Neuronetics, Inc. — Form 10-Q Summary
Business context and reporting period
Neuronetics is a commercial-stage medical technology company that develops and markets the NeuroStar Advanced Therapy System, a transcranial magnetic stimulation treatment for adults with major depressive disorder who have not achieved satisfactory improvement from prior antidepressant medication. The filing covers the three and nine months ended September 30, 2018, and was filed November 6, 2018.
The company reported 858 active U.S. systems in approximately 679 psychiatrist offices as of September 30, 2018, compared with 725 systems a year earlier. Treatment sessions represented the majority of U.S. revenue. Approximately 98% of revenue was generated in the United States.
Key financial metrics
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 |
|---|---|---|---|---|
| Revenue | $13.7 million | $10.5 million | $37.1 million | $28.3 million |
| Gross profit | $10.7 million | $7.9 million | $28.4 million | $21.7 million |
| Gross margin | 77.9% | 74.9% | 76.5% | 76.4% |
| Operating loss | $4.3 million | $2.8 million | $14.2 million | $9.4 million |
| Net loss | $5.0 million | $3.8 million | $18.0 million | $11.1 million |
| Net loss per share | $0.29 | $19.35 | $2.99 | $62.56 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(18.3) million | $(11.4) million |
U.S. treatment-session revenue was $9.2 million in the third quarter and $25.4 million for the first nine months. U.S. NeuroStar system revenue was $3.9 million and $9.8 million, respectively. The company stated that treatment-session volume increased approximately 31% in the quarter and 25% for the nine-month period, while average selling prices declined approximately 6% and 5%, respectively, due primarily to volume discounts.
At September 30, 2018, cash and cash equivalents were $106.8 million, compared with $29.1 million at December 31, 2017. Total assets were $119.0 million, and the accumulated deficit was $214.9 million. Debt principal was $30.0 million, with $5.0 million classified as current and $25.2 million of net long-term debt. The credit facility matures in March 2022 and bears interest at the greater of 8.15% or 30-day U.S. LIBOR plus 7.38%.
Material changes versus the prior comparable period
- Revenue increased 31% in both the quarter and nine-month period, driven by higher sales of NeuroStar systems and treatment sessions.
- Third-quarter gross margin expanded to 77.9% from 74.9%, while nine-month gross margin was essentially unchanged at approximately 76.5%.
- Sales and marketing expense increased 47% in the quarter and 43% for the nine-month period as the company expanded its commercial organization.
- General and administrative expense increased 44% in the quarter and 56% for the nine-month period, reflecting personnel, professional services and public-company infrastructure costs.
- Research and development expense increased 15% in the quarter but was approximately flat for the nine-month period.
- Net losses widened to $5.0 million for the quarter and $18.0 million for the nine-month period, compared with $3.8 million and $11.1 million, respectively.
- The company completed its initial public offering on July 2, 2018, issuing 6.325 million common shares at $17.00 per share and receiving $96.5 million of net proceeds. All outstanding convertible preferred stock converted into approximately 11.0 million common shares.
- The IPO materially improved liquidity and eliminated the preferred-stock liquidation preferences and the convertible preferred stock warrant liability.
Cash flow, liquidity and financing
Operating activities used $18.3 million of cash during the first nine months of 2018. Investing activities used $0.7 million, primarily for property, equipment and capitalized software. Financing activities provided $96.6 million, primarily from the IPO, resulting in a $77.6 million net increase in cash.
Management believes available cash and anticipated product revenue will fund operations for at least 24 months after September 30, 2018. The company expects continued operating losses as it expands sales and marketing, invests in research and development and incurs additional public-company costs.
The credit facility requires principal payments beginning in 2019 under the stated amortization schedule. The company expected to extend the interest-only periods through March 2020 if it achieved at least $45.0 million of fiscal 2018 revenue. It did not draw the additional $5.0 million Term C tranche after completing the IPO. The company was in compliance with its debt covenants at September 30, 2018.
Guidance, outlook, risks and unusual items
- Management expects revenue and expenses to increase as the company expands its U.S. sales and customer-support teams and develops international markets, particularly Japan.
- Management expects losses to continue for the next several years and expects sales and marketing, general and administrative and research and development expenses to increase in absolute dollars.
- Key growth initiatives include expansion of the NeuroStar installed base, increased treatment-session utilization, Japan commercialization and development of additional indications, potentially including bipolar depression and post-traumatic stress disorder.
- Material risks include dependence on reimbursement by Medicare and commercial payors, adoption by psychiatrists and patients, competition and technological change, regulatory requirements, international reimbursement, execution of the growth strategy and the need to maintain sufficient liquidity.
- The company is exposed to variable-rate debt, concentration of cash balances above FDIC insurance limits and ordinary-course credit risk from accounts receivable.
- The nine-month results included a $1.4 million non-cash charge from revaluation of convertible preferred stock warrants before their conversion into common-stock warrants. The company also recognized approximately $1.0 million of third-quarter share-based compensation and a $0.1 million non-utilization fee for not drawing the Term C loan.
- The company is an emerging growth company and elected the JOBS Act extended transition period for certain accounting standards. It was evaluating the future effects of revenue-recognition and lease-accounting standards.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls and procedures were deemed effective at September 30, 2018.
Most important facts for investors to verify
- Whether revenue growth, treatment-session volume and system installations continue at the reported pace while average selling prices remain under pressure.
- Whether expanding sales and marketing spending produces operating leverage and a path toward profitability.
- The company’s ongoing cash burn, projected liquidity runway and ability to meet debt amortization beginning in 2019.
- Achievement of the $45.0 million fiscal 2018 revenue threshold and the resulting extension of the debt interest-only period.
- Reimbursement and market adoption progress in the United States and Japan, including the timing of Japanese reimbursement.
- Potential dilution from approximately 2.9 million outstanding stock options, common-stock warrants and other equity awards.
- The accounting and disclosure effects of revenue-recognition and lease standards adopted in subsequent periods.