Neuronetics(STIM) - 2023 Q4 - Annual Report

Part I Item 1. Business Neuronetics markets the NeuroStar TMS system for neurohealth disorders, focusing on sales expansion, system utilization, and international growth Overview Neuronetics markets the NeuroStar TMS system for depression and OCD, generating $71.3 million in 2023 revenue from a large addressable market - The NeuroStar Advanced Therapy System is FDA-cleared for adult patients with MDD who have failed at least one prior antidepressant, as an adjunct for adults with OCD, and to decrease anxiety symptoms in adults with MDD[17] - The company estimates its total annual addressable market opportunity for treatment sessions in the United States is approximately $8.9 billion[19] Key Operational and Financial Metrics (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Global Patients Treated | ~169,068 | | Total Treatment Sessions Delivered | >6.1 million | | FY 2023 Revenue | $71.3 million | | Active U.S. Sites | 1,145 | Our Strategy The company's strategy focuses on expanding its sales force, increasing system utilization, growing in Japan, and pursuing R&D for new indications - Expand the direct sales organization to target approximately 53,000 psychiatrists at 26,000 practices in the U.S[30] - Increase utilization at the 1,145 active U.S. customer sites by expanding the NeuroStar practice development manager (PDM) team and investing in marketing resources and direct-to-consumer advertising[30] - Focus international commercial efforts on Japan through an exclusive distribution agreement with Teijin Pharma Limited, while opportunistically evaluating other markets[30][32] - Continue R&D to enhance the NeuroStar system's hardware and software for MDD and other potential neurohealth disorders[32] Sales, Marketing and Customer Support The company's sales efforts rely on a 91-person team, targeting psychiatrists and managing key customer concentrations and international distributors - The sales and customer support team consisted of 91 employees as of year-end 2023, with plans for expansion in 2024[34] - The company is dependent on a small number of customers, with a single combined entity accounting for 15% of revenue in 2023, under a new long-term exclusive agreement[35] - International sales are conducted through independent distributors, with an exclusive agreement with Teijin for the Japanese market expiring March 31, 2027[42] - The company's NeuroStar University program trained 369 customers in 2023 on best practices to improve patient experience and business operations[40] Competition The company competes with other TMS therapy providers like Brainsway and Magstim, as well as pharmaceutical treatments for neurohealth disorders - Direct competitors in the TMS therapy market include Brainsway, Apollo TMS, Magstim, MagVenture, CloudTMS, and Nexstim[43] - The company also faces competition from pharmaceutical companies that produce antidepressant medications and other treatments for neurohealth disorders[43] Intellectual Property The company protects its technology with a portfolio of over 98 patents, with key patents set to expire between 2024 and 2035 Patent Portfolio (as of Dec 31, 2023) | Region | Issued/Allowed Patents | Pending Applications | | :--- | :--- | :--- | | Worldwide | >98 | 18 | | United States | 38 | 10 | | Outside U.S. | 60 | 8 (incl. 1 PCT) | - U.S. and non-U.S. patents are expected to expire between 2024 and 2035; in 2024, five U.S. patents and 14 non-U.S. patents are set to expire[46] Government Regulation The company's Class II medical device is subject to extensive FDA and international regulations, including QSR, post-market surveillance, and fraud laws - The NeuroStar Advanced Therapy System is regulated as a Class II medical device in the U.S. and was initially authorized through the de novo classification process[57][64] - The company is subject to numerous post-market regulations, including QSR, medical device reporting, and recall regulations[70][73] - Operations are subject to federal and state fraud and abuse laws, including the Anti-Kickback Statute, the False Claims Act (FCA), and HIPAA[76][78][80] - The company has received CE certification under the EU Medical Device Regulation (MDR) and regulatory approval in Japan, where medical devices are regulated by the PMDA and MHLW[91][93] Human Capital The company employed 203 full-time staff as of year-end 2023, focusing on talent retention through competitive compensation and development programs - The company had 203 full-time employees as of December 31, 2023[102] - Compensation includes competitive pay, share-based awards, and comprehensive benefits; the company is committed to fair and equitable pay[106] - The company fosters diversity and inclusion and provides leadership development programs for managers and directors[104][105] Item 1A. Risk Factors The company faces risks from its history of net losses, reliance on the NeuroStar system, supplier dependencies, and extensive government regulation Risks Related to Business and Industry The company's history of net losses, customer concentration, and reliance on a single product line and single-source suppliers pose significant business risks - The company has a history of net losses, reporting $30.2 million in 2023 and $37.2 million in 2022, with an accumulated deficit of $376.1 million as of December 31, 2023[112] - A significant portion of revenue comes from a small number of customers, making the company vulnerable if these relationships are lost or deteriorate[129] - The business relies on single-source suppliers for some components and a single manufacturer for system assembly, creating potential supply chain vulnerabilities[151] - Success is dependent on adequate insurance coverage and reimbursement from third-party payors; unfavorable changes could deter psychiatrists from using the products[119] Risks Related to Intellectual Property The company's success depends on protecting its intellectual property, which faces risks from patent invalidation, limited patent lifespan, and potential litigation - The company may not be able to obtain and enforce sufficient patent protection, and existing patents may be challenged, invalidated, or circumvented[205][207] - Patents have a limited lifespan; patents for core technology will begin to expire in the U.S. in 2024, potentially opening the company to competition[214][215] - The company faces the risk of costly intellectual property infringement litigation from third parties, which could prevent the sale of its products or require expensive licensing or redesign efforts[219][226] - Protecting intellectual property rights in foreign countries is difficult and may be inadequate due to differences in legal systems[232][234] Risks Related to Government Regulation The company operates in a highly regulated environment, with risks related to obtaining regulatory clearances, product modifications, and compliance with fraud laws - Products and operations are subject to extensive and stringent government regulation in the U.S. and abroad; failure to comply could result in fines, recalls, or prohibitions on sales[246][247] - Modifications to products may require new 510(k) clearances or more burdensome PMAs, potentially causing marketing delays, recalls, or fines if the FDA disagrees with the company's determination[259][264] - The company is subject to federal, state, and foreign fraud and abuse laws (including Anti-Kickback and False Claims statutes), which could lead to substantial penalties if violated[280][282] - Discovery of serious safety issues or product defects could lead to mandatory or voluntary recalls, harming reputation and financial results[272][274] Risks Related to Capital Structure The company faces risks from its potential need for additional capital, restrictive debt covenants, and limitations on the use of its NOL carryforwards - The company may need to raise additional capital, which could result in dilution to stockholders or restrictive debt covenants[293][296] - The credit facility contains a net product revenue covenant that the company failed to meet in certain months of 2023 and 2021, requiring waivers from the lender; a future default could lead to acceleration of the debt[297][301] - As of December 31, 2023, the company had significant federal ($338.0 million) and state ($217.1 million) net operating loss carryforwards, but their future use may be limited by ownership change rules under Section 382[303] Risks Related to Ownership of Common Stock Ownership of the company's common stock involves risks from price volatility, concentrated ownership, anti-takeover provisions, and a no-dividend policy - The trading price of the common stock has been and may continue to be highly volatile[304] - As of February 29, 2024, officers, directors, and 5%+ stockholders beneficially owned approximately 10% of outstanding common stock, giving them material influence over stockholder matters[312] - Anti-takeover provisions in the company's charter and Delaware law could delay or prevent a change in control, potentially limiting the price investors are willing to pay[313][314] - The company has never paid cash dividends and does not intend to in the foreseeable future[318] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[331] Item 1C. Cybersecurity The company manages cybersecurity risks through an integrated program overseen by the Audit Committee, which has not materially impacted the business to date - Cybersecurity risk management is integrated into the overall risk management program, overseen by the Audit Committee of the board of directors[332][335] - The company uses a risk-based approach, employing security tools for detection and prevention, user training, and collaboration with third-party experts for assessments[332][333] - The company states that cybersecurity threats have not materially affected its business strategy, results of operations, or financial condition to date[334] Item 2. Properties The company leases a headquarters in Pennsylvania and a training facility in North Carolina, which are considered adequate for its current needs - Leases a 42,500 sq. ft. facility in Malvern, PA for its corporate headquarters, with the lease ending in February 2028[339] - Leases a 9,600 sq. ft. training facility in Charlotte, NC, with the lease ending in 2027[339] Item 3. Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its financial condition or operations - Management believes there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on the Company[340] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[341] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq as "STIM", with details provided on equity compensation plans and no reported issuer stock purchases - Common stock is traded on the Nasdaq Global Market under the symbol "STIM"; as of February 29, 2024, there were approximately 54 holders of record[344][345] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be Issued Upon Exercise (thousands) | Weighted-Average Exercise Price | Securities Remaining for Future Issuance (thousands) | | :--- | :--- | :--- | :--- | | Approved by security holders | 1,270 | $3.90 | 2,028 | | Not approved by security holders | — | — | 285 | | Total | 1,270 | $3.90 | 2,313 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 9% to $71.3 million in 2023, though the company remains unprofitable with a net loss of $30.2 million and faces liquidity risks Results of Operations Revenue increased 9% to $71.3 million in 2023, while net loss improved to $30.2 million, aided by lower operating expenses and higher other income Financial Performance Summary (FY 2023 vs. FY 2022) | Metric | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $71.3M | $65.2M | +9% | | Gross Profit | $51.7M | $49.7M | +4% | | Gross Margin | 72.5% | 76.3% | -3.8 p.p. | | Total Operating Expenses | $82.3M | $84.8M | -3% | | Loss from Operations | ($30.6M) | ($35.1M) | +13% | | Net Loss | ($30.2M) | ($37.2M) | +19% | - U.S. revenue grew 9% to $69.3 million, driven by a 13% increase in treatment session revenue to $50.9 million, attributed to growth in active customer sites and higher utilization[376][377][378] - Gross margin decreased to 72.5% from 76.3% primarily due to a $1.9 million inventory impairment, $1.3 million in software amortization, and $0.7 million in one-time costs for transitioning to a new contract manufacturer[381] - Other income increased significantly to $5.8 million from $2.2 million, mainly due to a $2.9 million Employee Retention Credit (ERC)[385] Liquidity and Capital Resources The company holds $59.7 million in cash and $60.0 million in debt, believing current resources are sufficient to fund operations for the next 12 months Key Liquidity Metrics (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Cash and Cash Equivalents | $59.7 million | | Accumulated Deficit | $376.1 million | | Debt Outstanding | $60.0 million | Cash Flow Summary (FY 2023) | Cash Flow Activity | Amount (in millions) | | :--- | :--- | | Net Cash Used in Operating Activities | $(32.0) | | Net Cash Used in Investing Activities | $(1.3) | | Net Cash Provided by Financing Activities | $22.7 | - Management believes current cash and anticipated revenues are sufficient to fund operations for at least the next 12 months[388] - On March 7, 2024, the company entered into a sixth amendment to its loan agreement to waive non-compliance with its revenue covenant and amend future financial covenants[395][396] Critical Accounting Policies and Use of Estimates Revenue recognition under ASC 606 is a critical accounting policy, requiring significant judgment in allocating transaction prices among performance obligations - Revenue recognition under ASC 606 is a critical policy, requiring management to identify performance obligations, determine transaction prices, and allocate prices to obligations[410] - Key performance obligations include the NeuroStar System, consumable Treatment Sessions, extended warranties, and clinical training[507] - The company uses its best estimate of standalone selling price to allocate the transaction price, maximizing observable inputs like historical pricing while adjusting for customer type, volume, and margins[514] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk from its variable-rate debt, as well as credit risk and potential inflation impacts - The company's credit facility bears a variable interest rate tied to SOFR; a hypothetical 1% increase in interest rates would increase annual interest expense by approximately $0.6 million[419] - Credit risk is managed by holding cash at a large financial institution and investing in highly-rated money market funds[417][418] - The company does not currently have exposure to foreign currency fluctuations and does not engage in hedging[421] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[424] - Management concluded that the internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework[427] - The company is a smaller reporting company and is therefore not required to include an auditor's attestation report on internal control over financial reporting[428] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[433] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[434] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[435] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[436] Item 14. Principal Accounting Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[437] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed with the report, while noting that financial statement schedules have been omitted - The financial statements are filed as part of the report, while all financial statement schedules have been omitted[439][440] - An index of exhibits filed with the report is provided, including charter documents, material contracts, and certifications[441][442] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the financial statements and identified the audit of revenue as a critical audit matter - KPMG LLP provided an unqualified audit opinion on the financial statements for the three years ended December 31, 2023[453] - The audit identified the "Sufficiency of audit evidence obtained over revenue" as a critical audit matter, citing the subjective judgment needed to assess the multiple revenue streams[457][461] Financial Statements The financial statements show a 2023 net loss of $30.2 million, a decrease in cash to $59.7 million, and an increase in total liabilities to $81.6 million Balance Sheet Summary (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $59,677 | $70,340 | | Total current assets | $93,793 | $98,769 | | Total assets | $115,831 | $116,884 | | Liabilities & Equity | | | | Total current liabilities | $19,812 | $33,199 | | Long-term debt, net | $59,283 | $22,829 | | Total liabilities | $81,641 | $59,824 | | Total Stockholders' equity | $34,190 | $57,060 | Statement of Operations Summary (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $71,348 | $65,206 | $55,312 | | Gross profit | $51,705 | $49,723 | $43,659 | | Loss from operations | $(30,554) | $(35,111) | $(27,564) | | Net loss | $(30,189) | $(37,159) | $(31,193) | | Net loss per share | $(1.05) | $(1.38) | $(1.22) | Statement of Cash Flows Summary (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash used in Operating activities | $(32,038) | $(30,739) | | Net Cash (used in) provided by Investing activities | $(1,322) | $6,731 | | Net Cash provided by Financing activities | $22,697 | $207 | | Net (decrease) in Cash | $(10,663) | $(23,801) | Notes to Financial Statements The notes detail key accounting policies, customer concentration, debt covenants, and the company's significant net operating loss carryforwards - A single customer accounted for 15% of revenue in 2023, 17% in 2022, and 20% in 2021[517] - As of Dec 31, 2023, the company had $60.0 million of borrowings outstanding under its Solar Facility; the company was not in compliance with its minimum net product revenue covenant at year-end but subsequently received a waiver in March 2024[553][566][601] - The company has federal net operating loss carryforwards of $338.0 million and state NOLs of $217.1 million, but maintains a full valuation allowance of $94.5 million against its deferred tax assets[587] - Share-based compensation expense was $7.3 million in 2023, down from $8.7 million in 2022[575]