614|
|Other issuances of stock from option plan||||||||||2,342|||||||||
|Balance at December 31, 2011||||$||||||$||||650,720||$||65||$||139,673,846||$||(128,585,390||)||$||11,088,521|