Neuronetics, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Neuronetics is a commercial-stage medical technology company focused on the NeuroStar Advanced Therapy System, a transcranial magnetic stimulation treatment for adults with major depressive disorder. The unaudited report covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. The company had 1,122 active U.S. systems in approximately 889 psychiatrist offices and 114 employees at June 30, 2020.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Revenue | $9.7 million | $16.6 million | Down 41% |
| Gross profit | $7.4 million | $12.4 million | Down 40% |
| Gross margin | 76.2% | 74.8% | Up 1.4 percentage points |
| Operating loss | $6.9 million | $6.6 million | Loss increased $0.3 million |
| Net loss | $7.8 million | $7.1 million | Loss increased $0.7 million |
| Basic and diluted loss per share | $0.41 | $0.39 | Loss per share increased |
| Metric | Six months 2020 | Six months 2019 | Change |
|---|---|---|---|
| Revenue | $21.2 million | $29.3 million | Down 28% |
| Gross profit | $16.1 million | $22.3 million | Down 28% |
| Operating loss | $17.2 million | $13.7 million | Loss increased $3.6 million |
| Net loss | $20.4 million | $14.6 million | Loss increased $5.8 million |
| Operating cash flow | $(23.1) million | $(16.4) million | Cash use increased $6.7 million |
Q2 revenue consisted primarily of U.S. treatment sessions, which declined 40% to $6.5 million, and U.S. NeuroStar system revenue, which declined 50% to $2.3 million. The company sold 61 systems in Q2, equal to the prior-year quarter. International revenue was $0.5 million, or 5% of total revenue. The six-month gross margin was approximately 75.8%, based on reported gross profit and revenue.
Cash and cash equivalents were $54.0 million at June 30, 2020, down from $75.7 million at December 31, 2019. Total assets were $80.0 million and stockholders’ equity was $29.4 million. The accumulated deficit was $270.5 million. Capital expenditures and capitalized software purchases were $0.5 million during the first six months.
Outstanding principal debt was $35.0 million under the Solar credit facility. Although the facility matures in February 2025, the full $34.4 million net carrying amount was classified as current because management believed a minimum revenue covenant beginning December 31, 2020 would probably not be achieved and the agreement contains subjective acceleration provisions. Management stated that cash, cash equivalents and anticipated product revenue were expected to fund operations for at least 12 months from issuance of the financial statements, including potential repayment of the facility if a waiver or amendment was not obtained.
Material changes versus the prior comparable period
- Revenue declined materially because COVID-19 reduced new patient treatment starts, system utilization and customer capital purchasing decisions.
- Gross margin improved because of revenue mix and lower personnel costs supporting installations.
- Sales and marketing expense fell 29% in Q2, general and administrative expense fell 6%, and research and development expense fell 34%, reflecting lower personnel, travel, marketing and development spending.
- Operating cash use increased to $23.1 million for the first six months, primarily because of the higher net loss and reductions in accounts payable and accrued expenses.
- On March 2, 2020, the company replaced its Oxford facility with the Solar facility, borrowed $35.0 million, repaid $35.0 million of Oxford principal and paid $2.5 million of Oxford final payment fees. The refinancing generated a $0.9 million loss on debt extinguishment, including $0.6 million of unamortized debt discounts and issuance costs.
- The company reduced its workforce by 95 employees in April and recorded $2.1 million of separation-related charges. Management estimated approximately $18 million of net savings through December 31, 2020. The former CEO transition agreement generated an additional $1.1 million charge, with $0.8 million remaining accrued at quarter-end.
- The company received and repaid a $6.4 million Paycheck Protection Program loan in May 2020, including accrued interest.
Guidance, outlook, risks and unusual items
- Full-year 2020 guidance was withdrawn on April 8, 2020. Management stated that it could not estimate the duration or scale of the pandemic’s effect on financial and operating results.
- The company expects continued operating losses while investing in its commercial organization, product development and potential additional indications, including bipolar depression and post-traumatic stress disorder.
- Management believed the Solar facility’s minimum trailing-revenue covenant would probably not be met as of December 31, 2020. Discussions with lenders regarding a waiver or amendment were ongoing, but no formal agreement had been executed at the filing date.
- COVID-19 risks include renewed restrictions, lower patient and physician activity, reduced insurance coverage, customer liquidity issues, supply-chain disruption and reduced access to capital.
- The Solar facility bears floating interest at 7.65% plus the greater of 1.66% or the applicable benchmark rate, is secured by substantially all company assets including intellectual property, and includes prepayment, final-payment and exit fees.
- One customer accounted for more than 10% of revenue in both the three- and six-month 2020 periods; no customer exceeded 10% in the comparable 2019 periods.
- Management reported no material legal proceedings and concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2020.
Important facts for investors to verify
- Whether the lender granted a waiver or amendment for the expected December 2020 revenue-covenant shortfall, and whether the debt remains classified as current in subsequent filings.
- Cash burn, treatment-session utilization, system placements and revenue recovery following COVID-19 disruptions.
- Whether the $54.0 million cash balance and operating cash generation are sufficient without equity issuance, additional debt or other financing.
- The effect of the 95-employee reduction on sales capacity, customer support, research and development and future growth.
- Customer concentration, reimbursement conditions and the sustainability of recurring treatment-session revenue.
- Interest-rate exposure and the total economic cost of the Solar facility, including final-payment, prepayment and exit fees.