Neuronetics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Neuronetics is a commercial-stage medical technology company developing and marketing the NeuroStar Advanced Therapy System, a non-invasive transcranial magnetic stimulation treatment for adults with major depressive disorder who have not adequately responded to prior antidepressant medication. The unaudited filing covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods.
As of September 30, 2019, the company reported 1,032 active U.S. systems installed in approximately 833 psychiatrist offices, approximately 76,200 patients treated, and 236 employees. Treatment sessions represented the majority of U.S. revenue.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $16.0 million, up 16% | $45.3 million, up 22% |
| Gross profit | $11.8 million | $34.1 million |
| Gross margin | 73.8%, versus 77.9% | 75.3%, versus 76.5% |
| Operating loss | $6.3 million, versus $4.3 million | $20.0 million, versus $14.2 million |
| Net loss | $6.9 million, or $0.37 per share | $21.5 million, or $1.17 per share |
| Operating cash flow | Not separately provided for the quarter | $(24.1) million, versus $(18.3) million |
- U.S. revenue was $15.3 million in the quarter and $43.7 million year to date, representing 96% and 97% of total revenue, respectively.
- For the quarter, U.S. treatment-session revenue was $10.3 million, up 11%, while U.S. system revenue was $4.6 million, up 18%. Treatment-session volume increased approximately 8%, but average selling prices declined approximately 6% because of volume discounts.
- For the nine months, U.S. treatment-session revenue increased 18% to $29.9 million, with treatment-session volume up approximately 17% and average selling price down approximately 5%.
- Sales and marketing expense increased 7% in the quarter and 14% year to date. General and administrative expense increased 32% and 47%, respectively, while research and development expense increased 64% and 58%.
- Interest expense was $0.9 million in the quarter and $2.8 million year to date. Other income was $0.4 million in the quarter and $1.3 million year to date.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $82.4 million at September 30, 2019, down from $104.6 million at December 31, 2018.
- Total assets were $105.5 million and stockholders’ equity was $54.3 million. Accumulated deficit increased to $242.5 million from $221.0 million.
- The company had $30.0 million of outstanding principal under its Oxford Finance credit facility, with $30.95 million recorded as debt net of discounts and accrued final payment fees. The facility matures in March 2022 and bears floating interest at the greater of 8.15% or 30-day U.S. LIBOR plus 7.38%.
- Scheduled principal payments are $11.25 million in 2020, $15.0 million in 2021, and $3.75 million in 2022. The interest-only period was extended through March 2020.
- The company used $24.1 million in operating activities, $0.5 million in investing activities, and received $2.3 million from stock-option exercises during the first nine months. Management stated that existing cash and anticipated product revenue are expected to fund operations for at least 24 months after September 30, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated, but operating losses widened because operating expenses increased faster than revenue.
- Gross margin declined due to a higher mix of system revenue, lower selling prices, and related product-mix effects.
- Cash used in operations increased by $5.8 million year over year, and cash declined by $22.2 million during the first nine months of 2019, compared with a $77.6 million increase in the 2018 period that included IPO proceeds.
- The company adopted ASC 606 and ASC 842 on January 1, 2019. ASC 606 did not affect revenue or retained earnings at adoption but deferred certain commissions. Reported sales and marketing expense was $1.3 million lower in the quarter and $2.9 million lower year to date than it would have been without the adoption, with a corresponding reduction in reported net loss.
- The company recognized $0.7 million of milestone consideration under its Teijin Japan distribution agreement following reimbursement approval; the milestone payments are deferred and recognized over the agreement term.
- Operating lease right-of-use assets and lease liabilities were recorded following adoption of ASC 842. The company also extended its Malvern facility lease through February 2028 and added approximately 10,000 square feet.
Guidance, Outlook, Risks, and Unusual Items
The filing provides no formal quantitative revenue or earnings guidance. Management expects revenue and expenses to increase as it expands its U.S. sales and customer-support organization, develops international markets, and invests in the next-generation NeuroStar system, the TrakStar practice-management system, and additional clinical indications such as bipolar depression and post-traumatic stress disorder.
- Management expects operating losses to continue for the next several years and expects sales and marketing, general and administrative, and research and development expenses to rise in absolute dollars.
- Growth depends on continued adoption of NeuroStar systems and treatment sessions, reimbursement from commercial and government payors, international reimbursement and demand, and successful product and clinical development.
- Japan reimbursement became effective June 1, 2019 at JPY12,000 per treatment session for eligible facilities. The Teijin agreement includes minimum purchase obligations and termination provisions tied to regulatory, reimbursement, commercial, and contractual conditions.
- The credit facility is secured by substantially all assets other than intellectual property and includes a financial maintenance covenant requiring achievement of at least 75% of trailing twelve-month forecast revenue. The company reported compliance as of September 30, 2019.
- The company may require additional equity or debt financing if cash and operating revenue are insufficient. Additional financing may dilute shareholders or impose restrictive covenants.
- Capital-system average selling prices declined 10% in the quarter and 9% year to date; treatment-session average selling prices also declined because of volume-based discounts.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2019.
Important Facts for Investors to Verify
- Whether revenue growth and the expanding installed base translate into improved operating leverage despite continued losses and cash burn.
- The sustainability of treatment-session volume growth and the effect of pricing discounts on revenue and gross margin.
- Cash runway relative to the scheduled $30.0 million debt principal payments beginning in 2020 and the company’s ability to remain compliant with its debt covenant.
- The scale and timing of revenue from Japan, including Teijin’s minimum purchases and the practical impact of Japanese reimbursement.
- The accounting effects of ASC 606, particularly deferred commissions and the comparability of reported sales and marketing expense with prior periods.
- Execution, regulatory, reimbursement, competitive, and clinical-development risks associated with the next-generation system and planned additional indications.