Neuronetics, Inc. 2018 Form 10-K Summary
Business context and reporting period
Neuronetics is a commercial-stage medical technology company developing and marketing 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 medication. The filing covers the fiscal year ended December 31, 2018; the fourth-quarter results are also presented below.
- U.S. installed base increased to 907 active systems in approximately 707 psychiatrist offices from 752 systems at December 31, 2017.
- The company estimated approximately 62,900 patients had been treated through December 31, 2018, across approximately 2.3 million treatment sessions.
- The company had 191 employees at year-end, including 133 in sales and customer support.
- The company completed its initial public offering in July 2018 and trades on Nasdaq under the symbol STIM.
Financial performance and key metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $52.8 million | $40.4 million | 31% increase |
| Gross profit | $40.3 million | $30.8 million | 31% increase |
| Gross margin | 76.4% | 76.2% | 20 basis-point increase |
| Operating loss | $19.8 million | $13.6 million | 46% larger loss |
| Net loss | $24.1 million | $16.1 million | 50% larger loss |
| Operating cash flow | $(20.6) million | $(11.1) million | Higher cash use |
| Capital expenditures and capitalized software | $1.0 million | $0.6 million | Higher investment |
| Cash flow from financing | $97.0 million | $23.8 million | Primarily IPO proceeds |
- U.S. revenue was $51.5 million, or 98% of total revenue, compared with $39.9 million, or 99%, in 2017. International revenue increased to $1.3 million from $0.6 million.
- U.S. treatment-session revenue increased 24% to $35.3 million, while U.S. system revenue increased 44% to $14.6 million. Treatment sessions represented 69% of U.S. revenue versus 71% in 2017.
- Sales and marketing expense increased 37% to $38.3 million; general and administrative expense increased 59% to $13.7 million; research and development expense increased 4% to $8.2 million.
- Interest expense increased to $3.7 million from $2.8 million. The company reported no income tax expense or benefit because its deferred tax assets were fully offset by a valuation allowance.
Fourth-quarter 2018 results
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Revenue | $15.6 million | $12.1 million |
| Gross profit | $11.9 million | $9.2 million |
| Operating loss | $5.7 million | $4.2 million |
| Net loss | $6.1 million | $4.9 million |
Fourth-quarter revenue was the strongest quarterly revenue reported in 2018. The company achieved the $45 million trailing-twelve-month revenue milestone required under its credit facility, extending the interest-only period on its outstanding term loans through March 2020.
Liquidity, debt and capital resources
- Cash and cash equivalents were $104.6 million at December 31, 2018, compared with $29.1 million at December 31, 2017.
- The IPO generated $107.5 million of gross proceeds and $96.5 million of net proceeds after underwriting discounts, commissions and offering expenses.
- Outstanding principal under the Oxford Finance credit facility was $30.0 million, with $30.4 million reported as long-term debt net of discounts and accrued final payment fees.
- The credit facility bears interest at the greater of 8.15% or 30-day U.S. LIBOR plus 7.38%, matures in March 2022 and is secured by substantially all assets other than intellectual property.
- Scheduled principal payments are $11.25 million in 2020, $15.0 million in 2021 and $3.75 million in 2022. No principal payment is scheduled for 2019.
- Management stated that cash, cash equivalents and anticipated product revenue should fund expected requirements for at least 24 months after December 31, 2018.
- The company was in compliance with its debt covenants at year-end. The principal covenant requires achievement of at least 75% of trailing-twelve-month forecasted revenue.
Material changes versus the prior comparable period
- Revenue growth accelerated to 31%, driven by higher system placements, increased treatment-session volume and expansion of the commercial organization.
- Operating expenses grew faster than revenue, particularly sales and marketing and general and administrative costs, resulting in a larger operating and net loss.
- Operating cash burn increased from $11.1 million to $20.6 million, primarily reflecting the larger net loss and investment in working capital.
- The IPO materially strengthened the balance sheet: stockholders’ equity increased to $71.0 million from a deficit of $192.7 million, and all convertible preferred stock converted into common stock.
- Convertible preferred stock warrant liabilities were reclassified to additional paid-in capital upon the IPO.
- International revenue remained limited but increased as the company prepared to commercialize in Japan through its exclusive distributor, Teijin Pharma Limited.
Guidance, outlook, commentary and risks
- Management expects revenue and expenses to increase as it expands U.S. sales, customer support, marketing, research and development, international activities and public-company infrastructure.
- The company expects to continue incurring losses in the near term and does not provide a specific revenue, margin or profitability forecast in the filing.
- Japan is the principal international growth opportunity. The company had marketing authorization and had submitted reimbursement dossiers, but reimbursement approval was still being pursued and was expected by management in the second half of 2019.
- The Teijin agreement includes minimum purchase obligations after Japanese reimbursement approval and may be terminated if reimbursement is not obtained by specified dates or falls below specified minimums.
- An adolescent MDD clinical trial did not meet its primary endpoint in the initial phase. The company stated that it was unlikely to seek a label expansion for adolescent MDD and did not expect the result to materially affect its current or future business.
- Key risks include continued losses and cash burn, dependence on TMS adoption and reimbursement, competition, regulatory and clinical-trial uncertainty, reliance on third-party manufacturers and suppliers, debt covenant and repayment obligations, product liability, cybersecurity and protection of patient health information.
- The company relies on a single contract manufacturer for assembly of the mobile console and patient positioning system and on single-source suppliers for certain components.
- Core U.S. patents are expected to begin expiring in 2024, creating a longer-term intellectual-property risk.
Most important facts for investors to verify
- Whether revenue growth and installed-system utilization can continue to offset substantial sales, marketing, administrative and research spending.
- Whether the company can reduce operating cash burn and eventually achieve profitability without additional dilutive or expensive financing.
- The status, timing and economics of Japanese reimbursement and the resulting purchase commitments from Teijin.
- Compliance with the Oxford credit facility’s revenue covenant and the company’s ability to meet principal and interest payments beginning in 2020.
- Actual reimbursement rates, treatment-session pricing and volume discounts, which affect recurring revenue and gross margin.
- Clinical, regulatory and commercial progress for potential additional indications, including bipolar depression and PTSD.
- The effect of the adolescent trial’s failed primary endpoint and any future clinical or regulatory disclosures.
- Supply-chain continuity, product quality, cybersecurity controls and any product liability, regulatory or legal proceedings.