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Neuronetics, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 001-38546

 

NEURONETICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

33-1051425

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

3222 Phoenixville Pike, Malvern, PA

19355

(Address of principal executive offices)

(Zip Code)

(610) 640-4202

(Registrant’s telephone number, including area code)

Not applicable.

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X]   No [   ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes [X]   No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

[   ]

 

Accelerated filer

[   ]

Non-accelerated filer

[X]

 

Smaller reporting company

[   ]

 

 

 

Emerging growth company

[X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [   ]   No [X]

There were 17,579,491 shares of the registrant’s common stock outstanding as of October 31, 2018.

 

 

 


 

NEURONETICS, INC.

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018

Table of Contents

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements.

 

3

 

 

 

 

 

 

 

Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Statements of Operations for the Three and Nine Months ended September 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Statement of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Nine Months ended September 30, 2018

 

5

 

 

 

 

 

 

 

Statements of Cash Flows for the Nine Months ended September 30, 2018 and 2017

 

6

 

 

 

 

 

 

 

Notes to Interim Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

18

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk.

 

29

 

 

 

 

 

Item 4.

 

Controls and Procedures.

 

29

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

 

Legal Proceedings.

 

31

 

 

 

 

 

Item 1A.

 

Risk Factors.

 

31

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

 

31

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities.

 

31

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures.

 

31

 

 

 

 

 

Item 5.

 

Other Information.

 

31

 

 

 

 

 

Item 6.

 

Exhibits.

 

32

 

 

 

 

 

SIGNATURES

 

33

 

 

2


 

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

 

NEURONETICS, INC.

Balance Sheets

(Unaudited; In thousands, except per share data)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,760

 

 

$

29,147

 

Accounts receivable, net

 

 

5,283

 

 

 

4,267

 

Inventory

 

 

2,614

 

 

 

2,468

 

Prepaid expenses and other current assets

 

 

2,082

 

 

 

1,123

 

Total current assets

 

 

116,739

 

 

 

37,005

 

Property and equipment, net

 

 

1,343

 

 

 

1,359

 

Other assets

 

 

897

 

 

 

574

 

Total Assets

 

$

118,979

 

 

$

38,938

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,102

 

 

$

2,513

 

Accrued expenses

 

 

6,383

 

 

 

7,511

 

Deferred revenue

 

 

1,813

 

 

 

1,970

 

Current portion of long-term debt

 

 

5,000

 

 

 

-

 

Total current liabilities

 

 

15,298

 

 

 

11,994

 

Long-term debt, net

 

 

25,198

 

 

 

29,556

 

Deferred revenue

 

 

2,032

 

 

 

2,275

 

Deferred rent

 

 

103

 

 

 

151

 

Convertible preferred stock warrant liability

 

 

-

 

 

 

478

 

Total Liabilities

 

 

42,631

 

 

 

44,454

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.01 par value: 308,593 shares previously authorized prior

     to initial public offering, issuable in series; no and 304,958 shares issued and

     outstanding at September 30, 2018 and December 31, 2017, respectively;

     no liquidation value at September 30, 2018

 

 

-

 

 

 

187,136

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000 shares authorized; no shares issued or

   outstanding at September 30, 2018 and December 31, 2017

 

 

-

 

 

 

-

 

Common stock, $0.01 par value: 200,000 shares authorized; 17,579 and 231 shares

   issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

176

 

 

 

2

 

Additional paid-in capital

 

 

291,072

 

 

 

4,292

 

Accumulated deficit

 

 

(214,900

)

 

 

(196,946

)

Total Stockholders' Equity (Deficit)

 

 

76,348

 

 

 

(192,652

)

Total Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

$

118,979

 

 

$

38,938

 

 

The accompanying notes are an integral part of these unaudited interim financial statements.  

 

3


 

NEURONETICS, INC.

Statements of Operations

(Unaudited; In thousands, except per share data)

 

 

 

Three Months ended

 

 

Nine Months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

13,737

 

 

$

10,491

 

 

$

37,141

 

 

$

28,325

 

Cost of revenues

 

 

3,034

 

 

 

2,636

 

 

 

8,736

 

 

 

6,675

 

Gross Profit

 

 

10,703

 

 

 

7,855

 

 

 

28,405

 

 

 

21,650

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

9,672

 

 

 

6,566

 

 

 

27,616

 

 

 

19,272

 

General and administrative

 

 

3,238

 

 

 

2,256

 

 

 

8,952

 

 

 

5,735

 

Research and development

 

 

2,125

 

 

 

1,843

 

 

 

6,010

 

 

 

6,018

 

Total operating expenses

 

 

15,035

 

 

 

10,665

 

 

 

42,578

 

 

 

31,025

 

Loss from Operations

 

 

(4,332

)

 

 

(2,810

)

 

 

(14,173

)

 

 

(9,375

)

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

928

 

 

 

807

 

 

 

2,749

 

 

 

2,068

 

Other expense (income), net

 

 

(299

)

 

 

136

 

 

 

1,032

 

 

 

(308

)

Net Loss

 

$

(4,961

)

 

$

(3,753

)

 

$

(17,954

)

 

$

(11,135

)

Net loss per share of common stock outstanding, basic and diluted

 

$

(0.29

)

 

$

(19.35

)

 

$

(2.99

)

 

$

(62.56

)

Weighted-average common shares outstanding, basic and diluted

 

 

17,382

 

 

 

194

 

 

 

6,014

 

 

 

178

 

 

The accompanying notes are an integral part of these unaudited interim financial statements.

 

4


 

NEURONETICS, INC.

Statement of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited; In thousands)

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity (Deficit)

 

Balance at December 31, 2017

 

 

304,958

 

 

$

187,136

 

 

 

231

 

 

$

2

 

 

$

4,292

 

 

$

(196,946

)

 

$

(192,652

)

Exercises of stock options

 

 

-

 

 

 

-

 

 

 

20

 

 

 

1

 

 

 

30

 

 

 

-

 

 

 

31

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

144

 

 

 

-

 

 

 

144

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,497

)

 

 

(5,497

)

Balance at March 31, 2018

 

 

304,958

 

 

 

187,136

 

 

 

251

 

 

 

3

 

 

 

4,466

 

 

 

(202,443

)

 

 

(197,974

)

Exercises of stock options

 

 

-

 

 

 

-

 

 

 

6

 

 

 

-

 

 

 

7

 

 

 

 

 

 

 

7

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

192

 

 

 

 

 

 

 

192

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,496

)

 

 

(7,496

)

Balance at June 30, 2018

 

 

304,958

 

 

 

187,136

 

 

 

257

 

 

 

3

 

 

 

4,665

 

 

 

(209,939

)

 

 

(205,271

)

Conversion of convertible preferred stock

   into common stock

 

 

(304,958

)

 

 

(187,136

)

 

 

10,994

 

 

 

109

 

 

 

187,027

 

 

 

-

 

 

 

187,136

 

Conversion of convertible preferred stock

   warrants into common stock warrants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,874

 

 

 

-

 

 

 

1,874

 

Issuance of common stock in initial public

   offering, net of issuance costs of $3,465

 

 

-

 

 

 

-

 

 

 

6,325

 

 

 

64

 

 

 

96,471

 

 

 

-

 

 

 

96,535

 

Exercises of stock options

 

 

-

 

 

 

-

 

 

 

3

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

7

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,028

 

 

 

-

 

 

 

1,028

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,961

)

 

 

(4,961

)

Balance at September 30, 2018

 

 

-

 

 

$

-

 

 

 

17,579

 

 

$

176

 

 

$

291,072

 

 

$

(214,900

)

 

$

76,348

 

 

The accompanying notes are an integral part of these unaudited interim financial statements.

 

5


 

NEURONETICS, INC.

Statements of Cash Flows

(Unaudited; In thousands)

 

 

 

Nine Months ended September 30,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(17,954

)

 

$

(11,135

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

671

 

 

 

455

 

Share-based compensation

 

 

1,364

 

 

 

295

 

Non-cash interest expense

 

 

642

 

 

 

542

 

Change in fair value of convertible preferred stock warrant liability

 

 

1,396

 

 

 

(250

)

Cost of rental units purchased by customers

 

 

148

 

 

 

118

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,016

)

 

 

(326

)

Inventory

 

 

(767

)

 

 

(519

)

Prepaid expenses and other assets

 

 

(298

)

 

 

(30

)

Accounts payable

 

 

(594

)

 

 

(819

)

Accrued expenses

 

 

(1,461

)

 

 

331

 

Deferred revenue

 

 

(400

)

 

 

(45

)

Deferred rent

 

 

(46

)

 

 

(29

)

Net Cash Used in Operating Activities

 

 

(18,315

)

 

 

(11,412

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment and capitalized software

 

 

(650

)

 

 

(319

)

Net Cash Used in Investing Activities

 

 

(650

)

 

 

(319

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in initial public offering

 

 

99,998

 

 

 

-

 

Payments of public offering costs

 

 

(3,465

)

 

 

-

 

Proceeds from exercises of stock options

 

 

45

 

 

 

30

 

Proceeds from issuance of Series G convertible preferred stock, net

 

 

-

 

 

 

14,825

 

Borrowings under credit facilities

 

 

-

 

 

 

5,000

 

Payments of debt issuance costs

 

 

-

 

 

 

(1,015

)

Net Cash Provided by Financing Activities

 

 

96,578

 

 

 

18,840

 

Net Increase in Cash and Cash Equivalents

 

 

77,613

 

 

 

7,109

 

Cash and Cash Equivalents, Beginning of Period

 

 

29,147

 

 

 

17,040

 

Cash and Cash Equivalents, End of Period

 

$

106,760

 

 

$

24,149

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,057

 

 

$

1,492

 

Transfer of inventory to property and equipment

 

$

235

 

 

$

248

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

Allocation of proceeds from debt financing to convertible preferred stock warrant

   liability

 

$

-

 

 

$

171

 

Conversion of convertible preferred stock into common stock

 

$

187,136

 

 

$

-

 

Conversion of convertible preferred stock warrants into common stock warrants

 

$

1,874

 

 

$

-

 

 

The accompanying notes are an integral part of these unaudited interim financial statements.

 

6


 

NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

1.

DESCRIPTION OF BUSINESS

Neuronetics, Inc., or the Company, is a commercial stage medical technology company focused on designing, developing and marketing products that improve the quality of life for patients who suffer from psychiatric disorders. The Company’s first commercial product, the NeuroStar Advanced Therapy System, is a non-invasive and non-systemic office-based treatment that uses transcranial magnetic stimulation, or TMS, to create a pulsed, MRI-strength magnetic field that induces electrical currents designed to stimulate specific areas of the brain associated with mood. The system was cleared in 2008 by the United States Food and Drug Administration, or the FDA, to treat adult patients with major depressive disorder, or MDD, who have failed to achieve satisfactory improvement from prior antidepressant medication in the current episode. The Company intends to continue to pursue development of its NeuroStar Advanced Therapy System for additional indications.

Initial Public Offering

On July 2, 2018, the Company closed its initial public offering, or IPO, in which the Company issued and sold 6.325 million shares of its common stock, which included shares sold pursuant to an option granted to the underwriters to purchase additional shares at a public offering price of $17.00 per share. The Company received net proceeds of $96.5 million after deducting underwriting discounts, commissions and other offering expenses paid by the Company. The Company’s common stock is listed on the Nasdaq Global Market under the trading symbol “STIM.” In addition, immediately prior to the closing of the IPO on July 2, 2018, (i) all of the Company’s outstanding shares of convertible preferred stock converted into an aggregate 11.0 million shares of common stock; (ii) all of the Company’s outstanding warrants to purchase convertible preferred stock converted into warrants to purchase common stock; and (iii) the Company filed an amended and restated certificate of incorporation to, among other things, decrease the number of shares of common stock, $0.01 par value per share, authorized for issuance to 200.0 million and to authorize the board of directors to issue up to 10.0 million shares of “blank check” preferred stock, $0.01 par value per share.

Liquidity

As of September 30, 2018, the Company had cash and cash equivalents of $106.8 million and an accumulated deficit of $214.9 million. The Company incurred negative cash flows from operating activities of $11.1 million for the year ended December 31, 2017 and $18.3 million for the nine months ended September 30, 2018. The Company has incurred operating losses since its inception, and management anticipates that its operating losses will continue in the near term as the Company seeks to expand its sales and marketing initiatives to support its growth into existing and new markets and invest in additional research and development activities. The Company’s primary sources of capital to date have been proceeds from its IPO, private placements of its convertible preferred securities, borrowings under its credit facilities and revenues from sales of its products. As of September 30, 2018, the Company had $30.0 million of borrowings outstanding under its credit facility, which matures in March 2022. Management believes that the Company’s cash and cash equivalents as of September 30, 2018 and anticipated revenues from sales of its products are sufficient to fund the Company’s operations for at least the next 24 months after September 30, 2018.

2.

BASIS OF PRESENTATION

The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification, or ASC, and Accounting Standards Updates, or ASUs, promulgated by the Financial Accounting Standards Board, or FASB.

Interim Financial Statements

The accompanying unaudited interim financial statements have been prepared from the books and records of the Company in accordance with GAAP for interim financial information and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission, or SEC, which permit reduced disclosures for interim periods. All adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the accompanying balance sheets and statements of operations, changes in convertible preferred stock and stockholders’ deficit and cash flows have been made. Although these interim financial statements do not include all of the information and footnotes required for complete annual financial statements, management believes the disclosures are adequate to make the information presented not misleading. Unaudited interim results of operations and cash flows for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full year. Unaudited interim financial statements and footnotes should be read in conjunction with the audited financial statements and footnotes included in the Company’s IPO prospectus filed with the SEC on June 29, 2018, wherein a more complete discussion of significant accounting policies and certain other information can be found.

7


 

Use of Estimates

The preparation of financial statements in accordance with GAAP and the rules and regulations of the SEC requires the use of estimates and assumptions, based on judgments considered reasonable, which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and assumptions on historical experience, known trends and events and various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Although management believes its estimates and assumptions are reasonable when made, they are based upon information available at the time they are made. Management evaluates the estimates and assumptions on an ongoing basis and, if necessary, makes adjustments. Due to the risks and uncertainties involved in the Company’s business and evolving market conditions, and given the subjective element of the estimates and assumptions made, actual results may differ from estimated results. The most significant estimates and judgments impact share-based compensation, product warranty accruals and the net realizable value of inventory.

Recapitalization

The Company effected a 0.0345-for-1 reverse split of its common stock on June 14, 2018. The reverse split combined each approximately 29 shares of the Company’s issued and outstanding common stock into one share of common stock and correspondingly adjusted the conversion price of its outstanding convertible preferred stock. No fractional shares were issued in connection with the reverse split. Any fractional share resulting from the reverse split was rounded down to the nearest whole share, and in lieu of any fractional share, the Company paid in cash to the holders of such fractional shares an amount equal to the fair market value, as determined by the board of directors, of such fractional shares. All share, per share and related information presented in these interim financial statements and the related notes thereto have been retroactively adjusted, where applicable, to reflect the reverse stock split.

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s complete summary of significant accounting policies can be found in “Note 3. Summary of Significant Accounting Policies” in the audited financial statements included in the Company’s IPO prospectus filed with the SEC on June 29, 2018.

4.

RECENT ACCOUNTING PRONOUNCEMENTS

JOBS Act Accounting Election

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these interim financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606), regarding the accounting for and disclosures of revenue recognition, with an effective date for public companies of annual and interim periods beginning after December 15, 2016. In July 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which deferred the effective date of the previously issued revenue recognition guidance by one year. This guidance is effective for public companies for annual and interim periods beginning after December 15, 2017. For all other entities, including emerging growth companies, this standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods with annual periods beginning after December 15, 2019. Early adoption is permitted. This update provides a single comprehensive model for accounting for revenue from contracts with customers. The model requires that revenue recognized reflects the actual consideration to which the entity expects to be entitled in exchange for the goods or services defined in the contract, including in situations with multiple performance obligations. In April 2016 and May 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” respectively. Both of these updates provide improvements and clarification to the previously issued revenue recognition guidance. The new standard can be adopted using one of two methods: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. The new standard will result in additional revenue-related disclosures in the notes to the Company’s financial statements. The majority of the Company’s revenue relates to the sales of NeuroStar Advanced Therapy Systems and treatment sessions to various customers. While the Company is still analyzing the impact of ASU 2014-09 on its financial statements and disclosures, it currently anticipates no significant changes to its revenue recognition practices as a result of the adoption of Topic 606. However, the Company currently expects the adoption of Topic 606 to change the accounting treatment for sales commissions and is analyzing the impact such change will have on its financial statements and disclosures. The Company historically expensed sales commissions as incurred. In addition, the new standard will require changes to the Company’s processes and controls to support additional disclosures, and the Company is in the process of identifying and designing such changes to processes and controls to ensure readiness.

8


 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with guidance regarding the accounting for and disclosure of leases. The update requires lessees to recognize all leases, including operating leases, with a term greater than 12 months on the balance sheet. This update also requires lessees and lessors to disclose key information about their leasing transactions. This guidance will be effective for public companies for annual and interim periods beginning after December 15, 2018. For all other entities, including emerging growth companies, this standard will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the effect that this guidance will have on its financial statements and related disclosures. The Company expects the implementation of this standard to have an impact on its financial statements and related disclosures as its aggregate future minimum lease payments under its current non-cancelable off lease were $1.3 million as of September 30, 2018, with an expiration date in 2021. The Company anticipates recognition on its balance sheet of an additional asset and corresponding liability related to this office lease. The Company is currently evaluating the impact the new standard may have on other types of leasing arrangements.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): “Improvements to Nonemployee Share-Based Payment Accounting,” which largely aligns the accounting for share-based payment awards issued to nonemployees with the accounting for share-based payment awards issued to employees. Under previous GAAP, the accounting for nonemployee share-based payments differed from that applied to employee awards, particularly with regard to the measurement date and the impact of performance conditions. Under the new guidance, (i) equity-classified share-based payment awards issued to nonemployees will be measured at the grant date, instead of the previous requirement to remeasure the awards through the performance completion date, (ii) for performance conditions, compensation cost associated with the award will be recognized when the achievement of the performance condition is probable, rather than upon achievement of the performance condition, and (iii) the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company currently has no outstanding nonemployee share-based payment awards for which there is unrecognized compensation expense and therefore does not currently expect the adoption of the new guidance to have an effect on its financial statements.

5.

FAIR VALUE MEASUREMENT AND FINANCIAL INSTRUMENTS

The carrying values of cash equivalents, accounts receivable, prepaids and other current assets, and accounts payable on the Company’s balance sheets approximated their fair values as of September 30, 2018 and December 31, 2017 due to their short-term nature. The carrying values of the Company’s current credit facility approximated its fair value as of September 30, 2018 and December 31, 2017 due to its variable interest rate.

Certain of the Company’s financial instruments are measured at fair value using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

Level 1:

Inputs are quoted prices for identical instruments in active markets.

 

 

Level 2:

Inputs are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

 

Level 3:

Inputs are unobservable and reflect the Company’s own assumptions, based on the best information available, including the Company’s own data.

The following tables set forth the carrying amounts and fair values of the Company’s financial instruments as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Based on

 

 

 

Carrying

Amount

 

 

Fair Value

 

 

Quoted

Prices In

Active

Markets

(Level 1)

 

 

Significant

other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (cash equivalents)

 

$

86,605

 

 

$

86,605

 

 

$

86,605

 

 

$

-

 

 

$

-

 

9


 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Based on

 

 

 

Carrying

Amount

 

 

Fair Value

 

 

Quoted

Prices In

Active

Markets

(Level 1)

 

 

Significant

other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (cash equivalents)

 

$

11,149

 

 

$

11,149

 

 

$

11,149

 

 

$

-

 

 

$

-

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock warrant liability

 

$

478

 

 

$

478

 

 

$

-

 

 

$

-

 

 

$

478

 

 

The fair value of the convertible preferred stock warrant liability was estimated using the Black-Scholes option pricing model and the following inputs and assumptions as of July 2, 2018 and December 31, 2017:

 

 

 

July 2, 2018

 

 

December 31, 2017

 

 

 

Series E

 

 

Series F

 

 

Series E

 

 

Series F

 

Estimated fair value of convertible preferred stock

 

$

26.41

 

 

$

26.41

 

 

$

9.57

 

 

$

11.01

 

Exercise price

 

$

19.55

 

 

$

9.73

 

 

$

19.55

 

 

$

9.73

 

Remaining term (in years)

 

4.5

 

 

2.6 - 6.5

 

 

5.0

 

 

3.1 - 7.0

 

Risk-free interest rate

 

2.7%

 

 

2.6% - 2.8%

 

 

2.2%

 

 

2.0% - 2.3%

 

Expected volatility

 

43%

 

 

43%

 

 

43%

 

 

43% - 44%

 

Dividend yield

 

0%

 

 

0%

 

 

0%

 

 

0%

 

 

The following table presents the changes in Level 3 instruments measured on a recurring basis for the nine months ended September 30, 2018 (in thousands):

 

Balance at December 31, 2017

 

$

478

 

Change in fair value

 

 

1,396

 

Reclassification to additional paid in capital

 

 

(1,874

)

Balance at September 30, 2018

 

$

-

 

 

6.

ACCOUNTS RECEIVABLE

The following table presents the composition of accounts receivable, net as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Gross accounts receivable - trade

 

$

5,742

 

 

$

4,684

 

Less: Allowances for doubtful accounts

 

 

(459

)

 

 

(417

)

Accounts receivable, net

 

$

5,283

 

 

$

4,267

 

 

7.

PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE

The following table presents the composition of property and equipment, net as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Laboratory equipment

 

$

150

 

 

$

150

 

Office equipment

 

 

493

 

 

 

487

 

Computer equipment and software

 

 

937

 

 

 

680

 

Manufacturing equipment

 

 

273

 

 

 

273

 

Leasehold improvements

 

 

172

 

 

 

153

 

Rental equipment

 

 

1,293

 

 

 

1,447

 

Property and equipment, gross

 

 

3,318

 

 

 

3,190

 

Less: Accumulated depreciation

 

 

(1,975

)

 

 

(1,831

)

Property and equipment, net

 

$

1,343

 

 

$

1,359

 

 

10


 

As of September 30, 2018 and December 31, 2017, the Company had capitalized software costs, net of $0.7 million and $0.4 million, respectively, which are included in “Other assets” on the balance sheet.

 

Depreciation and amortization expense was $0.2 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively, and $0.7 million and $0.5 million for the nine months ended September 30, 2018 and 2017, respectively.

8.

ACCRUED EXPENSES

The following table presents the composition of accrued expenses as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Compensation and related benefits

 

$

3,402

 

 

$

4,465

 

Consulting and professional fees

 

 

833

 

 

 

461

 

Research and development expenses

 

 

209

 

 

 

497

 

Sales and marketing expenses

 

 

148

 

 

 

620

 

Warranty

 

 

650

 

 

 

570

 

Sales tax payable

 

 

376

 

 

 

322

 

Interest payable

 

 

237

 

 

 

188

 

Other

 

 

528

 

 

 

388

 

Accrued expenses

 

$

6,383

 

 

$

7,511

 

 

9.

DEBT

The following table presents the composition of debt as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Outstanding principal

 

$

30,000

 

 

$

30,000

 

Accrued final payment fees

 

 

1,377

 

 

 

940

 

Less debt discounts

 

 

(1,179

)

 

 

(1,384

)

Total long-term debt, net

 

 

30,198

 

 

 

29,556

 

Less current portion of long-term debt

 

 

(5,000

)

 

 

-

 

Long-term debt, net

 

$

25,198

 

 

$

29,556

 

 

For the three months ended September 30, 2018, the Company recognized interest expense of $0.9 million, of which $0.7 million was cash and $0.2 million was non-cash interest expense related to the amortization of deferred debt issuance costs and accrual of final payment fees. For the three months ended September 30, 2017, the Company recognized interest expense of $0.8 million, of which $0.5 million was cash and $0.3 million was non-cash interest expense related to the amortization of deferred debt issuance costs and accrual of final payment fees.

For the nine months ended September 30, 2018, the Company recognized interest expense of $2.7 million, of which $2.1 million was cash and $0.6 million was non-cash interest expense related to the amortization of deferred debt issuance costs and accrual of final payment fees. For the nine months ended September 30, 2017, the Company recognized interest expense of $2.1 million, of which $1.6 million was cash and $0.5 million was non-cash interest expense related to the amortization of deferred debt issuance costs and accrual of final payment fees.

Current Credit Facility

In March 2017, the Company entered into a new loan and security agreement with Oxford Finance LLC, or Oxford, for a credit facility that replaced its previous $25.0 million credit facility with Oxford and which allowed it to borrow up to $35.0 million in three tranches of term loans: a Term A Loan in the amount of $25.0 million, which was drawn down immediately upon closing in March 2017, a Term B Loan in the amount of $5.0 million, which was drawn down in December 2017, and a Term C Loan in the amount of $5.0 million, which became available to the Company upon the achievement of $45.0 million of trailing twelve month revenues during the second quarter of 2018. Upon achieving the required revenue milestone, the Company had 60 days to notify Oxford if it elected to borrow the Term C Loan. As a result of completing its IPO on July 2, 2018 and receiving the net proceeds therefrom, the Company elected not to borrow the additional $5.0 million, and it is no longer available to the Company. Each term loan accrues interest from the date of borrowing through the date of repayment at a floating per annum rate of interest, which resets monthly and is equal to the greater of (a) 8.15% or (b) the 30 day U.S. LIBOR on the last business day of the month plus 7.38%. The Company was also required to issue to Oxford at the date of each borrowing warrants to purchase its Series F or later series of convertible preferred stock with a seven year term and in an amount equal to 3.95% of the first $5.0 million of each tranche borrowed. The credit facility matures and all amounts borrowed thereunder are due on March 1, 2022. As of September 30, 2018, the Company had borrowed and had outstanding an aggregate of $30.0 million of principal under the credit facility.

11


 

The Term A Loan features an interest-only period through March 2019, during which time the Company is required to make monthly interest payments, after which time the Company is required to make monthly payments of principal and interest based on a 36-month amortization schedule. However, upon the achievement of $45.0 million of revenues during fiscal 2018, the interest-only period can be extended for an additional 12 months through March 2020 and the amortization period then becomes 24 months. In connection with the drawdown of the Term A Loan, the Company issued to Oxford a warrant to purchase shares of its Series F convertible preferred stock. This convertible preferred stock warrant converted into a warrant to purchase 20,303 shares of the Company’s common stock at an exercise price of $9.73 per share. The warrant will expire in March 2024.

The Term B Loan features an interest-only period through March 2019, during which time the Company is required to make monthly interest payments, after which time the Company is required to make monthly payments of principal and interest based on a 36-month amortization schedule. However, upon the achievement of $45.0 million of revenues during fiscal 2018, the interest-only period can be extended for an additional 12 months through March 2020 and the amortization period then becomes 24 months. In connection with the drawdown of the Term B Loan, the Company issued to Oxford a warrant to purchase shares of its Series F convertible preferred stock. This convertible preferred stock warrant converted into a warrant to purchase 20,303 shares of the Company’s common stock at an exercise price of $9.73 per share. The warrant will expire in December 2024.

In addition to principal and interest payments due under the credit facility, the Company is required to make final payment fees to Oxford due upon the earlier of prepayment or maturity of each tranche, which are equal to 8% and 7% of the principal amounts of the Term A and Term B Loans, respectively, except that if the interest-only periods on the Term A and Term B Loans are extended then the final payment fees increase to 8.5% and 7.5% of the principal amounts of the Term A and Term B Loans, respectively. The Company accrues the estimated final payment fees using the effective interest rate, with a charge to non-cash interest expense, over the term of borrowing for each tranche. As of both September 30, 2018 and December 31, 2017, the effective interest rates for the Term A and Term B Loans were 10.7% and 11.6%, respectively. If the Company prepays its term loans prior to their respective scheduled maturities, it will also be required to make prepayment fees to Oxford equal to 3% if prepaid on or before the first anniversary of funding, 2% if prepaid after the first and on or before the second anniversary of funding, or 1% if prepaid after the second anniversary of funding of the principal amounts borrowed.

The Company’s obligations under the credit facility are secured by a first priority security interest in substantially all of its assets, other than its intellectual property. The Company has agreed not to pledge or otherwise encumber any of its intellectual property. The loan and security agreement related to the credit facility includes a financial maintenance covenant that requires the Company to achieve at least 75% of its trailing 12-month forecasted revenues, as measured each month in accordance with a forecast that the Company provided to Oxford upon signing the agreement and future forecasts that the Company is required to deliver to Oxford each year for the life of the credit facility, as well as customary affirmative and negative covenants. The Company was in compliance with all of the covenants under its credit facility as of September 30, 2018.

The loan and security agreement related to the credit facility contains events of default, including, without limitation, events of default upon: (i) failure to make payment pursuant to the terms of the agreement; (ii) violation of covenants; (iii) material adverse changes to the Company’s business; (iv) attachment or levy on the Company’s assets or judicial restraint on its business; (v) insolvency; (vi) significant judgments, orders or decrees for payments by the Company not covered by insurance; (vii) incorrectness of representations and warranties; (viii) incurrence of subordinated debt; (ix) revocation of governmental approvals necessary for the Company to conduct its business; and (x) failure by the Company to maintain a valid and perfected lien on the collateral securing the borrowing.

Based on a 36-month amortization of the outstanding principal amounts of the Term A and Term B Loans beginning on April 1, 2019 as discussed above, the following table sets forth by year the Company’s required future principal payments (in thousands):

 

Year:

 

Principal

Payments

 

2018

 

$

-

 

2019

 

 

7,500

 

2020

 

 

10,000

 

2021

 

 

10,000

 

2022

 

 

2,500

 

Total principal payments

 

$

30,000

 

 

12


 

Previous $25.0 Million Credit Facility

Prior to March 2017, the Company had a $25.0 million credit facility in place with Oxford, which it entered into in February 2014 and which allowed it to borrow up to $25.0 million in three tranches of term loans: a Term A Loan in the amount of $15.0 million, a Term B Loan in the amount of $5.0 million and a Term C Loan in the amount of $5.0 million, which was never drawn down. Each term loan accrued interest at per annum rates ranging from 8.5% to 8.9%. This facility featured an interest-only period on all tranches through March 2017, and the Company was also required to issue convertible preferred stock warrants to Oxford at the time of borrowing of each tranche. These convertible preferred stock warrants converted into common stock warrants immediately prior to the closing of the Company’s IPO on July 2, 2018.

In addition to principal and interest payments due under the previous $25.0 million credit facility, the Company was required to make final payment fees to Oxford upon the earlier of prepayment or maturity and equal to 8.5% and 4.7% of the principal amounts of the Term A and Term B Loans, respectively. The Company accrued final payment fees using the effective interest rate, with a charge to non-cash interest expense, over the term of borrowing and until its entry into the current credit facility in March 2017, at which time the Company paid Oxford $1.0 million in satisfaction of all final payment fee liabilities due under the prior credit facility.

Management evaluated whether the current credit facility entered into in March 2017 represented a debt modification or extinguishment in accordance with ASC 470-50, Debt—Modifications and Extinguishments. Upon determining that the change in cash flows between the previous and current credit facilities was not greater than 10%, management accounted for the transaction as a debt modification. As of March 2017, the unamortized balance of deferred debt issuance costs incurred in connection with the $25.0 million credit facility, and certain additional deferred debt issuance costs incurred in connection with entry into the current credit facility, are being amortized to interest expense through March 2022 utilizing the effective interest method.

10.

CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

Initial Public Offering

On July 2, 2018, the Company closed its IPO, in which the Company issued and sold 6.325 million shares of its common stock, which included shares sold pursuant to an option granted to the underwriters to purchase additional shares, at a public offering price of $17.00 per share. The Company received net proceeds of $96.5 million after deducting underwriting discounts, commissions, and other offering expenses paid by the Company. In addition, immediately prior to the closing of the IPO on July 2, 2018, (i) all of the Company’s outstanding shares of convertible preferred stock converted into an aggregate of 11.0 million shares of common stock; (ii) all of the Company’s outstanding warrants to purchase convertible preferred stock converted into warrants to purchase common stock; and (iii) the Company filed an amended and restated certificate of incorporation to, among other things, decrease the number of shares of common stock, $0.01 par value per share, authorized for issuance to 200.0 million and to authorize the board of directors to issue up to 10.0 million shares of “blank check” preferred stock, $0.01 par value per share.

Common Stock

The Company’s amended and restated certificate of incorporation as of September 30, 2018 authorized the issuance of 200.0 million shares of common stock, $0.01 par value per share, of which 17.6 million were issued and outstanding as of September 30, 2018.

Prior to the IPO, the Company was required to reserve and keep available out of its authorized but unissued shares of common stock a number of shares sufficient to effect the conversion into common stock of all outstanding shares of convertible preferred stock and convertible preferred stock warrants, convertible preferred stock or common stock warrants issuable upon borrowing the Term C Loan under the current credit facility, stock options granted and shares available for grant under its stock incentive plan.

13


 

The following table summarizes the total number of shares of the Company’s common stock issued and reserved for issuance as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Shares of common stock issued

 

 

17,579

 

 

 

231

 

Shares of common stock reserved for issuance for:

 

 

 

 

 

 

 

 

Convertible preferred stock outstanding:

 

 

 

 

 

 

 

 

Series A-1

 

 

-

 

 

 

166

 

Series A-2 (1)

 

 

-

 

 

 

898

 

Series B (2)

 

 

-

 

 

 

697

 

Series C (3)

 

 

-

 

 

 

1,063

 

Series D

 

 

-

 

 

 

1,705

 

Series E

 

 

-

 

 

 

1,534

 

Series F

 

 

-

 

 

 

3,531

 

Series G

 

 

-

 

 

 

1,400

 

Convertible preferred stock warrants outstanding:

 

 

 

 

 

 

 

 

Series E

 

 

-

 

 

 

14

 

Series F

 

 

-

 

 

 

91

 

Warrants issuable upon Term C Loan borrowing

 

 

-

 

 

 

20

 

Common stock warrants outstanding

 

 

105

 

 

 

-

 

Stock options outstanding

 

 

2,873

 

 

 

2,444

 

Restricted stock units outstanding

 

 

38

 

 

 

-

 

Shares available for grant under stock incentive plan

 

 

1,323

 

 

 

246

 

Shares available for sale under employee stock purchase plan

 

 

244

 

 

 

-

 

Total shares of common stock issued and

   reserved for issuance

 

 

22,162

 

 

 

14,040

 

___________________________

(1)

Shares of Series A-2 convertible preferred stock converted to common stock at a ratio of 0.03539 shares of common stock per share of Series A-2 convertible preferred stock.

(2)

Shares of Series B convertible preferred stock converted to common stock at a ratio of 0.04103 shares of common stock per share of Series B convertible preferred stock.

(3)

Shares of Series C convertible preferred stock converted to common stock at a ratio of 0.05071 shares of common stock per share of Series C convertible preferred stock.

 

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Holders of common stock are entitled to receive any dividends that the Company’s board of directors may declare out of funds legally available for that purpose on a non-cumulative basis. The Company has never paid, and for the foreseeable future does not expect to pay, a dividend on its common stock.

Immediately prior to the closing of the Company’s IPO on July 2, 2018, all of the Company’s outstanding shares of convertible preferred stock converted into an aggregate of 11.0 million shares of common stock, resulting in the elimination of the Company’s outstanding liquidation preferences.

Common Stock Warrants

The following table summarizes the Company’s outstanding common stock warrants as of September 30, 2018:

 

Warrants

Outstanding

(in thousands)

 

 

Exercise

Price

 

 

Expiration

Date

 

14

 

 

$

19.55

 

 

Dec-2022

 

30

 

 

$

9.73

 

 

Feb-2021

 

20

 

 

$

9.73

 

 

Aug-2023

 

20

 

 

$

9.73

 

 

Mar-2024

 

21

 

 

$

9.73

 

 

Dec-2024

 

105

 

 

 

 

 

 

 

 

14


 

11.

LOSS PER SHARE

The Company’s basic loss per common share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. The Company’s restricted stock awards (non-vested shares) are issued and outstanding at the time of grant but are excluded from the Company’s computation of weighted-average shares outstanding in the determination of basic loss per share until vesting occurs.

A net loss cannot be diluted, so when the Company is in a net loss position, basic and diluted loss per common share are the same. If in the future the Company achieves profitability, the denominator of a diluted earnings per common share calculation will include both the weighted-average number of shares outstanding and the number of common stock equivalents, if the inclusion of such common stock equivalents would be dilutive. Dilutive common stock equivalents potentially include warrants, stock options and non-vested restricted stock awards and units using the treasury stock method, along with the effect, if any, from the potential conversion of outstanding securities, such as convertible preferred stock.

The following potentially dilutive securities outstanding as of September 30, 2018 and 2017 have been excluded from the denominator of the diluted loss per share of common stock outstanding calculation (in thousands):

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Stock options

 

 

2,873

 

 

 

2,305

 

Non-vested restricted stock awards

 

 

7

 

 

 

15

 

Non-vested restricted stock units

 

 

38

 

 

 

-

 

Convertible preferred stock warrants

 

 

-

 

 

 

85

 

Common stock warrants

 

 

105

 

 

 

-

 

Shares of convertible preferred stock “as-converted”

 

 

-

 

 

 

10,994

 

 

12.

SHARE-BASED COMPENSATION

The amount of share-based compensation expense recognized by the Company by location in its statements of operations for the three and nine months ended September 30, 2018 and 2017 is as follows (in thousands):

 

 

 

Three Months ended September 30,

 

 

Nine Months ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of revenues

 

$

6

 

 

$

5

 

 

$

15

 

 

$

12

 

Sales and marketing

 

 

709

 

 

 

38

 

 

 

828

 

 

 

94

 

General and administrative

 

 

273

 

 

 

40

 

 

 

415

 

 

 

148

 

Research and development

 

 

40

 

 

 

14

 

 

 

106

 

 

 

41

 

Total

 

$

1,028

 

 

$

97

 

 

$

1,364

 

 

$

295

 

2018 Equity Incentive Plan

In June 2018, the Company adopted the 2018 Equity Incentive Plan, or 2018 Plan, which authorized the issuance of up to 1.4 million shares in the form of restricted stock, stock appreciation rights and stock options to the Company’s directors, employees and consultants. The amount and terms of grants are determined by the Company’s board of directors. To date, the Company has granted restricted stock units to one member of senior management and to an independent member of its board of directors as compensation for board service. All stock options granted to date have had exercise prices equal to the fair value, as determined by the closing price as reported by the Nasdaq Global Market, of the underlying common stock on the date of grant. The contractual term of stock options is up to 10 years, and stock options are exercisable in cash or as otherwise determined by the board of directors. Generally, stock options vest 25% upon the first anniversary of the date of grant and the remainder ratably monthly thereafter for 36 months. As of September 30, 2018, there were 1.3 million shares available for future issuance under the 2018 plan.  

2003 Stock Incentive Plan

In April 2003 (and as subsequently amended), the Company adopted the 2003 Stock Incentive Plan, or 2003 Plan, which authorized the issuance of up to 3.1 million shares in the form of restricted stock, stock appreciation rights and stock options to the Company’s directors, employees and consultants. The amount and terms of grants are determined by the Company’s board of directors. To date, the Company has granted restricted stock awards only to an independent member of its board of directors and only as compensation for board service. All stock options granted to date have had exercise prices equal to the estimated fair value, as determined by the board of directors, of the underlying common stock on the date of the grant. The contractual term of stock options is up to 10 years, and stock options are exercisable in cash or as otherwise determined by the board of directors. Generally, stock options vest 25% upon the first anniversary of the date of grant and the remainder ratably monthly thereafter for 36 months. As of September 30, 2018, there were no shares available for future issuance under the 2003 Plan. As of the closing of the Company’s IPO, all shares available for issuance under the 2003 Plan were carried over to the newly adopted 2018 Stock Incentive Plan, or 2018 Plan.

15


 

Stock Options

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2018:

 

 

 

Number of

Shares under

Option

(in thousands)

 

 

Weighted-

average

Exercise Price

per Option

 

 

Weighted-

average

Remaining

Contractual

Life (in years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding at December 31, 2017

 

 

2,444

 

 

$

2.39

 

 

 

 

 

 

 

 

 

Granted

 

 

535

 

 

$

7.19

 

 

 

 

 

 

 

 

 

Exercised

 

 

(29

)

 

$

1.58

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(77

)

 

$

3.13

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2018

 

 

2,873

 

 

$

3.27

 

 

 

7.2

 

 

$

82,739

 

Exercisable at September 30, 2018

 

 

1,642

 

 

$

2.23

 

 

 

5.9

 

 

$

48,967

 

Vested and expected to vest at September 30, 2018

 

 

2,873

 

 

$

3.27

 

 

 

7.2

 

 

$

82,739

 

 

The Company recognized share-based compensation expense related to stock options of $1.0 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively, and $1.3 million and $0.2 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, there was $2.9 million of total unrecognized compensation cost related to non-vested stock options which the Company expects to recognize over a weighted-average period of 3.2 years. The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2018 was estimated at $4.38 per option. The total intrinsic value of stock options exercised during the nine months ended September 30, 2018 was $0.1 million.

For the nine months ended September 30, 2018, the grant-date fair value of stock options was estimated at the time of grant using the following weighted-average inputs and assumptions in the Black-Scholes option pricing model:

 

Estimated fair value of common stock

 

$

7.19

 

Exercise price

 

$

7.19

 

Expected term (in years)

 

 

6.0

 

Risk-free interest rate

 

 

2.7

%

Expected volatility

 

 

65.6

%

Dividend yield

 

 

0

%

 

In April 2018, the Company’s board of directors granted options to purchase 54,794 shares of common stock to the members of the board. These options have an exercise price of $5.22 and vest in 12 equal monthly installments beginning in March 2018; however, the entire grant was subject to forfeiture if an initial public offering of the Company’s common stock did not occur by December 31, 2018. The estimated grant-date fair value of the options awards was $0.2 million. Upon the closing of the Company’s IPO on July 2, 2018, the Company recognized the fair value of the vested portion of the awards as share-based compensation expense, with the unvested portion to be recognized as share-based compensation expense ratably over the remaining service period.

Restricted Stock Awards and Restricted Stock Units

The following table summarizes the Company’s restricted stock award and restricted stock unit activity for the nine months ended September 30, 2018:

 

 

 

Non-vested

Restricted

Stock Awards

(in thousands)

 

 

Weighted-

average

Grant-date

Fair  Value

 

 

Non-vested

Restricted

Stock Units

(in thousands)

 

 

Weighted-

average

Grant-date

Fair  Value

 

Non-vested at December 31, 2017

 

 

16

 

 

$

2.32

 

 

 

-

 

 

$

-

 

Granted

 

 

-

 

 

$

-

 

 

 

38

 

 

$

25.92

 

Vested

 

 

(9

)

 

$

2.32

 

 

 

-

 

 

$

-

 

Non-vested at September 30, 2018

 

 

7

 

 

$

2.32

 

 

 

38

 

 

$

25.92

 

 

The Company recognized approximately $0.1 million in share-based compensation expense related to restricted stock awards and restricted stock units during the three and nine months ended September 30, 2018 and 2017. As of September 30, 2018, there was $0.9 million of unrecognized compensation cost related to non-vested restricted stock awards and restricted stock units, which the Company expects to recognize over a weighted-average period of 3.6 years. The total fair value at the vesting date of restricted stock awards and restricted stock units vested during the nine months ended September 30, 2018 was $0.2 million.

16


 

13.

EMPLOYEE BENEFIT PLANS

401(k) Defined Contribution Plan

The Company maintains a 401(k) defined contribution retirement plan which covers all of its employees. Employees are eligible to participate on the first of the month following their date of hire. Under the 401(k) plan, participating employees may defer up to 100% of their pre-tax salary but not more than statutory limits. There is currently no employer matching of employee contributions and employee contributions vest immediately.

2018 Employee Stock Purchase Plan

In July 2018, the Company adopted the 2018 Employee Stock Purchase Plan, or 2018 ESPP, with an initial 0.2 million share reserve, subject to automatic annual increases on January 1st of each year for a period of up to ten years, as defined in the plan document. The purpose of the 2018 ESPP is to enhance employee interest in the success and progress of the Company by encouraging employee ownership of common stock of the Company. The 2018 ESPP provides the opportunity to purchase the Company’s common stock at a 15% discount to the market price through payroll deductions or lump sum cash investments. As of September 30, 2018, the Company had not yet approved any offering under the 2018 ESPP.

14.

COMMITMENTS AND CONTINGENCIES

Executive Employment Agreements

The Company has entered into an employment agreement and offer letters with certain key executives, providing for compensation and severance in certain circumstances, as defined in the agreements.

Leases

In January 2013, the Company entered into a 93-month lease for its headquarters office and warehouse. The Company also rents certain office equipment. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not yet paid. Landlord allowances for tenant improvements are deferred and recognized as a reduction to rent expense on a straight-line basis and over the remaining lease term.

Legal Matters

The Company is subject from time to time to various claims and legal actions arising during the ordinary course of its business. Management believes that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on the Company’s results of operations, financial condition, or cash flows.

 

15.

GEOGRAPHICAL SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company currently operates in one business segment as it is managed and operated as one business. A single management team that reports to the chief operating decision maker comprehensively manages the entire business. The Company does not operate any material separate lines of business or separate business entities with respect to its products or product development.

The following geographic data includes revenue generated from the Company’s third-party distributors. The Company’s revenue was generated in the following geographic regions for the years indicated (in thousands):

 

 

 

Revenues by Geography

 

 

 

Three Months ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Amount

 

 

% of

Revenues

 

 

Amount

 

 

% of

Revenues

 

United States

 

$

13,518

 

 

 

98

%

 

$

10,398

 

 

 

99

%

International

 

 

219

 

 

 

2

%

 

 

93

 

 

 

1

%

Total revenues

 

$

13,737

 

 

 

100

%

 

$

10,491

 

 

 

100

%

 

 

 

Revenues by Geography

 

 

 

Nine Months ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Amount

 

 

% of

Revenues

 

 

Amount

 

 

% of

Revenues

 

United States

 

$

36,388

 

 

 

98

%

 

$

28,017

 

 

 

99

%

International

 

 

753

 

 

 

2

%

 

 

308

 

 

 

1

%

Total revenues

 

$

37,141

 

 

 

100

%

 

$

28,325

 

 

 

100

%

 

17


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with our unaudited interim financial statements and related notes thereto included elsewhere herein. In addition to historical financial information, some of the information contained in the following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts, including statements regarding our future results of operations and financial position, business strategy, current and prospective products, product approvals, research and development costs, current and prospective collaborations, timing and likelihood of success, plans and objectives of management for future operations and future results of current and anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our IPO prospectus filed with the Securities and Exchange Commission, or SEC, on June 29, 2018. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Overview

We are a commercial stage medical technology company focused on designing, developing and marketing products that improve the quality of life for patients who suffer from psychiatric disorders. Our first commercial product, the NeuroStar Advanced Therapy System, is a non-invasive and non-systemic office-based treatment that uses transcranial magnetic stimulation, or TMS, to create a pulsed, MRI-strength magnetic field that induces electrical currents designed to stimulate specific areas of the brain associated with mood. The system is cleared by the United States Food and Drug Administration, or FDA, to treat adult patients with major depressive disorder, or MDD, that have failed to achieve satisfactory improvement from prior antidepressant medication in the current MDD episode. NeuroStar Advanced Therapy is safe, clinically effective, reproducible and precise and we believe is supported by the largest clinical data set of any competing TMS system. We believe we are the market leader in TMS therapy based on our U.S. installed base of 858 active NeuroStar Advanced Therapy Systems in approximately 679 psychiatrist offices as of September 30, 2018 and the estimated 58,000 patients treated with approximately 2.1 million of our treatment sessions through such date. We generated revenues of $13.7 million and $37.1 million for the three and nine months ended September 30, 2018, respectively.

We designed the NeuroStar Advanced Therapy System as a non-invasive therapeutic alternative to treat patients who suffer from MDD and to address many of the key limitations of existing treatment options. We generate revenues from initial capital sales of our systems, recurring treatment sessions and service and repair and extended warranty contracts. We derive the majority of our revenues from recurring treatment sessions. For the three months ended September 30, 2018, revenues from sales of our treatment sessions and NeuroStar Advanced Therapy Systems represented 68% and 29% of our U.S. revenues, respectively. For the nine months ended September 30, 2018, revenues from sales of our treatment sessions and NeuroStar Advanced Therapy Systems represented 70% and 27% of our U.S. revenues, respectively.

We currently sell our NeuroStar Advanced Therapy System and recurring treatment sessions in the United States through our direct sales and customer support team, which was comprised of 141 people as of September 30, 2018. Our sales force primarily targets 15,100 psychiatrists at 3,600 high-decile psychiatric practices that we estimate, based on data from Symphony Health and our own internal estimates, treat approximately 33% of the total MDD patients in the United States who meet our labeled indication and are insured. We expect to continue to expand our direct sales and customer support team to further penetrate the market by demonstrating the benefits of our NeuroStar Advanced Therapy to psychiatrists and their MDD patients. Some of our customers have and may purchase more than one NeuroStar Advanced Therapy System. Based on our commercial data, we believe psychiatrists can recoup their initial capital investment in our system by providing a standard course of treatment to approximately 12 patients. We believe psychiatrists can generate approximately $7,500 to $10,000 of revenue per patient for a standard course of treatment, which may provide meaningful incremental income to their practices. We have a diverse customer base of psychiatrists in group psychiatric practices in the United States. No single customer accounted for more than 10% of our revenues for three and nine months ended September 30, 2018. Patients are reimbursed by Medicare and the vast majority of commercial payors in the United States for treatment sessions utilizing our NeuroStar Advanced Therapy System.

18


 

We market our products in a few select markets outside the United States through independent distributors. International revenues represented 2% of our total revenues for both the three and nine months ended September 30, 2018, respectively. In October 2017, we entered into an exclusive distribution agreement with Teijin Pharma Limited, or Teijin, for the distribution of our NeuroStar Advanced Therapy Systems and treatment sessions to customers who will treat patients with MDD in Japan. We received regulatory approval for our system in Japan in September 2017, and we plan to work with Teijin to obtain reimbursement for NeuroStar Advanced Therapy in Japan in 2018. We expect our international revenues to increase as a percentage of our total revenues as we grow our presence in Japan.

Our research and development efforts are focused on the following: hardware and software product developments and enhancements of our NeuroStar Advanced Therapy System and clinical development relating to additional indications, which may include bipolar depression and post-traumatic stress disorder. We outsource the manufacture of components of our NeuroStar Advanced Therapy Systems that are produced to our specifications, and individual components are either shipped directly from our third-party contract manufacturers to our customers or consolidated into pallets at our Malvern, Pennsylvania facility prior to shipment. Final installation of these systems occurs at the customer site.

Our total revenues increased by $3.2 million, or 31%, from $10.5 million for the three months ended September 30, 2017 to $13.7 million for the three months ended September 30, 2018 and by $8.8 million, or 31%, from $28.3 million for the nine months ended September 30, 2017 to $37.1 million for the nine months ended September 30, 2018. For the three and nine months ended September 30, 2018, our U.S. revenues were $13.5 million and $36.4 million, respectively, compared to $10.4 million and $28.0 million for the three and nine months ended September 30, 2017, respectively, which represent increases of 30% and 30% period over period. Due to the seasonality of our sales, during the first quarter of each year, we typically experience reduced revenues compared to our other quarters. We incurred net losses of $5.0 million and $18.0 million for the three and nine months ended September 30, 2018, respectively, compared to net losses of $3.8 million and $11.1 million for the three and nine months ended September 30, 2017, respectively. We expect to continue to incur losses for the next several years as we expand our commercial organization to support our planned sales growth and while continuing to invest in our pipeline indications. As of September 30, 2018, we had an accumulated deficit of $214.9 million.

On July 2, 2018, we closed our initial public offering, or IPO, in which we issued and sold 6.325 million shares of our common stock, which included shares sold pursuant to an option granted to the underwriters to purchase additional shares, at a public offering price of $17.00 per share. We received net proceeds of $96.5 million after deducting underwriting discounts, commissions and other offering expenses paid by us. Our common stock is listed on the Nasdaq Global Market under the trading symbol “STIM.” Our primary sources of capital to date have been from our IPO, private placements of our convertible preferred securities, borrowings under our credit facilities and revenues from sales of our products.

Components of Our Results of Operations

Revenues

To date, we have generated revenues primarily from the capital portion of our business and related sales and rentals of the NeuroStar Advanced Therapy System and the recurring revenues from our sale of treatment sessions in the United States.

NeuroStar Advanced Therapy System Revenues.    NeuroStar Advanced Therapy System revenues consist primarily of sales or rentals of a capital component, including upgrades to the equipment attributable to the initial sale of the system. NeuroStar Advanced Therapy Systems can be purchased outright or on a rent-to-own basis by certain customers. We had an installed base of 858 and 725 active NeuroStar Advanced Therapy Systems as of September 30, 2018 and 2017, respectively.

Treatment Session Revenues.    Treatment session revenues primarily include sales of NeuroStar Treatment Sessions and SenStar treatment links. The NeuroStar Treatment Sessions are access codes that are delivered electronically in the United States. The SenStar treatment links are disposable units containing single-use access codes that are sold and used outside the United States. Access codes are purchased separately by our customers, primarily on an as-needed basis, and are required by the NeuroStar Advanced Therapy System in order to deliver treatment sessions.

Other Revenues.    Other revenues are derived primarily from service and repair and extended warranty contracts with our existing customers.

We refer you to the section titled “Critical Accounting Policies and Use of Estimates—Revenue Recognition” appearing in our IPO prospectus filed with the SEC on June 29, 2018 for additional information regarding how we account for revenues.

19


 

Cost of Revenues and Gross Margin

Cost of revenues primarily consists of the costs of components and products purchased from our third-party contract manufacturers of our NeuroStar Advanced Therapy Systems as well as the cost of treatment packs for individual treatment sessions. We use third-party contract manufacturing partners to produce the components for and assemble the completed NeuroStar Advanced Therapy Systems. Cost of revenues also includes costs related to personnel, royalties, warranty, shipping, and our operations and field service departments. We expect our cost of revenues to increase in absolute dollars as and to the extent our revenues grow.

Our gross profit is calculated by subtracting our cost of revenues from our revenues. We calculate our gross margin as our gross profit divided by our revenues. Our gross margin has been and will continue to be affected by a variety of factors, primarily product sales mix, pricing and third-party contract manufacturing costs. Our gross margins on revenues from sales of NeuroStar Advanced Therapy Systems are lower than our gross margins on revenues from sales of treatment sessions and, as a result, the sales mix between NeuroStar Advanced Therapy Systems and treatment sessions can affect the gross margin in any reporting period.

Sales and Marketing Expenses

Sales and marketing expenses consist of market research and commercial activities related to the sale of our NeuroStar Advanced Therapy Systems and treatment sessions and salaries and related benefits, sales commissions and share-based compensation for employees focused on these efforts. Other significant sales and marketing costs included conferences and trade shows, promotional and marketing activities, including direct and online marketing, practice support programs, television and radio media campaigns, travel and training expenses.

We anticipate a significant increase in headcount in our commercial organization and in expenses in executing on our growth initiatives as we continue to expand our business in the United States and internationally. As a result, we expect our sales and marketing expenses to continue to increase in absolute dollars.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel expenses, including salaries and related benefits, share-based compensation and travel expenses, for employees in executive, finance, information technology, legal and human resource functions. General and administrative expenses also include the cost of insurance, outside legal fees, accounting and other consulting services, audit fees from our independent registered public accounting firm, board of directors’ fees and other administrative costs, such as corporate facility costs, including rent, utilities, depreciation and maintenance not otherwise included in cost of revenues.

We anticipate that our general and administrative expenses will increase in absolute dollars because of an expanded infrastructure and an increased headcount. We anticipate higher corporate infrastructure costs including, but not limited to, accounting, legal, human resources, consulting and investor relations fees, listing fees on the Nasdaq Global Market, costs associated with SEC reporting and compliance, as well as increased director and officer insurance premiums, as a result of our current status as a public company.

Research and Development Expenses

Research and development expenses consist primarily of personnel expenses, including salaries and related benefits and share-based compensation for employees in clinical development, product development, regulatory and quality assurance functions, as well as expenses associated with outsourced professional scientific development services and costs of investigative sites and consultants that conduct our preclinical and clinical development programs. We typically use our employee, consultant and infrastructure resources across our research and development programs.

We plan to incur research and development expenses for the near future as we expect to continue our development of TMS Therapy for the treatment of additional patient populations and new indications, which may include bipolar depression, post-traumatic stress disorder and potential other clinical indications yet to be determined, as well as for various hardware and software development projects. As a result, we expect our research and development expenses to continue to increase in absolute dollars.

Interest Expense

Interest expense consists of cash interest payable under our credit facility and non-cash interest attributable to the accrual of final payment fees and the amortization of deferred financing costs related to our indebtedness.

Other Expense (Income), Net

Other expense (income), net consists primarily of the revaluation related to our convertible preferred stock warrants, which were accounted for as a liability  prior to their conversion into common stock warrants on July 2, 2018 and marked-to-market at each reporting period, as well as interest income earned on our money market account balances, and non-utilization fees paid to Oxford related to our decision not to borrow the Term C Loan. Upon the closing of our IPO on July 2, 2018, all of our outstanding convertible preferred stock warrants converted into warrants to acquire an aggregate of 0.1 million shares of our common stock, resulting in the reclassification of the convertible preferred stock warrant liability into additional paid-in capital.

20


 

Results of Operations

Comparison of the Three Months ended September 30, 2018 and 2017

 

 

 

Three Months ended

September 30,

 

 

Increase / (Decrease)

 

 

 

2018

 

 

2017

 

 

Dollars

 

 

Percentage

 

 

 

(in thousands, except percentages)

 

Revenues

 

$

13,737

 

 

$

10,491

 

 

$

3,246

 

 

 

31

%

Cost of revenues

 

 

3,034

 

 

 

2,636

 

 

 

398

 

 

 

15

%

Gross Profit

 

 

10,703

 

 

 

7,855

 

 

 

2,848

 

 

 

36

%

Gross Margin

 

 

78

%

 

 

75

%

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

9,672

 

 

 

6,566

 

 

 

3,106

 

 

 

47

%

General and administrative

 

 

3,238

 

 

 

2,256

 

 

 

982

 

 

 

44

%

Research and development

 

 

2,125

 

 

 

1,843

 

 

 

282

 

 

 

15

%

Total operating expenses

 

 

15,035

 

 

 

10,665

 

 

 

4,370

 

 

 

41

%

Loss from Operations

 

 

(4,332

)

 

 

(2,810

)

 

 

(1,522

)

 

 

-54

%

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

928

 

 

 

807

 

 

 

121

 

 

 

15

%

Other expense (income), net

 

 

(299

)

 

 

136

 

 

 

(435

)

 

 

320

%

Net Loss

 

$

(4,961

)

 

$

(3,753

)

 

$

(1,208

)

 

 

-32

%

 

 

 

Revenues by Geography

Three Months ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Amount

 

 

% of

Revenues

 

 

Amount

 

 

% of

Revenues

 

 

 

(in thousands, except percentages)

 

United States

 

$

13,518

 

 

 

98

%

 

$

10,398

 

 

 

99

%

International

 

 

219

 

 

 

2

%

 

 

93

 

 

 

1

%

Total revenues

 

$

13,737

 

 

 

100

%

 

$

10,491

 

 

 

100

%

 

 

 

U.S. Revenues by Product Category

Three Months ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Amount

 

 

% of

Revenues

 

 

Amount

 

 

% of

Revenues

 

 

 

(in thousands, except percentages)

 

NeuroStar Advanced Therapy System

 

$

3,908

 

 

 

29

%

 

$

2,829

 

 

 

27

%

Treatment sessions

 

 

9,218

 

 

 

68

%

 

 

7,229

 

 

 

70

%

Other

 

 

392

 

 

 

3

%

 

 

340

 

 

 

3

%

Total U.S. revenues

 

$

13,518

 

 

 

100

%

 

$

10,398

 

 

 

100

%

 

Revenues

Total revenues increased by $3.2 million, or 31%, from $10.5 million for the three months ended September 30, 2017 to $13.7 million for the three months ended September 30, 2018. Revenues in the United States increased by $3.1 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 due to higher unit sales of both NeuroStar Advanced Therapy Systems and treatment sessions. International revenues increased for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, primarily due to the recognition of deferred revenue related to the upfront and milestone payments received in the fourth quarter of 2017, both related to our distribution agreement with Teijin for Japan.

Revenues in the United States increased by $3.1 million, or 30%, from $10.4 million for the three months ended September 30, 2017 to $13.5 million for the three months ended September 30, 2018. NeuroStar Advanced Therapy System revenues in the United States grew by $1.1 million, or 38%, in the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The increase in U.S. NeuroStar revenue was primarily driven by higher capital revenue growth of 58% due to higher unit sales and a 1% increase in average selling prices, partially offset by lower upgrade, rent-to-own, and other related revenue. NeuroStar Advanced Therapy System revenues represented 29% and 27% of U.S. revenues for the three months ended September 30, 2018 and 2017, respectively. We believe the growth in NeuroStar Advanced Therapy System revenues between these two periods was the result of the efforts of our expanded commercial organization and increased marketing efforts. As of September 30, 2018, we had an installed base of 858 active systems in the United States, compared to 725 as of September 30, 2017.

21


 

Treatment session revenues in the United States represented 68% and 70% of total revenues in the United States for the three months ended September 30, 2018 and 2017, respectively, and increased by 28% from $7.2 million for the three months ended September 30, 2017 to $9.2 million for the three months ended September 30, 2018. The increase in United States treatment session revenues was primarily the result of an approximate 31% increase in the number of treatment sessions sold. This was offset by an approximate 6% decline in average selling price due to certain volume pricing discounts within our existing customer base, plus an increase in other treatment session revenue.

Cost of Revenues and Gross Margin

Cost of revenues increased by $0.4 million, or 15%, from $2.6 million for the three months ended September 30, 2017 to $3.0 million for the three months ended September 30, 2018. The increase was primarily due to increased costs associated with increased NeuroStar Advanced Therapy System sales volumes. Gross margin increased from 74.9% for the three months ended September 30, 2017 to 77.9% for the three months ended September 30, 2018. The majority of the increase in gross margin was the result of increased leverage on our service and operations costs as a result of higher sales compared to the prior year period.

Sales and Marketing Expenses

Sales and marketing expenses increased by $3.1 million, or 47%, from $6.6 million for the three months ended September 30, 2017 to $9.7 million for the three months ended September 30, 2018. The increase was primarily due to increased personnel costs as a result of our sales expansion activities, as well as higher sales commissions and marketing expenses, consistent with our growth in revenues.

General and Administrative Expenses

General and administrative expenses increased by $1.0 million, or 44%, from $2.3 million for the three months ended September 30, 2017 to $3.2 million for the three months ended September 30, 2018. The increase was primarily due to an increase in personnel and legal, accounting and other professional services expenses required to support the growth of our business and the infrastructure for public company reporting.

Research and Development Expenses

Research and development expenses increased $0.3 million, or 15%, from $1.8 million for the three months ended September 30, 2017 to $2.1 million for the three months ended September 30, 2018. The increase was primarily due to higher product development costs related to the launch of the next generation of our NeuroStar Advanced Therapy System and TrakStar practice management system, which were partially offset by a decline in spending on clinical studies.

Interest Expense

Interest expense increased $0.1 million, or 15%, from $0.8 million for the three months ended September 30, 2017 to $0.9 million for the three months ended September 30, 2018 primarily as a result of higher cash interest expenses related to the $10.0 million increase during 2017 in principal borrowings under our current credit facility, a coupon rate of interest on the total $30.0 million of principal borrowings outstanding that is currently approximately 1% higher versus the prior year period, and higher non-cash interest expenses accrued in connection with the final payment fees due to the lender under the agreement.

Other Expense (Income), Net

Other expense (income), net, which includes the change in the fair value of the liability related to our then-outstanding convertible preferred stock warrants, increased by $0.4 million, from $0.1 million for the three months ended September 30, 2017 to $(0.3) million for the three months ended September 30, 2018. Other expense (income), net for the three months ended September 30, 2018 also includes $0.4 million of interest income earned on the Company’s IPO proceeds during the third quarter of 2018, as well as a one-time $0.1 million non-utilization fee related to the Company’s election to not draw down the Term C Loan. The three months ended September 30, 2017 included a non-cash charge of $0.2 million to revalue our then-outstanding convertible preferred stock warrant liability, as well as $0.02 million of interest income.

22


 

Comparison of the Nine Months ended September 30, 2018 and 2017

 

 

 

Nine Months ended September 30,

 

 

Increase / (Decrease)

 

 

 

2018

 

 

2017

 

 

Dollars

 

 

Percentage

 

 

 

(in thousands, except percentages)

 

Revenues

 

$

37,141

 

 

$

28,325

 

 

$

8,816

 

 

 

31

%

Cost of revenues

 

 

8,736

 

 

 

6,675

 

 

 

2,061

 

 

 

31

%

Gross Profit

 

 

28,405

 

 

 

21,650

 

 

 

6,755

 

 

 

31

%

Gross Margin

 

 

76

%

 

 

76

%

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

27,616

 

 

 

19,272

 

 

 

8,344

 

 

 

43

%

General and administrative

 

 

8,952

 

 

 

5,735

 

 

 

3,217

 

 

 

56

%

Research and development

 

 

6,010

 

 

 

6,018

 

 

 

(8

)

 

-

 

Total operating expenses

 

 

42,578

 

 

 

31,025

 

 

 

11,553

 

 

 

37

%

Loss from Operations

 

 

(14,173

)

 

 

(9,375

)

 

 

(4,798

)

 

 

-51

%

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

2,749

 

 

 

2,068

 

 

 

681

 

 

 

33

%

Other expense (income), net

 

 

1,032

 

 

 

(308

)

 

 

1,340

 

 

 

435

%

Net Loss

 

$

(17,954

)

 

$

(11,135

)

 

$

(6,819

)

 

 

-61

%

 

 

 

Revenues by Geography

Nine Months ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

 

(in thousands, except percentages)

 

United States

 

$

36,388

 

 

 

98

%

 

$

28,017

 

 

 

99

%

International

 

$

753

 

 

 

2

%

 

$

308

 

 

 

1

%

Total revenues

 

$

37,141

 

 

 

100

%

 

$

28,325

 

 

 

100

%

 

 

 

U.S. Revenues by Product Category

Nine Months ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

 

(in thousands, except percentages)

 

NeuroStar Advanced Therapy System

 

$

9,849

 

 

 

27

%

 

$

6,660

 

 

 

24

%

Treatment sessions

 

 

25,378

 

 

 

70

%

 

 

20,366

 

 

 

73

%

Other

 

 

1,161

 

 

 

3

%

 

 

991

 

 

 

3

%

Total U.S. revenues

 

$

36,388

 

 

 

100

%

 

$

28,017

 

 

 

100

%

 

Revenues

Total revenues increased by $8.8 million, or 31%, from $28.3 million for the nine months ended September 30, 2017 to $37.1 million for the nine months ended September 30, 2018. Revenues in the United States increased by $8.4 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 due to higher unit sales of both NeuroStar Advanced Therapy Systems and treatment sessions. International revenues increased for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to the recognition of deferred revenue related to the upfront and milestone payments received in the fourth quarter of 2017 and an initial order in 2018, both related to our distribution agreement with Teijin for Japan.

Revenues in the United States increased by $8.4 million, or 30%, from $28.0 million for the nine months ended September 30, 2017 to $36.4 million for nine months ended September 30, 2018. NeuroStar Advanced Therapy System revenues in the United States grew by $3.2 million, or 48%, in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase in U.S. NeuroStar revenue was driven by higher capital revenue growth of 67% due to higher unit sales and a 1% increase in average selling prices, partially offset by lower upgrade, rent-to-own, and other related revenue. Included in the U.S. NeuroStar Advanced Therapy System revenues for the nine months ended September 30, 2018 was a multi-unit order during the second quarter in the amount of $0.5 million. NeuroStar Advanced Therapy System revenues represented 27% and 24% of U.S. revenues for the nine months ended September 30, 2018 and 2017, respectively. We believe the growth in NeuroStar Advanced Therapy System revenues between these two periods was the result of the efforts of our expanded commercial organization and increased marketing efforts. As of September 30, 2018, we had an installed base of 858 active systems in the United States, compared to 725 as of September 30, 2017.

23


 

Treatment session revenues in the United States represented 70% and 73% of total revenues in the United States for the nine months ended September 30, 2018 and 2017, respectively, and increased by 25% from $20.4 million for the nine months ended September 30, 2017 to $25.4 million for the nine months ended September 30, 2018. The increase in United States treatment session revenues was primarily the result of an approximate 25% increase in the number of treatment sessions sold. This was offset by an approximate 5% decline in average selling price due to certain volume pricing discounts within our existing customer base, plus an increase in other treatment session revenue.

Cost of Revenues and Gross Margin

Cost of revenues increased by $2.1 million, or 31%, from $6.7 million for the nine months ended September 30, 2017 to $8.7 million for the nine months ended September 30, 2018. The increase was primarily due to increased costs associated with NeuroStar Advanced Therapy System sales volumes. Gross margin remained relatively flat from 76.4% for the nine months ended September 30, 2017 compared to 76.5% for the nine months ended September 30, 2018. The change in gross margin was due to the higher mix of NeuroStar Advanced Therapy System revenues in the nine months ended September 30, 2018 in relation to treatment session revenues and the reduction in the average selling price of our treatment sessions discussed above, which were offset by increased leveraged on our service and operations costs as a result of higher sales compared to the prior period.

Sales and Marketing Expenses

Sales and marketing expenses increased by $8.3 million, or 43%, from $19.3 million for the nine months ended September 30, 2017 to $27.6 million for the nine months ended September 30, 2018. The increase was primarily due to increased personnel costs as a result of our sales and marketing expansion activities, as well as higher sales commissions and marketing expenses, consistent with our growth in revenues.

General and Administrative Expenses

General and administrative expenses increased by $3.2 million, or 56%, from $5.7 million for the nine months ended September 30, 2017 compared to $9.0 million for the nine months ended September 30, 2018. The increase was primarily due to an increase in personnel and legal, accounting and other professional services expenses required to support the growth of our business and the infrastructure for public company reporting.

Research and Development Expenses

Research and development expenses remained flat for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2018. A decline in spending on clinical studies was offset by expenses relating to the launch of the next generation of our NeuroStar Advanced Therapy System and TrakStar practice management system.

Interest Expense

Interest expense increased $0.7 million, or 33%, from $2.1 million for the nine months ended September 30, 2017 to $2.7 million for the nine months ended September 30, 2018, primarily as a result of higher cash interest expenses related to the $10.0 million increase during 2017 in principal borrowings under our current credit facility, a coupon rate of interest on the total $30.0 million of principal borrowings outstanding that is currently approximately 1% higher versus the prior year period, and higher non-cash interest expenses accrued in connection with the final payment fees due to the lender under the agreement.

Other Expense (Income), Net

Other expense (income), net, which includes the change in the fair value of the liability related to our then-outstanding convertible preferred stock warrants, increased by $1.3 million, from $(0.3) million for the nine months ended September 30, 2017 to $1.0 million for the nine months ended September 30, 2018. The increase was driven by a non-cash charge of $1.4 million to revalue the convertible preferred stock warrant liability based on the closing stock price on June 29, 2018, following the pricing of our IPO on June 27, 2018. Upon the closing of our IPO on July 2, 2018, all of our outstanding convertible preferred stock warrants converted into common stock warrants, resulting in the reclassification of our convertible preferred stock warrant liability into additional paid-in capital. Other expense (income), net for the nine months ended September 30, 2018 also includes $0.4 million of interest income earned on the Company’s IPO proceeds during the third quarter of 2018 as well as a one-time $0.1 million non-utilization fee related to the Company’s election to not draw down the Term C Loan. The nine months ended September 30, 2017 included a net non-cash gain of $0.2 million to revalue our then-outstanding convertible preferred stock warrant liability as a result of the closing of our sale of Series G convertible preferred stock, as well as $0.05 million of interest income.

Liquidity and Capital Resources

Overview

On July 2, 2018, we closed our IPO, in which we issued and sold 6.325 million shares of our common stock, which included shares sold pursuant to an option granted to the underwriters to purchase additional shares, at a public offering price of $17.00 per share. We received net proceeds of $96.5 million after deducting underwriting discounts, commissions, and other offering expenses paid by us. Our common stock is listed on the Nasdaq Global Market under the trading symbol “STIM.”

24


 

As of September 30, 2018, we had cash and cash equivalents of $106.8 million and an accumulated deficit of $214.9 million, compared to cash and cash equivalents of $29.1 million and an accumulated deficit of $196.9 million as of December 31, 2017. We incurred negative cash flows from operating activities of $18.3 million and $11.4 million for the nine months ended September 30, 2018 and 2017, respectively. We have incurred operating losses since our inception, and we anticipate that our operating losses will continue in the near term as we seek to expand our sales and marketing initiatives to support our growth in existing and new markets, invest funds in additional research and development activities and utilize cash for other corporate purposes. Our primary sources of capital to date have been from our IPO, private placements of our convertible preferred securities, borrowings under our credit facilities and sales of our products. As of September 30, 2018, we had $30.0 million of borrowings outstanding under our credit facility, which matures in March 2022.

We expect our revenues and expenses to increase in connection with our on-going activities, particularly as we continue to execute on our growth strategy, including expansion of our sales and customer support teams. We also expect to incur additional costs now that we are a public company. Based on our current business plan, we believe that our cash and cash equivalents as of September 30, 2018 and anticipated revenues from sales of our products will be sufficient to meet our anticipated cash requirements for at least the next 24 months after September 30, 2018. However, if these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional common or preferred equity or debt securities, or enter into a new credit facility or another form of third-party funding or seek other debt financing. If we raise additional funds by issuing equity or equity-linked securities, our stockholders would experience dilution and any new equity securities could have rights, preferences and privileges superior to those of holders of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us or our stockholders, or at all. It is also possible that we may allocate significant amounts of capital towards products or technologies for which market demand is lower than expected and, as a result, abandon such efforts. If we are unable to obtain adequate financing when we require it, or if we obtain financing on terms which are not favorable to us, or if we expend capital on products or technologies that are unsuccessful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may be required to delay the development, commercialization and marketing of our products.

Our current and future funding requirements will depend on many factors, including:

 

our ability to achieve revenue growth and improve operating margins;

 

the cost of expanding our operations and offerings, including our sales and marketing efforts;

 

our ability to improve or maintain coverage and reimbursement arrangements with domestic third-party and government payors;

 

our rate of progress in establishing coverage and reimbursement arrangements from international commercial third-party and government payors, particularly in Japan;

 

our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of our products and maintaining or improving our sales to our current customers;

 

the cost of research and development activities, including research and development relating to additional indications, which may include bipolar depression and PTSD;

 

the effect of competing technological and market developments;

 

costs related to international expansion; and

 

the potential cost of and delays in product development as a result of any regulatory oversight applicable to our products.

Cash Flows

The following table sets forth a summary of our cash flows for the nine months ended September 30, 2018 and 2017:

 

 

 

Nine Months ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Net Cash Used in Operating Activities

 

$

(18,315

)

 

$

(11,412

)

Net Cash Used in Investing Activities

 

 

(650

)

 

 

(319

)

Net Cash Provided by Financing Activities

 

 

96,578

 

 

 

18,840

 

Net Increase in Cash and Cash Equivalents

 

$

77,613

 

 

$

7,109

 

 

25


 

Net Cash Used in Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2018 was $18.3 million, consisting primarily of a net loss of $18.0 million and a decrease in net operating liabilities of $4.6 million, partially offset by non-cash charges of $4.2 million. The decrease in net operating liabilities was primarily due to a decrease in accrued expenses as a result of first quarter 2018 payments of 2017 incentive compensation and commissions accrued as of December 31, 2017, as well as an increase in accounts receivable as a result of higher sales volumes. Non-cash charges consisted of depreciation and amortization, non-cash interest expense, share-based compensation, the cost of rental units purchased by customers and the change in the fair value of the liability related to our then-outstanding convertible preferred stock warrants.

Net cash used in operating activities for the nine months ended September 30, 2017 was $11.4 million, consisting primarily of a net loss of $11.1 million and a decrease in net operating liabilities of $1.4 million, partially offset by non-cash charges of $1.2 million. The decrease in net operating liabilities was primarily due to a decrease in accounts payable due to timing of payments. Non-cash charges consisted of depreciation and amortization, non-cash interest expense, share-based compensation, the cost of rental units purchased by customers and the change in the fair value of the liability related to our then-outstanding convertible preferred stock warrants.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2018 was $0.7 million, compared to net cash used in investing activities for the nine months ended September 30, 2017 of $0.3 million, in each case attributable to purchases of property and equipment and capitalized software costs.

Net Cash Provided by Financing Activities

Net cash provided by financing activates for the nine months ended September 30, 2018 was $96.6 million, consisting primarily of $100.0 million of proceeds related to the closing of our IPO on July 2, 2018, partially offset by $3.5 million of payments of costs related to the IPO. Net cash provided by financing activities for the nine months ended September 30, 2017 was $18.8 million, consisting of $14.8 million of net proceeds from our issuance of Series G convertible preferred stock and $5.0 million of borrowings under our current credit facility, partially offset by payment of $1.0 million of deferred debt issuance costs incurred in connection with our March 2017 amendment to our credit facility.

Indebtedness

Current Credit Facility

In March 2017, we entered into a new loan and security agreement with Oxford Finance LLC, or Oxford, for a credit facility that replaced our previous $25.0 million credit facility with Oxford and which allowed us to borrow up to $35.0 million in three tranches of term loans: a Term A Loan in the amount of $25.0 million, which was drawn down immediately upon closing in March 2017, a Term B Loan in the amount of $5.0 million, which was drawn down in December 2017, and a Term C Loan in the amount of $5.0 million, which became available to us upon the achievement of $45.0 million of trailing twelve month revenues during the second quarter of 2018. Upon achieving the required revenue milestone, we had 60 days to notify Oxford if we elected to borrow the Term C Loan. As a result of completing our IPO on July 2, 2018 and receiving the net proceeds therefrom, we elected not to borrow the additional $5.0 million, and it is no longer available to us. Each term loan accrues interest from the date of borrowing through the date of repayment at a floating per annum rate of interest, which resets monthly and is equal to the greater of (a) 8.15% or (b) the 30 day U.S. LIBOR on the last business day of the month plus 7.38%. At the date of each borrowing, we were required to issue to Oxford warrants to purchase our Series F or later series of convertible preferred stock with a seven year term and in an amount equal to 3.95% of the first $5.0 million of each tranche borrowed. The credit facility matures and all amounts borrowed thereunder are due on March 1, 2022. As of September 30, 2018, we had borrowed and had outstanding an aggregate of $30.0 million of principal under our credit facility.

The Term A Loan features an interest-only period through March 2019, during which time we are required to make monthly interest payments, after which time we are required to make monthly payments of principal and interest based on a 36-month amortization schedule. However, upon the achievement of $45.0 million of revenues during fiscal 2018, the interest-only period can be extended for an additional 12 months through March 2020 and the amortization period then becomes 24 months. In connection with the drawdown of the Term A Loan, we issued to Oxford a warrant to purchase shares of our Series F convertible preferred stock. Immediately prior to the closing of our IPO on July 2, 2018, this convertible preferred stock warrant converted into a warrant to purchase 20,303 shares of our common stock at an exercise price of $9.73 per share. The warrant will expire in March 2024.

The Term B Loan features an interest-only period through March 2019, during which time we are required to make monthly interest payments, after which time we are required to make monthly payments of principal and interest based on a 36-month amortization schedule. However, upon the achievement of $45.0 million of revenues during fiscal 2018, the interest-only period can be extended for an additional 12 months through March 2020 and the amortization period then becomes 24 months. In connection with the drawdown of the Term B Loan, we issued to Oxford a warrant to purchase shares of our Series F convertible preferred stock. Immediately prior to the closing of our IPO on July 2, 2018, this convertible preferred stock warrant converted into a warrant to purchase 20,303 shares of our common stock at an exercise price of $9.73 per share. The warrant will expire in December 2024.

26


 

In addition to principal and interest payments due under the credit facility, we are required to make final payment fees to Oxford due upon the earlier of prepayment or maturity of each tranche, which are equal to 8% and 7% of the principal amounts of the Term A and Term B Loans, respectively, except that if the interest-only periods on the Term A and Term B Loans are extended then the final payment fees increase to 8.5% and 7.5% of the principal amounts of the Term A and Term B Loans, respectively. We accrue the estimated final payment fees using the effective interest rate, with a charge to non-cash interest expense, over the term of borrowing for each tranche. As of both September 30, 2018 and December 31, 2017, the effective interest rates for the Term A and Term B Loans were 10.7% and 11.6%, respectively. If we prepay our term loans prior to their respective scheduled maturities, we will also be required to make prepayment fees to Oxford equal to 3% if prepaid on or before the first anniversary of funding, 2% if prepaid after the first and on or before the second anniversary of funding, or 1% if prepaid after the second anniversary of funding of the principal amounts borrowed.

Our obligations under the credit facility are secured by a first priority security interest in substantially all of our assets, other than our intellectual property. We have agreed not to pledge or otherwise encumber any of our intellectual property. The loan and security agreement related to our credit facility includes a financial maintenance covenant that requires us to achieve at least 75% of our trailing 12-month forecasted revenues, as measured each month in accordance with a forecast that we provided to Oxford upon signing the agreement and future forecasts that we are required to deliver to Oxford each year for the life of the credit facility, as well as customary affirmative and negative covenants. We were in compliance with all of the covenants under our credit facility as of September 30, 2018.

The loan and security agreement related to our credit facility contains events of default, including, without limitation, events of default upon: (i) failure to make payment pursuant to the terms of the agreement; (ii) violation of covenants; (iii) material adverse changes to our business; (iv) attachment or levy on our assets or judicial restraint on our business; (v) insolvency; (vi) significant judgments, orders or decrees for payments by us not covered by insurance; (vii) incorrectness of representations and warranties; (viii) incurrence of subordinated debt; (ix) revocation of governmental approvals necessary for us to conduct our business; and (x) failure by us to maintain a valid and perfected lien on the collateral securing the borrowing.

Based on a 36-month amortization of the outstanding principal amounts of the Term A and Term B Loans beginning on April 1, 2019 as discussed above, the following table sets forth by year our required future principal payments (in thousands):

 

Year:

 

Principal

Payments

 

2018

 

$

-

 

2019

 

 

7,500

 

2020

 

 

10,000

 

2021

 

 

10,000

 

2022

 

 

2,500

 

Total principal payments

 

$

30,000

 

 

We currently anticipate that we will extend the interest-only periods on the Term A and Term B Loans upon achieving $45.0 million of revenues during fiscal 2018, which is currently expected to occur in the fourth quarter of 2018.

Cash and Non-Cash Interest Expense

For the three months ended September 30, 2018, we recognized interest expense of $0.9 million, of which $0.7 million was cash and $0.2 million was non-cash interest expense related to the amortization of deferred financing costs and accrual of final payment fees. For the three months ended September 30, 2017, we recognized interest expense of $0.8 million, of which $0.5 million was cash and $0.3 million was non-cash interest expense related to the amortization of deferred financing costs and accrual of final payment fees.

For the nine months ended September 30, 2018, we recognized interest expense of $2.7 million, of which $2.1 million was cash and $0.6 million was non-cash interest expense related to the amortization of deferred financing costs and accrual of final payment fees. For the nine months ended September 30, 2017, we recognized interest expense of $2.1 million, of which $1.6 million was cash and $0.5 million was non-cash interest expense related to the amortization of deferred financing costs and accrual of final payment fees.

Previous $25.0 Million Credit Facility

Prior to March 2017, we had a $25.0 million credit facility in place with Oxford, which we entered into in February 2014 and which allowed us to borrow up to $25.0 million in three tranches of term loans: a Term A Loan in the amount of $15.0 million, a Term B Loan in the amount of $5.0 million, and a Term C Loan in the amount of $5.0 million, which was never drawn down. Each term loan accrued interest at per annum rates ranging from 8.5% to 8.9%. This facility featured an interest-only period on all tranches through March 2017, and we were also required to issue convertible preferred stock warrants to Oxford at the time of borrowing of each tranche. These convertible preferred stock warrants converted into common stock warrants immediately prior to the closing of our IPO on July 2, 2018.

27


 

We accrued final payment fees using the effective interest rate, with a charge to non-cash interest expense, over the term of borrowing and until our entry into our current credit facility in March 2017, at which time we paid Oxford $1.0 million in satisfaction of all final payment fee liabilities due under the prior credit facility.

We evaluated whether our current credit facility entered into in March 2017 represented a debt modification or extinguishment in accordance with ASC 470-50, Debt—Modifications and Extinguishments. Upon determining that the change in cash flows between the previous and current credit facilities was not greater than 10%, we accounted for the transaction as a debt modification. As of March 2017, the unamortized balance of deferred financing costs incurred in connection with the $25.0 million credit facility, and certain additional deferred financing costs incurred in connection with entry into our current credit facility, are being amortized to interest expense through March 2022 utilizing the effective interest method.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, partnerships or other relationships with unconsolidated entities, often referred to as structured finance or special-purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Commitments and Contractual Obligations

As of September 30, 2018, there were no significant changes to our commitments and future minimum contractual obligations as set forth in our IPO prospectus filed with the SEC on June 29, 2018.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, or Securities Act, for complying with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (b) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous six years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Recent Accounting Pronouncements

We refer you to “Note 4. Recent Accounting Pronouncements” in “Notes to Interim Financial Statements” located in “Part I – FINANCIAL INFORMATION, Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Our cash is held on deposit in demand accounts at a large financial institution in amounts in excess of the Federal Deposit Insurance Corporation, or FDIC, insurance coverage limit of $250,000 per depositor, per FDIC-insured bank, per ownership category. We have reviewed the financial statements of this institution and believe it has sufficient assets and liquidity to conduct its operations in the ordinary course of business with little or no credit risk to us.

Financial instruments that potentially subject us to concentrations of credit risk principally consist of cash equivalents and accounts receivable. We limit our credit risk associated with cash equivalents by placing investments in highly-rated money market funds. We limit our credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary, but we do not require collateral to secure amounts owed to us by our customers.

As discussed above in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Indebtedness” section of this Quarterly Report on Form 10-Q, our credit facility bears interest at a floating per annum rate of interest, which resets monthly and is equal to the greater of (a) 8.15% or (b) the 30 day U.S. LIBOR on the last business day of the month plus 7.38%. As a result, we are exposed to risks from changes in interest rates. We believe that a one point increase in interest rates would have resulted in an approximate $0.2 million increase to our interest expense for the year ended December 31, 2017.

Inflationary factors, such as increases in our cost of revenues and operating expenses, may adversely affect our operating results. Although we do not believe inflation has had a material impact on our financial condition, results of operations or cash flows to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin or decrease our operating expenses as a percentage of our revenues if our selling prices of our products do not increase as much or more than our costs increase.

We do not currently have any exposure to foreign currency fluctuations and do not engage in any hedging activities as part of our normal course of business.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2018.

As a result of becoming a public company, we will be required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ended December 31, 2019. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The SEC defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be detected or prevented on a timely basis.

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Inherent Limitations on Effectiveness of Controls and Procedures

Internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are achieved. Further, the design of a control system must be balanced against resource constraints, and therefore the benefits of controls must be considered relative to their costs. Given the inherent limitations in all systems of controls, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Accordingly, given the inherent limitations in a cost-effective system of internal control, financial statement misstatements due to error or fraud may occur and may not be detected. Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance of achieving their objectives. We conduct periodic evaluations of our systems of controls to enhance, where necessary, our control policies and procedures

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2018, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

We are subject from time to time to various claims and legal actions arising during the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on our results of operations, financial condition, or cash flows.

Item 1A.

Risk Factors.

You should carefully consider the information described in the “Risk Factors” section of our IPO prospectus filed with the SEC on June 29, 2018. There have been no material changes to the risk factors described therein.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Issuances of Unregistered Securities

None.

Use of Proceeds from IPO

Our IPO was effected pursuant to a Registration Statement on Form S-1 (File No. 333-225307) that was declared effective by the SEC on June 27, 2018. On June 27, 2018, we sold 6.325 million shares of our common stock at a public offering price of $17.00 per share, for aggregate gross proceeds of $107.5 million.

On July 2, 2018, we received net proceeds from our IPO of $96.5 million after deducting underwriting discounts, commissions, and other offering expenses paid by us. The funds shall are being in a manner consistent with the use of proceeds from the IPO as described in our IPO prospectus under the caption “Use of Proceeds,” which has not materially changed since the filing of our IPO prospectus with the SEC on June 29, 2018.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

None.

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Item 6.

Exhibits.

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q. Where so indicated, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated.

 

Exhibit

Number

 

Description

  10.10*

 

2018 Equity Incentive Plan

  10.11*

 

2018 Employee Stock Purchase Plan

  31.1*

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31.2*

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  32.1**

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  32.2**

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Filed herewith.

**

This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C Section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing of the registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

NEURONETICS, INC.

(Registrant)

 

 

 

 

Date: November 6, 2018

By:

 

/s/ Christopher Thatcher

 

Name:

 

Christopher Thatcher

 

Title:

 

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

Date: November 6, 2018

By:

 

/s/ Peter Donato

 

Name:

 

Peter Donato

 

Title:

 

VP, Finance and Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

33