NeuroMetrix(NURO) - 2018 Q4 - Annual Report

Part I Business NeuroMetrix is a commercial-stage healthcare company specializing in neurostimulation and digital medicine, with key products Quell and DPNCheck, and a 2018 collaboration with GSK - The company has two principal product lines: wearable neurostimulation therapeutic devices and point-of-care neuropathy diagnostic tests[14] - In early 2018, NeuroMetrix entered into a collaboration with GlaxoSmithKline (GSK), selling the rights to Quell in markets outside the United States. This collaboration includes milestone payments and co-funding for the Quell development program[21] Marketed Product Summary | Product | Time on Market | Technology | Primary Clinical Indications | No. Patients Tested/Treated (units) | | :--- | :--- | :--- | :--- | :--- | | Quell | Q2 2015 – present | Transcutaneous Electrical Nerve Stimulation | Relief for chronic, intractable pain | > 180,000 | | SENSUS | Q1 2013 – present | Transcutaneous Electrical Nerve Stimulation | Relief for chronic, intractable pain | > 11,000 | | DPNCheck | Q4 2011 – present | Nerve Conduction | Diagnosis and evaluation of peripheral neuropathies, such as DPN | > 1,100,000 | | ADVANCE | Q2 2008 – present | Nerve Conduction | Diagnosis and evaluation of CTS, low back pain, peripheral neuropathies | > 1,900,000 (ADVANCE and NC-stat) | Primary Marketed Products Key products include Quell for chronic pain and DPNCheck for neuropathy diagnosis, with legacy ADVANCE system support - Quell is a wearable device for chronic pain relief, available over-the-counter (OTC). Cumulatively through 2018, over 180,000 Quell devices have been shipped to customers[27] - DPNCheck is a quantitative nerve conduction test for systemic neuropathies like DPN, used at the point-of-care. Cumulatively through 2018, nearly 5,000 DPNCheck devices have been shipped[28][29] - The ADVANCE System is a legacy platform for traditional nerve conduction studies, with an installed base of approximately 250 active customers. The company does not actively market the device[30][32] Sales, Marketing, and Distribution Quell is distributed via e-commerce and retail in the U.S., while DPNCheck targets Medicare Advantage and international partners - Quell is distributed in the U.S. via e-commerce (company website, Amazon) and select retailers, promoted through television and digital advertising[37] - U.S. sales for DPNCheck focus on Medicare Advantage organizations, where early detection of neuropathy can impact patient care costs and provider premiums[38] - DPNCheck has international distribution partners: Fukuda Denshi in Japan, Omron Beijing Ltd. in China, and Scienta Farma in Mexico[38] Manufacturing and Supply Final assembly is in-house, relying on external suppliers for components and sub-assemblies, with FDA registration and ISO certification - Final assembly and servicing of Quell and DPNCheck devices are performed in-house in Massachusetts, while sub-assemblies and components are sourced from outside suppliers[41] - Key suppliers include Sunburst EMS and MC Assembly for device sub-assemblies, and Katecho, Inc. for DPNCheck biosensors and Quell electrodes[42][43] Intellectual Property The company protects its technology with 42 issued U.S. patents and 32 pending applications as of December 2018 - As of December 31, 2018, the company held 42 issued U.S. patents, 5 issued foreign patents, and had 32 pending patent applications[61] - Wearable therapeutic products (Quell) are covered by 10 issued U.S. utility patents, 3 design patents, and 28 pending applications. Foreign patents for these products were assigned to GSK[61] - Utility patents for legacy neurodiagnostic products began to expire in 2017, though the company has additional patents with terms extending beyond 2018[62] FDA and Other Governmental Regulation Products are Class II medical devices regulated by FDA 510(k) clearance and QSR, with ongoing FTC review of Quell marketing - All of the company's products to date have been classified as Class II, moderate-risk medical devices and have been subject to the 510(k) review and clearance process[74] - The Quell device received 510(k) clearance for over-the-counter (OTC) use in July 2014 for the symptomatic relief and management of chronic pain[84] - In 2017, the company received a Civil Investigative Demand (CID) from the FTC regarding marketing representations for Quell. The FTC's review for compliance is ongoing[85][214] Risk Factors Significant risks include operating losses, going concern doubt, reliance on GSK, single-source manufacturers, and regulatory scrutiny - The company has a history of significant operating losses, with an accumulated deficit of $191.0 million as of December 31, 2018[93] - The independent auditor's report includes a going concern explanatory paragraph, citing recurring losses and negative cash flows, which raises substantial doubt about the company's ability to continue operations for the next year[94][96] - The company's future is highly dependent on the success of its collaboration with GSK. An inability to meet milestones or delays in GSK's commercialization plans could materially and adversely affect operations[102] - The company relies on single-source manufacturers for key product components, and any disruption in this supply chain could prevent product delivery and harm the business[111] - The company is subject to an ongoing FTC investigation regarding its marketing claims for Quell, which could result in penalties or restrictions on marketing[115][116] Unresolved Staff Comments None Properties The company operates from leased facilities in Waltham and Woburn, Massachusetts, for headquarters, engineering, manufacturing, and fulfillment - The company leases approximately 12,000 sq. ft. in Waltham, MA for headquarters/engineering and 10,000 sq. ft. in Woburn, MA for manufacturing/fulfillment[158] Legal Proceedings The company is not currently a party to any material legal proceedings Mine Safety Disclosures Not applicable Part II Details the company's common stock market, selected financial data, management's discussion and analysis, and internal controls Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on Nasdaq under 'NURO', with details on stockholder numbers and equity compensation plans - The company's common stock is traded on the Nasdaq Capital Market under the symbol "NURO"[162] Equity Compensation Plan Information as of December 31, 2018 | Plan Category | Securities to be issued upon exercise | Weighted average exercise price ($) | Securities remaining for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 494,101 | $4.08 | 517,820 | | Not approved by security holders | — | — | 12,500 | | Totals | 494,101 | $4.08 | 530,320 | Selected Financial Data Refers to detailed financial statements and supplementary data within the Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses 2018 revenue decline, improved gross margin, significant GSK collaboration income, and ongoing going concern issues Comparison of Revenues (2018 vs. 2017) | Metric | 2018 ($) | 2017 ($) | Change ($) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $16.1M | $17.1M | ($1.0M) | (5.9)% | | Quell Revenues | $10.5M | $12.3M | ($1.8M) | (14.9)% | | DPNCheck Revenues | $4.2M | $3.1M | $1.1M | 34.3% | Gross Profit and Margin (2018 vs. 2017) | Metric | 2018 ($) | 2017 ($) | Change ($) | % Change (%) | | :--- | :--- | :--- | :--- | :--- | | Cost of Revenues | $8.7M | $10.2M | ($1.5M) | (14.9)% | | Gross Profit | $7.4M | $6.9M | $0.5M | 7.7% | | Gross Margin | 45.9% | 40.1% | +580 bps | 14.5% | - The company recorded $12.3 million in collaboration income from GSK in 2018 upon achievement of product development milestones[183] - Cash and cash equivalents increased by $2.7 million to $6.8 million at year-end 2018, primarily due to $14.2 million in net cash provided by the GSK collaboration[187][191] - The company's recurring losses and negative cash flows from operating activities raise substantial doubt about its ability to continue as a going concern, and it may need to raise additional funds in 2020[193] Critical Accounting Policies and Estimates Key accounting policies involve significant judgment in revenue recognition, accounts receivable, and inventory valuation - Revenue recognition requires judgment in estimating product returns, based on historical data and current information. Certain products have a 30 or 60-day right of return[198][199] - Inventory valuation is based on the lower of cost or net realizable value, with write-downs for excess or obsolete inventory. Consumable electrodes and biosensors have an 18 to 24-month shelf life[203] - Effective January 1, 2018, the company adopted the new revenue recognition standard ASU 2014-09, which resulted in discontinuing the sell-through deferral model and led to a credit to accumulated deficit of $0.3 million[205] Quantitative and Qualitative Disclosures About Market Risk The company's market risk is minimal, primarily related to cash and equivalents, with no derivative or foreign exchange exposure Financial Statements and Supplementary Data Refers to detailed financial statements and supplementary data within the Annual Report Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[210] - Management concluded that internal control over financial reporting was effective as of December 31, 2018[211] Other Information Covers ongoing FTC investigation, warrant repurchase plans, and the extension of the Shareholder Rights Agreement - The company intends to repurchase up to $25,000 of its warrants traded under the symbol NUROW. Through Dec 31, 2018, it had spent $2,391 to repurchase 38,506 warrants[215] - On January 21, 2019, the company extended its Shareholder Rights Agreement by an additional year[216] Part III Covers corporate governance, executive compensation, security ownership, related party transactions, and accounting fees Directors, Executive Officers and Corporate Governance Details executive officers, directors, board structure, committee compositions, and the company's Code of Business Conduct and Ethics - The Board of Directors is classified into three staggered three-year terms[227] - The Board has determined that directors Goodman, Surgenor, Katz, and Van Avermaete are independent[227] - The Audit Committee consists of Mr. Surgenor (Chairman), Dr. Goodman, and Ms. Katz, all of whom are independent. Mr. Surgenor qualifies as an 'audit committee financial expert'[229] Executive Compensation Outlines 2018 executive compensation, including salaries and equity awards, noting no performance bonuses were paid Summary of Executive Compensation (2018 vs. 2017) | Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Shai N. Gozani, M.D. Ph.D. (CEO) | 2018 | 415,000 | — | 63,211 | 478,211 | | | 2017 | 415,000 | 194,531 | — | 609,531 | | Thomas T. Higgins (CFO) | 2018 | 325,000 | — | 31,606 | 356,606 | | | 2017 | 325,000 | 121,875 | — | 446,875 | | Frank McGillin (CCO) | 2018 | 341,250 | — | 31,606 | 372,856 | | | 2017 | 325,000 | 97,500 | — | 422,500 | - The Compensation Committee determined that although the gating metric for 2018 bonuses was met, inadequate progress on other metrics led to no management bonus pool being created for 2018[245] - In January 2018, named executive officers received stock option grants: Dr. Gozani (75,000), Mr. Higgins (37,500), and Mr. McGillin (37,500). No equity grants were made to executive officers in 2017[246] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details beneficial ownership of common stock by directors, executive officers, and significant stockholders like Sabby Management - As of January 23, 2019, all current directors and executive officers as a group beneficially owned 511,632 shares, representing 6.5% of the class[262] - Sabby Management, LLC is listed as a beneficial owner of 5% or more, with beneficial ownership of 852,437 shares (9.99% of the class) issuable upon conversion of preferred stock, subject to a 9.99% ownership limitation[262][264] Certain Relationships and Related Transactions, and Director Independence Discloses related party transactions, primarily private equity offerings with Sabby Management, LLC in 2017 - In Q1 2017, the company completed a private offering with Sabby Management for $7.0 million in gross proceeds, issuing Series E convertible preferred stock and warrants, and resetting the conversion/exercise prices of Sabby's other holdings[267] - In Q3 2017, the company completed another private offering with Sabby Management for $7.0 million in gross proceeds, issuing Series F convertible preferred stock, and also issued additional Series F shares in exchange for retiring existing warrants[266] Principal Accounting Fees and Services Details fees paid to the independent registered public accounting firm for audit and other services in 2018 and 2017 Accounting Fees (2018 vs. 2017) | Fee Type | 2018 ($) | 2017 ($) | | :--- | :--- | :--- | | Audit Fees | $141,614 | $107,600 | | Audit-Related Fees | $0 | $0 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | Part IV Lists all exhibits and financial statement schedules filed as part of the Form 10-K Exhibits and Financial Statement Schedules Lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key corporate and contractual documents Financial Statements Presents the company's audited financial statements, including the independent auditor's report and detailed notes Report of Independent Registered Public Accounting Firm Auditor's report confirms fair presentation of financial statements but highlights a 'Going Concern Uncertainty' due to recurring losses - The auditor's report contains a "Going Concern Uncertainty" paragraph[299] - The going concern issue is based on the company's recurring losses from operations, negative cash flows, and significant accumulated deficit[299] Financial Statements Data Presents key financial data, showing 2018 net income driven by collaboration income, and changes in assets, equity, and cash flow Key Balance Sheet Data (As of Dec 31) | Metric | 2018 ($) | 2017 ($) | | :--- | :--- | :--- | | Cash and cash equivalents | $6,780,429 | $4,043,681 | | Total current assets | $11,631,017 | $9,103,374 | | Total assets | $12,113,248 | $9,599,224 | | Total current liabilities | $6,015,437 | $4,581,835 | | Total liabilities | $6,015,437 | $4,581,835 | | Accumulated deficit | ($191,016,591) | ($191,338,054) | | Total stockholders' equity | $6,097,811 | $5,017,389 | Key Statement of Operations Data (Year Ended Dec 31) | Metric | 2018 ($) | 2017 ($) | | :--- | :--- | :--- | | Revenues | $16,090,138 | $17,092,336 | | Gross profit | $7,383,056 | $6,856,798 | | Loss from operations | ($12,291,567) | ($13,082,618) | | Collaboration income | $12,255,704 | $0 | | Net income (loss) | $23,605 | ($12,859,253) | Notes to Financial Statements Provides detailed explanations of accounting policies, going concern uncertainty, revenue recognition, and complex financing arrangements - The company adopted the new revenue recognition standard ASU 2014-09 on Jan 1, 2018, using the modified retrospective method. This resulted in a $297,858 credit to accumulated deficit[330][332] - As of Dec 31, 2018, the company had federal and state net operating loss (NOL) carryforwards of approximately $143.0 million and $48.4 million, respectively. A full valuation allowance has been provided against these deferred tax assets[194][376] - In 2017, two private offerings with an institutional investor (Sabby Management) were accounted for as extinguishments, resulting in a total deemed dividend of $6.8 million recognized against additional paid-in capital[398] Contractual Obligations as of Dec 31, 2018 | Obligation Type | Total ($) | Less than 1 year ($) | 1 – 3 years ($) | 3 – 5 years ($) | More than 5 years ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $2,619,927 | $629,222 | $1,294,357 | $413,132 | $283,216 | | Purchase order obligations | $4,988,383 | $4,988,383 | — | — | — | | Total | $7,608,310 | $5,617,605 | $1,294,357 | $413,132 | $283,216 |