Neuronetics, Inc. annual report, FY2023

Neuronetics, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing was signed March 7, 2024; it reports full-year results rather than standalone fourth-quarter results.

Business context

Neuronetics is a commercial-stage medical technology company that sells the NeuroStar Advanced Therapy System, a non-invasive transcranial magnetic stimulation system cleared for major depressive disorder, obsessive-compulsive disorder and anxious depression. Revenue is generated primarily from recurring treatment sessions, along with system sales, leases, service and warranty contracts.

Estimated global patients treated through December 31, 2023: 169,068.
Treatment sessions delivered through December 31, 2023: more than 6.1 million.
Active U.S. customer sites: 1,145, up from 1,101 at year-end 2022.
Employees: 203 full-time employees at year-end 2023.
The company operates primarily in the United States; international sales are principally supported by distributors, including Teijin in Japan.

Key financial metrics

Metric	2023	2022	Change
Revenue	$71.3 million	$65.2 million	Up 9%
Gross profit	$51.7 million	$49.7 million	Up 4%
Gross margin	72.5%	76.3%	Down 380 basis points
Operating loss	$30.6 million	$35.1 million	Improved $4.6 million
Net loss	$30.2 million	$37.2 million	Improved $7.0 million
Basic and diluted loss per share	$1.05	$1.38	Improved
Cash flow from operations	$(32.0) million	$(30.7) million	Use increased $1.3 million
Cash and cash equivalents	$59.7 million	$70.3 million	Down $10.7 million
Debt, net	$59.3 million	$36.0 million	Increased

Revenue and operating performance

U.S. revenue was $69.3 million, or 97% of total revenue, compared with $63.4 million in 2022.
International revenue was $2.0 million, or 3% of total revenue, compared with $1.8 million in 2022.
U.S. treatment-session revenue increased 13% to $50.9 million and represented 73% of U.S. revenue, compared with 71% in 2022.
Treatment sessions sold increased to 791,023 from 572,587, while U.S. system revenue was broadly unchanged at $16.5 million. Capital system sales declined to 204 units from 213.
Cost of revenue increased 27% to $19.6 million, exceeding revenue growth and reducing gross margin.
Sales and marketing expense declined 5% to $47.3 million, primarily because a 2022 sales-retention compensation program was discontinued.
General and administrative expense was essentially flat at $25.4 million; research and development expense increased modestly to $9.5 million.
Interest expense increased 28% to $5.4 million due to higher debt balances and interest rates.
Other income increased to $5.8 million, including a $2.9 million Employee Retention Credit and higher interest income.

Liquidity, debt and cash flow

Operating cash burn remained substantial at $32.0 million in 2023. Cash declined to $59.7 million after a $22.7 million inflow from financing activities, primarily additional debt.
Outstanding borrowings under the SLR/Solar credit facility were $60.0 million at year-end, with maturity in March 2028.
Principal payments are scheduled to begin in April 2026: $22.5 million in 2026, $30.0 million in 2027 and $7.5 million in 2028.
Future interest payments were estimated at $22.0 million, including $6.7 million due within 12 months of year-end. The facility has a variable interest rate; a 1% increase in interest rates would add approximately $0.6 million of annual interest expense.
Management stated that cash, cash equivalents and anticipated product revenue should fund operations for at least 12 months from issuance of the financial statements, but the company expects continued operating losses and may require additional financing.

Material changes versus 2022

Revenue growth was driven by higher treatment-session utilization and 44 additional active U.S. sites, rather than increased system sales.
Gross margin declined because of a $1.9 million impairment of specialized components for discontinued systems, $0.7 million of one-time costs related to the contract-manufacturer transition and $1.3 million of additional amortization from the latest software release.
The company transitioned console manufacturing to a new contract manufacturer, Ascential Technologies.
Debt increased by $25.0 million during 2023, including a $22.5 million Term C borrowing in October, while operating cash burn increased modestly.
The company’s accumulated deficit increased to $376.1 million from $345.9 million.
The company’s emerging growth company status expired on December 31, 2023, increasing certain disclosure and compliance requirements, although it remains a smaller reporting company and non-accelerated filer.

Guidance, outlook and unusual items

Management expects 2024 sales and marketing expense to remain broadly consistent with 2023, excluding planned growth in the co-op marketing program.
General and administrative expense is expected to remain relatively consistent with 2023.
Research and development expense is expected to increase as the company develops additional indications and hardware and software enhancements.
The filing identifies a goal of achieving cash-flow break-even in the fourth quarter of 2024 and on a full-year basis in 2025. This is a forward-looking objective, not achieved 2023 guidance.
The company expects growth from additional U.S. site utilization, expanded sales and customer support resources, international opportunities—particularly Japan—and additional product indications.
The $2.9 million Employee Retention Credit was recognized in other income and recorded as a receivable at year-end; investors should assess its collectability and non-recurring nature.
On December 31, 2023 and in January and February 2024, the company was not in compliance with the credit facility’s minimum net-product-revenue covenant. The lender subsequently granted waivers and, on March 7, 2024, amended future revenue and minimum-liquidity covenant levels.
The filing states that no current legal claims are expected to have a material adverse effect on financial condition, results of operations or cash flows.

Principal risks and contingencies

Persistent losses, negative operating cash flow and potential need for additional capital; equity financing could dilute shareholders.
Debt covenant compliance and lender remedies, including acceleration of debt secured by substantially all company assets.
Dependence on reimbursement coverage, physician adoption, patient utilization and a concentrated customer base; one customer represented 15% of 2023 revenue.
Dependence on NeuroStar products, third-party manufacturers and certain single-source suppliers.
Competition from other TMS systems, pharmaceutical treatments and emerging technologies.
FDA, international regulatory, product liability, recall, healthcare fraud-and-abuse, privacy and cybersecurity risks.
Patent expirations beginning in 2024 and uncertainty regarding the scope and enforceability of intellectual-property protection.
International expansion and reliance on third-party distributors, particularly the exclusive Teijin relationship in Japan.

Investor verification checklist

Verify the company’s ability to reduce cash burn and achieve the stated cash-flow break-even objectives.
Review the March 2024 sixth amendment to the credit facility, including revised covenants, waiver terms and default consequences.
Assess liquidity relative to the $60.0 million debt balance, scheduled principal payments and variable-rate interest burden.
Determine whether treatment-session growth and higher site utilization can offset relatively flat system sales and support improving margins.
Separate recurring operating performance from the $2.9 million Employee Retention Credit and other unusual items.
Monitor the contract-manufacturer transition, inventory exposure related to discontinued systems and future gross-margin recovery.
Evaluate customer concentration, reimbursement trends, Japan revenue growth and the renewal or termination terms of the Teijin agreement.
Review outstanding equity awards, potential dilution and the company’s substantial accumulated deficit.