Item 1. Financial Statements
NeuroMetrix, Inc.
Balance Sheets
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June 30, 2017
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December 31, 2016
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(Unaudited)
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Assets
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Current assets:
|
|
|
|
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Cash and cash equivalents
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$
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3,611,949
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|
|
$
|
3,949,135
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Accounts receivable, net
|
984,515
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|
|
738,729
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Inventories
|
1,477,327
|
|
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1,252,238
|
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Prepaid expenses and other current assets
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1,719,996
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1,646,821
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Total current assets
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7,793,787
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7,586,923
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Fixed assets, net
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444,321
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532,706
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Other long-term assets
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144,551
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164,262
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Total assets
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$
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8,382,659
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$
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8,283,891
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts payable
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$
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758,208
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$
|
734,048
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Accrued compensation
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505,553
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|
307,471
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Accrued expenses
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1,746,556
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1,648,731
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Deferred revenue
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659,273
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628,236
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Total current liabilities
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3,669,590
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3,318,486
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Common stock warrants
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41,099
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4,641
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Total liabilities
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3,710,689
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3,323,127
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Commitments and contingencies (Note 8)
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Stockholders’ equity:
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Preferred stock
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—
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—
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Convertible preferred stock
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22
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18
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Common stock, $0.0001 par value; 100,000,000 shares authorized at June 30, 2017 and December 31, 2016; 1,650,519 and 836,862 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
|
165
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|
84
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Additional paid-in capital
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189,620,780
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183,439,463
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Accumulated deficit
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(184,948,997
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)
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(178,478,801
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)
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Total stockholders’ equity
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4,671,970
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4,960,764
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Total liabilities and stockholders’ equity
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$
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8,382,659
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$
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8,283,891
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The accompanying notes are an integral part of these interim financial statements.
NeuroMetrix, Inc.
Statements of Operations
(Unaudited)
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Quarters Ended June 30,
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Six Months Ended June 30,
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2017
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2016
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2017
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2016
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Revenues
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$
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4,310,059
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$
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2,647,422
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$
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8,616,181
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$
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4,922,669
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Cost of revenues
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2,639,402
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1,572,370
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5,337,004
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3,054,883
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Gross profit
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1,670,657
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1,075,052
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3,279,177
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1,867,786
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Operating expenses:
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Research and development
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877,584
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1,127,850
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1,780,868
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2,284,640
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Sales and marketing
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2,919,281
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2,832,279
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5,516,993
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5,240,158
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General and administrative
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1,245,347
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1,292,305
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2,667,129
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2,716,646
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Total operating expenses
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5,042,212
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5,252,434
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9,964,990
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10,241,444
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Loss from operations
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(3,371,555
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)
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(4,177,382
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)
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(6,685,813
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)
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(8,373,658
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)
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Interest income
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3,207
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4,553
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7,464
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11,258
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Change in fair value of warrant liability
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130,552
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77,309
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208,153
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171,625
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Net loss
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(3,237,796
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)
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(4,095,520
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)
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(6,470,196
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)
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(8,190,775
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)
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Deemed dividends attributable to preferred shareholders (Note 9)
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—
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(19,846,377
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)
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(4,041,682
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)
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(19,846,377
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)
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Net loss applicable to common stockholders
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$
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(3,237,796
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)
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$
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(23,941,897
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)
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$
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(10,511,878
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)
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$
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(28,037,152
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)
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Net loss per common share applicable to common stockholders, basic and diluted
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$
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(2.49
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)
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$
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(42.98
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)
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$
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(9.12
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)
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$
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(52.49
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)
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Weighted average number of common shares outstanding, basic and diluted
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1,302,231
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557,089
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1,152,441
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534,192
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The accompanying notes are an integral part of these interim financial statements.
NeuroMetrix, Inc.
Statements of Cash Flows
(Unaudited)
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Six Months Ended June 30,
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2017
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2016
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Cash flows from operating activities:
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Net loss
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$
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(6,470,196
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)
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$
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(8,190,775
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation
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126,254
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124,396
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Stock-based compensation
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113,635
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121,989
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Change in fair value of warrant liability
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(208,153
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)
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(171,625
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)
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Changes in operating assets and liabilities:
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Accounts receivable
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(245,786
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)
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|
413,733
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Inventories
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(225,089
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)
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41,031
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Prepaid expenses and other current and long-term assets
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(53,464
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)
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(198,543
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)
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Accounts payable
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24,160
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(356,769
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)
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Accrued expenses and compensation
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295,907
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|
235,924
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Deferred revenue
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31,037
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185,132
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Net cash used in operating activities
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(6,611,695
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)
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(7,795,507
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)
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Cash flows from investing activities:
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Purchases of fixed assets
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(37,869
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)
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(55,823
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)
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Net cash used in investing activities
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(37,869
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)
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(55,823
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)
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Cash flows from financing activities:
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Net proceeds from issuance of stock and warrants
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6,312,378
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6,719,315
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Net cash provided by financing activities
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6,312,378
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6,719,315
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Net decrease in cash and cash equivalents
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(337,186
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)
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(1,132,015
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)
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Cash and cash equivalents, beginning of period
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3,949,135
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12,462,872
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Cash and cash equivalents, end of period
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$
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3,611,949
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$
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11,330,857
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Supplemental disclosure of cash flow information:
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Change in fair value of warrant liability from repricing
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$
|
244,611
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$
|
—
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Common stock issued to settle employee incentive compensation obligation
|
$
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—
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$
|
318,761
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The accompanying notes are an integral part of these interim financial statements.
NeuroMetrix, Inc.
Notes to Unaudited Financial Statements
June 30, 2017
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1.
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Business and Basis of Presentation
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Our Business-An Overview
NeuroMetrix, Inc. or the Company, is a commercial stage, innovation driven healthcare company combining bioelectrical and digital medicine to address chronic health conditions including chronic pain, sleep disorders, and diabetes. The Company’s lead product is Quell, an over-the-counter wearable therapeutic device for chronic pain. Quell is integrated into a digital health platform that helps patients optimize their therapy and decrease the impact of chronic pain on their quality of life. The Company also markets DPNCheck®, a rapid point-of-care test for diabetic neuropathy, which is the most common long-term complication of Type 2 diabetes. The Company maintains an active research effort and has several pipeline programs. The Company is located in Waltham, Massachusetts and was founded as a spinoff from the Harvard-MIT Division of Health Sciences and Technology in 1996.
During the first quarter of 2017, the Company completed an equity offering, detailed in Note 9 to the financial statements, which resulted in gross proceeds of
$7.0 million
and approximately
$6.3 million
after deducting fees and expenses. In July 2017, the Company entered into a second
$7.0 million
equity offering, in which the first tranche of
$3.5 million
closed on July 12, 2017, and in which a second tranche of
$3.5 million
is subject to shareholder approval and expected to close late in September of 2017 (see footnote 11).
The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has suffered recurring losses from operations and negative cash flows from operating activities. At
June 30, 2017
, the Company had an accumulated deficit of
$184.9 million
. The Company held cash and cash equivalents of
$3.6 million
as of
June 30, 2017
. The Company believes that these resources, cash proceeds from the second 2017 equity offering, and the cash to be generated from expected product sales will be sufficient to meet its projected operating requirements into the
second quarter of 2018
. The Company continues to face significant challenges and uncertainties and, as a result, the Company’s available capital resources may be consumed more rapidly than currently expected due to (a) decreases in sales of the Company’s products and the uncertainty of future revenues; (b) changes the Company may make to the business that affect ongoing operating expenses; (c) changes the Company may make in its business strategy; (d) regulatory developments affecting the Company’s existing products and products under development; (e) changes the Company may make in its research and development spending plans; and (f) other items affecting the Company’s forecasted level of expenditures and use of cash resources. Accordingly, the Company will need to raise additional funds to support its operating and capital needs in the
second quarter of 2018
and beyond. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company intends to obtain additional funding through public or private financing, collaborative arrangements with strategic partners, or through additional credit lines or other debt financing sources to increase the funds available to fund operations. However, the Company may not be able to secure such financing in a timely manner or on favorable terms, if at all. Furthermore, if the Company issues equity or debt securities to raise additional funds, its existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of the Company’s existing stockholders. If the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to its products or proprietary technologies, or grant licenses on terms that are not favorable to the Company. Without additional funds, the Company may be forced to delay, scale back or eliminate some of its sales and marketing efforts, research and development activities, or other operations and potentially delay product development in an effort to provide sufficient funds to continue its operations. If any of these events occurs, the Company’s ability to achieve its development and commercialization goals would be adversely affected.
Certain prior period amounts have been adjusted to reflect the Company's 1-for-8 reverse stock split effected May 11, 2017.
Unaudited Interim Financial Statements
The accompanying unaudited balance sheet as of
June 30, 2017
, unaudited statements of operations for the
quarters and six months
ended
June 30, 2017
and
2016
and the unaudited statements of cash flows for the
six months ended
June 30, 2017
and
2016
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 8 of Regulation S-X. The accompanying balance sheet as of
December 31, 2016
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. In the opinion of management, the financial statements include all normal and recurring adjustments considered necessary for a fair statement of the Company’s financial position and operating results. Operating results for the
quarters and six months
ended
June 30, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year ended
December 31, 2016
included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or the SEC, on February 9, 2017 (File No. 001-33351), or the Company’s 2016 Form 10-K.
Revenues
The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred and risk of loss has passed, the seller’s price to the buyer is fixed or determinable, and collection is reasonably assured. Revenues associated with the Company’s medical devices and consumables are generally recognized upon shipment, assuming all other revenue recognition criteria have been met. Revenue associated with shipments made to distributors who have the right to return any unsold product is recognized once the product is sold by the distributor to the end customer (i.e. under a sell-through model), assuming all other revenue recognition criteria have been met. Cash received prior to all the conditions for revenue recognition being met is recorded as deferred revenue. Deferred revenue recorded prior to cash receipt is recorded as an offset to accounts receivable.
As of
June 30, 2017
the total value of shipments made to sell-through distributors but not yet sold through to end customers totaled
$2,031,262
. Of this total,
$1,371,989
was recorded as a reduction to accounts receivable and
$659,273
was recorded in deferred revenue, as cash had been received. As of
December 31, 2016
, the total value of shipments that had been made to sell-through distributors but had not yet been sold through to end customers totaled
$1,247,545
. Of this total,
$619,309
was recorded as a reduction to accounts receivable and
$628,236
was recorded in deferred revenue, as cash had been received. Related costs of goods sold of
$1,276,207
and
$910,595
have been deferred and recorded in prepaid expenses and other current assets as of
June 30, 2017
and
December 31, 2016
, respectively.
Revenue recognition involves judgments, including assessments of expected returns from customers who have the right to return product for any reason under
30 days
or
60 days
rights of return. Where the Company can reasonably estimate future returns, it recognizes revenues and records as a reduction of revenue a provision for estimated returns. The Company analyzes various factors, including its historical product returns in arriving at this judgment. Changes in judgments or estimates could materially impact the timing and amount of revenues and costs recognized. The provision for expected returns recorded in accrued expense was
$413,871
and
$488,200
as of
June 30, 2017
and
December 31, 2016
, respectively.
Accounts receivable are recorded net of the allowance for doubtful accounts which represents the Company’s best estimate of probable credit losses. Allowance for doubtful accounts was
$25,000
as of
June 30, 2017
and
December 31, 2016
.
One customer accounted for
16%
of total revenue for the
quarters and six months
ended
June 30, 2017
. A different customer accounted for approximately
11%
and
12%
of total revenue for the quarter and six-months ended
June 30, 2016
, respectively. Three customers accounted for
58%
and two customers accounted for
41%
of accounts receivables as of
June 30, 2017
and
December 31, 2016
, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during reporting periods. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2016-2,
Leases (Topic 842)
(“ASU 2016-2”). ASU 2016-2 requires that lessees will need to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The provisions of this guidance are effective for annual periods beginning after December 31, 2018, and for interim periods therein. The Company is in the process of evaluating this standard and assessing the impact, if any, ASU 2016-2 will have on the Company’s financial statements.
In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued Accounting Standards Update (“ASU”) No. 2014-9,
Revenue from Contracts with Customers
(“ASU 2014-9”), a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The objective of ASU 2014-9 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers,
which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. An entity can elect to adopt ASU 2014-9 using one of two methods, either full retrospective adoption to each prior reporting period, or recognizing the cumulative effect of adoption at the date of initial application. In March 2016, the FASB issued ASU No. 2016-8,
Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)
, which clarifies the implementation guidance on principal versus agent considerations. The Company is in the process of evaluating the new standard and assessing the impact, if any, ASU 2014-9 will have on the Company’s financial statements and which adoption method will be used.
For the
quarters and six months
ended
June 30, 2017
and
2016
, the Company had no components of other comprehensive income or loss other than net loss itself.
|
|
3.
|
Net Loss Per Common Share
|
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period plus the dilutive effect of the weighted average number of outstanding instruments such as options, warrants, and restricted stock. Because the Company has reported a net loss for all periods presented, diluted loss per common share is the same as basic loss per common share, as the effect of utilizing the fully diluted share count would have reduced the net loss per common share. Therefore, in calculating net loss per share amounts, shares underlying the following potentially dilutive weighted average number of common stock equivalents were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Options
|
97,774
|
|
|
27,373
|
|
|
97,832
|
|
|
27,117
|
|
Warrants
|
4,845,186
|
|
|
2,351,490
|
|
|
4,619,920
|
|
|
2,164,269
|
|
Convertible preferred stock
|
3,883,251
|
|
|
641,266
|
|
|
3,042,295
|
|
|
559,066
|
|
Total
|
8,826,211
|
|
|
3,020,129
|
|
|
7,760,047
|
|
|
2,750,452
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Purchased components
|
$
|
772,720
|
|
|
$
|
466,906
|
|
Work in progress
|
—
|
|
|
154,971
|
|
Finished goods
|
704,607
|
|
|
630,361
|
|
|
$
|
1,477,327
|
|
|
$
|
1,252,238
|
|
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
Technology fees
|
$
|
450,000
|
|
|
$
|
450,000
|
|
Sales return allowance
|
413,871
|
|
|
488,200
|
|
Professional services
|
363,000
|
|
|
390,800
|
|
Advertising and promotion
|
115,400
|
|
|
28,100
|
|
Clinical studies
|
104,000
|
|
|
25,000
|
|
Warranty reserve
|
98,286
|
|
|
45,879
|
|
Other
|
201,999
|
|
|
220,752
|
|
|
$
|
1,746,556
|
|
|
$
|
1,648,731
|
|
|
|
6.
|
Commitments and Contingencies
|
Operating Lease
In August 2014, the Company entered into a
5
-year operating lease agreement with
one
5
-year extension option for manufacturing and order fulfillment facilities in Woburn, Massachusetts (the “Woburn Lease”). The Woburn Lease commenced December 15, 2014 and has a monthly base rent of
$7,598
. In September 2014, the Company entered into a
7
-year operating lease agreement with
one
5
-year extension option for its corporate office and product development activities in Waltham, Massachusetts (the “Waltham Lease”). The term of the Waltham Lease commenced on February 20, 2015 and includes fixed payment obligations that escalate over the initial lease term. Average monthly base rent under the
7
-year lease is approximately
$37,792
. These payment obligations were accrued and recognized over the term of occupancy. Under the Waltham Lease, the landlord was responsible for making certain improvements to the leased space at an agreed upon cost to the landlord. Total costs for the landlord improvements exceeded the agreed upon cost by
$275,961
. The landlord billed that excess cost to the Company as additional rent which has been included in other long term assets at
June 30, 2017
. This additional rent has been included in the net calculation of lease payments, so that rent expense is recognized on a straight-line basis over the term of occupancy.
|
|
7.
|
Fair Value Measurements
|
The Fair Value Measurements and Disclosures Topic of the Codification defines fair value, establishes a framework for measuring fair value in applying generally accepted accounting principles, and expands disclosures about fair value measurements. This Codification topic identifies two kinds of inputs that are used to determine the fair value of assets and liabilities: observable and unobservable. Observable inputs are based on market data or independent sources while unobservable inputs are based on the Company’s own market assumptions. Once inputs have been characterized, this Codification topic requires companies to prioritize the inputs used to measure fair value into one of three broad levels. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values identified by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values identified by Level 3 inputs are unobservable data points and are used to measure fair value to the extent that observable inputs are not available. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use at pricing the asset or liability.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis for the periods presented and indicates the fair value hierarchy of the valuation techniques it utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates, and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2017 Using
|
|
June 30, 2017
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
245,036
|
|
|
$
|
245,036
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
$
|
245,036
|
|
|
$
|
245,036
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants
|
$
|
41,099
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,099
|
|
Total
|
$
|
41,099
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,099
|
|
Due to the lack of market quotes relating to our common stock warrants issued in financings in 2014 and 2013, the fair value of the common stock warrants was determined at
June 30, 2017
using the Black-Scholes model, which is based on Level 3 inputs. As of
June 30, 2017
, inputs used in the Black-Scholes model are presented below. The assumptions used may change as the underlying sources of these assumptions and market conditions change. Based on the Black-Scholes model, the Company recorded a common stock warrants liability of
$41,099
at
June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Black-Scholes Inputs to Warrant Liability Valuation at June 30, 2017
|
Warrants:
|
|
Stock Price
|
|
Exercise Price
|
|
Expected Volatility
|
|
Risk-Free Interest
|
|
Expected Term
|
|
Dividends
|
2014 Offering
|
|
$
|
2.69
|
|
|
$
|
5.60
|
|
|
69.05
|
%
|
|
1.37
|
%
|
|
2 years
|
|
none
|
2013 Offering
|
|
$
|
2.69
|
|
|
$
|
5.60
|
|
|
70.38
|
%
|
|
1.24
|
%
|
|
11 months
|
|
none
|
The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities between
December 31, 2016
and
June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Offering
|
|
2013 Offering
|
|
Total
|
Balance at December 31, 2016
|
$
|
4,112
|
|
|
$
|
529
|
|
|
$
|
4,641
|
|
Change in fair value of warrant liability from repricing (see Note 9)
|
177,999
|
|
|
66,612
|
|
|
244,611
|
|
Change in fair value of warrant liability
|
(147,158
|
)
|
|
(60,995
|
)
|
|
(208,153
|
)
|
Balance at June 30, 2017
|
$
|
34,953
|
|
|
$
|
6,146
|
|
|
$
|
41,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016 Using
|
|
December 31, 2016
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
833,831
|
|
|
$
|
833,831
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
$
|
833,831
|
|
|
$
|
833,831
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants
|
$
|
4,641
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,641
|
|
Total
|
$
|
4,641
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,641
|
|
Due to the lack of market quotes relating to our common stock warrants then outstanding, the fair value of the common stock warrants was determined at
December 31, 2016
using the Black-Scholes model, which is based on Level 3 inputs. As of
December 31, 2016
, inputs used in the Black-Scholes model are presented below. The assumptions used may change as the underlying sources of these assumptions and market conditions change. Based on the Black-Scholes model, the Company recorded a common stock warrants liability of
$4,641
at
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Black-Scholes Inputs to Warrant Liability Valuation at December 31, 2016
|
Warrants:
|
Stock Price
|
|
Exercise Price
|
|
Expected Volatility
|
|
Risk-Free Interest
|
|
Expected Term
|
|
Dividends
|
2014 Offering
|
$
|
5.92
|
|
|
$
|
65.28
|
|
|
64.19
|
%
|
|
1.33
|
%
|
|
2 years, 6 months
|
|
none
|
2013 Offering
|
$
|
5.92
|
|
|
$
|
64.00
|
|
|
71.61
|
%
|
|
0.99
|
%
|
|
1 year, 5 months
|
|
none
|
The Company is party to a Loan and Security Agreement, as amended (the “Credit Facility”), with a bank. As of
June 30, 2017
, the Credit Facility permitted the Company to borrow up to
$2.5 million
on a revolving basis. The Credit Facility was amended, most recently on December 29, 2016 and expires on
January 15, 2018
. Amounts borrowed under the Credit Facility will bear interest equal to the prime rate plus
0.5%
. Any borrowings under the Credit Facility will be collateralized by the Company’s cash, accounts receivable, inventory, and equipment. The Credit Facility includes traditional lending and reporting covenants. These include certain financial covenants applicable to liquidity that are to be maintained by the Company. As of
June 30, 2017
, the Company was in compliance with these covenants and had not borrowed any funds under the Credit Facility. However,
$507,381
of the amount under the Credit Facility is restricted to support letters of credit issued in favor of the Company's facilities landlords and a materials component supplier. Consequently, the amount available for borrowing under the Credit Facility as of
June 30, 2017
was approximately
$2.0 million
.
Preferred stock and convertible preferred stock consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized at June 30, 2017 and December 31, 2016; no shares issued and outstanding at June 30, 2017 and December 31, 2016
|
$
|
—
|
|
|
$
|
—
|
|
Series B convertible preferred stock, $0.001 par value, 147,000 shares designated at June 30, 2017 and December 31, 2016, and 500 shares issued and outstanding at June 30, 2017 and December 31, 2016
|
$
|
1
|
|
|
$
|
1
|
|
Series D convertible preferred stock, $0.001 par value, 21,300 shares designated at June 30, 2017 and December 31, 2016, 14,052.93 and 17,202.65 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
|
$
|
14
|
|
|
$
|
17
|
|
Series E convertible preferred stock, $0.001 par value, 7,000 and zero shares designated at June 30, 2017 and December 31, 2016, respectively, and 7,000 and zero shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
|
$
|
7
|
|
|
$
|
—
|
|
Private Offerings of Common Stock and Warrants
In the first quarter of 2017, the Company completed a private equity offering with an institutional investor and its affiliates (collectively the “Investor”) and issued (i)
7,000
shares of Series E convertible preferred stock (the “Series E Preferred Stock”) at a price of
$1,000
per share, and (ii) warrants to purchase up to
1,250,000
shares of common stock, par value
$0.0001
per share (the “Common Stock”), at an exercise price of
$5.60
per share (the “Q1 2017 Offering”). As a part of this offering, the Company reset (i) the conversion price of
19,458.90
shares of Series D convertible preferred stock that were held by the Investor to
$5.60
per share, and (ii) the exercise price of warrants to purchase up to
2,934,484
shares of common stock that were held by the Investor to
$5.60
per share. The Q1 2017 Offering resulted in gross proceeds of
$7.0 million
. After underwriting discounts, commission and expenses, net proceeds of the Q1 2017 Offering were
$6.3 million
.
Each share of Series E Preferred Stock has a stated value of
$1,000
and is convertible at the option of the holder into the number of shares of common stock determined by dividing the stated value by the conversion price of
$5.60
, which is subject to adjustment as provided in the Certificate of Designation for the Series E Preferred Stock. The Series E Preferred Stock has no dividend rights, liquidation preference or other preferences over common stock and has no voting rights except as provided in the Certificate of Designation for the Series E Preferred Stock and as required by law.
The Q1 2017 Offering was accounted for as an extinguishment of the Investor’s equity holdings in recognition of the unrelated equity instruments that were revised in the transaction, the cumulative effect of adjustments to several series of convertible preferred shares in successive transactions, and the significant transfer of value in excess of the funding received by the Company. Under the extinguishment model, a deemed dividend was recognized within retained earnings which represented the fair value of issued Series E Preferred Stock and warrants plus the incremental the fair value of repricing the outstanding Series D Preferred Stock held by the Investor plus the incremental the fair value of repricing outstanding warrants, less the fair value of the consideration transferred, less the carrying value of the outstanding Series D Preferred Stock. The amount of the deemed dividend totaled
$4.0 million
. During the
six
months ended
June 30, 2017
,
3,149.72
shares of the Series D Preferred Stock were converted into a total of
218,125
shares of common stock. As of
June 30, 2017
,
14,052.93
shares of Series D Preferred Stock remained outstanding.
Between December 19, 2016 and closing of the Q1 2017 Offering on March 7, 2017, the Investor converted
5,405.975
shares of Series D Preferred Stock into
374,375
common shares at the original conversion rate. Following the resetting of the conversion rate, with effect from December 19, 2016, the Company owed the Investor an additional
590,977
common shares associated with these conversions. These common shares were not delivered to the Investor due to a provision in the financing agreement related to the Q1 2017 Offering which limits the Investor’s ownership in the Company to
4.99%
of the outstanding common stock. The undelivered shares of common stock represented a non-cash obligation of the Company which was satisfied by the Company when the Investor’s ownership position reduced below the share ownership limitation level. During the
six
months ended
June 30, 2017
,
590,978
common shares were delivered to the Investor by the Company and as of
June 30, 2017
,
zero
common shares associated with these conversions remained undelivered.
The Company determined that equity classification was appropriate for the warrants issued in the Q1 2017 Offering, following guidance in the Derivatives and Hedging topic of the Codification. In making this equity classification determination, the Company noted the warrants may only be settled in shares of common stock and had no requirements to be settled in registered shares when exercised. The fair value of the
five
year warrants was estimated to be
$3.49 million
on the offering date
using a Black-Scholes model with the following assumptions: stock price of
$4.96
, exercise price of
$5.60
, expected volatility of
70.2%
, risk free interest rate of
2.04%
, expected term of
five years
, and
no
dividends.
In June 2016, the Company completed a private equity offering with one institutional investor (the “Investor”) and issued (i)
21,300
shares of Series D convertible preferred stock (the “Series D Preferred Stock”) at a price of
$1,000
per share, and (ii) warrants to purchase up to
1,475,069
shares of common stock, par value
$0.0001
per share (the “Common Stock”), at an exercise price of
$13.52
per share (the “June 2016 Offering”). As a part of this offering, the Company redeemed
13,800
shares of Series C convertible preferred stock (the “Series C Preferred Stock”) issued in December 2015 that were held by the Investor. Accordingly, the June 2016 Offering resulted in proceeds of
$7.5 million
. After underwriting discounts, commission and expenses, net proceeds of the June 2016 Offering were
$6.7 million
.
Each share of Series D Preferred Stock had a stated value of
$1,000
and is convertible at the option of the holder into the number of shares of common stock determined by dividing the stated value by the conversion price of
$14.44
, which is subject to adjustment as provided in the Certificate of Designation for the Series D Preferred Stock. The Series D Preferred Stock has no dividend rights, liquidation preference or other preferences over common stock and has no voting rights except as provided in the Certificate of Designation for the Series D Preferred Stock and as required by law.
The June 2016 Offering was accounted for as a modification of the Investor’s Series C Preferred Stock. Under the modification model, a deemed dividend was recognized within retained earnings which represented the fair value of consideration transferred plus the fair value of repurchased Series C Preferred Stock, less the fair value of the newly issued Series D Preferred Stock and warrants. The amount of the deemed dividend totaled
$19.8 million
. During 2016,
4,097.35
shares of the Series D Preferred Stock were converted into a total of
283,750
shares of common stock. During
six months ended
June 30, 2017
,
3,149.72
shares of the Series D Preferred Stock were converted into a total of
255,625
shares of common stock. As of
June 30, 2017
,
14,052.93
shares of Series D Preferred Stock remained outstanding.
In March 2016, the Company issued an aggregate of
22,260
shares of fully vested common stock with a value of
$318,761
in partial settlement of 2015 management incentive compensation. The shares issued reflected the
$14.32
closing price of the Company’s common stock as reported on the NASDAQ Capital Market on March 9, 2016.
Total compensation cost related to nonvested awards not yet recognized at
June 30, 2017
was
$461,547
. The total compensation costs are expected to be recognized over a weighted-average period of
2.8
years.
The Company’s common stock is quoted on the NASDAQ Capital Market under the symbol “NURO.” One of the requirements for continued listing on the NASDAQ Capital Market is maintenance of a minimum closing bid price of
$1.00
per share. The Company’s common stock had been trading below a price of
$1.00
per share, and was subject to delisting from The NASDAQ Stock Market LLC, or NASDAQ. On May 11, 2017, the Company effected a 1-for-8 reverse stock split of its common stock, or the Reverse Stock Split. This action was taken to return the Company to compliance with Nasdaq listing requirements. As a result, every eight shares of the Company’s pre-reverse split common stock were combined and reclassified into one share of its common stock. The par value and other terms of the common stock were not affected by the Reverse Stock Split. The Company’s shares outstanding immediately prior to the split totaled
10,147,721
, which were subsequently adjusted to
1,268,440
shares outstanding. Share, per share, and stock option amounts for all periods presented within the financial statements contained in the Quarterly Report on Form 10-Q, including the December 31, 2016 Balance Sheet amounts for common stock and additional paid-in capital, have been retroactively adjusted to reflect the Reverse Stock Split.
In July 2017, the Company announced a
$7.0 million
private equity offering with an institutional investor. The Offering provides for the issuance of (i)
7,000
shares of Series F convertible preferred stock at a price of
$1,000
per share, the repurchase and retirement of
4.2 million
outstanding warrants at fair value in exchange for
3,261
Series F convertible preferred shares, and the adjustment of the conversion price for
21,053
outstanding shares of Series D and E preferred stock to current market value. The transaction will to be completed in two tranches of
$3.5 million
each. The first tranche closed and was funded on July 12, 2017 and the second tranche is planned to close in September following shareholder approval.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and the accompanying notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. For a description of factors that may cause our actual results to differ materially from those anticipated in these forward-looking statements, please refer to the below section of this Quarterly Report on Form 10-Q titled “Cautionary Note Regarding Forward-Looking Statements.” Unless the context otherwise requires, all references to “we”, “us”, the “Company”, or “NeuroMetrix” in this Quarterly Report on Form 10-Q refer to NeuroMetrix, Inc.
Overview
NeuroMetrix is a commercial stage, innovation driven healthcare company combining bioelectrical and digital medicine to address chronic health conditions including chronic pain, sleep disorders, and diabetes. Our business is fully integrated with in-house capabilities spanning product development, manufacturing, regulatory affairs and compliance, sales and marketing, and customer support. We derive revenues from the sale of medical devices and after-market consumable products and accessories. Our products are sold in the United States and selected overseas markets, and are cleared by the U.S. Food and Drug Administration, or FDA, and regulators in foreign jurisdictions where appropriate. We have two principal product lines:
• Wearable neuro-stimulation therapeutic devices
• Point-of-care neuropathy diagnostic tests
Our core expertise in biomedical engineering has been refined over nearly two decades of designing, building and marketing medical devices that stimulate nerves and analyze nerve response for diagnostic and therapeutic purposes. We created the market for point-of-care nerve testing and were first to market with sophisticated, wearable technology for management of chronic pain. We also have an experienced management team and Board of Directors.
Chronic pain is a significant public health problem. It is defined by the National Institutes of Health as any pain lasting more than 12 weeks in contrast to acute pain, which is a normal bodily response to injury or trauma. Chronic pain conditions include painful diabetic neuropathy, or PDN, arthritis, fibromyalgia, sciatica, musculoskeletal pain, cancer pain and many others. Chronic pain may be triggered by an injury or there may be an ongoing cause such as disease or illness. There may also be no clear cause. Pain signals continue to be transmitted in the nervous system over extended periods of time often leading to other health problems. These can include fatigue, sleep disturbance, decreased appetite, and mood changes which cause difficulty in carrying out important activities and contributing to disability and despair. In general, chronic pain cannot be cured. Treatment of chronic pain is focused on reducing pain and improving function. The goal is effective pain management.
Chronic pain is widespread. It affects over 100 million adults in the United States and more than 1.5 billion people worldwide. The global market for pain management drugs and devices alone was valued at $35 billion in 2012. The estimated incremental impact of chronic pain on health care costs in the United States is over $250 billion per year and lost productivity is estimated to exceed $300 billion per year. Estimated out-of-pocket spending in the United States on chronic pain is $20 billion per year.
The most common approach to chronic pain is pain medication. This includes over-the-counter drugs (such as Advil and Motrin), and prescription drugs including anti-convulsants (such as Lyrica and Neurontin) and anti-depressants (such as Cymbalta and Elavil). Topical creams may also be used (such as Zostrix and Bengay). With severe pain, narcotic pain medications may be prescribed (such as codeine, fentanyl, morphine, and oxycodone). The approach to treatment is individualized, drug combinations may be employed, and the results are often hit or miss. Side effects and the potential for addiction are real and the risks are substantial.
Reflecting the difficulty in treating chronic pain, we believe that inadequate relief leads 25% to 50% of pain sufferers to turn to the over-the-counter market for supplements or alternatives to prescription pain medications. These include non-prescription medications, topical creams, lotions, electrical stimulators, dietary products, braces, sleeves, pads and other items. In total they account for over $4 billion in annual spending in the United States on pain relief products.
High frequency nerve stimulation is an established treatment for chronic pain supported by numerous clinical studies demonstrating efficacy. In simplified outline, the mechanism of action involves intensive nerve stimulation to activate the body’s central pain inhibition system resulting in widespread analgesia, or pain relief. The nerve stimulation activates brainstem
pain centers leading to the release of endogenous opioids that act primarily through the delta opioid receptor to reduce pain signal transmission through the central nervous system. This therapeutic approach is available through deep brain stimulation and through implantable spinal cord stimulation, both of which require surgery and have attendant risks. Non-invasive approaches to neuro-stimulation (transcutaneous electrical nerve stimulation, or TENS) have achieved limited efficacy in practice due to device limitations, ineffective dosing and low patient compliance.
Quell, our OTC wearable device for pain relief, was unveiled at the January 2015 Consumer Electronics Show (CES) and made commercially available in the United States during the second quarter of 2015. Quell revenues for fiscal years 2016 and 2015 were approximately
$7.4 million
and
$2.1 million
, respectively. Quell revenues for the
six
months ended
June 30, 2017
were approximately
$6.1 million
. Following commercial launch through
June 30, 2017
, approximately
98,341
Quell devices plus electrodes and accessories were shipped to consumers with a total invoiced value of
$22.2 million
, prior to the impact of product returns. Quell utilizes our patented 100% drug-free neuro-stimulation technology to provide relief from chronic intractable pain, such as nerve pain due to diabetes, fibromyalgia, arthritic pain, and lower back and leg pain. This advanced wearable device is lightweight and can be worn during the day while active, and at night while sleeping. It has been cleared by the U.S. Food and Drug Administration (the "FDA") for treatment of chronic intractable pain without a doctor’s prescription. Users of the device have the option of using their smartphones to control pain therapy and to track sleep, activity, gait and therapy parameters. Quell is distributed in North America via e-commerce, including the Company’s website (
www.quellrelief.com
) and Amazon, via direct response television including QVC, via retail merchandisers including Target, CVS, Walgreens, Best Buy, Bed Bath and Beyond and via health care professionals such as pain management physician practices and podiatry practices. Distribution is supported by television promotion to expand product awareness. We believe there are significant opportunities to market Quell outside of the United States, particularly in Western Europe, Japan and China. We received regulatory approval to market Quell in the European Union and Australia and we anticipate initiating marketing in the future.
DPNCheck, our diagnostic test for peripheral neuropathies, was made commercially available in the fourth quarter of 2011. DPNCheck revenues for fiscal years 2016 and 2015 were approximately
$2.5 million
, and
$2.3 million
, respectively. DPNCheck revenues for the
six
months ended
June 30, 2017
were approximately
$1.6 million
. Our U.S. sales efforts focus on Medicare Advantage providers who assume financial responsibility and the associated risks for the health care costs of their patients. We believe that DPNCheck presents an attractive clinical case with early detection of neuropathy allowing for earlier clinical intervention to help mitigate the effects of neuropathy on both patient quality of life and cost of care. Also, the diagnosis and documentation of neuropathy provided by DPNCheck helps clarify the patient health profile which, in turn, may have a direct, positive effect on the Medicare Advantage premium received by the provider. We believe that attractive opportunities exist outside the United States, including Japan where we launched DPNCheck with our distribution partner Omron Healthcare in the third quarter of 2014; in China where we received regulatory approval and launched DPNCheck with our distribution partner Omron Healthcare in the fourth quarter of 2016; and in Mexico where our distributor Scienta Farma received regulatory approval and initiated sales in the fourth quarter of 2015.
Our products consist of a medical device used in conjunction with a consumable electrode or biosensor. Other accessories and consumables are also available to customers. Our goal for these products is to build an installed base of active customer accounts and distributors that regularly order aftermarket products to meet their needs. We successfully implemented this model when we started our business with the NC-stat system and applied it to subsequent product generations including ADVANCE. Our recent products, Quell and DPNCheck, conform to this model. Other products in our development pipeline are based on the device plus consumables business model.
Results of Operations
Comparison of Quarters Ended
June 30, 2017
and
2016
Revenues
The following table summarizes our revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
Revenues
|
$
|
4,310.1
|
|
|
$
|
2,647.4
|
|
|
$
|
1,662.7
|
|
|
62.8
|
%
|
Revenues include sales from Quell, DPNCheck and our legacy neurodiagnostic products. Quell was made commercially available during the second quarter of 2015 and sales of DPNCheck launched in the fourth quarter of 2011. During the
second
quarter of
2017
total revenues increased by approximately
$1.7 million
, or
62.8%
, from the
second
quarter of
2016
.
Quell revenues were approximately
$3.0 million
and
$1.6 million
in the quarters ended
June 30, 2017
and
2016
, respectively. This increase of approximately
$1.4 million
was the largest contributor to overall revenue growth.
During the
second
quarter of
2017
,
20,110
Quell devices and
30,707
electrode reorder packages with a total invoiced value of approximately
$4.4 million
were shipped to Quell customers. In the comparative
second
quarter of
2016
, we shipped
11,213
Quell devices and
10,237
electrode reorder packages with a total invoiced value of approximately
$2.5 million
. Quell revenues are recorded at the point of shipment or, where distributors have a contractual right to return unsold merchandise, when Quell is sold through to the ultimate customer. In both cases, revenues are recorded net of a provision for product returns under our right-of-return policy.
In the
second
quarter of
2017
DPNCheck revenue of approximately
$0.8 million
reflected sales of
126
DPNCheck devices plus
47,700
biosensors. This compared with approximately
$0.5 million
in revenue in the
second
quarter of
2016
reflecting sales of
96
DPNCheck devices and
32,875
biosensors.
ADVANCE neurodiagnostic products contributed approximately
$0.4 million
in revenue for the
second
quarter of
2017
, as compared to approximately
0.5 million
in the
second
quarter of
2016
.
Cost of Revenues and Gross Profit
The following table summarizes our cost of revenues and gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
Cost of revenues
|
$
|
2,639.4
|
|
|
$
|
1,572.4
|
|
|
$
|
1,067.0
|
|
|
67.9
|
%
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
1,670.7
|
|
|
$
|
1,075.0
|
|
|
$
|
595.7
|
|
|
55.4
|
%
|
Our cost of revenues increased to approximately
$2.6 million
in the
second
quarter of
2017
as compared to approximately
$1.6 million
in the
second
quarter of
2016
. Gross profit decreased to
38.8%
in the
second
quarter of
2017
from
40.6%
in the
second
quarter of
2016
. Gross profit reflects the mix effects of lower average selling prices for the expanding Quell retail and TV business. As we build our installed base of Quell users, we expect accelerating growth in electrode sales at higher margins. Also, we expect continued growth in Quell sales to improve manufacturing cost absorption, contributing to future margin gains.
Operating Expenses
The following table summarizes our operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
$
|
877.6
|
|
|
$
|
1,127.9
|
|
|
$
|
(250.3
|
)
|
|
(22.2
|
)%
|
Sales and marketing
|
2,919.3
|
|
|
2,832.3
|
|
|
87.0
|
|
|
3.1
|
%
|
General and administrative
|
1,245.3
|
|
|
1,292.3
|
|
|
(47.0
|
)
|
|
(3.6
|
)%
|
Total operating expenses
|
$
|
5,042.2
|
|
|
$
|
5,252.5
|
|
|
$
|
(210.3
|
)
|
|
(4.0
|
)%
|
Research and Development
Research and development expenses for the quarters ended
June 30, 2017
and
2016
were approximately
$0.9 million
and
$1.1 million
, respectively. The decrease of approximately
$0.3 million
relates primarily to a $0.4 million decrease in Quell development spending partially offset by a $0.1 million increase in clinical study spending.
Sales and Marketing
Sales and marketing expenses increased to approximately
$2.9 million
for the quarter ended
June 30, 2017
from approximately
$2.8 million
for the quarter ended
June 30, 2016
. The
$0.1 million
increase in spending reflected an additional $0.2 million in television advertising, on-line advertising and paid search.
General and Administrative
General and administrative expenses of approximately
$1.2 million
for the quarter ended
June 30, 2017
were flat compared to the quarter ended
June 30, 2016
.
Change in fair value of warrant liability
The change in fair value of warrant liability of approximately $
130,552
relates to the revaluation of warrants from the fair value of
$171,651
estimated at
March 31, 2017
to
$41,099
at
June 30, 2017
. A Black-Scholes model is utilized in calculating the fair value of the warrant liability. The lower fair value at
June 30, 2017
reflects our lower stock price at
June 30, 2017
compared to
March 31, 2017
, as well as the shorter remaining term of the warrants. In comparison, the change in fair value of warrant liability of
$77,309
for the
second
quarter of
2016
relates to the revaluation of warrants from
$185,987
at
March 31, 2016
to
$108,678
at
June 30, 2016
.
Net loss per common share applicable to common stockholders, basic and diluted
The net loss per common share applicable to common stockholders, basic and diluted, was
$2.49
and
$42.98
for the quarters ended
June 30, 2017
and
2016
, respectively.
Net loss per common share applicable to common stockholders for the quarter ended
June 30, 2017
of
$2.49
consists of our net loss reported in our Statement of Operations for the quarter ended
June 30, 2017
of
$3.2 million
, or
$2.49
per share. The per share amount was calculated using
1,302,231
weighted average shares outstanding as of
June 30, 2017
.
Net loss per common share applicable to common stockholders for the quarter ended
June 30, 2016
of
$42.98
reflected a deemed dividend attributable to preferred stockholders of
$19,846,377
, or
$35.63
per share, related to our June 2016 offering; and our net loss reported in our Statement of Operations for the quarter ended
June 30, 2016
of
$4.1 million
, or
$7.35
. The per share amount was calculated using
557,089
weighted average shares outstanding as of
June 30, 2016
.
Comparison of
Six Months Ended
June 30, 2017
and
2016
Revenues
The following table summarizes our revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
Revenues
|
$
|
8,616.2
|
|
|
$
|
4,922.7
|
|
|
$
|
3,693.5
|
|
|
75.0
|
%
|
Revenues include sales from Quell, DPNCheck and our legacy neurodiagnostic products. Quell was made commercially available during the second quarter of 2015 and sales of DPNCheck launched in the fourth quarter of 2011. During the
six months ended
June 30, 2017
total revenues increased by approximately
$3.7 million
, or
75.0%
, from the
six months ended
of
2016
.
Quell revenues were approximately
$6.1 million
and
$2.8 million
in the
six months ended
June 30, 2017
and
2016
, respectively. This increase of approximately
$3.3 million
was the largest contributor to overall revenue growth.
During the
six months ended
June 30, 2017
,
38,807
Quell devices and
56,144
electrode reorder packages with a total invoiced value of approximately
$8.5 million
were shipped to Quell customers. In the comparative
six
months of
2016
, we shipped
19,351
Quell devices and
18,275
electrode reorder packages with a total invoiced value of approximately
$4.2 million
. Quell revenues are recorded at the point of shipment or, where distributors have a contractual right to return unsold merchandise, when Quell is sold through to the ultimate customer. In both cases, revenues are recorded net of a provision for product returns under our right-of-return policy.
In the
six months ended
June 30, 2017
DPNCheck revenue of approximately
$1.6 million
reflected sales of
289
DPNCheck devices plus
98,550
biosensors. This compared with approximately
$0.9 million
in revenue in the comparative
six
months of
2016
reflecting sales of
181
DPNCheck devices and
67,900
biosensors.
ADVANCE neurodiagnostic products contributed approximately
$0.9 million
in revenue for the
six months ended
June 30, 2017
, as compared to approximately
$1.1 million
in the comparative
six
months of
2016
.
Cost of Revenues and Gross Profit
The following table summarizes our cost of revenues and gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
Cost of revenues
|
$
|
5,337.0
|
|
|
$
|
3,054.9
|
|
|
$
|
2,282.1
|
|
|
74.7
|
%
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
3,279.2
|
|
|
$
|
1,867.8
|
|
|
$
|
1,411.4
|
|
|
75.6
|
%
|
Our cost of revenues increased to approximately
$5.3 million
in the
six months ended
June 30, 2017
as compared to approximately
$3.1 million
in the
six months ended
June 30, 2016
. Gross profit increased to
38.1%
in the
six months ended
June 30, 2017
from
37.9%
in the comparative
six
months of
2016
. The expansion in gross profit reflects growing Quell sales, particularly higher margin electrodes, offset by increased sales weighting toward retail channels which carry tighter gross margins. As we build our installed base of Quell users, we expect accelerating growth in electrode sales at higher margins. Also, we expect continued growth in Quell sales to improve manufacturing cost absorption, contributing to future margin gains.
Operating Expenses
The following table summarizes our operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
(in thousands)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Research and development
|
$
|
1,780.9
|
|
|
$
|
2,284.6
|
|
|
$
|
(503.7
|
)
|
|
(22.0
|
)%
|
Sales and marketing
|
5,517.0
|
|
|
5,240.2
|
|
|
276.8
|
|
|
5.3
|
%
|
General and administrative
|
2,667.1
|
|
|
2,716.6
|
|
|
(49.5
|
)
|
|
(1.8
|
)%
|
Total operating expenses
|
$
|
9,965.0
|
|
|
$
|
10,241.4
|
|
|
$
|
(276.4
|
)
|
|
(2.7
|
)%
|
Research and Development
Research and development expenses for the
six months ended
June 30, 2017
and
2016
were approximately
$1.8 million
and
$2.3 million
, respectively. The decrease of approximately
$0.5 million
relates primarily to a $0.7 million decrease in Quell development spending partially offset by a $0.1 million increase in clinical study spending.
Sales and Marketing
Sales and marketing expenses increased to approximately
$5.5 million
for the
six months ended
June 30, 2017
from
$5.2 million
for the comparative
six
months of
2016
. The approximately
$0.3 million
increase in spending reflected an additional $0.6 million in television advertising, on-line advertising and paid search partially offset by sales and marketing headcount-related cost reductions of approximately $0.2 million from the comparative
six
months of
2016
as compared to the
six months ended
June 30, 2017
.
General and Administrative
General and administrative expenses of approximately
$2.7 million
for the
six months ended
June 30, 2017
were flat compared to the comparative
six
months of
2016
.
Change in fair value of warrant liability
The change in fair value of warrant liability of approximately
$208,153
for the
six months ended
June 30, 2017
, relates to the revaluation of warrants from the fair value of $
4,641
estimated at
December 31, 2016
to
$41,099
at
June 30, 2017
. A Black-Scholes model is utilized in calculating the fair value of the warrant liability. The higher fair value at
June 30, 2017
reflects the $
244,611
impact of repricing 23,475,870 warrants in conjunction with our Q1 2017 Offering offset by our lower stock price at
June 30, 2017
compared to
December 31, 2016
, as well as the shorter remaining term of the warrants. In comparison, the change in fair value of warrant liability of
$171,625
for the
second
quarter of
2016
relates to the revaluation of warrants from
$280,303
at
December 31, 2015
to
$108,678
at
June 30, 2016
.
Net loss per common share applicable to common stockholders, basic and diluted
The net loss per common share applicable to common stockholders, basic and diluted, was
$9.12
and
$52.49
for the
six months ended
June 30, 2017
and
2016
, respectively.
Net loss per common share applicable to common stockholders for the
six months ended
June 30, 2017
of
$9.12
reflected a deemed dividend attributable to preferred stockholders of
$4.0 million
, or
$3.51
per share, related to our Q1 2017 Offering; and our net loss reported in our Statement of Operations for the
six months ended
June 30, 2017
of
$6.5 million
, or
$5.61
per share. The per share amount was calculated using
1,152,441
weighted average shares outstanding as of
June 30, 2017
.
Net loss per common share applicable to common stockholders for the
six months ended
June 30, 2016
of
$52.49
reflected a deemed dividend attributable to preferred stockholders of
$19.8 million
, or
$37.16
per share, related to our June 2016 Offering; and our net loss reported in our Statement of Operations for the
six months ended
June 30, 2016
of
$8.2 million
, or
$15.33
per share. The per share amount was calculated using
534,192
weighted average shares outstanding as of
June 30, 2016
.
Liquidity and Capital Resources
Our principal source of liquidity is our cash and cash equivalents. As of
June 30, 2017
, cash and cash equivalents totaled
$3.6 million
. Our ability to generate revenue to fund our operations largely depends on the success of our wearable therapeutic products for chronic pain and our diagnostic products for neuropathy. A low level of market interest in Quell or DPNCheck, an accelerated decline in our neurodiagnostics consumables sales, or unanticipated increases in our operating costs would have an adverse effect on our liquidity and cash generated from operations. The following table sets forth information relating to our cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Change
|
|
% Change
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
3,611.9
|
|
|
$
|
3,949.1
|
|
|
$
|
(337.2
|
)
|
|
(8.5
|
)%
|
During the first quarter of 2017, we closed a securities purchase agreement relating to a $7 million private offering (the "Q1 2017 Offering") providing for the issuance of (i) 7,000 shares of Series E convertible preferred stock at a price of $1,000 per share, and (ii) warrants to purchase 1,250,000 shares of our common stock, at an exercise price of $5.60 per share. After underwriting discounts, commission and expenses, net proceeds of the Q1 2017 Offering were $6.3 million.
In July 2017, we announced a $7.0 million private equity offering (the "Q3 2017 Offering") providing for the issuance of (i) 7,000 shares of Series F convertible preferred stock at a price of $1,000 per share, the repurchase and retirement of 4.2 million outstanding warrants at fair value in exchange for 3,621 Series F convertible preferred shares, and the adjustment of the conversion price for 21,053 Series D and E preferred shares to current market value. The Q3 2017 Offering will be completed in two tranches of $3.5 million each. The first tranche closed and was funded on July 12, 2017 and the second tranche is planned to close in September following shareholder approval.
In order to supplement our access to capital, we are party to an amended Loan and Security Agreement, most recently amended on December 29, 2016, with a bank which provides us with a credit facility in the amount of
$2.5 million
on a revolving basis. The amended credit facility expires on January 15, 2018. Amounts borrowed under the credit facility will bear interest equal to the prime rate plus 0.5%. Any borrowings under the credit facility will be collateralized by our cash, accounts receivable, inventory, and equipment. The Credit Facility includes traditional lending and reporting covenants. These include certain financial covenants applicable to liquidity that are to be maintained by us. As of
June 30, 2017
, we were in compliance with these covenants and had not borrowed any funds under the credit facility. However, approximately
$0.5 million
of the amount under the Credit Facility is restricted to support letters of credit issued in favor of our facilities landlords and a materials component supplier. Consequently, the amount available for borrowing under the credit facility as of
June 30, 2017
was approximately
$2.0 million
.
During the
six months ended
June 30, 2017
, our cash and cash equivalents decreased by
$0.3 million
reflecting
$6.6 million
of net cash usage for ongoing business operations partially offset by net proceeds of
$6.3 million
from the Q1 2017 Offering.
In managing working capital, we focus on two important financial measurements as presented below:
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
Year Ended
December 31,
|
|
2017
|
|
2016
|
|
2016
|
|
|
|
|
|
|
Days sales outstanding (days)
|
20
|
|
19
|
|
23
|
Inventory turnover rate (times per year)
|
7.9
|
|
4.9
|
|
6.1
|
Customer payment terms generally vary from payment-on-order for Quell e-commerce sales to 30 days from invoice date.
The following sets forth information relating to sources and uses of our cash:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Net cash used in operating activities
|
$
|
(6,611.7
|
)
|
|
$
|
(7,795.5
|
)
|
Net cash used in investing activities
|
(37.9
|
)
|
|
(55.8
|
)
|
Net cash provided by financing activities
|
6,312.4
|
|
|
6,719.3
|
|
Our operating activities used
$6.6 million
for the
six
months ended
June 30, 2017
, which was primarily attributable to our net loss of
$6.5 million
. This loss included non-cash credits of approximately
$0.2 million
for revaluing outstanding warrants at fair value. In addition, operating activities included increases in
accounts receivable
of
$0.2 million
and
inventories
of
$0.2 million
, partially offset by increases in
accrued expenses and compensation
of
$0.3 million
.
We held cash and cash equivalents of
$3.6 million
as of
June 30, 2017
. We believe that these resources, as well as $7.0 million in gross proceeds from the Q3 2017 Offering, including the first tranche of $3.5 million which closed on July 12, 2017, and a second tranche of $3.5 million which is subject to shareholder approval and expected to close in September, and the cash to be generated from expected product sales will be sufficient to meet our projected operating requirements into the
second quarter of 2018
. We continue to face significant challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to (a) decreases in sales of our products; (b) changes we may make to the business that affect ongoing operating expenses; (c) changes we may make in our business strategy; (d) regulatory developments affecting our existing products; (e) changes we may make in our research and development spending plans; and (f) other items affecting our forecasted level of expenditures and use of cash resources. Accordingly, we will need to raise additional funds to support our operating and capital needs in the
second quarter of 2018
and beyond. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We will attempt to obtain additional funding through public or private financing, collaborative arrangements with strategic partners, or through additional credit lines or other debt financing sources. However, we may not be able to secure such financing in a timely manner or on favorable terms, if at all. We filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission (the "SEC") covering shares of our common stock and other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate at prices and on terms to be determined at the time of any such offerings. However, pursuant to applicable SEC rules, we only have the ability to sell shares under the shelf registration statement, during any 12-month period, in an amount less than or equal to one-third of the aggregate market value of our common stock held by non-affiliates. If we raise additional funds by issuing equity or debt securities, either through the sale of securities pursuant to a registration statement or by other means, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. Without additional funds, we may be forced to delay, scale back or eliminate some of our sales and marketing efforts, research and development activities, or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals would be adversely affected.
Off-Balance Sheet Arrangements, Contractual Obligation and Contingent Liabilities and Commitments
As of
June 30, 2017
, we did not have any off-balance sheet financing arrangements.
See Note 6, Commitments and Contingencies, of our Notes to Unaudited Financial Statements for information regarding commitments and contingencies.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases (Topic 842) ("
ASU 2016-02"). ASU 2016-02 requires that lessees will need to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The provisions of this guidance are effective for annual periods beginning after December 31, 2018,
and for interim periods therein. The Company is in the process of evaluating the new standard and assessing the impact, if any, ASU 2016-02 will have on the Company’s financial statements.
In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The objective of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers
, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or recognizing the cumulative effect of adoption at the date of initial application. In March 2016, the FASB issued ASU No. 2016-08,
Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)
, which clarifies the implementation guidance on principal versus agent considerations. The Company is in the process of evaluating the new standard and assessing the impact, if any, ASU 2014-09 will have on the Company’s financial statements or which adoption method will be used.
Cautionary Note Regarding Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q, including under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, without limitation, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, such as our estimates regarding anticipated operating losses, future revenues and projected expenses; our expectations for commercialization of our Quell product outside the United States; our future liquidity and our expectations regarding our needs for and ability to raise additional capital; our ability to manage our expenses effectively and raise the funds needed to continue our business; our belief that there are unmet needs for the management of chronic pain and in the diagnosis and treatment of diabetic neuropathy; our expectations surrounding Quell and DPNCheck; our expected timing and our plans to develop and commercialize our products; our ability to meet our proposed timelines for the commercial availability of our products; our ability to obtain and maintain regulatory approval of our existing products and any future products we may develop; regulatory and legislative developments in the United States and foreign countries; the performance of our third-party manufacturers; our ability to obtain and maintain intellectual property protection for our products; the successful development of our sales and marketing capabilities; the size and growth of the potential markets for our products and our ability to serve those markets; our plan to make Quell more broadly available through retail distribution; our belief that there are significant opportunities to market Quell outside the United States; our estimate of our customer returns of our products; the rate and degree of market acceptance of any future products; our reliance on key scientific management or personnel; the payment and reimbursement methods used by private or government third party payers; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this quarterly report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the section titled “Risk Factors” below and in our Annual Report on Form 10-K. 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.