Neuronetics, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
Neuronetics is a commercial-stage medical technology company focused on psychiatric disorders. Its primary product is the FDA-cleared NeuroStar Advanced Therapy System, a non-invasive transcranial magnetic stimulation system for adults with major depressive disorder who have not achieved satisfactory improvement from prior antidepressant treatment.
This filing covers the fiscal year ended December 31, 2019. The filing also provides unaudited quarterly information, including fourth-quarter 2019 results. The company had 1,085 active U.S. systems in approximately 870 psychiatrist offices, an estimated 81,600 patients treated, approximately 2.9 million treatment sessions, and 235 full-time employees at year-end.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $62.7 million | $52.8 million | 19% increase |
| Gross profit | $47.3 million | $40.3 million | 17% increase |
| Gross margin | 75.4% | 76.4% | Down 1.0 percentage point |
| Operating loss | $26.9 million | $19.8 million | Loss increased $7.1 million |
| Net loss | $29.0 million | $24.1 million | Loss increased $4.9 million |
| Basic and diluted loss per share | $1.58 | $2.69 | Improved due primarily to higher share count |
| Cash flow from operations | $(30.5) million | $(20.6) million | Use increased $9.9 million |
| Cash and cash equivalents | $75.7 million | $104.6 million | Down $28.9 million |
| Debt principal outstanding | $30.0 million | $30.0 million | Flat |
U.S. revenue was $60.8 million, or 97% of total revenue, compared with $51.5 million, or 98%, in 2018. International revenue increased to $1.9 million from $1.3 million, primarily reflecting multi-unit orders from Japanese distributor Teijin. U.S. treatment-session revenue was $41.1 million, representing 68% of U.S. revenue, while U.S. system revenue was $18.0 million, or 30%.
Revenue growth was accompanied by higher expenses: sales and marketing increased 12% to $43.0 million, general and administrative expense increased 28% to $17.5 million, and research and development expense increased 67% to $13.7 million. Share-based compensation was $3.4 million, compared with $1.7 million in 2018.
Material changes versus the prior comparable period
- Revenue increased 19%, driven by higher U.S. system sales and treatment-session utilization. The company sold 250 systems in 2019, up 43% from 2018, and the active U.S. installed base rose from 907 to 1,085 systems.
- Treatment-session revenue increased 17%, although average U.S. treatment-session revenue per active system declined 3% to approximately $39,900.
- Gross margin declined because of a higher mix of sales-type leases and lower average selling prices on capital sales, partially offset by operating leverage.
- Operating expenses grew faster than revenue, resulting in a larger operating loss and net loss.
- Operating cash burn increased substantially, while cash declined by $28.9 million during the year.
- The company adopted ASC 606 and ASC 842 in 2019. ASC 606 resulted in $4.5 million of prepaid commission expense at year-end and reduced reported 2019 sales and marketing expense by $4.5 million versus the amount that would have been reported without adoption.
- Japan reimbursement became effective June 1, 2019 for covered patients treated in major inpatient and outpatient psychiatric facilities, supporting the company’s international expansion strategy.
Liquidity, debt and cash flow
Management stated that cash and cash equivalents at December 31, 2019, together with anticipated product revenue, were expected to fund operations for at least 24 months after year-end. The company nevertheless expects continued operating losses and negative operating cash flow as it expands sales and marketing, invests in research and development, and supports international growth.
The Oxford credit facility had $30.0 million of principal outstanding at year-end, with scheduled principal payments of $11.25 million in 2020, $15.0 million in 2021, and $3.75 million in 2022. The debt was secured by substantially all assets other than intellectual property, bore a floating interest rate, and included financial and operating covenants. The company reported compliance with its covenants at December 31, 2019.
As a subsequent event, on March 2, 2020 the company replaced the Oxford facility with a Solar Capital facility permitting up to $50.0 million. It initially borrowed $35.0 million, prepaid the Oxford facility, and received an interest-only period through March 2022, subject to applicable conditions and covenants.
Outlook, management commentary and unusual items
- Management expects continued revenue growth from expanding the U.S. installed base, increasing treatment utilization, expanding the commercial organization, and developing Japan and other international markets.
- Management expects operating losses to continue in the near term and expects sales and marketing, general and administrative, and research and development expenses to increase in absolute dollars.
- Pipeline opportunities include potential indications such as bipolar depression and post-traumatic stress disorder, but these would require additional clinical work and regulatory clearance.
- The adolescent MDD study did not meet its primary endpoint in the initial phase. The company stated it was unlikely to seek a label expansion for adolescent MDD and did not expect the results to materially affect its current or future business.
- The business depends heavily on U.S. reimbursement from Medicare and commercial payors. Changes in coverage, reimbursement rates, medical-necessity determinations, or healthcare policy could reduce demand.
- Key risks include continued losses and cash burn, the need for future financing, competition from other TMS systems and antidepressants, regulatory and clinical trial uncertainty, reliance on third-party suppliers and distributors, product liability, cybersecurity and protected-health-information risks, and potential disruptions from pandemics or other events.
- No material legal proceedings were reported, and management stated that existing ordinary-course claims were not reasonably expected to have a material adverse effect.
Important facts for investors to verify
- Whether treatment-session utilization and revenue per installed system improve sufficiently to offset the company’s increasing operating expenses.
- The timing and amount of debt repayments under the Solar facility, including compliance with revenue covenants and conditions for additional borrowing.
- The sustainability of reimbursement coverage and rates in the United States and the commercial ramp in Japan.
- Whether the company can reduce operating cash burn and reach profitability without significant equity dilution or additional debt.
- The status, cost, and regulatory prospects of product enhancements and potential new indications.
- The impact of ASC 606 commission capitalization and other accounting changes on comparisons of operating expenses and cash flow.
- The effects of competition, supplier concentration, third-party distribution arrangements, regulatory changes, product claims, and cybersecurity incidents.