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Quarter Report: 2010 June (Form 10-Q)
NeuroMetrix, Inc. - Quarter Report: 2010 June (Form 10-Q)
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TABLE OF CONTENTS
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
| (Mark One) |
|
|
ý |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010 |
OR |
o |
|
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 |
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04-3308180 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
62 Fourth Avenue, Waltham, Massachusetts 02451
(Address of principal executive offices, including 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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):
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| Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
|
Smaller reporting company ý |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 23,098,331 shares of common stock,
par value $0.0001 per share, were outstanding as of July 30, 2010.
Table of Contents
NeuroMetrix, Inc.
Form 10-Q
Quarterly Period Ended June 30, 2010
TABLE OF CONTENTS
1
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
NeuroMetrix, Inc.
Balance Sheets
(Unaudited)
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June 30,
2010 |
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December 31,
2009 |
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Assets |
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|
|
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Current assets: |
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
|
$ |
19,080,117 |
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$ |
22,937,410 |
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| |
Short-term investments |
|
|
2,500,000 |
|
|
7,495,000 |
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| |
Accounts receivable, net |
|
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2,758,344 |
|
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3,326,331 |
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| |
Inventories |
|
|
4,891,262 |
|
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4,559,607 |
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| |
Prepaid expenses and other current assets |
|
|
427,625 |
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404,716 |
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| |
Current portion of deferred costs |
|
|
110,355 |
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132,774 |
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| |
|
|
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|
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| |
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Total current assets |
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29,767,703 |
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38,855,838 |
|
Restricted cash |
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|
408,000 |
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|
408,000 |
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Fixed assets, net |
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|
778,657 |
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906,625 |
|
Intangible assets, net |
|
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245,000 |
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|
280,000 |
|
Deferred costs and other long-term assets |
|
|
71,144 |
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116,057 |
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| |
|
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|
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| |
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Total assets |
|
$ |
31,270,504 |
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$ |
40,566,520 |
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| |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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| |
Accounts payable |
|
$ |
721,886 |
|
$ |
1,086,946 |
|
| |
Accrued compensation |
|
|
1,058,192 |
|
|
1,369,257 |
|
| |
Accrued expenses |
|
|
1,417,362 |
|
|
1,295,577 |
|
| |
Current portion of deferred revenue |
|
|
581,137 |
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|
699,775 |
|
| |
Current portion of capital lease obligation |
|
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35,245 |
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30,357 |
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| |
|
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| |
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Total current liabilities |
|
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3,813,822 |
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4,481,912 |
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Deferred revenue, net of current portion |
|
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253,123 |
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341,513 |
|
Capital lease obligation, net of current portion |
|
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14,289 |
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33,224 |
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| |
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|
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| |
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Total liabilities |
|
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4,081,234 |
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4,856,649 |
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| |
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Commitments and contingencies (Notes 7 and 9) |
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Stockholders' equity: |
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| |
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none outstanding |
|
|
— |
|
|
— |
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| |
Common stock, $0.0001 par value; 50,000,000 shares authorized; 23,098,331 and 22,969,670 shares issued and outstanding at June 30, 2010 and
December 31, 2009, respectively |
|
|
2,310 |
|
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2,297 |
|
| |
Additional paid-in capital |
|
|
138,183,197 |
|
|
137,420,711 |
|
| |
Accumulated deficit |
|
|
(110,996,237 |
) |
|
(101,713,137 |
) |
| |
|
|
|
|
|
| |
|
Total stockholders' equity |
|
|
27,189,270 |
|
|
35,709,871 |
|
| |
|
|
|
|
|
| |
|
Total liabilities and stockholders' equity |
|
$ |
31,270,504 |
|
$ |
40,566,520 |
|
| |
|
|
|
|
|
The
accompanying notes are an integral part of these interim financial statements.
2
Table of Contents
NeuroMetrix, Inc.
Statements of Operations
(Unaudited)
|
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|
|
|
|
|
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|
|
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Quarter Ended
June 30, |
|
Six Months Ended
June 30, |
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2010 |
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2009 |
|
2010 |
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
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|
|
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| |
Medical equipment |
|
$ |
512,108 |
|
$ |
704,803 |
|
$ |
1,053,034 |
|
$ |
1,403,772 |
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| |
Consumables |
|
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3,340,368 |
|
|
6,055,616 |
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6,365,835 |
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12,182,225 |
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| |
|
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|
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|
|
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| |
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Total revenues |
|
|
3,852,476 |
|
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6,760,419 |
|
|
7,418,869 |
|
|
13,585,997 |
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Cost of revenues |
|
|
1,405,348 |
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1,934,920 |
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2,701,362 |
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3,875,308 |
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| |
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| |
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Gross margin |
|
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2,447,128 |
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4,825,499 |
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4,717,507 |
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9,710,689 |
|
Operating expenses: |
|
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|
|
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|
|
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|
|
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| |
|
Research and development |
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1,658,050 |
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1,408,674 |
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3,332,531 |
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2,730,436 |
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| |
|
Sales and marketing |
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3,143,484 |
|
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2,921,094 |
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|
6,383,821 |
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5,441,608 |
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| |
|
General and administrative |
|
|
2,176,074 |
|
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2,360,143 |
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4,315,653 |
|
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4,692,233 |
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| |
|
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|
|
|
|
|
|
|
| |
|
|
Total operating expenses |
|
|
6,977,608 |
|
|
6,689,911 |
|
|
14,032,005 |
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12,864,277 |
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| |
|
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Loss from operations |
|
|
(4,530,480 |
) |
|
(1,864,412 |
) |
|
(9,314,498 |
) |
|
(3,153,588 |
) |
| |
|
Interest income |
|
|
11,409 |
|
|
63,646 |
|
|
31,398 |
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136,317 |
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| |
|
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|
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Net loss |
|
$ |
(4,519,071 |
) |
$ |
(1,800,766 |
) |
$ |
(9,283,100 |
) |
$ |
(3,017,271 |
) |
| |
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Per common share data, basic and diluted: |
|
|
|
|
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|
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|
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| |
|
Net loss |
|
$ |
(0.20 |
) |
$ |
(0.13 |
) |
$ |
(0.40 |
) |
$ |
(0.22 |
) |
| |
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|
|
|
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|
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|
Weighted average number of common shares outstanding, basic and diluted |
|
|
23,038,106 |
|
|
13,948,138 |
|
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23,023,275 |
|
|
13,926,502 |
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| |
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|
|
|
|
|
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|
The
accompanying notes are an integral part of these interim financial statements.
3
Table of Contents
NeuroMetrix, Inc.
Statements of Cash Flows
(Unaudited)
|
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|
|
|
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|
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|
|
|
Six Months Ended
June 30, |
|
|
|
2010 |
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,283,100 |
) |
$ |
(3,017,271 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
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| |
Depreciation and amortization |
|
|
271,366 |
|
|
301,517 |
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| |
Stock-based compensation |
|
|
604,529 |
|
|
1,070,263 |
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| |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
| |
|
Accounts receivable |
|
|
567,987 |
|
|
190,920 |
|
| |
|
Inventories |
|
|
(331,655 |
) |
|
549,975 |
|
| |
|
Prepaid expenses and other current assets |
|
|
(22,909 |
) |
|
(61,116 |
) |
| |
|
Accounts payable |
|
|
(365,060 |
) |
|
1,114,330 |
|
| |
|
Legal settlement |
|
|
— |
|
|
(3,705,866 |
) |
| |
|
Accrued expenses and compensation |
|
|
(189,280 |
) |
|
(396,565 |
) |
| |
|
Deferred revenue, deferred costs, and other |
|
|
(139,696 |
) |
|
(105,743 |
) |
| |
|
|
|
|
|
| |
|
|
Net cash used in operating activities |
|
|
(8,887,818 |
) |
|
(4,059,556 |
) |
| |
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
| |
Purchases of investments |
|
|
— |
|
|
(4,995,000 |
) |
| |
Maturities of investments |
|
|
4,995,000 |
|
|
2,500,000 |
|
| |
Purchases of fixed assets |
|
|
(108,398 |
) |
|
(167,015 |
) |
| |
Purchase of technological and intellectual property |
|
|
— |
|
|
(350,000 |
) |
| |
|
|
|
|
|
| |
|
|
Net cash provided by (used in) investing activities |
|
|
4,886,602 |
|
|
(3,012,015 |
) |
| |
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
| |
Proceeds from issuance of common stock |
|
|
157,970 |
|
|
245,157 |
|
| |
Payments on capital lease |
|
|
(14,047 |
) |
|
(10,421 |
) |
| |
|
|
|
|
|
| |
|
|
Net cash provided by financing activities |
|
|
143,923 |
|
|
234,736 |
|
| |
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(3,857,293 |
) |
|
(6,836,835 |
) |
Cash and cash equivalents, beginning of period |
|
|
22,937,410 |
|
|
12,302,284 |
|
| |
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
19,080,117 |
|
$ |
5,465,449 |
|
| |
|
|
|
|
|
The
accompanying notes are an integral part of these interim financial statements.
4
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements
June 30, 2010
1. Business and Basis of Presentation
Business
NeuroMetrix, Inc., or the Company, a Delaware corporation, was founded in June 1996. The Company is a science-based health care
company transforming patient care through neurotechnology. To date the Company's focus has been primarily on the assessment of neuropathies. Neuropathies affect the peripheral nerves and parts of the
spine and are frequently caused by or associated with carpal tunnel syndrome, diabetes, sciatica, and other clinical disorders. The Company markets systems for the performance of nerve conduction
studies and needle electromyography procedures. The Company's product pipeline includes a rapid, low cost, point-of-care test for diabetic peripheral neuropathy, a nerve localization system designed
to deliver pharmacologic agents such as anesthetics and corticosteroids in close proximity to nerves for regional anesthesia, pain control, and the treatment of focal neuropathies, and devices and
pharmaceutical agents to treat peripheral nerve and spinal cord injuries.
The
Company believes that its current cash, cash equivalents, and short-term investments, and the cash to be generated from expected product sales will be sufficient to meet
its projected operating requirements through 2011. The Company is currently facing 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) changes in future revenues; (b) changes the Company makes to its ongoing operating expenses; (c) planned changes in the Company's
business strategy; (d) regulatory developments affecting the Company and its products; (e) decisions the Company makes regarding the size of its sales force and the magnitude of its
sales and marketing programs; (f) changes the Company makes to research and development spending plans; (g) the outcome of the class action lawsuit against the Company; and
(h) other items affecting the Company's forecasted level of expenditures and use of cash resources. Accordingly, the Company may need to raise additional funds to support its operating and
capital needs. The Company may attempt to obtain additional funding through public or private financing, collaborative arrangements with strategic partners, or through additional credit lines or other
debt financing sources to increase the funds available to fund its operations. However, the Company may not be able to secure such financing on favorable terms, if at all. 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
efforts in an effort to provide sufficient funds to continue its operations.
Unaudited Interim Financial Statements
The accompanying unaudited balance sheet as of June 30, 2010, unaudited statements of operations for the quarters and six months
ended June 30, 2010 and 2009 and the unaudited statements of cash flows for the six months ended June 30, 2010 and 2009 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 presentation of the Company's
financial position and operating results. Operating results for the quarter and six months ended June 30, 2010 are not necessarily indicative of the results
5
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
1. Business and Basis of Presentation (Continued)
that
may be expected for the year ending December 31, 2010 or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year
ended December 31, 2009 included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or the SEC, on March 12, 2010 (File
No. 001-33351). The accompanying balance sheet as of December 31, 2009 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.
Financial Statements for the Quarter Ended March 31, 2010
During the second quarter of 2010, the Company identified fraudulent sales transactions involving two sales representatives, resulting
in a $146,333 overstatement of revenues for the quarter ended March 31, 2010. The Company believes that these sales transactions, individually and in the aggregate, are not material to the
financial results as reported in previously issued interim financial statements for the quarter ended March 31, 2010. As of and for the quarter ended March 31, 2010, these sales
transactions affected the financial statements as follows: an overstatement of revenues of $146,333; an overstatement of the associated cost of revenue and sales commissions of $38,078 and $30,937,
respectively; an overstatement of accounts receivable of $158,239, which includes an overstatement of sales tax payable of $11,905; an understatement of inventory of $31,673, net of inventory losses
of $6,405; and an understatement of other current assets of $32,343 related to an insurance receivable for the associated loss claim less a $5,000 deductible. The balance sheet and statement of
operations as of and for the quarter ended March 31, 2010 are presented below as originally reported and after adjustment for the amounts described above. There was no impact to total net cash
used in operating activities within the statement of cash flows for the quarter ended March 31, 2010.
6
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
1. Business and Basis of Presentation (Continued)
NeuroMetrix, Inc.
Balance Sheet
As of March 31, 2010
(Unaudited)
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|
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|
As Previously
Reported |
|
Adjustments |
|
As Adjusted |
|
Assets |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
20,792,785 |
|
$ |
— |
|
$ |
20,792,785 |
|
Short-term investments |
|
|
4,995,000 |
|
|
— |
|
|
4,995,000 |
|
Accounts receivable, net |
|
|
3,048,218 |
|
|
(158,239 |
) |
|
2,889,979 |
|
Inventories |
|
|
4,978,525 |
|
|
31,673 |
|
|
5,010,198 |
|
Prepaid expenses and other current assets |
|
|
512,664 |
|
|
32,343 |
|
|
545,007 |
|
Current portion of deferred costs |
|
|
126,850 |
|
|
— |
|
|
126,850 |
|
| |
|
|
|
|
|
|
|
| |
Total current assets |
|
|
34,454,042 |
|
|
(94,223 |
) |
|
34,359,819 |
|
Restricted cash |
|
|
408,000 |
|
|
— |
|
|
408,000 |
|
Fixed assets, net |
|
|
850,975 |
|
|
— |
|
|
850,975 |
|
Intangible assets, net |
|
|
262,500 |
|
|
— |
|
|
262,500 |
|
Deferred costs and other long-term assets |
|
|
90,761 |
|
|
— |
|
|
90,761 |
|
| |
|
|
|
|
|
|
|
| |
|
Total assets |
|
$ |
36,066,278 |
|
$ |
(94,223 |
) |
$ |
35,972,055 |
|
| |
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,389,219 |
|
$ |
— |
|
$ |
1,389,219 |
|
Accrued compensation |
|
|
784,217 |
|
|
— |
|
|
784,217 |
|
Accrued expenses |
|
|
1,374,418 |
|
|
(11,905 |
) |
|
1,362,513 |
|
Current portion of deferred revenue |
|
|
668,405 |
|
|
— |
|
|
668,405 |
|
Current portion of capital lease obligation |
|
|
32,710 |
|
|
— |
|
|
32,710 |
|
| |
|
|
|
|
|
|
|
| |
Total current liabilities |
|
|
4,248,969 |
|
|
(11,905 |
) |
|
4,237,064 |
|
Deferred revenue, net of current portion |
|
|
299,277 |
|
|
— |
|
|
299,277 |
|
Capital lease obligation, net of current portion |
|
|
24,110 |
|
|
— |
|
|
24,110 |
|
| |
|
|
|
|
|
|
|
| |
Total liabilities |
|
|
4,572,356 |
|
|
(11,905 |
) |
|
4,560,451 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none outstanding |
|
|
— |
|
|
— |
|
|
— |
|
| |
Common stock, $0.0001 par value; 50,000,000 shares authorized; 23,038,106 shares issued and outstanding at March 31, 2010 |
|
|
2,304 |
|
|
— |
|
|
2,304 |
|
| |
Additional paid-in capital |
|
|
137,886,466 |
|
|
— |
|
|
137,886,466 |
|
| |
Accumulated deficit |
|
|
(106,394,848 |
) |
|
(82,318 |
) |
|
(106,477,166 |
) |
| |
|
|
|
|
|
|
|
| |
|
Total stockholders' equity |
|
|
31,493,922 |
|
|
(82,318 |
) |
|
31,411,604 |
|
| |
|
|
|
|
|
|
|
| |
|
Total liabilities and stockholders' equity |
|
$ |
36,066,278 |
|
$ |
(94,223 |
) |
$ |
35,972,055 |
|
| |
|
|
|
|
|
|
|
7
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
1. Business and Basis of Presentation (Continued)
NeuroMetrix, Inc.
Statement of Operations
For the Quarter Ended March 31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
Reported |
|
Adjustments |
|
As Adjusted |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |
Medical equipment |
|
$ |
580,212 |
|
$ |
(39,286 |
) |
$ |
540,926 |
|
| |
Consumables |
|
|
3,132,514 |
|
|
(107,047 |
) |
|
3,025,467 |
|
| |
|
|
|
|
|
|
|
| |
|
|
Total revenues |
|
|
3,712,726 |
|
|
(146,333 |
) |
|
3,566,393 |
|
Cost of revenues |
|
|
1,334,092 |
|
|
(38,078 |
) |
|
1,296,014 |
|
| |
|
|
|
|
|
|
|
| |
|
|
Gross margin |
|
|
2,378,634 |
|
|
(108,255 |
) |
|
2,270,379 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
| |
|
Research and development |
|
|
1,674,481 |
|
|
— |
|
|
1,674,481 |
|
| |
|
Sales and marketing |
|
|
3,271,274 |
|
|
(30,937 |
) |
|
3,240,337 |
|
| |
|
General and administrative |
|
|
2,134,579 |
|
|
5,000 |
|
|
2,139,579 |
|
| |
|
|
|
|
|
|
|
| |
|
|
Total operating expenses |
|
|
7,080,334 |
|
|
(25,937 |
) |
|
7,054,397 |
|
| |
|
|
|
|
|
|
|
Loss from operations |
|
|
(4,701,700 |
) |
|
(82,318 |
) |
|
(4,784,018 |
) |
| |
|
Interest income |
|
|
19,989 |
|
|
— |
|
|
19,989 |
|
| |
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,681,711 |
) |
$ |
(82,318 |
) |
$ |
(4,764,029 |
) |
| |
|
|
|
|
|
|
|
Per common share data, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss |
|
$ |
(0.20 |
) |
$ |
(0.01 |
) |
$ |
(0.21 |
) |
| |
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic and diluted |
|
|
23,008,278 |
|
|
— |
|
|
23,008,278 |
|
| |
|
|
|
|
|
|
|
Revenues
Medical equipment revenues consist of sales of the NC-stat and ADVANCE Systems, related modules, and revenues from extended
service agreements. Revenues associated with the sale of the NC-stat and ADVANCE devices are recognized upon shipment provided that the fee 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 NC-stat docking station, as well as the ADVANCE communication hub together with access to NeuroMetrix information systems, are considered one
unit of accounting and are deferred and recognized on a straight line basis over the estimated period of time 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.
8
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
1. Business and Basis of Presentation (Continued)
Consumables
revenues consist of sales of single use nerve specific electrodes, EMG needles, and other accessories. Consumables revenues are recognized upon shipment provided that the fee
is fixed or determinable, persuasive evidence of an arrangement exists, collection of receivables is reasonably assured, and product returns are reasonably estimable.
The
Company's payment terms extended to customers with traditional payment terms generally require payment within 30 days from invoice date. In addition, the Company offers
extended payment terms of up to one year for new customers placing large dollar value orders for a combination of medical equipment and consumables. Typically these sales involve installment payments
in 12 equal monthly amounts. Revenues are recognized upon shipment provided the selling price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred and risk of
loss has passed, collection of the resulting receivables is reasonably assured, and product returns are reasonably estimable. In developing parameters for revenue recognition, the Company relied on
its historical experience for similar arrangements. During the quarter ended June 30, 2010, the Company recognized gross revenue of $515,000 on sales with extended payment terms. During the six
months ended June 30, 2010, the Company recognized gross revenue of $1.2 million on sales with extended payment terms. As of June 30, 2010, accounts receivable, net, included
$1.3 million of amounts under extended payment terms.
Product
sales are made with a 30-day right of return. Because the Company can reasonably estimate future returns, the Company recognizes revenues associated with product
sales that contain a right of return upon shipment and at the same time reduces revenue and accounts receivable by the amount of estimated returns.
Proceeds
received in advance of product shipment are recorded as deferred revenues.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management
to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during reporting periods. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In September 2009, the Emerging Issues Task Force, or EITF, issued new rules pertaining to the accounting for revenue arrangements with
multiple deliverables. The new rules provide an alternative method for establishing fair value of a deliverable when vendor specific objective evidence cannot be determined. The guidance provides for
the determination of the best estimate of selling price to separate deliverables and allows the allocation of arrangement consideration using this relative selling price model. The guidance supersedes
the prior multiple element revenue arrangement accounting rules that are currently used by the Company. The new guidance can be prospectively applied by us beginning January 1, 2011 or can be
early or retrospectively adopted. The Company is currently evaluating the impact of the new rules including the timing of adoption, but it does not believe adoption will have a material effect on its
financial statements.
9
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
1. Business and Basis of Presentation (Continued)
In
September 2009, the EITF issued new rules to exclude (a) non-software components of tangible products and (b) software components of tangible products that
are sold, licensed, or leased
with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product's essential functionally. The new
guidance can be prospectively applied by us beginning January 1, 2011 or can be early or retrospectively adopted. The Company is currently evaluating the impact of the new rules including the
timing of adoption, but it does not believe adoption will have a material effect on its financial statements.
In
January 2010, the Financial Accounting Standards Board issued Accounting Standards Update No. 2010-06, "Fair Value Measurements and
Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"). ASU 2010-06 requires new disclosures regarding
significant transfers in and out of Levels 1 and 2, as well as information about activity in Level 3 fair value measurements, including presenting information about purchases, sales,
issuances, and settlements on a gross versus a net basis in the Level 3 activity roll forward. In addition, ASU 2010-06 also clarifies existing disclosures regarding input and
valuation techniques, as well as the level of disaggregation for each class of assets and liabilities. ASU No. 2010-06 is effective for interim and annual periods beginning after
December 15, 2009, except for the disclosures pertaining to purchases, sales, issuances, and settlements in the roll forward of Level 3 activity; those disclosures are effective for
interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 had no current impact and is expected to have no subsequent impact on the Company's
financial statements.
2. Comprehensive Loss
For the quarters and six months ended June 30, 2010 and 2009, the Company had no components of other comprehensive income or loss other than net loss.
3. Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Unvested restricted shares, although
legally issued and outstanding, are not considered outstanding for purposes of calculating basic net income per share. Diluted net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding instruments such as options, warrants, and restricted stock. Because the Company has
reported a net loss attributable to common stockholders 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
10
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
3. Net Loss Per Common Share (Continued)
following
potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share because their effect was anti-dilutive for each of the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
June 30, |
|
Six Months Ended
June 30, |
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Options |
|
|
3,538,877 |
|
|
3,069,538 |
|
|
3,407,177 |
|
|
2,893,237 |
|
Warrants |
|
|
8,375,694 |
|
|
— |
|
|
8,375,694 |
|
|
— |
|
Restricted stock |
|
|
59,563 |
|
|
— |
|
|
29,946 |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
|
11,974,134 |
|
|
3,069,538 |
|
|
11,812,817 |
|
|
2,893,237 |
|
| |
|
|
|
|
|
|
|
|
|
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2010 |
|
December 31,
2009 |
|
Purchased components |
|
$ |
1,356,206 |
|
$ |
1,346,267 |
|
Finished goods |
|
|
3,535,056 |
|
|
3,213,340 |
|
| |
|
|
|
|
|
|
|
$ |
4,891,262 |
|
$ |
4,559,607 |
|
| |
|
|
|
|
|
5. Intangible Assets
In January 2009, the Company acquired certain technological and intellectual property assets from Cyberkinetics Neurotechnology Systems, Inc., or Cyberkinetics, and Andara Life
Science, Inc., a wholly-owned subsidiary of Cyberkinetics, for $350,000 in cash. The Company is amortizing these intangible assets using the straight-line method over their economic
lives, which is estimated to be five years. Research and development expenses for the quarters ended June 30, 2010 and 2009 each included amortization of this technological and intellectual
property of $17,500. Research and development expenses for the six months ended June 30, 2010 and 2009 each included $35,000 of such amortization. Accumulated amortization on these intangible
assets at June 30, 2010 was $105,000.
The
estimated future amortization expense for intangible assets as of June 30, 2010 is as follows:
|
|
|
|
|
|
|
Estimated
Amortization
Expense |
|
2010 (remaining six months) |
|
$ |
35,000 |
|
2011 |
|
|
70,000 |
|
2012 |
|
|
70,000 |
|
2013 |
|
|
70,000 |
|
| |
|
|
|
|
|
$ |
245,000 |
|
| |
|
|
|
11
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
6. Accrued Expenses
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2010 |
|
December 31,
2009 |
|
Professional services |
|
$ |
469,643 |
|
$ |
488,191 |
|
Customer overpayments |
|
|
514,325 |
|
|
306,251 |
|
License fee |
|
|
125,000 |
|
|
— |
|
Sales taxes |
|
|
80,147 |
|
|
191,601 |
|
Other |
|
|
228,247 |
|
|
309,534 |
|
| |
|
|
|
|
|
|
|
$ |
1,417,362 |
|
$ |
1,295,577 |
|
| |
|
|
|
|
|
Product Warranty Costs
The Company accrues estimated product warranty costs at the time of sale which are included in cost of sales in the statements of
operations. The amount of the accrued warranty liability is based on historical information such as past experience, product failure rates, number of units repaired, and estimated cost of material and
labor. The liability for product warranty costs is included in accrued expenses in the balance sheet.
The
following is a rollforward of the Company's accrued warranty liability for the quarters and six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
June 30, |
|
Six Months Ended
June 30, |
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Balance at beginning of period |
|
$ |
47,577 |
|
$ |
62,881 |
|
$ |
48,355 |
|
$ |
136,170 |
|
Accrual for warranties |
|
|
1,357 |
|
|
2,198 |
|
|
2,571 |
|
|
4,762 |
|
Settlements made |
|
|
(1,348 |
) |
|
(10,574 |
) |
|
(3,340 |
) |
|
(86,427 |
) |
| |
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
47,586 |
|
$ |
54,505 |
|
$ |
47,586 |
|
$ |
54,505 |
|
| |
|
|
|
|
|
|
|
|
|
12
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
7. Commitments and Contingencies
Operating Lease
The Company leases office and engineering laboratory space in Waltham, Massachusetts. The lease term extends through March 31,
2013. Base rent for the period April 2010 through March 2013 ranges from $705,000 to $765,000 on an annualized basis.
Future
minimum lease payments under noncancelable operating leases as of June 30, 2010 are as follows:
|
|
|
|
|
2010 (remaining six months) |
|
$ |
352,500 |
|
2011 |
|
|
727,500 |
|
2012 |
|
|
757,500 |
|
2013 |
|
|
191,250 |
|
| |
|
|
|
Total minimum lease payments |
|
$ |
2,028,750 |
|
| |
|
|
|
8. Fair Value Measurements
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 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
June 30, 2010 Using |
|
|
|
June 30,
2010 |
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) |
|
Significant
Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
14,723,927 |
|
$ |
14,723,927 |
|
$ |
— |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,723,927 |
|
$ |
14,723,927 |
|
$ |
— |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
13
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
8. Fair Value Measurements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2009 Using |
|
|
|
December 31,
2009 |
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) |
|
Significant
Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
22,223,503 |
|
$ |
22,223,503 |
|
$ |
— |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,223,503 |
|
$ |
22,223,503 |
|
$ |
— |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
9. Legal Matters
As previously disclosed in the Company's filings with the SEC, on March 17, 2008, a putative securities class action complaint was filed in the United States District Court for
the District of Massachusetts against the Company and certain of its current and former officers. On March 27, 2008, a related putative securities class action complaint was filed in the same
court, against the same defendants. These two actions were subsequently consolidated, and the court appointed a lead plaintiff. On November 10, 2008, a consolidated amended class action
complaint was filed, which alleged, among other things, that between October 27, 2005 and February 12, 2008, the defendants violated the federal securities laws by allegedly making false
and misleading statements and failing to disclose material information to the investing public. The plaintiffs sought unspecified damages. On January 30, 2009, the Company filed a motion to
dismiss the consolidated amended complaint on the grounds, among others, that it failed to state a claim on which relief can be granted. On December 8, 2009, the Court entered an order granting
defendants' motion to dismiss and dismissing the consolidated amended complaint in its entirety with prejudice. The plaintiffs filed a notice of appeal with the United States Court of Appeals for the
First Circuit on January 6, 2010. The appeal is currently pending and oral arguments on the appeal have recently been scheduled for mid-September 2010.
The
litigation process is inherently uncertain, and the Company cannot guarantee that the outcome of the above lawsuit will be favorable for the Company or that it will not be material
to its business, results of operations, or financial position. However, the Company does not believe that a loss is probable related to this litigation. Accordingly, no accrual has been recorded
relating to this matter at June 30, 2010.
As
previously disclosed in the Company's filings with the SEC, on April 22, 2008, a shareholder derivative action was filed in the United States District Court for the District of
Massachusetts against a number of the Company's current and former directors and officers. On December 10, 2008, a verified amended shareholder derivative complaint was filed, alleging, among
other things, that, between August 2004 and the date the action was filed, the defendants breached various fiduciary duties to the Company based on conduct similar to that alleged in the putative
securities class actions, including that the defendants caused the Company to make false and misleading statements, to fail to disclose material information to the public and to engage in improper
business practices. The plaintiff sought various forms of monetary and non-monetary relief. The parties reached an agreement to resolve the shareholder derivative action, subject to Court
approval, and executed a formal stipulation of settlement on December 21, 2009. On February 23, 2010, the Court entered an order approving the
14
Table of Contents
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements (Continued)
June 30, 2010
9. Legal Matters (Continued)
parties'
settlement and entered a judgment dismissing the case in its entirety, with prejudice. In conjunction with the settlement, the Company's insurance carrier paid directly to third parties
$350,000 for the plaintiff's counsel's attorneys fees and reimbursement of expenses. No payment was required by the Company.
10. Credit Facility
On March 5, 2010, the Company entered into a Loan and Security Agreement, or the Credit Facility, with Comerica Bank, which permits it to borrow up to $7.5 million on a
revolving basis for a one-year term. Amounts borrowed under the Credit Facility will bear interest equal to the prime rate plus 0.5%. Any borrowings under the Credit Facility will be
secured by the Company's cash, accounts receivable, inventory, and equipment. The Company had not borrowed any funds under the Credit Facility as of June 30, 2010 and is in compliance with the
financial covenant of the Credit Facility.
11. Subsequent Event
Subsequent to the end of the second quarter of 2010, the Company implemented a reduction in force that resulted in the elimination of approximately 25 positions, representing 25% of its
workforce, as well as other cost savings initiatives. During the third quarter of 2010, the Company expects to record a charge of $0.3 million in connection with this matter, primarily related
to severance expenses.
15
Table of Contents
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 was founded in June 1996. NeuroMetrix is a science-based health care company transforming patient care through
neurotechnology. To date our focus has been primarily on the assessment of neuropathies. Neuropathies affect the peripheral nerves and parts of the spine and are frequently caused by or associated
with carpal tunnel syndrome, diabetes, sciatica, and other clinical disorders. We market systems for the performance of nerve conduction studies and needle electromyography procedures. Our product
pipeline includes a rapid, low cost, point-of-care test for diabetic peripheral neuropathy, a nerve localization system designed to deliver pharmacologic agents such as anesthetics and corticosteroids
in close proximity to nerves for regional anesthesia, pain control, and the treatment of focal neuropathies, and devices and pharmaceutical agents to treat peripheral nerve and spinal cord injuries.
We
currently market and sell two medical devices cleared by the United States Food and Drug Administration, or FDA, which are used for the assessment of neuropathies. Our
NC-stat System is a point-of-care device for the performance of nerve conduction studies. It has been sold historically to a broad group of physicians since its
initial market launch in May 1999. We are presently focusing our sales efforts for our NC-stat System on primary care physicians and clinics. Our NC-stat System is comprised
of: (1) single use nerve-specific electrodes, (2) the NC-stat device and related components, and (3) the NC-stat docking station, an optional device that
enables the physician's office to transmit data to our onCall Information System. Our ADVANCE™ NCS/EMG System, or the ADVANCE System, is a comprehensive platform for the performance of
traditional nerve conduction studies and invasive electromyography procedures. We are presently focusing our sales efforts for our ADVANCE System on specialist physicians with peripheral nerve
expertise, including neurologists, physical medicine and rehabilitation physicians, neurosurgeons, orthopedic and hand surgeons, and pain medicine physicians. Our ADVANCE System is comprised of:
(1) various types of electrodes and needles, (2) our ADVANCE device and related modules, and (3) a communication hub that enables the physician's office to network their device to
our servers for data archiving, report generation, and other network services. Our neurodiagnostic equipment is used in approximately 4,200 physicians' offices, clinics, and hospitals. Approximately
1.5 million patient studies have been performed with our neurodiagnostic devices since 1999.
We
are continuing our efforts to bring clarity to physician reimbursement for medically appropriate nerve conduction studies. We believe that consistent and adequate physician
reimbursement for nerve conduction studies performed using our neurodiagnostic devices is essential to our efforts to build our U.S. business and thereby deliver the significant clinical benefits of
this technology to patients. A significant, positive step was taken on reimbursement in the fourth quarter of 2009 when the CMS published a new Category I CPT code (95905), or CPT code 95905,
in the 2010 Physician's Fee Schedule for nerve conduction studies performed with preconfigured electrode arrays, such as those utilized with our NC-stat System. Therefore, we believe that
this CPT code may streamline Medicare reimbursement for medically appropriate nerve conduction studies performed using our NC-stat System. This is an important development because we
believe the assignment of this code reaffirms the
16
Table of Contents
clinical
utility of our NC-stat System and supports its use by primary care physicians and internal medicine specialists when medically appropriate. As for any new CPT code, broad adoption
by physicians will take time and may have some challenges. However, we believe that physicians using our NC-stat System will find this new code useful and supportive of their efforts to
deliver optimal and efficient patient care.
Unlike
pre-existing Medicare nerve conduction study codes, but similar to many other diagnostic procedures, CPT code 95905 is billed per limb tested as opposed to per nerve.
Although practice patterns will vary, we believe that fewer units of CPT code 95905 will generally be billed per patient than under the pre-existing nerve conduction study codes. Lower
physician reimbursement under CPT code 95905 can affect testing patterns and, in the near term, has reduced and, we expect, will continue to put downward pressure on, our revenues and margins. It is
difficult to predict adoption and utilization of this new CPT code in the near term as there are many factors in play. Over time, however, we anticipate the new CPT code may have a positive influence
on reimbursement by commercial insurers. We believe that ultimately the effect of the CPT code on revenues will be positive and will allow us to increase revenues over time. In the meantime, we
anticipate an ongoing period of readjustment that could span several quarters or perhaps longer.
We
are currently implementing several modifications to ADVANCE which we believe will be completed during the fourth quarter of 2010. We believe that these modifications, which primarily
enhance the capability of physicians to customize nerve conduction study reporting, will make the ADVANCE System attractive for use in the primary care physician office market. Once the modifications
are complete, it is our intention to introduce ADVANCE into that market while continuing to support our existing NC-stat customers.
ASCEND,
another device under development, is being designed to precisely deliver pharmacologic agents such as anesthetics and corticosteroids in close proximity to nerves for regional
anesthesia, pain control, and the treatment of focal neuropathies such as carpal tunnel syndrome will be de-emphasized in the near term which will postpone completion of its development
and the regulatory process leading to product launch. We have submitted a federal grant proposal to fund the continued development of ASCEND, which, if successful, could accelerate development. At
this time we are not able to forecast the timing for commercial launch of ASCEND.
Within
our pipeline of pharmacologic compounds for neural conduction enhancement, we are developing our lead compound, NM101, for use in chronic spinal cord injury. We are presently
performing the pre-clinical work required to file an investigational new drug application with the FDA and we plan to continue to advance the compound through pre-clinical
testing as we evaluate strategic options.
Andara
is our implantable stimulator for spinal nerve repair. The FDA provided us with greater clarity on the clinical requirements for approval of this product. Our next step would be
to design and conduct a clinical trial targeting the same safety and efficacy endpoints as the original study conducted by us but with a larger sample size. However, this project is currently on hold
as we focus our resources on our other pipeline products.
Recent Developments
In our nerve testing business, we recognize that our products need broader market exposure for growth. Today we sell to new customers
in the U.S. physician office market through a direct sales force. We plan to supplement that direct sales force with about twenty five independent sales representatives. Our direct sales force will be
a smaller, core team assigned to key market areas with the independent representatives covering the remaining geography. In total, we expect to have about 40 sales territories. For the orthopedic and
specialty markets, today also covered by our sales force, we intend to use regional distributors to expand coverage. The transition to a hybrid direct/distribution model is underway and will continue
in the third and fourth quarters. After sale support for all new and existing
17
Table of Contents
customers
will be provided by our team of field-based clinical educators. We believe that this team is positively impacting customer testing by providing high quality technical and clinical support,
and therefore we plan to slightly increase its size.
We
recently narrowed the focus of our product development efforts. We are implementing several modifications to ADVANCE which are designed to enhance the ability of physicians to
customize reporting of test results which we believe will make the device attractive for use in the physician office market. Once the modifications are complete, it is our intention to introduce
ADVANCE into that market. ASCEND, our development stage product for therapeutic nerve injections and regional anesthesia, will be de-emphasized in the near term which will postpone
completion of its development and the regulatory process leading to product launch.
We
see a significant opportunity to expand utilization of our nerve testing technology in individuals with diabetes. Currently about twenty five percent of the tests performed with our
NC-stat and ADVANCE devices are targeted at diagnosis of large fiber diabetic peripheral neuropathy, or DPN, in patients exhibiting clinical symptoms of that condition. Nerve conduction
studies, or NCS, are the gold standard for diagnosis of DPN; however, cost and limited access have prevented utilization of NCS for wide spread screening which is essential for early detection of DPN
and prevention of its complications, such as foot ulcers. We believe that a rapid, low cost, point-of-care test for DPN represents an attractive U.S. and international
market opportunity. We have made development of a low cost version of NC-stat and a low cost disposable electrode for this application, an R&D priority. Assuming that we reach our project
milestones, we believe we have the capability to launch this product in the U.S. and several international markets in the second half of 2011.
In
order to resource these product and sales initiatives, and to conserve operating funds, we recently implemented a reduction in force that resulted in the elimination of approximately
twenty five positions representing twenty five percent of our workforce, as well as other cost savings initiatives. We estimate this should reduce our annual spending by approximately
$2.5 million. During the third quarter of 2010, we expect to record a charge of $0.3 million in connection with this matter, primarily related to severance expenses.
Overall Outlook
We believe that today's health care environment continues to be characterized by uncertainty. Our customers face a range of challenges
including changes in reimbursement, decreased patient visits, and uncertainty arising from national health care reform. These factors have resulted in downward pressure on our revenues and margins.
However, an improving reimbursement environment related to our products causes us to believe that after a period of readjustment, we have an opportunity to reinvigorate the business and expand our
installed base of customers. We believe that the steps we are taking will position us to work through the near term challenges as we rebuild demand and return to growth.
Adjustment of First Quarter 2010 Financial Statements
As further described in Note 1 of the Notes to Unaudited Financial Statements included elsewhere in this Quarterly Report on
Form 10-Q, during the second quarter of 2010, we identified fraudulent sales transactions involving two sales representatives, resulting in an overstatement of revenues for the
quarter ended March 31, 2010. We believe that these sales transactions, individually and in the aggregate, are not material to the financial results as reported in previously issued interim
financial statements for the quarter ended March 31, 2010. The balance sheet and statement of operations as of and for the quarter ended March 31, 2010 are presented in Note 1 of
the Notes to Unaudited Financial Statements as originally reported and after adjustment for these sales transactions. These transactions had no impact on total net cash used in operating activities
within the statement of cash flows for the quarter ended March 31, 2010.
18
Table of Contents
Results of Operations
Comparison of Quarters Ended June 30, 2010 and 2009
Revenues
The following table presents a historical view of our active customers and studies performed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2010 |
|
Year Ended
December 31, 2009 |
|
|
|
Second
Quarter |
|
First
Quarter |
|
Fourth
Quarter |
|
Third
Quarter |
|
Second
Quarter |
|
Installed base (active testing accounts) |
|
|
4,167 |
|
|
4,309 |
|
|
4,493 |
|
|
4,660 |
|
|
4,848 |
|
Patient studies |
|
|
34,638 |
|
|
36,529 |
|
|
35,649 |
|
|
39,143 |
|
|
42,764 |
|
The
following table summarizes our revenues from medical equipment and consumables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
June 30, |
|
|
|
|
|
|
|
2010 |
|
2009 |
|
Change |
|
% Change |
|
|
|
($ in thousands)
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Medical equipment |
|
$ |
512.1 |
|
$ |
704.8 |
|
$ |
(192.7 |
) |
|
(27.3 |
)% |
| |
Consumables |
|
|
3,340.4 |
|
|
6,055.6 |
|
|
(2,715.2 |
) |
|
(44.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Total revenues |
|
$ |
3,852.5 |
|
$ |
6,760.4 |
|
$ |
(2,907.9 |
) |
|
(43.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Revenues
in the quarter ended June 30, 2010 reflected the continued impact and uncertainty associated with the introduction of Medicare CPT code 95905 as well as reimbursement
uncertainty with commercial insurers. Medicare CPT code 95905addresses nerve conduction studies performed with pre-configured electrode arrays such as those used with the
NC-stat device. The new code both defines nerve test procedures and assigns values on a different basis than pre-existing codes. The net result is lower physician reimbursement
per nerve study. While lower reimbursement rates have had a negative impact on our revenues, we believe that this CPT code may streamline Medicare reimbursement for medically appropriate nerve
conduction studies performed using our NC-stat System. This is an important development because we
believe the assignment of this code reaffirms the clinical utility of our NC-stat System and supports its use by primary care physicians and internal medicine specialists when medically
appropriate. As for any new CPT code, broad adoption by physicians will take time and may have some challenges. However, we believe that physicians using our NC-stat System will find this
code useful and supportive of their efforts to deliver optimal and efficient patient care.
Medical
equipment revenues, consisting of sales of the NC-stat and ADVANCE devices, related modules, and revenues from extended service agreements, were $512,100 and $704,800
for the quarters ended June 30, 2010 and 2009, respectively, a decrease of $192,700, or 27.3%. This decrease reflects lower average selling price, or ASP, on system shipments in the second
quarter of 2010 compared to the second quarter of 2009, which was partially offset by increased volume. We shipped 77 NC-stat and ADVANCE devices, net, to new customers during the
second quarter of 2010 compared with 74 NC-stat and ADVANCE devices, net, shipped to new customers during the second quarter of 2009. Medical equipment revenue reflects the
proportional allocation of revenue among multiple products included on customer invoices. Excluding this proportional allocation, medical equipment ASP in the second quarter of 2010 was $2,600
compared to $4,800 in the second quarter of 2009.
Consumables
revenues, consisting of single use nerve specific electrodes, which are used with our NC-stat System and our ADVANCE System, and EMG needles, which are used with
our ADVANCE System, were $3.3 million and $6.1 million for the quarters ended June 30, 2010 and 2009, respectively, a decrease of $2.7 million, or 44.8%. Three primary
factors contributed to the decline between the
19
Table of Contents
second
quarter of 2009 and the second quarter of 2010: our installed base of customers contracted by 14.0%; patient studies contracted by 19.0%; and our electrode ASP declined by 22.4% from $35.62 in
the quarter ended June 30, 2009 to $27.63 during the same period in 2010.
Cost of Revenues and Gross Margin
The following table summarizes our cost of revenues and gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30, |
|
|
|
|
|
|
|
2010 |
|
2009 |
|
Change |
|
% Change |
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cost of revenues |
|
$ |
1,405.3 |
|
$ |
1,934.9 |
|
$ |
(529.6 |
) |
|
(27.4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
2,447.1 |
|
$ |
4,825.5 |
|
$ |
(2,378.4 |
) |
|
(49.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Our
cost of revenues was $1.4 million, or 36.5% of revenues, for the quarter ended June 30, 2010, compared to $1.9 million, or 28.6% of revenues, for the same period
in 2009. This decrease of $529,600 was due mainly to lower shipment volume. Our gross margin percentage of 63.5% of revenues for the quarter ended June 30, 2010 decreased from 71.4% of revenues
for the same period in 2009. The lower gross margin percentage in the second quarter of 2010 resulted primarily from a 19.2% decline in electrode ASP compared with the second quarter of 2009.
We
believe that our margins will remain comparable to the second quarter of 2010 during the third quarter of 2010 and then decline by approximately 10% in the fourth quarter of 2010 and
early 2011. This will be due to expected higher purchased electrode costs flowing through cost of sales as we reduce purchasing volume to better manage our electrode inventory and working capital.
Operating Expenses
The following table presents a breakdown of our operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30, |
|
|
|
|
|
|
|
2010 |
|
2009 |
|
Change |
|
% Change |
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development |
|
$ |
1,658.0 |
|
$ |
1,408.7 |
|
$ |
249.3 |
|
|
17.7 |
% |
| |
Sales and marketing |
|
|
3,143.5 |
|
|
2,921.1 |
|
|
222.4 |
|
|
7.6 |
|
| |
General and administrative |
|
|
2,176.1 |
|
|
2,360.1 |
|
|
(184.0 |
) |
|
(7.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses |
|
$ |
6,977.6 |
|
$ |
6,689.9 |
|
$ |
287.7 |
|
|
4.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
Research and Development
Research and development expenses for the quarters ended June 30, 2010 and 2009 were $1.7 million and
$1.4 million, respectively. The comparative results for the second quarter of 2010 included a $216,000 increase in expenditures for development materials for new products, a $77,000 increase in
personnel costs, and a charge of $63,000 for a license maintenance fee, which were partially offset by a $117,000 reduction in stock-based compensation.
Sales and Marketing
Sales and marketing expenses increased to $3.1 million for the quarter ended June 30, 2010 from $2.9 million for
the quarter ended June 30, 2009. The increase resulted mainly from a $228,000 increase in compensation and related costs, largely resulting from expansion in our international sales
organization, and for the addition of a team of field clinical educators.
20
Table of Contents
General and Administrative
General and administrative expenses decreased to $2.2 million for the quarter ended June 30, 2010 from
$2.4 million for the quarter ended June 30, 2009. This decrease consisted of a $154,000 reduction in stock-based compensation, a $118,000 decrease in consulting services and temporary
labor, and a $91,000 decrease in staffing and related costs, which were partially offset by a $208,000 increase in bad debt expense. There had been a credit to bad debt expense of $142,000 during the
second quarter of 2009 due to net recoveries of previously reserved balances.
Subsequent Event
Subsequent to the end of the second quarter of 2010, we implemented a reduction in force that resulted in the elimination of
approximately twenty five positions, representing twenty five percent of our workforce, as well as other cost savings initiatives. We estimate this action should reduce our annual spending by
approximately $2.5 million. During the third quarter of 2010, we expect to record a charge of approximately $0.3 million, primarily related to severance expenses.
Interest Income
Interest income was $11,409 and $63,646 for the quarters ended June 30, 2010 and 2009, respectively. Interest income was earned
from investments in cash equivalents and short-term investments. The decrease in interest income for the quarter ended June 30, 2010, as compared to the same period in 2009,
reflects lower rates of return and a shift to higher quality, shorter duration, investments.
Comparison of Six Months Ended June 30, 2010 and 2009
Revenues
The following table summarizes our revenues from medical equipment and consumables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, |
|
|
|
|
|
|
|
2010 |
|
2009 |
|
Change |
|
% Change |
|
|
|
($ in thousands)
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Medical equipment |
|
$ |
1,053.1 |
|
$ |
1,403.8 |
|
$ |
(350.7 |
) |
|
(25.0 |
)% |
| |
Consumables |
|
|
6,365.8 |
|
|
12,182.2 |
|
|
(5,816.4 |
) |
|
(47.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Total revenues |
|
$ |
7,418.9 |
|
$ |
13,586.0 |
|
$ |
(6,167.1 |
) |
|
(45.4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Revenue
for the six months ended June 30, 2010 reflected the continued impact and uncertainty associated with the introduction of Medicare CPT code 95905, as well as reimbursement
uncertainty with commercial insurers. This new CPT code addresses nerve conduction studies performed with pre-configured electrode arrays such as those used with the NC-stat
device. The new code both defines nerve test procedures and assigns values on a different basis than pre-existing codes. The net result is lower physician reimbursement per nerve study.
While lower reimbursement rates have had a negative impact on our revenues, we believe that this CPT code may streamline Medicare reimbursement for medically appropriate nerve conduction studies
performed using our NC-stat System. This is an important development because we
believe the assignment of this code reaffirms the clinical utility of our NC-stat System and supports its use by primary care physicians and internal medicine specialists when medically
appropriate. As for any new CPT code, broad adoption by physicians will take time and may have some challenges. However, we believe that physicians using our NC-stat System will find this
new code useful and supportive of their efforts to deliver optimal and efficient patient care.
21
Table of Contents
Medical equipment revenues, consisting of sales of the NC-stat and ADVANCE devices, related modules, and revenues from extended service agreements,
were $1.1 million and $1.4 million for the six months ended June 30, 2010 and 2009, respectively, a decrease of $351,000, or 25.0%. This decrease reflects lower average selling
price, or ASP, on system shipments in the first half of 2010 compared to the first half of 2009, which was partially offset by increased sales volume. We shipped 152 NC-stat and ADVANCE
devices, net, to new customers during the first six months of 2010 compared with 147 devices, net, shipped to new customers during the first six months of 2009. Medical equipment revenue reflects a
proportional allocation of invoice amounts where there are multiple deliverables. Excluding this allocation, medical equipment ASP in the first six months of 2010 was $2,600 compared to $4,600 in the
first six months of 2009.
Consumables
revenues, consisting of single use nerve specific electrodes, which are used with our NC-stat System and our ADVANCE System, and EMG needles, which are used with
our ADVANCE System, were $6.4 million and $12.2 million for the six months ended June 30, 2010 and 2009, respectively, a decrease of $5.8 million, or 47.7%. Three primary
factors contributed to the decline between the first six months of 2009 and the first six months of 2010: our installed base of customers contracted by 14.0%; patient studies contracted by 17.7%; and
our electrode ASP declined by 21.6% from $35.46 for the six months ended June 30, 2009 to $27.79 for the six months ended June 30, 2010.
Cost of Revenues and Gross Margin
The following table summarizes our cost of revenues and gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
2010 |
|
2009 |
|
Change |
|
% Change |
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cost of revenues |
|
$ |
2,701.4 |
|
$ |
3,875.3 |
|
$ |
(1,173.9 |
) |
|
(30.3 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
4,717.5 |
|
$ |
9,710.7 |
|
$ |
(4,993.2 |
) |
|
(51.4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Our
cost of revenues was $2.7 million, or 36.4% of revenues, for the six months ended June 30, 2010, compared to $3.9 million, or 28.5% of revenues, for the same
period in 2009. This decrease of $1.2 million was due to lower shipment volume. Our gross margin percentage of 63.6% of revenues for the six months ended June 30, 2010 decreased from
71.5% of revenues for the same period in 2009. The lower gross margin percentage in the first half of 2010 resulted primarily from a 20.9% decline in electrode ASP compared with the first half of
2009.
We
believe that our margins will remain comparable to the second quarter of 2010 during the third quarter of 2010 and then decline by approximately 10% in the fourth quarter of 2010 and
early 2011. This will be due to expected higher purchased electrode costs flowing through cost of sales as we reduce purchasing volume to better manage our electrode inventory and working capital.
Operating Expenses
The following table presents a breakdown of our operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
2010 |
|
2009 |
|
Change |
|
% Change |
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development |
|
$ |
3,332.5 |
|
$ |
2,730.4 |
|
$ |
602.1 |
|
|
22.1 |
% |
| |
Sales and marketing |
|
|
6,383.8 |
|
|
5,441.6 |
|
|
942.2 |
|
|
17.3 |
|
| |
General and administrative |
|
|
4,315.7 |
|
|
4,692.3 |
|
|
(376.6 |
) |
|
(8.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses |
|
$ |
14,032.0 |
|
$ |
12,864.3 |
|
$ |
1,167.7 |
|
|
9.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
22
Table of Contents
Research and Development
Research and development expenses for the six months ended June 30, 2010 and 2009 were $3.3 million and
$2.7 million, respectively. The comparative results for the first half of 2010 included a $265,000 increase in personnel related costs, a $225,000 license maintenance fee, a $156,000 increase
in consulting and outside services, and a $218,000 increase in expenditures for development materials for new products, which were partially offset by a $201,000 reduction in stock-based compensation
and a $47,000 decrease in the cost of lab supplies.
Sales and Marketing
Sales and marketing expenses increased to $6.4 million for the six months ended June 30, 2010 from $5.4 million
for the six months ended June 30, 2009. This increase included $800,000 in compensation and related costs largely resulting from expansion in our international sales organization, and for the
addition of a team of field clinical educators, $95,000 for recruiting costs, $88,000 for internal meeting costs, and $49,000 for advertising and promotions costs, which were partially offset by a
$78,000 reduction in stock-based compensation.
General and Administrative
General and administrative expenses decreased to $4.3 million for the six months ended June 30, 2010 from
$4.7 million for the six months ended June 30, 2009. This decrease consisted of a $186,000 reduction in stock-based compensation, a $169,000 decrease in consulting services and temporary
labor, a $120,000 decrease in professional fees, and a $90,000 decrease in staffing and related costs, which were partially offset by a $109,000 increase in taxes.
Subsequent Event
Subsequent to the end of the second quarter of 2010, we implemented a reduction in force that resulted in the elimination of
approximately twenty five positions, representing twenty five percent of our workforce, as well as other cost savings initiatives. We estimate this action should reduce our annual spending by
approximately $2.5 million. During the third quarter of 2010, we expect to record a charge of approximately $0.3 million, primarily related to severance expenses.
Interest Income
Interest income was $31,000 and $136,000 for the six months ended June 30, 2010 and 2009, respectively. Interest income was
earned from investments in cash equivalents and short-term investments. The decrease in interest income for the six months ended June 30, 2010, as compared to the same period in
2009, reflects lower rates of return and a shift to higher quality, shorter duration, investments.
Liquidity and Capital Resources
Our principal source of liquidity is our cash, cash equivalents, and short-term investments. As of June 30, 2010,
these totaled $21.6 million. The weighted average maturity of our short-term investments was 42 days. Our ability to generate cash from operations is dependent upon our
ability to generate revenue from sales of our products, as well as our ability to manage our operating costs and net assets. However, there is no assurance we will be successful in increasing our
revenue. A decrease in demand for our products or unanticipated increases in our operating costs would likely have an adverse effect on our liquidity and cash generated from operations.
We
have filed with the SEC an equity shelf registration statement in the amount of $50 million, which will allow us to issue equity securities, subject to limitations on smaller
reporting companies regarding the amount of securities that may be sold in a given period set forth in General
23
Table of Contents
Instruction I.B.6.
of Form S-3, during a three year period through the first quarter of 2013. In addition, we have entered into a Credit Facility under which we may borrow up
to $7.5 million on a revolving basis tied to cash and eligible accounts receivable. The credit facility has a one year term ending in the first quarter of 2011. The Credit Facility is discussed
in more detail in the section below titled "Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments."
The
following table sets forth information relating to our liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2010 |
|
December 31,
2009 |
|
Change |
|
% Change |
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
19,080.1 |
|
$ |
22,937.4 |
|
$ |
(3,857.3 |
) |
|
(16.8 |
)% |
Short-term held-to-maturity investments |
|
|
2,500.0 |
|
|
7,495.0 |
|
|
(4,995.0 |
) |
|
(66.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and short-term held-to-maturity investments |
|
$ |
21,580.1 |
|
$ |
30,432.4 |
|
$ |
(8,852.3 |
) |
|
(29.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
During
the first six months of 2010, our cash, cash equivalents, and short-term investments decreased by $8.9 million, primarily due to net cash used in operating
activities.
In
managing our working capital, two of the financial measurements we monitor are days sales outstanding, or DSO, and inventory turnover rate, which are presented in the table below for
the quarters ended June 30, 2010 and 2009, and the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
June 30, |
|
|
|
|
|
Year Ended
December 31,
2009 |
|
|
|
2010 |
|
2009 |
|
Days sales outstanding (days)* |
|
|
48 |
|
|
44 |
|
|
44 |
|
Inventory turnover rate (times per year) |
|
|
1.1 |
|
|
1.5 |
|
|
1.5 |
|
- *
- Accounts
with traditional payment terms.
Our
payment terms extended to customers with traditional payment terms generally require payment within 30 days from invoice date. At June 30, 2010, we experienced an
increase in DSO to 48 days from 44 days at December 31, 2009. The increase in DSO in the first six months of 2010 partially reflected changes in the physician reimbursement
environment, as well as turnover in personnel managing our
credit and collection function. Since the first quarter of 2010, DSO has improved by approximately 27 days from 75 days to 48 days.
In
addition to receivables with traditional payment terms, we have offered extended payment terms on initial, high value purchases by new customers. Typically these sales involve
installment payments in twelve equal monthly amounts. As of June 30, 2010, there were net accounts receivable of $1.3 million with extended payment terms, which are excluded from the
traditional DSO calculation. As of December 31, 2009, there were $442,000 of such net accounts receivable.
Our
inventory turnover rate for the quarter ended June 30, 2010 was 1.1 times per year, compared with 1.5 times per year for the year ended December 31, 2009. The decrease
in the inventory turnover rate for the six months ended June 30, 2010 reflected a combination of reduced sales and higher inventory balances compared with the year earlier period. We are taking
steps to reduce inventory purchases in order to better match our operating needs.
24
Table of Contents
The
following sets forth information relating to the sources and uses of our cash:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, |
|
|
|
2010 |
|
2009 |
|
|
|
(in thousands)
|
|
Net cash used in operating activities |
|
$ |
(8,887.8 |
) |
$ |
(4,059.6 |
) |
Net cash provided by (used in) investing activities |
|
|
4,886.6 |
|
|
(3,012.0 |
) |
Net cash provided by financing activities |
|
|
143.9 |
|
|
234.7 |
|
Our
operating activities used $8.9 million in cash in the six months ended June 30, 2010. This use of cash resulted largely from the net loss for the six months of
$9.3 million. For the six months ended June 30, 2009, our operating activities used $4.1 million, which included legal settlement payments totaling $3.7 million.
Our
investing activities provided $4.9 million in cash in the six months ended June 30, 2010. This source of cash resulted primarily from $5.0 million provided by
the maturities of investments. For the six months ended June 30, 2009, our investing activities used $3.0 million in cash. This use of cash included $5.0 million to purchase
short-term investments, $350,000 paid to acquire certain technological and intellectual property assets, and $167,000 paid to acquire fixed assets. These uses of cash in 2009 were
partially offset by $2.5 million provided by the maturity of certain investments.
Our
financing activities provided $144,000 and $235,000 in the six months ended June 30, 2010 and 2009, respectively, primarily from proceeds from the issuance of our common
stock.
We
expect to incur net losses and negative cash flows from operations for the foreseeable future. Based upon our current plans, we believe that our cash, cash equivalents, and
short-term investments, and the cash to be generated from expected product sales will be sufficient to meet our projected operating requirements through 2011. During the remainder of 2010,
we expect to continue to hold our cash in money market funds and certificates of deposit.
Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments
As of June 30, 2010, we did not have any off-balance sheet financing arrangements.
We
currently have a Credit Facility with Comerica Bank, which permits us to borrow up to $7.5 million on a revolving basis for a one-year term. Amounts borrowed under
the Credit Facility will bear interest equal to the prime rate plus 0.5%. Any borrowings under the Credit Facility will be secured by our cash, accounts receivable, inventory, and equipment. We have
not borrowed any funds under the Credit Facility as of June 30, 2010 and we are in compliance with the financial covenant of the Credit Facility.
See
notes 7 and 9 of the notes to unaudited financial statements for information regarding commitments and contingencies.
Recent Accounting Pronouncements
In September 2009, the Emerging Issues Task Force, or EITF, issued new rules pertaining to the accounting for revenue arrangements with
multiple deliverables. The new rules provide an alternative method for establishing fair value of a deliverable when vendor specific objective evidence cannot be determined. The guidance provides for
the determination of the best estimate of selling price to separate deliverables and allows the allocation of arrangement consideration using this relative selling price model. The guidance supersedes
the prior multiple element revenue arrangement accounting rules that are currently used by us. The new guidance can be prospectively applied by us beginning January 1, 2011 or can be early or
retrospectively adopted. We are currently evaluating the impact of
25
Table of Contents
the
new rules including the timing of adoption, but we do not believe adoption will have a material effect on our financial statements.
In
September 2009, the EITF issued new rules to exclude (a) non-software components of tangible products and (b) software components of tangible products that
are sold, licensed, or leased
with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product's essential functionally. The new
guidance can be prospectively applied by us beginning January 1, 2011 or can be early or retrospectively adopted. We are currently evaluating the impact of the new rules including the timing of
adoption, but we do not believe adoption will have a material effect on our financial statements.
In
January 2010, the Financial Accounting Standards Board issued Accounting Standards Update No. 2010-06, "Fair Value Measurements and
Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"). ASU 2010-06 requires new disclosures regarding
significant transfers in and out of Levels 1 and 2, as well as information about activity in Level 3 fair value measurements, including presenting information about purchases, sales,
issuances, and settlements on a gross versus a net basis in the Level 3 activity roll forward. In addition, ASU 2010-06 also clarifies existing disclosures regarding input and
valuation techniques, as well as the level of disaggregation for each class of assets and liabilities. ASU No. 2010-06 is effective for interim and annual periods beginning after
December 15, 2009, except for the disclosures pertaining to purchases, sales, issuances, and settlements in the roll forward of Level 3 activity; those disclosures are effective for
interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 had no current impact and is expected to have no subsequent impact on our financial
statements.
Cautionary Note Regarding Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q 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 for the remainder of 2010 and beyond; our beliefs that the assignment of CPT code 95905 is essential to build our U.S. business, may streamline Medicare reimbursement for
studies performed using our NC-stat system, reaffirms the clinical utility of our NC-stat System and supports its use by primary care physicians and internal medicine
specialists and will over time positively influence reimbursement patterns by commercial insurers; our expectations regarding how physician reimbursement under CPT code 95905 could affect testing
patterns and, in the short term, result in continued downward pressure on our revenues and margins, but in the longer term have a positive impact on our revenues; our beliefs that the new health care
environment has resulted in significant uncertainty for customers and how this uncertainty will impact our business; our beliefs regarding potential liability or losses resulting from litigation; our
expectations regarding the targeted timeline for modifications to our ADVANCE system and whether such system will be attractive for use in the physician office market; our expectations regarding the
targeted timelines for commercialization of products in our development pipeline; our expectations that a rapid low cost point-of-care test for DPN represents a U.S. and
international market opportunity, and our expectations surrounding the timeline by which this product could be developed and commercially launched; our effectiveness in implementing a hybrid
direct/distribution sales model; our beliefs regarding the outcome of discussions with the FDA concerning its recent notice to us that certain reporting functions of the onCall Information System are
not substantially equivalent to the cleared NC-stat System; our liquidity and our expectations regarding our needs for and ability to raise additional capital; 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
26
Table of Contents
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. In particular, you should consider these forward-looking statements in light of the risk factors set forth in Item 1A. Risk Factors of our most recent Annual
Report on Form 10-K, as supplemented by the risk factors set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and
Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, and factors described in our other public filings and in this report, as well as other factors
that will be discussed in future reports filed with or furnished to the Securities and Exchange Commission. 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, cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued expenses. 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 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer
and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of June 30, 2010, 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. In May 2010, we enhanced our internal controls
surrounding the sales process to ensure independent verification of each purchase order prior to shipment. This was in response to the fraudulent sales transactions described in Note 1 of the
Notes to Unaudited Financial Statements. Other than this, there were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control
that occurred during the quarter
ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
27
Table of Contents
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 9 "Legal Matters" of our Notes to Unaudited Financial Statements contained in this Quarterly Report on
Form 10-Q for a description of legal proceedings involving us.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I,
Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2009 and Part II, 1A of our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2010, which could materially affect our business, financial condition or results of operations. The risks described in our Annual
Report on Form 10-K and Quarterly Reports on Form 10-Q are not the only risks that we face. In addition, risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations. Other than the addition of the following risk factor, which
replaces and supersedes the risk factor with the same heading in our Annual Report on Form 10-K, there have been no material changes in or additions to the risk factors included in
our Annual Report on Form 10-K for the year ended December 31, 2009 or our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.
We are subject to extensive regulation by the FDA, which could restrict the sales and marketing of the NC-stat or ADVANCE Systems and could cause us to incur
significant costs.
We sell medical devices that are subject to extensive regulation in the United States by the FDA with regard to manufacturing,
labeling, sale, promotion, distribution and shipping. Before a new medical device, or a new use of or claim for an existing product, can be marketed in the United States, it must first be cleared or
approved by the FDA. Medical devices may be marketed only for the indications for which they are approved or cleared. The regulatory review process can be expensive and lengthy. The FDA's process for
granting 510(k) clearance typically takes approximately three months, but it can be significantly longer. The process for obtaining a pre-market approval, or PMA, is much more costly and
onerous. By law, the time period designated for the FDA's review of a PMA is 180 days; however, this time is often extended and it is not uncommon for the PMA review process to take three years
or longer, from the time the application is filed with the FDA.
The
FDA may remove our devices from the market or enjoin them from commercial distribution if safety or effectiveness problems develop. Further, we may not be able to obtain additional
510(k) clearances or pre-market approvals for new products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining
future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and future profitability. We have made
modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and
requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices. If any of these events occurs or if the FDA takes other enforcement
actions, we may not be able to provide our customers with the products they require on a timely basis, our reputation could be harmed, and we could lose customers and suffer reduced revenues and
increased costs.
We
recently were notified by the FDA that certain reporting functions of the onCall Information System ("onCall") that operates with the company's cleared NC-stat device and
for which we submitted a 510(k) premarket notification in 2006 were deemed by the FDA to be not substantially equivalent to the cleared NC-stat System or other existing predicate devices.
In its letter, the FDA indicated that we could submit another 510(k) with specific additional information identified in the letter. onCall has
28
Table of Contents
been
in use since 1999, and continued in use with FDA's agreement after we voluntarily submitted a 510(k) in 2006 for these reporting functions, in order to resolve our differences of opinion with FDA
as to whether such reporting functions had been covered by previous 510(k) premarket notifications. We have submitted an administrative appeal of FDA's not substantially equivalent determination. In
parallel, we have begun a dialogue with the FDA's Center for Devices and Radiological Health ombudsman to better understand and address the FDA's concerns. It is possible that this dialogue or the
appeal will lead to a determination of substantial equivalence for the current 510(k) premarket notification or our submitting a new 510(k) premarket notification for these reporting functions of
onCall. We cannot currently predict the outcome of either the administrative appeal or the dialogue with the FDA staff.
If
the FDA does not clear these reporting functions and we are unable to offer onCall in its present configuration, we may be required to modify or remove these reporting functions. We
believe that we could manage the modifications in an orderly manner and in a way that the NC-stat System would retain its current utility for physicians. However, we are not able to
predict the impact such modifications might have on our ability to generate revenues from the NC-stat System, particularly during a transition period. The transition to a modified onCall,
even if successful, could have a material adverse impact on our business.
We
also are subject to numerous post-marketing regulatory requirements, including FDA's quality system regulations, which relate to the design, manufacture, packaging,
labeling, storage, installation and servicing of our products, labeling regulations, medical device reporting regulations and correction and removal reporting regulations. Our failure or the failure
by any manufacturer of our products to comply with applicable regulatory requirements could result in enforcement action by the FDA. FDA enforcement actions relating to post-marketing
regulatory requirements or other issues, including any issues arising from the not substantially equivalent letter described above, may include any of the following:
- •
- warning letters, untitled letters, fines, injunctions, product seizures, consent decrees and civil penalties;
- •
- requiring repair, replacement, refunds, customer notifications or recall of our products;
- •
- imposing operating restrictions, suspension or shutdown of production;
- •
- refusing our requests for 510(k) clearance or PMA approval of new products, new intended uses, or modifications to
existing products;
- •
- requesting voluntary rescission of 510(k) clearances or withdrawing PMA approvals that have already been granted; and
- •
- criminal prosecution.
If
any of these events were to occur, they could harm our reputation, our ability to generate revenues and our profitability.
Also,
from time to time, legislation is introduced into Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of medical
devices. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict
whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. The FDA has publicly stated that it is
reevaluating its longstanding 510(k) review program. It is not clear when the program will be modified and what effect the modified review process will have on our ability to bring our product
candidates to market.
29
Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Reserved.]
Item 5. Other Information
None.
Item 6. Exhibits
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report,
which Exhibit Index is incorporated herein by this reference.
30
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
|
|
|
| |
|
NEUROMETRIX, INC. |
Date: August 10, 2010 |
|
/s/ SHAI N. GOZANI, M.D., PH. D.
Shai N. Gozani, M.D., Ph. D.
Chairman, President and Chief Executive Officer |
Date: August 10, 2010 |
|
/s/ THOMAS T. HIGGINS
Thomas T. Higgins
Senior Vice President, Chief Financial Officer and Treasurer |
31
Table of Contents
EXHIBIT INDEX
|
|
|
|
| Exhibit No. |
|
Description |
| |
31.1 |
|
Certification of Principal Executive Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith. |
|
31.2 |
|
Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith. |
|
32 |
|
Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350. Furnished herewith. |
