Neuronetics, Inc. — Q2 2023 Form 10-Q Summary
Business Context and Reporting Period
Neuronetics is a commercial-stage medical technology company focused on neurohealth disorders. Its primary product is the NeuroStar Advanced Therapy System, a transcranial magnetic stimulation system cleared by the FDA for adults with major depressive disorder who have not adequately responded to prior antidepressant medication. Revenue is generated primarily from system sales and recurring treatment sessions.
The filing covers the three and six months ended June 30, 2023, compared with the respective periods ended June 30, 2022. The interim financial statements are unaudited. The company reported 156,235 global patients treated and more than 5.6 million treatment sessions through June 30, 2023.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Revenue | $17.6 million | $16.3 million | $33.2 million | $30.5 million |
| Gross profit | $12.8 million | $12.3 million | $24.2 million | $23.0 million |
| Gross margin | 72.5% | 75.3% | 72.9% | 75.3% |
| Loss from operations | $(7.3) million | $(9.8) million | $(17.3) million | $(19.9) million |
| Net loss | $(4.9) million | $(10.4) million | $(15.4) million | $(21.3) million |
| Net loss per share | $(0.17) | $(0.39) | $(0.54) | $(0.80) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(24.0) million | $(21.1) million |
Q2 net loss margin was approximately 27.8%, compared with approximately 63.8% in the prior-year quarter. Six-month net loss margin was approximately 46.5%, compared with approximately 69.7% in the prior-year period.
- Revenue mix: U.S. revenue represented 98% of Q2 revenue and 97% of six-month revenue. U.S. treatment-session revenue was $12.3 million in Q2 and $23.0 million for the six months, representing 71% of U.S. revenue in both periods.
- Operating expenses: Q2 sales and marketing expense declined 16% to $11.6 million, while research and development expense increased 16% to $2.4 million. For the six months, sales and marketing expense declined 11% to $23.5 million and research and development expense increased 34% to $5.2 million.
- Liquidity: Cash and cash equivalents were $45.9 million at June 30, 2023, down from $70.3 million at December 31, 2022. Total assets were $100.4 million and stockholders’ equity was $45.5 million.
- Debt: Outstanding principal under the credit facility was $37.5 million, with net debt of $36.7 million after discounts. The facility matures in March 2028 and requires interest-only payments through March 2026, followed by principal and interest payments beginning April 2026.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8% in Q2 and 9% for the first six months, primarily from higher U.S. NeuroStar system and treatment-session sales.
- U.S. treatment-session revenue increased 9% in Q2 and 11% for the six months. System revenue increased 2% in Q2 and 4% for the six months.
- System volume was broadly stable: 54 systems were recognized as capital revenue in Q2 2023 versus 58 in Q2 2022, and 103 versus 104 for the six-month periods.
- Gross margin declined by 2.8 percentage points in both the quarter and year-to-date periods, driven by higher costs related to a contract manufacturer transition and software amortization from a product release.
- Operating losses narrowed due primarily to lower sales and marketing spending, partially offset by higher research and development costs.
- Net loss benefited materially from $2.9 million of Employee Retention Credit income recorded in other income. The company recognized a corresponding receivable in prepaid expenses and other current assets.
- Interest expense increased 14% in Q2 and 21% for the six months because of higher interest rates and debt balances.
- The company entered into a March 2023 amendment to its credit facility, borrowed an additional $2.5 million, extended the loan maturity to March 2028, and paid a $1.2 million final payment fee.
- On March 31, 2023, the company issued a $6.0 million secured promissory note to TMS Neurohealth Centers and its guarantors, bearing interest at SOFR plus 7.65%. Net notes receivable totaled $6.6 million at June 30, 2023, including an allowance for credit losses.
Guidance, Outlook, Risks and Unusual Items
Management expects operating losses to continue for the next several years while it invests in its commercial organization, product development and additional indications. Management expects 2023 sales and marketing expense to decline from 2022 levels, general and administrative expense to remain approximately flat, and research and development expense to increase.
Management believes cash on hand and anticipated product revenue are sufficient to fund operations for at least 12 months from issuance of the financial statements. However, the company continues to generate significant negative operating cash flow and may need additional equity or debt financing if cash and revenue are insufficient. Additional financing could dilute shareholders or impose restrictive covenants.
- Key business risks include the company’s history of losses, dependence on NeuroStar system utilization, physician and patient demand, third-party reimbursement, sales-force effectiveness, competing technologies, product defects, intellectual property protection, regulatory developments and inflationary pressure.
- One customer represented 14% of Q2 revenue and 16% of six-month revenue. Customer concentration and collection performance should be monitored.
- The company is exposed to variable interest rates on its credit facility and notes receivable.
- The Employee Retention Credit was a material favorable and potentially non-recurring item in Q2 results; the filing does not indicate that comparable credit income will recur.
- The company reported compliance with all credit-facility covenants as of June 30, 2023 and projected continued compliance.
- Management reported no material changes to previously disclosed risk factors, no material adverse legal proceedings, and effective disclosure controls as of June 30, 2023.
Investor Verification Checklist
- Verify the sustainability of treatment-session growth and whether system placements translate into recurring utilization.
- Assess whether gross-margin pressure from the contract manufacturer transition and software amortization persists.
- Reconcile operating cash burn with the company’s assertion that liquidity covers at least 12 months.
- Review the credit facility’s interest-rate exposure, covenants, fees and 2026 principal repayment commencement.
- Evaluate the collectability and credit exposure associated with the $6.0 million Greenbrook/TMS Neurohealth secured note.
- Separate recurring operating performance from the $2.9 million Employee Retention Credit benefit.
- Monitor customer concentration, reimbursement coverage, competitive pressures and the company’s ability to reach profitability without additional financing.