Nexstim
Written by
Nexstim |
Funding agreed; business retrenched |
H1 results and update |
Healthcare equipment |
1 September 2016 |
Share price performance
Business description
Next events
Analyst
Nexstim is a research client of Edison Investment Research Limited |
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Nexstim shareholders have agreed to the €12m funding package announced in July so management has cash until into early 2018. Cost savings of €2.3m per year have been initiated with cuts of €1.6m in the US as a distributor sales model is implemented. This gives lower margins but offers a flexible cost base. The strategy remains focused on the FDA de novo 510(k) application for stroke rehabilitation. The FDA will state by late September if it will review the application. This might give US sales from H217 but the process is uncertain. H1 sales were €0.9m, up 38% over H115.
Year |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
2.21 |
(10.21) |
(1.43) |
0.0 |
N/A |
N/A |
12/15 |
2.53 |
(9.55) |
(1.19) |
0.0 |
N/A |
N/A |
12/16e |
2.06 |
(8.32) |
(0.91) |
0.0 |
N/A |
N/A |
12/17e |
2.56 |
(5.36) |
(0.40) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. EPS is estimated after 2016 dilution only.
FDA de novo stroke application: News by late Sept
Nexstim has Phase III data plus additional occupational therapy on more than 138 patients (out of 199). Meaningful clinical improvements were seen in 66% of patients in both arms – better than historical norms. This has encouraged Nexstim to apply to the FDA for a de novo 510(k) for stoke rehabilitation. The FDA review, if accepted by late September, will probably take about nine to 12 months, but further trials and data may be needed. The outlook for stroke sales is not certain.
Funding agreed until early 2018
The AGM confirmed the convertible loan facility and standby equity drawdown arrangements with Bracknor Investment, a Dubai-based investment company. These could be worth €10m if fully used. The Finnish Innovation Fund (Sitra) has agreed to match this funding up to €1.5m. In addition, Sitra will make a Directed Issuance investment of €0.5m. There are warrants to Bracknor and Sitra.
H1 results
H1 saw revenues rise 38% to €0.9m from €0.6m. The previous 2016 revenue target of €3.1m set by Edison has been lowered to €2.1 as H2 sales will stall since no US salesforce now exists and distributors need to be appointed and trained. From 2017, the new distribution strategy produces lower margins; Edison expects distributor costs of 30-40%. Ongoing costs in H216 will be lower but there will probably be exceptional charges. Savings of €2.3m in 2017 are now included.
Valuation: Complex data need a cautious projection
Navigated Brain Stimulation (NBS) is sold for pre-surgical brain mapping in the US and EU, but the market is limited. The revised forecast (see below) implies a share price of €0.96/share (formerly €1.15) based on a revised indicative value of €17.2m after expected 2016 dilution. Nexstim could receive €2-3m of funding in 2016. Edison expects about €5m cash will be required in 2017.
Revised model post restructuring
Given the new strategy, the following adjustments have been made.
■
Sales of units in 2016 have been adjusted from 15 to seven at a full price of €200k each. Servicing is set at €400k and consumables sales at €230k. This gives just over €2m in revenues. The fall in units is because most sales were expected to be Q4 weighted and the US sales team has been laid off immediately. EU sales will follow a similar trajectory. Some sales will be being completed.
■
From 2017, distributors will take over. These need to be recruited and their staff need training on two complex systems aimed at very sophisticated clinical users. At best, these new arrangements cannot be operating fully until spring 2017. Hence, NBS sales in 2017 have been reduced to 15 units from 20. Sales in 2018 have been set at 20, down from 25. After that, the new strategy should be fully operative. Edison notes that all these forecasts are just reasonable assumptions and no management guidance is available.
■
Prices of NBS disposables have been reduced by 30% from 2017 to reflect distributor margins. The unit prices of NBS systems have been reduced by 40%. The difference is because the consumables need little sales support; the units need a lot of sales investment on sporadic and lengthy sales processes.
■
In 2016, US costs have been cut from the end of August, saving €670k. Costs in Finland have been cut from October, saving €175k. From 2017, costs have reduced by €2.3m as indicated by management.
■
Navigated Brain Therapy (NBT) sales, possibly for stroke therapy, are assumed from 2018. Note that the NBT value to Nextim is assumed, following management strategy set by the former CEO, to be lower than NBS at €80k per unit, €80 per consumable. These prices are designed to encourage uptake as a high consumable use rate is projected. These sales obviously depend on the FDA decision, although the system could be sold in theory in the EU now as it is CE marked. Prices received by Nexstim have been adjusted on the assumption that these systems will also be sold by distributors (40% lower for units and 30% lower for the consumable).
■
The future cost structure has been amended as a percentage of revenues so that, with no direct sales function:
•
R&D is 10% (unchanged, but lower in absolute terms due to reduced revenues);
•
admin is 15% of revenues (from 20%); and
•
marketing and technical support to distributors is 10% of revenues (formerly 15% of a higher revenue line).
■
Finnish corporation tax, when due, is 20% and there is no federal US tax on the US subsidiary.
Valuation
The effect of the price cut is to reduce the long-term cash flows from the business. The immediate cuts reduce the potential 2017 funding need to about €5m in Edison’s forecast. However, the shares and warrants due in 2016, now agreed by shareholders, will impose an immediate dilution. The reduced cost base offsets this, so the indicative price is €1.37 before the new dilution and is estimated at €0.96 after the likely 2016 dilution. This is dependent on gaining an FDA review, and the number of shares and warrants in issue at the end of 2017 is highly unpredictable.
The value of €0.96 compared to the previous indicative value of €1.15/share is shown in Exhibit 1. The funding arrangements were covered in detail in the July 2016 note, available online.
Exhibit 1: Indicative valuation compared to July 2016 using a 2016 dilution scenario
|
July 2016 |
August 2016 |
||
Shares |
Value |
Shares |
Values |
|
Equity value 2016 (€m) |
|
28.6 |
22.2 |
|
Additional funding need 2017 (€m) |
|
-8.0 |
-5.0 |
|
Overall value including further funding need (€m) |
20.6 |
17.22 |
||
Shares in issue June 2016 (m) |
8.1 |
8.1 |
||
New shares due to CBF and fees in 2016 (m) |
5.2 |
5.3 |
||
Warrants on CBF 2016 (m) |
3.1 |
3.1 |
||
Options (m) (inc 700k new options from May 2016) |
1.5 |
1.5 |
||
Total shares, options and warrants |
17.9 |
18.0 |
||
Diluted value at current share price (€) |
|
1.15 |
0.96 |
|
Source: Edison Investment Research CBF is Convertible Bond Facility. There is also a Standby Equity drawdown Arrangement but this is not assumed to be used in 2016, see previous note.
Exhibit 2: Financial summary
€'000s |
2014 |
2015 |
2016e |
2017e |
||
Year end 31 December |
FAS |
FAS |
FAS |
FAS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
2,210 |
2,528 |
2,055 |
2,560 |
Cost of Sales |
(638) |
(821) |
(683) |
(1,162) |
||
Gross Profit |
1,572 |
1,707 |
1,372 |
1,398 |
||
EBITDA |
|
|
(7,422) |
(9,984) |
(7,702) |
(5,152) |
Operating Profit (before GW and except) |
|
(7,568) |
(10,096) |
(7,712) |
(5,162) |
|
Intangible Amortisation |
(231) |
(274) |
(250) |
(250) |
||
Exceptionals |
- |
- |
- |
- |
||
Operating Profit |
(7,800) |
(10,370) |
(7,962) |
(5,412) |
||
Other |
- |
- |
- |
- |
||
Net Interest |
(2,646) |
544 |
(610) |
(200) |
||
Profit Before Tax (norm) |
|
|
(10,214) |
(9,552) |
(8,322) |
(5,362) |
Profit Before Tax (FRS 3) |
|
|
(10,445) |
(9,826) |
(8,572) |
(5,612) |
Tax |
- |
(1) |
- |
- |
||
Profit After Tax (norm) |
(10,214) |
(9,553) |
(8,322) |
(5,362) |
||
Profit After Tax (FRS 3) |
(10,445) |
(9,827) |
(8,572) |
(5,612) |
||
Average Number of Shares Outstanding (m) |
7.1 |
8.0 |
9.2 |
13.4 |
||
EPS - normalised (c) |
|
|
(143) |
(119) |
(91) |
(40) |
EPS - FRS 3 |
|
|
(1.46) |
(1.23) |
(0.93) |
(0.42) |
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
71.1 |
67.5 |
66.8 |
54.6 |
||
EBITDA Margin (%) |
-335.8 |
-394.9 |
-374.9 |
-201.2 |
||
Operating Margin (before GW and except.) (%) |
-342.4 |
-399.4 |
-375.4 |
-201.6 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
979 |
974 |
974 |
974 |
Intangible Assets |
527 |
631 |
631 |
631 |
||
Tangible Assets |
442 |
333 |
333 |
333 |
||
Other |
10 |
10 |
10 |
10 |
||
Current Assets |
|
|
13,014 |
8,233 |
2,660 |
2,164 |
Stocks |
247 |
421 |
421 |
421 |
||
Debtors |
930 |
659 |
360 |
611 |
||
Cash |
11,484 |
6,875 |
1,602 |
849 |
||
Other |
354 |
277 |
277 |
283 |
||
Current Liabilities |
|
|
(1,928) |
(2,417) |
(2,516) |
(2,732) |
Creditors |
(1,382) |
(1,084) |
(1,084) |
(1,300) |
||
Short term borrowings |
(134) |
(384) |
(484) |
(484) |
||
Short term leases |
0 |
0 |
0 |
0 |
||
Other |
(412) |
(948) |
(948) |
(948) |
||
Long Term Liabilities |
|
|
(3,475) |
(3,245) |
(3,145) |
(8,045) |
Long term borrowings |
(3,405) |
(3,197) |
(3,097) |
(7,997) |
||
Long term leases |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(71) |
(47) |
(47) |
(47) |
||
Net Assets |
|
|
8,590 |
3,545 |
(2,027) |
(7,639) |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(7,146) |
(9,065) |
(7,403) |
(5,193) |
Net Interest |
(640) |
(544) |
(610) |
(200) |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(860) |
(380) |
(260) |
(260) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Financing |
18,818 |
5,280 |
3,000 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
300 |
100 |
0 |
4,900 |
||
Net Cash Flow |
10,473 |
(4,609) |
(5,273) |
(753) |
||
Opening net debt/(cash) |
|
|
2,529 |
(7,945) |
(3,293) |
1,980 |
HP finance leases initiated |
- |
- |
- |
- |
||
Other |
0 |
(43) |
- |
(4,900) |
||
Closing net debt/(cash) |
|
|
(7,945) |
(3,293) |
1,980 |
7,633 |
Source: Edison Investment Research, Nexstim accounts. Note: FAS = Finnish Accounting Standards. Average number of shares and EPS for 2016 and 2017 are estimates based on the share issue scenario in Exhibit 2. The amounts and timings of new issues are uncertain and represented in 2017 by illustrative debt of c €5m.
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