Neuronetics, Inc. annual report, FY2020

Neuronetics, Inc. 2020 Form 10-K Summary

Business context and reporting period

Neuronetics is a commercial-stage medical technology company that develops and markets the NeuroStar Advanced Therapy System, a non-invasive transcranial magnetic stimulation system cleared by the FDA for adults with major depressive disorder who have not achieved satisfactory improvement from prior antidepressant treatment. The filing covers the fiscal year ended December 31, 2020; quarterly information indicates fourth-quarter 2020 revenue of $15.6 million.

U.S. installed base increased to 1,170 active systems in approximately 916 psychiatrist offices from 1,085 systems at December 31, 2019.
Approximately 100,231 patients had been treated through December 31, 2020, representing approximately 3.6 million treatment sessions.
The company had 126 full-time employees at year-end.
Revenue is generated primarily from recurring treatment sessions, system sales and leases, and service and extended warranty contracts.

Financial performance and key metrics

Metric	2020	2019	Change
Revenue	$49.2 million	$62.7 million	Down 21%
Gross profit	$37.7 million	$47.3 million	Down 20%
Gross margin	76.5%	75.4%	Up 1.1 percentage points
Operating loss	$22.3 million	$26.9 million	Improved $4.6 million
Net loss	$27.5 million	$29.0 million	Improved $1.6 million
Basic and diluted loss per share	$1.46	$1.58	Improved
Cash used in operating activities	$28.4 million	$30.5 million	Improved $2.1 million
Cash and cash equivalents at year-end	$49.0 million	$75.7 million	Down $26.8 million

U.S. revenue was $47.5 million, or 96% of total revenue, compared with $60.8 million, or 97%, in 2019. International revenue was $1.7 million, or 4% of total revenue. U.S. treatment-session revenue was $34.9 million, representing 73% of U.S. revenue, while system revenue was $11.1 million, or 23%.

U.S. systems sold declined to 166 from 250, a decrease of 84 units.
U.S. treatment sessions sold declined to 439,936 from 555,570, a decrease of 115,634 sessions.
Cost of revenues declined 25% to $11.6 million, primarily reflecting lower revenue volume.
Sales and marketing expense declined 24% to $32.6 million; research and development expense declined 33% to $9.2 million.
General and administrative expense increased 4% to $18.2 million, primarily due to higher severance expense.
Interest expense increased to $4.5 million from $3.7 million, and the company recorded a $0.9 million loss on extinguishment of debt.
Accumulated deficit was $277.5 million at December 31, 2020, compared with $250.1 million at the prior year-end.

Liquidity, debt and capital resources

Net working capital was $51.3 million at December 31, 2020, compared with $72.0 million at December 31, 2019.
Outstanding borrowings were $35.0 million principal, reported as $34.6 million of long-term debt net of discounts.
In March 2020, the company replaced its Oxford facility with a Solar Capital credit facility. The facility permits aggregate borrowing of up to $50.0 million, including $35.0 million drawn under Term A and up to $15.0 million in additional tranches subject to revenue and other conditions.
The Solar facility matures in February 2025, bears a floating interest rate, is interest-only through March 2022 subject to extension conditions, and is secured by substantially all company assets, including intellectual property.
Required Term A principal payments are scheduled to begin in 2022, with $35.0 million due through 2025.
The company was in compliance with its debt covenants at December 31, 2020. The facility includes minimum revenue covenants, restrictions on additional debt and collateral, and events of default, including certain material adverse effect provisions.
In April 2020, the company received a $6.4 million Paycheck Protection Program loan and repaid it in full, including accrued interest, in May 2020.
On February 2, 2021, the company issued 5.566 million shares at $15.50 per share and received approximately $80.6 million of net proceeds. Management stated that cash, the offering proceeds and anticipated product revenue were expected to fund operations for at least 12 months from issuance of the financial statements.

Material changes versus the prior comparable period

COVID-19 materially reduced new patient starts, system utilization, capital purchases, customer office access and in-person sales activity. Management attributed most of the revenue decline to quarantines, travel restrictions, office closures and the broader economic slowdown.
Revenue declined 21%, with U.S. revenue down 22%, system revenue down 38%, and treatment-session revenue down 15%.
Despite lower revenue, gross margin improved because of a more favorable product mix, including a greater proportion of treatment-session revenue.
Operating and net losses narrowed primarily because of reduced sales and marketing and research and development spending.
The company reduced its workforce by 95 employees in April 2020 and recorded $2.1 million of related separation costs. Additional executive and employee transition agreements resulted in $1.8 million of charges, with $1.0 million remaining accrued at year-end.
The company incurred a $0.9 million loss on extinguishment of the Oxford debt facility when it entered into the Solar facility.
Revenue concentration increased: one customer represented more than 10% of 2020 revenue, compared with no customer exceeding 10% in 2019.
The company obtained FDA clearance on November 23, 2020 for TouchStar, a three-minute intermittent theta-burst protocol using the NeuroStar system.

Guidance, outlook, management commentary and risks

The filing does not provide formal 2021 revenue or earnings guidance. Management expects continued operating losses in the near term while investing in commercialization, customer utilization, international expansion and research and development. Management expects research and development expense to remain similar to 2020 levels and general and administrative expense to increase modestly in 2021.

Growth initiatives focus on expanding the direct sales and customer support organization, increasing utilization of the installed base, expanding digital and patient-awareness marketing, developing Japan through Teijin, and evaluating additional indications such as bipolar depression and PTSD.
The adolescent MDD clinical trial did not meet its primary endpoint in the initial phase. The company stated that it is unlikely to seek a label expansion for adolescent MDD and does not expect the results to materially affect its current or future business.
Key risks include continued COVID-19 effects, dependence on reimbursement and patient access, slow adoption of TMS, intense competition, persistent losses and cash burn, debt covenant compliance, variable-rate interest expense, and potential need for additional capital.
The company relies on single-source suppliers for certain components and on a single manufacturer for assembly of the system. Supply interruption, quality issues or regulatory requirements could delay shipments or require costly transitions.
Additional risks include FDA and foreign regulatory requirements, product liability, recalls, healthcare fraud and abuse laws, HIPAA and cybersecurity obligations, intellectual property challenges, distributor dependence, and future changes in reimbursement or healthcare policy.
The company reported no material pending legal proceedings and no off-balance-sheet arrangements.

Most important facts for investors to verify

Whether treatment-session volumes and new system sales recover as COVID-19 restrictions and provider operating conditions normalize.
Cash burn, revenue performance and remaining liquidity following the February 2021 equity offering.
Compliance with Solar facility revenue covenants and the ability to meet principal payments beginning in 2022.
Customer utilization and revenue per installed system, not merely growth in the installed base.
Sustainability of the 76.5% gross margin as product mix, pricing and system sales change.
Actual commercial traction in Japan under the Teijin distribution agreement and the availability of reimbursement.
Progress and regulatory requirements for TouchStar, bipolar depression, PTSD and other potential indications.
Effects of the 2020 workforce reduction on sales capacity, customer support and future growth.
Customer concentration, allowance for doubtful accounts and collection trends, particularly amid healthcare-provider liquidity pressures.