NeuroMetrix, Inc.
NeuroMetrix, Inc. (Form: 10-Q, Received: 10/28/2014 16:47:36)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2014

 

OR

 

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

 

For the transition period from ____ to ____    

 

Commission File Number 001-33351

________________________

 

NEUROMETRIX, INC.

(Exact name of registrant as specified in its charter)

 

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

 

(781) 890-9989

(Registrant’s telephone number, including area code)

 

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

 

Yes  x     No  ¨

 

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

 

Yes x     No ¨

 

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

 

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

(Do not check if a smaller

 
    reporting company)  

 

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

 

Yes ¨ No x

 

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

7,944,257 shares of common stock, par value $0.0001 per share, were outstanding as of October 24, 2014.

 

 
 

 

NeuroMetrix, Inc.

Form 10-Q

Quarterly Period Ended September 30, 2014

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
       
Item 1.   Financial Statements:  
       
    Balance Sheets (unaudited) as of September 30, 2014 and December 31, 2013 2
       
    Statements of Operations (unaudited) for the quarters and nine months ended September 30, 2014 and 2013 3
       
    Statements of Cash Flows (unaudited) for the nine months ended September 30, 2014 and 2013 4
       
    Notes to Unaudited Financial Statements 5
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
       
Item 3.   Quantitative and Qualitative Disclosures about Market Risk 19
       
Item 4.   Controls and Procedures 19
       
PART II – OTHER INFORMATION  
       
Item 1.   Legal Proceedings 19
       
Item 1A.   Risk Factors 19
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 20
       
Item 3.   Defaults Upon Senior Securities 20
       
Item 4.   Mine Safety Disclosures 20
       
Item 5.   Other Information 20
       
Item 6.   Exhibits 20
       
Signatures     21

 

1
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

NeuroMetrix, Inc.

Balance Sheets

(Unaudited)

 

    September 30,
2014
    December 31,
2013
 
             
Assets            
Current assets:            
Cash and cash equivalents   $ 11,687,021     $ 9,195,753  
Accounts receivable, net     611,790       390,922  
Inventories     630,236       563,036  
Prepaid expenses and other current assets     440,906       416,816  
Total current assets     13,369,953       10,566,527  
                 
Fixed assets, net     198,045       229,313  
Other long-term assets     555       923  
Total assets   $ 13,568,553     $ 10,796,763  
                 
Liabilities and Stockholders’ Equity                
Current liabilities:                
                 
Accounts payable   $ 522,714     $ 322,896  
Accrued compensation     778,053       386,004  
Accrued expenses     1,215,058       870,196  
Current portion of deferred revenue     38,716       68,812  
Total current liabilities     2,554,541       1,647,908  
                 
Deferred revenue, net of current portion     10,050       15,277  
Common stock warrants     4,803,015       1,938,603  
Total liabilities     7,367,606       3,601,788  
                 
Commitments and contingencies (See Note 6)                
                 
Stockholders’ equity:                
Preferred stock, $0.001 par value; 5,000,000 shares authorized at September 30, 2014 and December 31, 2013:            
Convertible preferred stock; 11,083 and 4,438 shares designated at September 30, 2014 and December 31, 2013, respectively, and 4,022.357 and 0 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively     4        
Common stock, $0.0001 par value; 50,000,000 shares authorized; 7,944,257 and 5,945,581 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively     794       595  
Additional paid-in capital     157,669,250       153,806,460  
Accumulated deficit     (151,469,101 )     (146,612,080 )
Total stockholders’ equity     6,200,947       7,194,975  
Total liabilities and stockholders’ equity   $ 13,568,553     $ 10,796,763  

 

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

 

2
 

 

NeuroMetrix, Inc.

Statements of Operations

(Unaudited)

 

    Quarters Ended
September 30,
    Nine Months Ended
September 30,
 
    2014     2013     2014     2013  
                         
Revenues   $ 1,427,828     $ 1,314,728     $ 4,103,135     $ 3,876,654  
                                 
Cost of revenues     639,025       578,484       1,909,443       1,649,429  
                                 
Gross profit     788,803       736,244       2,193,692       2,227,225  
                                 
Operating expenses:                                
Research and development     945,349       740,324       3,273,900       2,727,590  
Sales and marketing     537,785       581,079       1,678,665       2,241,138  
General and administrative     1,310,012       1,014,295       3,605,047       3,240,049  
                                 
Total operating expenses     2,793,146       2,335,698       8,557,612       8,208,777  
                                 
Loss from operations     (2,004,343 )     (1,599,454 )     (6,363,920 )     (5,981,552 )
                                 
Interest income     1,336       1,407       3,362       4,570  
Warrants offering costs     (23,256 )           (50,874 )     (376,306 ))
Change in fair value of warrant liability     564,550       881,783       1,554,411       2,037,779  
                                 
Net loss   $ (1,461,713 )   $ (716,264 )   $ (4,857,021 )   $ (4,315,509 )
                                 
Net loss per common share applicable to common stockholders, basic and diluted (See Note 3, Net Loss per Common Share)   $ (0.19 )   $ (0.26 )   $ (1.18 )   $ (2.13 )
                                 
Weighted average number of common shares outstanding, basic and diluted     7,853,292       2,725,466       6,602,626       2,387,462  

 

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

 

3
 

 

NeuroMetrix, Inc.

Statements of Cash Flows

(Unaudited)

 

    Nine Months Ended
September 30,
 
    2014     2013  
Cash flows from operating activities:            
Net loss   $ (4,857,021 )   $ (4,315,509 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     103,250       116,398  
Stock-based compensation     208,358       158,932  
Inventory charges           95,186  
Warrants offering cost     50,874       376,306  
Change in fair value of warrant liability     (1,554,411 )     (2,037,779 )
Changes in operating assets and liabilities:                
Accounts receivable     (220,868 )     (52,768 )
Inventories     (67,200 )     195,121  
Prepaid expenses and other current assets     (26,476 )     (27,662 )
Accounts payable     199,818       5,870  
Accrued expenses and compensation     841,317       208,588  
Deferred revenue, deferred costs, and other     (32,570 )     (53,191 )
Net cash used in operating activities     (5,354,929 )     (5,330,508 )
                 
Cash flows from investing activities:                
Purchases of fixed assets     (71,982 )     (27,808 )
Net cash used in investing activities     (71,982 )     (27,808 )
                 
Cash flows from financing activities:                
Net proceeds from issuance of stock and other equity     7,918,179       4,512,935  
Payments on capital lease           (17,929 )
Net cash  provided by financing activities     7,918,179       4,495,006  
                 
Net increase (decrease) in cash and cash equivalents     2,491,268       (863,310 )
Cash and cash equivalents, beginning of period     9,195,753       8,699,478  
Cash and cash equivalents, end of period   $ 11,687,021     $ 7,836,168  
                 
Supplemental disclosure of cash flow information:                
Common stock issued to settle incentive compensation obligation   $ 104,402     $ 285,296  
Warrants issued under Securities Purchase Agreement recorded as a non-current liability   $ 4,418,824     $ 4,011,205  

 

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

 

4
 

 

NeuroMetrix, Inc.

Notes to Unaudited Financial Statements

September 30, 2014

 

1. Business and Basis of Presentation

 

Our Business-An Overview

 

NeuroMetrix, Inc., or the Company, a Delaware corporation, was founded in June 1996. The Company is an innovative health-care company that develops wearable medical technology and point-of-care diagnostic tests to help patients and physicians better manage chronic pain, nerve diseases, and neuropathic sleep disorders. The Company believes that there are large and important unmet needs in the treatment of diabetic neuropathies and adjacent forms of chronic pain. With substantial experience in medical devices to measure and alter peripheral nerve function, the Company believes it is well positioned to address these unmet needs through the development of novel proprietary medical devices. Accordingly, the Company has a major focus on developing and marketing medical devices for diabetic neuropathies. The Company has over a decade of experience in neuropathy detection starting with approval in 1998 by the United States Food and Drug Administration, or FDA, of the NC-stat System, a point-of-care device for the performance of general purpose nerve conduction studies.

 

In 2013 the Company launched the SENSUS™ Pain Management System, or SENSUS, a wearable transcutaneous electrical nerve stimulator indicated for management of chronic pain, and is the only device cleared by the FDA for use during sleep. It markets SENSUS to physicians managing patients with painful diabetic neuropathy and other forms of chronic pain. The Company also markets the NC-stat ®  DPNCheck ®  device, which is a fast, accurate, and quantitative nerve conduction test used to evaluate systemic neuropathies such as diabetic peripheral neuropathy, or DPN. NC-stat DPNCheck is designed to be used by physicians and other clinicians at the point-of-care to objectively detect, stage, and monitor DPN. The Company’s historical neurodiagnostic 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 and which is primarily used in physician offices and clinics. While the ADVANCE System contributes to the Company’s revenues, the Company is not actively managing the ADVANCE business for growth.

 

On June 24, 2014, the Company entered into a Securities Purchase Agreement with a single institutional investor providing for the issuance of common stock, convertible preferred stock and warrants to purchase common stock, which is referred to as the 2014 Offering. The Company received net proceeds of $7.9 million from the 2014 Offering. See Note 9, Stockholders’ Equity, for additional details.

 

The Company held cash and cash equivalents of $11.7 million as of September 30, 2014. The Company believes that these resources and the cash to be generated from expected product sales will be sufficient to meet its projected operating requirements for at least the next twelve months. The Company continues to face significant challenges and uncertainties and, as a result, the Company’s available capital resources may be consumed more rapidly than currently expected due to (a) unanticipated decreases in sales of the Company’s products and the uncertainty of future revenues from the Company’s new products; (b) changes the Company may make to the business that affect ongoing operating expenses; (c) changes the Company may make in its business strategy; (d) regulatory developments affecting the Company’s existing products and delays in the FDA approval process for products under development; (e) changes in the Company’s research and development spending plans; and (f) other items affecting the Company’s forecasted level of expenditures and use of cash resources. Accordingly, the Company will need to raise additional funds to support its future operating and capital needs beyond the next twelve months. The Company may attempt to obtain additional funding through public or private financing, collaborative arrangements with strategic partners, or through additional credit lines or other debt financing sources to increase the funds available to fund operations. However, the Company may not be able to secure such financing in a timely manner or on favorable terms, if at all. Furthermore, if the Company issues equity or debt securities to raise additional funds, its existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of the Company’s existing stockholders. If the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to its potential products or proprietary technologies, or grant licenses on terms that are not favorable to the Company. Without additional funds, the Company may be forced to delay, scale back or eliminate some of its sales and marketing efforts, research and development activities, or other operations and potentially delay product development in an effort to provide sufficient funds to continue its operations. If any of these events occur, the Company’s ability to achieve its development and commercialization goals would be adversely affected.

 

5
 

 

Unaudited Interim Financial Statements

 

The accompanying unaudited balance sheet as of September 30, 2014, unaudited statements of operations for the quarters and nine months ended September 30, 2014 and 2013 and the unaudited statements of cash flows for the nine months ended September 30, 2014 and 2013 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the financial statements include all normal and recurring adjustments considered necessary for a fair statement of the Company’s financial position and operating results. Operating results for the quarter ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or the SEC, on February 24, 2014 (File No. 001-33351), or the Company’s 2013 Form 10-K. The accompanying balance sheet as of December 31, 2013 has been derived from audited financial statements prepared at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

Revenues

 

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 seller’s 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 Company’s determination of BESP involves a weighting of several factors based on the specific facts and circumstances of an arrangement. Specifically, the Company considers the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts, its ongoing pricing strategy, the value of any enhancements that have been built into the deliverable, and the characteristics of the varying markets in which the deliverable is sold.

 

Revenue recognition involves judgments, including assessments of expected returns and expected customer relationship periods. The Company analyzes various factors, including a review of specific transactions, its historical returns, average customer relationship periods, customer usage, customer balances, and market and economic conditions. Changes in judgments or estimates on these factors could materially impact the timing and amount of revenues and costs recognized. Should market or economic conditions deteriorate, the Company’s actual return or bad debt experience could exceed its estimate.

 

6
 

 

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.

 

During the quarter and nine months ended September 30, 2014 two customers accounted for a combined 31% and 22% of total revenue, respectively. At September 30, 2014, two customers accounted for a combined 32% of gross accounts receivables.

 

Use of Estimates

 

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

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the provisions of ASU 2014-15 and assessing the impact, if any, it may have on our financial position, results of operations or cash flows.

  

In May 2014, the FASB and the International Accounting Standards Board ("IASB") jointly issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The objective of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the first quarter of 2017. An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or recognizing the cumulative effect of adoption at the date of initial application.  The Company is in the process of evaluating the new standard and does not know the effect, if any, ASU 2014-09 will have on the Consolidated Financial Statements or which adoption method will be used.

 

2. Comprehensive Loss

 

For the quarters and nine months ended September 30, 2014 and 2013, the Company had no components of other comprehensive income or loss other than net loss itself.

 

3. Net Loss Per Common Share

 

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

 

    Quarters Ended September 30,     Nine Months Ended September 30,  
    2014     2013     2014     2013  
Options     576,746       236,381       406,540       113,447  
Warrants     4,978,892       3,147,889       2,436,336       1,804,593  
Unvested restricted stock     15,493       17,665       16,512       24,035  
Convertible preferred stock     1,971,744       1,875,308       693,361       833,667  
Total     7,542,875       5,277,243       3,552,749       2,775,742  

 

  The Beneficial Conversion Feature, or BCF, recorded in both the 2014 Offering and 2013 Offering, as defined in Note 9, have been recognized as deemed dividends attributable to the Preferred Stock and are reflected as an adjustment in the calculation of earnings per share. See Note 9, Stockholders’ Equity, for further details.

 

7
 

 

Net loss per common share was determined as follows:

 

    Quarters Ended September 30,     Nine Months Ended September 30,  
    2014     2013     2014     2013  
Net loss   $ (1,461,713 )   $ (716,264 )   $ (4,857,021 )   $ (4,315,509 )
Deemed dividend attributable to preferred stockholders in connection with embedded conversion features                 (2,955,668 )     (766,872 )
Net loss applicable to common stockholders   $ (1,461,713 )   $ (716,264 )   $ (7,812,689 )   $ (5,082,381 )
                                 
Net loss per common share applicable to common stockholders, basic and diluted   $ (0.19 )   $ (0.26 )   $ (1.18 )   $ (2.13 )
                                 
Weighted average number of common shares outstanding, basic and diluted     7,853,292       2,725,466       6,602,626       2,387,462  

 

4. Inventories

 

Inventories consist of the following:

 

    September 30,
2014
    December 31,
2013
 
             
Purchased components   $ 193,854     $ 205,320  
Finished goods     436,382       357,716  
    $ 630,236     $ 563,036  

 

5. Accrued Compensation and Expenses

 

The following table provides a rollforward of the liability balance for severance obligations, of which was recorded as research and development expense in the Company’s Statement of Operations during the three and nine months ended September 30, 2014. The balance as of September 30, 2014 will be paid out by June 30, 2015. There was $110,608 in severance charges accrued as of December 31, 2013.

 

    Quarter Ended
September 30,
2014
    Nine Months
Ended
September 30,2014
 
             
Balance – beginning   $ 302,758     $ 110,608  
Accrual for severance           302,758  
Severance payments made     (82,149 )     (192,757 )
Balance at September 30, 2014   $ 220,609     $ 220,609  

 

Accrued expenses consist of the following: 

 

 

    September 30,
2014
    December 31,
2013
 
             
Technology fees   $ 450,000     $ 450,000  
Professional services     364,471       263,642  
Clinical study obligations     37,000       51,424  
Sales taxes     29,689       32,688  
Personnel related obligations     85,406       12,322  
Federal excise tax     23,934       24,600  
Consulting fees     47,639        
Other     176,919       35,520  
    $ 1,215,058     $ 870,196  

 

8
 

 

6. Commitments and Contingencies

 

Operating Lease

 

In June 2013, the Company amended the lease agreement dated October 18, 2000 between Fourth Avenue LLC and the Company for office and engineering laboratory space to extend the term of the lease through March 31, 2015. Base rent for the period from January 2014 through March 2015 is $52,917 per month.

 

The Company plans to relocate its corporate headquarters and operations facilities. In August 2014, the Company entered into a 5-year operating lease agreement with one 5-year extension option for manufacturing and order fulfillment facilities in Woburn Massachusetts (the “Woburn Lease”). The Woburn Lease commences December 1, 2014 and has a monthly base rent of $7,350. In September 2014, the Company entered into a 7-year operating lease agreement with one 5-year extension option for its corporate office and product development activities in Waltham Massachusetts (the “Waltham Lease”). The term of the Waltham Lease commences on February 20, 2015 and includes fixed payment obligations that escalate over the initial lease term. Average monthly base rent under the 7-year lease is approximately $37,792. These payment obligations will be accrued and recognized over the term of occupancy such that rent expense is recognized on a straight-line basis. Under the Waltham Lease, the landlord is responsible for making certain improvements to the leased space at an agreed upon cost to the landlord. If the landlord and the Company mutually agree to make improvements that cost in excess of the agreed upon landlord cost, the landlord will bill that excess cost to the Company as additional rent. This additional rent, if and when incurred, will be included in the net calculation of lease payments, so that rent expense will be recognized on a straight-line basis over the remaining term of occupancy.

 

7. Fair Value Measurements

 

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

 

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis for the periods presented and indicates the fair value hierarchy of the valuation techniques it utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates, and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

 

          Fair Value Measurements at September 30, 2014 Using  
    September 30,
2014
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Assets:                        
Cash equivalents   $ 10,887,755     $ 10,887,755     $     $  
Total   $ 10,887,755     $ 10,887,755     $     $  
                                 
Liabilities:                                
Common stock warrants   $ 4,803,015     $     $     $ 4,803,015  
Total   $ 4,803,015     $     $     $ 4,803,015  

 

9
 

 

Due to the lack of market quotes relating to our common stock warrants, the fair value of the common stock warrants was determined at September 30, 2014 using the Black-Scholes model, which is based on Level 3 inputs. As of September 30, 2014, inputs used in the Black-Scholes model are presented below. The assumptions used may change as the underlying sources of these assumptions and market conditions change. Based on the Black-Scholes model, the Company recorded a common stock warrants liability of $4.8 million at September 30, 2014.

 

          Black-Scholes Inputs to Warrant Liability Valuation at September 30, 2014
Warrants:   Stock
Price
    Exercise Price     Expected Volatility     Risk-Free Interest     Expected
Term
  Dividends
2014 Offering   $ 1.80     $ 2.04       69.53 %     1.69 %   4yr 9mo   none
2013 Offering   $ 1.80     $ 2.00       75.66 %     1.34 %   3yr 8mo   none

 

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities between the initial warrant issuances in June 2013 and September 30, 2014.

 

    2014 Offering     2013 Offering     Total  
Balance at December 31, 2012   $     $     $  
Initial fair value of  warrants at issuance in June 2013           4,011,205       4,011,205  
Change in fair value of warrant liability
          289,657       289,657  
Reclassification of liability to additional paid-in capital upon exercise of warrants           (2,362,259 )     (2,362,259 )
Balance at December 31, 2013   $     $ 1,938,603     $ 1,938,603  
Initial fair value of warrants at issuance in June 2014     4,418,823             4,418,823  
Change in fair value of warrant liability     (603,133 )     (951,278 )     (1,554,411 )
Balance at September 30, 2014   $ 3,815,690     $ 987,325     $ 4,803,015  

 

 

 

          Fair Value Measurements at December 31, 2013 Using  
    December 31,
2013
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Assets:                        
Cash equivalents   $ 3,926,600     $ 3,926,600     $     $ ——  
Total   $ 3,926,600     $ 3,926,600     $     $  
                                 
Liabilities:                                
Common stock warrants   $ 1,938,603     $     $     $ 1,938,603  
Total   $ 1,938,603     $     $     $ 1,938,603  

 

Due to the lack of market quotes relating to our common stock warrants, the fair value of the common stock warrants was determined at December 31, 2013 using the Black-Scholes model, which is based on Level 3 inputs. As of December 31, 2013, inputs used in the Black-Scholes model are presented below. The assumptions used may change as the underlying sources of these assumptions and market conditions change. Based on the Black-Scholes model, the Company recorded a common stock warrants liability of $1.9 million at December 31, 2013.

 

    Black-Scholes Inputs to Warrant Liability Valuation at December 31, 2013
Warrants:   Stock
Price
    Exercise Price     Expected Volatility     Risk-Free Interest     Expected
Term
  Dividends
2013 Offering   $ 2.92     $ 2.00       67.60 %     1.71 %   4yr 5mo   none

 

10
 

 

8. Credit Facility

 

The Company is party to a Loan and Security Agreement, or the Credit Facility, with a bank, that was amended and extended on January 31, 2014 until January 15, 2015. As of September 30, 2014, the Credit Facility permitted the Company to borrow up to $2.5 million on a revolving basis. 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 the Company’s 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 the Company. As of September 30, 2014, the Company was in compliance with these covenants and had not borrowed any funds under the Credit Facility. However, $451,731 of the amount available under the Credit Facility is restricted to support letters of credit issued in favor of the Company’s landlords for its existing premise and the premise leased in September 2014 for its future corporate offices. Consequently, the amount available for borrowing under the Credit Facility as of September 30, 2014 was $2.0 million.

 

9. Stockholders’ Equity

 

Public Offerings of Common Stock and Warrants

 

During June 2014 and June 2013 the Company entered into securities purchase agreements for two equity offerings that were similar in structure and in terms. The purchase agreement entered into in June 2014 (the “2014 Offering”) provided for the issuance of (i) 664,600 shares of common stock at a price of $2.04 per share, (ii) 2,621.859 shares of Series A-3 Preferred Stock at a price of $1,000 per share, (iii) 4,022.357 shares of Series A-4 Preferred Stock at a price of $1,000 per share, and (iv) five year warrants to purchase up to 3,921,569 shares of common stock with an exercise price of $2.04 per share. The 2014 Offering resulted in approximately $8.0 million in gross proceeds, before deducting expenses. Net proceeds from the 2014 Offering were approximately $7.9 million.

 

The purchase agreement entered into in June 2013 (the “2013 Offering) provided 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. The 2013 Offering resulted in approximately $5.0 million in gross proceeds, before deducting placement agent fees and other expenses. Net proceeds from the 2013 Offering were approximately $4.5 million.

 

In these equity offerings, each share of Preferred Stock has or had a stated value of $1,000 and is convertible at the option of the holder into the number of shares of common stock determined by dividing the stated value by the conversion price which is subject to adjustment as provided in each Certificate of Designation for the Preferred Stock. The Preferred Stock has no dividend rights, liquidation preference or other preferences over common stock and has no voting rights except as provided in each Certificate of Designation for the Preferred Stock and as required by law.

 

The terms and conditions of the Preferred Stock were evaluated based on the guidance of the Derivatives and Hedging topic of the Codification to determine if the conversion feature was an embedded derivative requiring bifurcation. It was concluded for both equity offerings that bifurcation was not required because the conversion feature was clearly and closely related to the Preferred Stock. The conversion price at which shares of Preferred Stock were convertible into shares of common stock was determined to be lower than the fair value of common stock at the date of the Purchase Agreement. This “in-the-money” beneficial conversion feature, or BCF, required separate recognition and measurement of its intrinsic value (i.e., the amount of the increase in value that holders of Preferred Stock would realize upon conversion based on the value of the conversion shares on the date of the Purchase Agreement). For both equity offerings, the BCF measurement was limited by the transaction proceeds which had been allocated to the Preferred Stock. Because there was not a stated redemption date for the shares of Preferred Stock, the BCF was recognized as a deemed dividend attributable to the Preferred Stock and reflected as an adjustment in the calculation of earnings per share. The amounts of the BCF totaled $2,955,668 and $766,900, respectively, for the 2014 Offering and the 2013 Offering.

 

The Series A-4 Preferred Stock is convertible into an aggregate of 1,971,744 shares of common stock. During June and July 2014, all of the shares of the Series A-3 Preferred Stock were converted into 1,285,225 shares of common stock. All of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock issued in the 2013 Offering was converted in 2013 into a total of 2,117,787 shares of common stock.

 

11
 

 

The Company will continue to revalue unexercised warrants from both offerings at each reporting period over the life of the warrants using the Black-Scholes model and the changes in the fair value of the warrants will be recognized in the Company's statement of operations. The warrants issued in connection with the 2013 Offering and the 2014 Offering are within the scope of the Derivatives and Hedging topic of the Codification. This Codification topic requires issuers to classify as liabilities (or assets under certain circumstances) financial instruments which require an issuer to settle in registered shares. As the warrants are required to be settled in registered shares when exercised and since the Company is required to pay cash in the event it does not make timely filings with the SEC, the Company reflected the warrants as a liability in the balance sheet.

 

The fair value of the warrants issued in connection with the 2014 Offering was estimated to be $4.4 million on the offering date using a Black-Scholes model with the following assumptions: stock price of $2.00, exercise price of $2.04, expected volatility of 67.48%, risk free interest rate of 1.64%, expected term of five years, and no dividends. These warrants remain outstanding. They were revalued at September 30, 2014 in the amount of $3.8 million using the same Black-Scholes model and the liability was reflected in the September 30, 2014 balance sheet.

 

The 2013 Offering warrants were estimated at a fair value of $4.0 million on the offering date using a Black-Scholes model with the following assumptions: stock price of $2.60, exercise price of $2.00, expected volatility of 73.6%, risk free interest rate of 1.05%, expected term of five years, and no dividends. These warrants were revalued at each subsequent reporting period using the same Black-Scholes model. The liability for the remaining 1,057,323 warrants from the 2013 Offering was reflected in the balance sheet at September 30, 2014 in the amount of $987,000.

 

In 2014 and 2013, the Company issued shares of fully vested common stock in partial settlement of management incentive compensation. The 2014 issuance totaled 42,615 shares with a value of $104,400 reflecting the $2.45 closing price of the Company’s common stock as reported on the NASDAQ Capital Market on February 25, 2014. The 2013 issuance totaled 119,370 shares with a value of $285,300 reflecting the $2.39 NASDAQ Capital Market closing price on June 4, 2013.

 

 

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

 

You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and the accompanying notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. For a description of factors that may cause our actual results to differ materially from those anticipated in these forward-looking statements, please refer to the below section of this Quarterly Report on Form 10-Q titled “Cautionary Note Regarding Forward-Looking Statements.” Unless the context otherwise requires, all references to “we”, “us”, the “Company”, or “NeuroMetrix” in this Quarterly Report on Form 10-Q refer to NeuroMetrix, Inc.

 

Overview

 

NeuroMetrix is an innovative health-care company that develops wearable medical technology and point-of-care tests to help patients and physicians manage chronic pain, nerve disease, and sleep disorders. Our Company was founded in 1996 and has been publicly traded on NASDAQ since 2004. The Company’s technology foundation was built at Harvard Medical School and the Massachusetts Institute of Technology. It is employed in numerous FDA-cleared products that have been used by physicians in more than 6 million diagnostic tests of nerve function. We have an intellectual property base that encompasses 64 issued and pending patents and extensive, difficult to replicate know-how in our practice area. We have an experienced management team and Board of Directors, and we are strategically located in the greater Boston area.

 

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

 

12
 

 

We believe that there are large and important unmet needs in the treatment of diabetic neuropathies and adjacent forms of chronic pain such as fibromyalgia, post herpetic neuropathy (shingles), and conditions with both chronic pain and disturbed sleep such as restless leg syndrome. As a medical device company with both unique and substantial experience in devices to measure and alter peripheral nerve function, we believe we are well positioned to address these unmet needs through the development of novel proprietary medical devices. Accordingly, we have a major focus on developing and marketing medical devices for 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.

 

During the past three years we have launched two products with the potential to change medical practice. SENSUS, our wearable transcutaneous electrical nerve stimulator indicated for management of chronic pain, and the only device cleared by the FDA for use during sleep, was launched in early 2013. Revenues from SENSUS were approximately $615,000 and $138,000 for the nine months ended September 30, 2014 and 2013, respectively. We market SENSUS to physicians managing patients with painful diabetic neuropathy, or PDN, and other forms of chronic pain. The prevalence of PDN is 16% to 26% of people, with diabetes representing a –three to five million patient group. We are building demand by contracting with independent durable medical equipment, or DME, suppliers employing sales representatives who detail physicians. Physician prescriptions are fulfilled by the DME suppliers who maintain a stock of SENSUS devices and consumables

 

NC-stat DPNCheck, our point-of-care neuropathy test for accurate and cost-effective screening, diagnosing and monitoring of peripheral neuropathies such as diabetic peripheral neuropathy, was launched in late 2011. Revenues were approximately $1.2 million and $761,000 for the nine months ended September 30, 2014 and 2013, respectively. Our sales efforts in the U.S. market are focused on Medicare Advantage providers who 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 a compelling clinical case with 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. Outside of the United States we are working with Omron Healthcare Company, Ltd. on regulatory and distribution matters. We received regulatory approval in Japan during the second quarter of 2014 and we launched NC-stat DPNCheck in that market during the third quarter of 2014. Other attractive international market opportunities include China where we are also working with Omron Healthcare.

 

We manage our historical neurodiagnostics business, centered on the ADVANCE System, for cash flow and not growth. This business generated approximately $3.8 million in revenue during 2013 and $2.2 million and $3.0 million for the nine ended September 30, 2014 and 2013, respectively. We expect this line of our business will continue to decline in the future.

 

13
 

 

Results of Operations

 

Comparison of Quarters Ended September 30, 2014 and 2013

 

Revenues

 

The following table summarizes our revenues:

 

    Quarters Ended September 30,        
    2014     2013     Change     % Change  
          (in thousands)              
Revenues   $ 1,427.8     $ 1,314.7     $ 113.1       8.6 %

 

Revenues include sales from SENSUS, our therapeutic device for relief of chronic pain; NC-stat DPNCheck, our diagnostic test for DPN; and our legacy ADVANCE neurodiagnostics business. During the third quarter of 2014, we shipped approximately 950 SENSUS devices plus consumable electrodes and recorded revenue of approximately $164,000 compared to 557 devices and $73,000 in revenue recorded in the third quarter of 2013. In the third quarter of 2014 we recorded revenue of $611,000 from sales of NC-stat DPNCheck devices and consumable biosensors, compared to $317,000 in revenue recorded in the third quarter of 2013. Revenues also include sales from our ADVANCE neurodiagnostic products totaling $653,000 in the third quarter of 2014, compared to $925,000 in the third quarter of 2013.

 

Cost of Revenues and Gross Profit

 

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

 

    Quarters Ended September 30,        
    2014     2013     Change     % Change  
          (in thousands)              
Cost of revenues   $ 639.0     $ 578.5     $ 60.5       10.5 %
                                 
Gross profit   $ 788.8     $ 736.2     $ 52.6       7.1 %

 

Our cost of revenues increased to $639,000 in the third quarter of 2014, compared to $578,500 in the third quarter of 2013. Gross margin decreased to 55.2% in the third quarter of 2014 from 56.0% in the third quarter of 2013. The decline in gross margin was primarily due to a shift in product mix to lower margin SENSUS devices.

 

Operating Expenses

 

The following table presents a breakdown of our operating expenses:

 

    Quarters Ended September 30,        
    2014     2013     Change     % Change  
          (in thousands)              
Operating expenses:                        
Research and development   $ 945.3     $ 740.3     $ 205.0       27.7 %
Sales and marketing     537.8       581.1       (43.3 )     (7.5 )%
General and administrative     1,310.0       1,014.3       295.7       29.2 %
Total operating expenses   $ 2,793.1     $ 2,335.7     $ 457.4       19.6 %

 

Research and Development

 

Research and development expenses for the quarters ended September 30, 2014 and 2013 were $945,300 and $740,300, respectively. The increase of $205,000 included outside engineering costs of $343,000 associated with development of an over-the-counter wearable device for chronic pain. Personnel related costs including stock based compensation and recruiting costs were lower in the third quarter of 2014 due to lower headcount and accrued incentive compensation.

 

14
 

 

Sales and Marketing

 

Sales and marketing expenses decreased to $537,800 for the quarter ended September 30, 2014 from $581,100 for the quarter ended September 30, 2013. The reduction of $43,300 included the effects of lower consulting and outside services costs totaling $107,000 offset by increased personnel related costs of $64,000.

 

General and Administrative

 

General and administrative expenses increased by $295,700 to $1.3 million for the quarter ended September 30, 2014 compared to the quarter ended September 30, 2013. This change was primarily attributable to the following increases: Board of Directors and consulting costs totaling $92,000, bad debt expense of $20,000, financial printing costs of $8,000 and other expenses totaling $171,000.

 

Interest Income

 

Interest income was approximately $1,300 and $1,400 for the quarters ended September 30, 2014 and 2013, respectively. Interest income was earned from investments in cash equivalents.

 

Warrants offering costs

 

Warrants offering costs of $23,300 consists of offering costs allocated to warrants in the 2014 Offering.

 

Change in fair value of warrant liability

 

The change in fair value of warrant liability of approximately $565,000 relates to the revaluation of warrants issued in the 2014 Offering and 2013 Offering from the fair value of $5.4 million estimated at June 30, 2014 to $4.8 million at September 30, 2014.

 

Comparison of Nine Months Ended September 30, 2014 and 2013

 

Revenues

 

The following table summarizes our revenues:

 

    Nine Months Ended September 30,        
    2014     2013     Change     % Change  
          (in thousands)              
Revenues   $ 4,103.1     $ 3,876.7     $ 226.4       5.8 %

 

Revenues include sales from SENSUS, our therapeutic device for relief of chronic, intractable pain; NC-stat DPNCheck, our diagnostic test for DPN; and our legacy ADVANCE neurodiagnostics business. Through the third quarter of 2014 we shipped approximately 4,100 SENSUS devices plus consumable electrodes and recorded revenue of approximately $615,000 compared to 910 devices and $138,000 in revenue recorded through the third quarter of 2013. Through the third quarter of 2014 we recorded revenue of $1.2 million from sales of NC-stat DPNCheck devices and consumable biosensors. This was in comparison with $761,000 in revenue recorded through the third quarter of 2013. Revenues also include sales from our ADVANCE neurodiagnostic products totaling $2.2 million through the third quarter of 2014, compared to $3.0 million through the third quarter of 2013.

 

Cost of Revenues and Gross Profit

 

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

 

    Nine Months Ended September 30,        
    2014     2013     Change     % Change  
          (in thousands)              
Cost of revenues   $ 1,909.4     $ 1,649.4     $ 260.0       15.8 %
                                 
Gross profit   $ 2,193.7     $ 2,227.2     $ (33.5 )     (1.5 )%

 

15
 

 

Our cost of revenues increased to $1.9 million through the third quarter of 2014, compared to $1.6 million through the third quarter of 2013. Gross margin decreased to 53.5% in the third quarter of 2014 from 57.5% in the third quarter of 2013. The decline in gross margin was due to a shift in product mix to lower margin SENSUS devices.

 

Operating Expenses

 

The following table presents a breakdown of our operating expenses:

 

    Nine Months Ended September 30,        
    2014     2013     Change     % Change  
          (in thousands)              
Operating expenses:                        
Research and development   $ 3,273.9     $ 2,727.6     $ 546.3       20.0 %
Sales and marketing     1,678.7       2,241.1       (562.4 )     (25.1 )
General and administrative     3,605.0       3,240.1       364.9       11.3  
Total operating expenses   $ 8,557.6     $ 8,208.8     $ 348.8       4.2 %

 

Research and Development

 

Research and development expenses for the nine months ended September 30, 2014 and 2013 were $3.3 million and $2.7 million, respectively. The increase of $546,300 was primarily related to outside engineering costs of $632,000 associated with development of an over-the-counter wearable device for chronic pain and increased professional fees of $49,000. This was partially offset by a decrease in clinical and development costs of $148,000.

 

Sales and Marketing

 

Sales and marketing expenses decreased to $1.7 million for the nine months ended September 30, 2014 from $2.2 million for the nine months ended September 30, 2013. The reduction of $562,400 included the effects of lower headcount and associated personnel costs of $536,000.

 

General and Administrative

 

General and administrative expenses increased to $3.6 million for the nine months ended September 30, 2014 from $3.2 million for the nine months ended September 30, 2013. The increase of $364,900, primarily relates to increased consulting costs $156,000, and personnel related costs including stock based compensation and recruiting fees of $84,000.

 

Interest Income

 

Interest income was approximately $3,300 and $4,600 for the nine months ended September 30, 2014 and 2013, respectively. Interest income was earned from investments in cash equivalents.

 

Warrants offering costs

 

Warrants offering costs of $50,900 and $376,300 consists of offering costs allocated to warrants in the 2014 Offering and 2013 Offering, respectively.

 

Change in fair value of warrant liability

 

The change in fair value of warrant liability of approximately $1.5 million relates to the revaluation of 2014 warrants between the closing date of the 2014 Offering to the reporting date of September 30, 2014, plus the revaluation of the 2013 warrants from December 31, 2013 to September 30, 2014

 

16
 

 

Liquidity and Capital Resources

 

Our principal source of liquidity is our cash and cash equivalents. As of September 30, 2014, cash and cash equivalents totaled $11.7 million. On June 24, 2014, we entered into a securities purchase agreement providing for the issuance of (i) 664,600 shares of common stock at a price of $2.04 per share, (ii) 2,621.859 shares of Series A-3 Preferred Stock at a price of $1,000 per share, (iii) 4,022.357 shares of Series A-4 Preferred Stock at a price of $1,000 per share, and (iv) five year warrants to purchase up to 3,921,569 shares of common stock with an exercise price of $2.04 per share. We received net proceeds of approximately $7.9 million from the 2014 Offering. See Note 9, Stockholders’ Equity, of our Notes to Unaudited Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q for further information regarding this transaction. Our ability to generate revenue to fund our operations will largely depend on the success of our diabetes products and management of our legacy neurodiagnostic 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 cash generated from operations. The following table sets forth information relating to our cash and cash equivalents:

 

 

    September 30,
2014
    December 31,
2013
    Change     % Change  
          (in thousands)              
                         
Cash and cash equivalents   $ 11,687.0     $ 9,195.8     $ 2,491.2       27.1 %

 

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, or the Credit Facility. The amended Credit Facility expires on January 30, 2015. 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 September 30, 2014, we were in compliance with these covenants and had not borrowed any funds under the Credit Facility. However, $451,731 of the amount under the Credit Facility is restricted to support letter of credits issued in favor of our landlords in connection with our lease arrangements. Consequently, the amount available for borrowing under the Credit Facility as of September 30, 2014 was $2.0 million.

 

Our cash and cash equivalents have increased by $2.5 million this year reflecting proceeds of $8 million from the 2014 Offering offset by our loss from operations.

 

In managing our working capital, we monitor days sales outstanding and inventory turnover rate, which are presented in the table below:

 

    Quarters Ended
September 30,
    Year Ended
December 31,
 
    2014     2013     2013  
                   
Days sales outstanding (days)
    36       40       32  
Inventory turnover rate (times per year)     4.1       3.6       3.9  

 

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

 

    Nine Months Ended
September 30,
 
    2014     2013  
             
    (in thousands)  
             
Net cash used in operating activities   $ (5,354.9 )   $ (5,330.5 )
Net cash used in investing activities     (72.0 )     (27.8 )
Net cash (used in) provided by financing activities     7,918.2       4,495.0  

 

17
 

 

Our operating activities used $5.4 million in the nine months ended September 30, 2014. The primary driver for the use of cash in our operating activities during the first nine months of 2014 was our net loss of $4.9 million , which included non-cash charges of $ 312,000, for stock-based compensation and for depreciation and amortization, and non-cash credits of approximately $1.6 million for revaluing outstanding warrants at fair value.

 

We believe that our cash and cash equivalents at September 30, 2014 and the cash to be generated from expected product sales will be sufficient to meet our projected operating requirements for at least the next twelve months. We continue to face significant challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to (a) unanticipated 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 future operating and capital needs beyond the next twelve months. 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. We have filed a shelf registration statement on Form S-3 with the SEC to register shares of our common stock and other securities for sale, giving us the opportunity to raise funding when considered appropriate at prices and on terms to be determined at the time of any such offerings. Pursuant to the instructions to Form S-3, we currently 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 June 2014 Offering, we will be limited in the use of the shelf registration statement until June 2015. 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, 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.

 

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

 

As of September 30, 2014, we did not have any off-balance sheet financing arrangements.

 

See Note 6, Commitments and Contingencies, of our Notes to Unaudited Financial Statements for information regarding commitments and contingencies.

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the provisions of ASU 2014-15 and assessing the impact, if any, it may have on our financial position, results of operations or cash flows.

 

In May 2014, the FASB and the International Accounting Standards Board ("IASB") jointly issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The objective of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the first quarter of 2017. An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or recognizing the cumulative effect of adoption at the date of initial application.  The Company is in the process of evaluating the new standard and does not know the effect, if any, ASU 2014-09 will have on the Consolidated Financial Statements or which adoption method will be used.

 

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Cautionary Note Regarding Forward-Looking Statements

 

The statements contained in this Quarterly Report on Form 10-Q, including under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, without limitation, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, such as our estimates regarding anticipated operating losses, future revenues and projected expenses ; 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 treatment of diabetic neuropathies and adjacent forms of chronic pain and our expectations surrounding our NC-stat DPNCheck and SENSUS devices; our plans to develop and commercialize our products; the success and timing of our studies and/or clinical trials; 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 Quarterly Report on Form 10-Q or any document incorporated by reference herein or therein. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this quarterly report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the section titled “Risk Factors” below and in our 2013 Form 10-K. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures . Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2014, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Controls . There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

While we are not 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.

 

Item 1A. Risk Factors

 

There have been no material changes in the risk factors described in “Item 1A. Risk Factors” of our 2013 Form 10-K.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

In August 2014, the Company entered into a 5-year operating lease agreement with one 5-year extension option for manufacturing and order fulfillment facilities in Woburn, Massachusetts (the “Woburn Lease”). The Woburn Lease commences December 1, 2014 and has a monthly base rent of $7,350. In September 2014, the Company entered into a 7-year operating lease agreement with one 5-year extension option for its corporate office and product development activities in Waltham, Massachusetts (the “Waltham Lease”). The term of the Waltham Lease commences on February 20, 2015 and the lease includes fixed payment obligations that escalate over the initial lease term. Average monthly base rent under the 7-year lease is approximately $37,792. These payment obligations will be accrued and recognized over the term of occupancy such that rent expense is recognized on a straight-line basis. Under the Waltham Lease, the landlord is responsible for making certain improvements to the leased space at an agreed upon cost to the landlord. If the landlord and the Company mutually agree to make improvements that cost in excess of the agreed upon landlord cost, the landlord will bill that excess cost to the Company as additional rent. This additional rent, if and when incurred, will be included in the net calculation of lease payments, so that rent expense will be recognized on a straight-line basis over the remaining term of occupancy. The descriptions of the Woburn Lease and Waltham Lease contained herein do not purport to be complete and are qualified in their entirety by reference to the full text of the Woburn Lease and the Waltham Lease, copies of which are set forth as Exhibit 10.1 and 10.2, respectively, to this Quarterly Report on Form 10-Q and are incorporated herein by reference.

 

In October 2014, the Compensation Committee of the Board of Directors approved modifications to the Management Retention and Incentive Plan (the “Plan”). A full description of the Plan is included under Part II, Item 5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, as filed on August 3, 2012, which is incorporated herein by reference. Under the Plan, a portion of the consideration payable upon a change of control transaction, as defined in the Plan, would be paid to executive officers and certain other key employees. The modifications of the Plan include eliminating a provision which reduced management Percentage Interest in a change of control transaction following the closing of an Equity Financing, as defined in the Plan. In addition, the Plan was modified to set at 2% the Percentage Interest of the Company’s Chief Financial Officer in a change of control transaction. The description of the Plan, as modified, contained herein does not purport to be complete and is qualified in its entirety by reference to the full text of the Plan, as modified, a copy of which is set forth as Exhibit 10.3 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

 

In October 2014, the Compensation Committee of the Board of Directors approved a new employment agreement (the “Employment Agreement”) for the Company’s Chief Financial Officer. The agreement was designed to reflect current industry employment practices based on consultations with Radford. The employment agreement of the Chief Financial Officer has a term of three years, a base salary of $325,000, bonus target of 50% and separation benefits of salary, bonus target and benefits continuation of twelve months. Additionally, if there is a separation in connection with a change of control, all options held by the Chief Financial Officer, as applicable, will accelerate and vest in full. The description of the employment agreement contained herein does not purport to be complete and is qualified in its entirety by reference to the full text of the employment agreement, a copy of which is set forth as Exhibit 10.4 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

 

Item 6. Exhibits

 

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

 

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SIGNATURES

 

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

 

    NEUROMETRIX, INC.  
       
Date: October 28, 2014 /s/  SHAI N. GOZANI, M.D., PH. D.  
    Shai N. Gozani, M.D., Ph. D.  
    Chairman, President and Chief Executive Officer  
       
       
Date: October 28, 2014 /s/  THOMAS T. HIGGINS  
    Thomas T. Higgins  
    Senior Vice President, Chief Financial Officer and Treasurer  

 

21
 

 

EXHIBIT INDEX

 

Exhibit No.   Description
     
10.1   Lease Agreement by and between the Company and Cummings Properties, LLC, dated August 27, 2014
     
10.2   Lease Agreement by and between the Company and Boston Properties, Inc., dated September 10, 2014
     
10.3   Management Retention and Incentive Plan, as modified, dated October 27, 2014
     
10.4   Employment Agreement by and between the Company and the Senior Vice President and Chief Financial Officer, dated October 27, 2014
     
10.5   Employment Agreement by and between the Company and the Senior Vice President and General Manager, Consumer, dated August 14, 2014
     
      31.1  

Certification of Principal Executive Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. Filed herewith.

     
      31.2  

Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. Filed herewith.

     
      32.1   Certification of Principal Executive Officer and Principal Financial Officer Required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
     
      101   The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Statements of Operations for the quarters and nine months ended September 30, 2014 and 2013, (iii) Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (iv) Notes to Financial Statements.

 

 

 

 

Exhibit 10.1

 



















 

Exhibit 10.2

 













































































































































































 

Exhibit 10.3

 

NEUROMETRIX, INC.

 

Management Retention and Incentive Plan

 

1.             Purpose of the Plan . The purpose of this Management Retention and Incentive Plan (the “ Plan ”) is to provide the executive officers and certain other key employees of NeuroMetrix, Inc., a Delaware corporation (the “ Company ”), listed on Schedule A hereto (the “ Participants ,” and each, a “ Participant ”) with consideration in the event of a Change of Control Transaction (as defined below) involving the Company and another entity (the “ Successor Company ”) based on the allocations listed on Schedule A hereto and as such allocations may be adjusted pursuant to Section 7 hereof (the “ Percentage Interest ”). These allocations relate to the Total Consideration (as defined below) to be received in the Change of Control Transaction by the Company and/or its stockholders. The Plan is designed to retain the Company’s executive officers and certain key employees while providing an incentive to continue to build corporate value. The Plan has been structured to work in conjunction with, and not replace, the Company’s other incentive programs such as its equity plans, severance arrangements, compensation and bonus plan, and other benefits. As described further herein, the consideration to be paid to each Participant will be reduced over time as a result of any issuances of future equity grants to Participants. The Plan reflecting modifications from the 2012 Plan, shall be effective as of October 27, 2014.

 

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

 

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

 

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

 

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

 

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

 

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

 

 
 

 

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

 

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

 

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

 

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

 

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

 

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

 

(h)             RESERVED

 

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

 

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

 

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

 

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

 

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

 

2
 

 

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

 

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

 

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

 

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

 

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

 

3
 

 

4.             Eligibility to Earn Plan Consideration . Except as otherwise provided in Section 9 below, each Participant will have the right to receive Plan Consideration, subject to the Participant’s continued employment or service with the Company through the date of the closing of the Change of Control Transaction unless terminated by the Company other than for cause within 180 days prior to the announcement of the Change of Control Transaction. If a Participant’s service to the Company in all capacities (whether as an employee, consultant, advisor, director or any other service provider) terminates for any reason prior to the date of the closing of the Change of Control Transaction (other than by the Company not for cause within 180 days of the announcement of the Change of Control Transaction), whether initiated by the Company or the Participant, and with or without cause, then such Participant shall no longer be considered a “Participant” thereafter for purposes of the Plan, and such Participant will not be entitled to receive any Plan Consideration hereunder. The Company in its sole discretion will determine whether a Participant’s service relationship has terminated for this purpose.

 

5.             Type of Plan Consideration . Pursuant to this Plan, the Participants who are employed by the Company on the date of the closing of a Change of Control Transaction, or whose employment is terminated by the Company not for cause within 180 days of a Change of Control Transaction, shall receive their Plan Consideration from the Successor Company in cash and at the times set forth in Section 8 of the Plan.

 

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

 

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

 

4
 

 

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

 

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

 

7.             RESERVED

 

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

 

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

 

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

 

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

 

5
 

 

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

 

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

 

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

 

6
 

 

For purposes of this provision,

 

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

 

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

 

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

 

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

 

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

 

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

 

7
 

 

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

 

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

 

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

 

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

 

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

 

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

 

8
 

 

SCHEDULE A

 

NAME PERCENTAGE INTEREST
   
Gozani 5.0%
Higgins 2.0%

 

9
 

 

Exhibit A

 

FORM OF GENERAL RELEASE

 

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

 

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

 

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

 

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

 

 

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

 

10
 

 

By signing and returning this Agreement, I acknowledge that:

 

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

 

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

 

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

 

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

 

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

 

11
 

 

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

 

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

 

           
Date:      By:      
        Name:      

 

12
 

 

 

Exhibit 10.4

 



















 

Exhibit 10.5

 



















 

EXHIBIT 31.1

 

CERTIFICATION

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date: October 28, 2014

/s/ SHAI N. GOZANI, M.D., PH.D.
  Shai N. Gozani, M.D., Ph.D.
 

Chairman, President and Chief Executive Officer

 

 

 

EXHIBIT 31.2

 

CERTIFICATION

 

I, Thomas T. Higgins, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date: October 28, 2014

/s/ THOMAS T. HIGGINS
  Thomas T. Higgins
  Senior Vice President, Chief Financial Officer and Treasurer

 

 

 

EXHIBIT 32

 

CERTIFICATION

 

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

 

The Quarterly Report for the quarter ended September 30, 2014 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

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

 

October 28, 2014

 

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