Neuronetics, Inc. — Form 10-Q Summary
Business context and reporting period
Neuronetics is a commercial-stage medical technology company focused on psychiatric disorders. Its primary product is the FDA-cleared NeuroStar Advanced Therapy System, a transcranial magnetic stimulation treatment for adults with major depressive disorder who did not achieve satisfactory improvement from prior antidepressant medication. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, and was filed August 14, 2018.
- As of June 30, 2018, the company had 816 active U.S. systems installed in approximately 637 psychiatrist offices and reported approximately 54,000 patients treated through approximately 1.9 million treatment sessions.
- Revenue is generated primarily from system sales and recurring treatment sessions, with additional service, repair, and extended-warranty revenue.
- The company operated in one business segment. The United States generated 97% of second-quarter revenue and 98% of six-month revenue.
Financial performance and liquidity
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $13.3 million | $10.3 million | $23.4 million | $17.8 million |
| Gross profit | $10.0 million | $7.8 million | $17.7 million | $13.8 million |
| Gross margin | 75.5% | 75.7% | 75.6% | 77.4% |
| Loss from operations | $(5.2) million | $(2.6) million | $(9.8) million | $(6.6) million |
| Net loss | $(7.5) million | $(2.9) million | $(13.0) million | $(7.4) million |
| Net loss per share | $(30.60) | $(16.58) | $(55.29) | $(43.42) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(13.4) million | $(9.5) million |
- Second-quarter revenue increased 29%, while six-month revenue increased 31%, driven by higher system sales and treatment-session volume.
- U.S. treatment-session revenue increased 21% in the quarter and 23% for the six-month period, supported by increases in treatment sessions performed of 25% and 27%, respectively. Average treatment-session selling prices declined 4% in both comparisons because of volume discounts.
- U.S. system revenue increased 42% in the quarter and 55% for the six-month period, primarily from higher unit volume. The second quarter included a $0.5 million multi-unit order.
- Sales and marketing expense increased 54% in the quarter and 41% year to date; general and administrative expense increased 68% and 64%, respectively, reflecting commercial expansion and preparation for public-company reporting.
- Research and development expense decreased 7% year to date because of lower clinical-study spending, partly offset by development of next-generation systems and the TrakStar practice-management system.
- Cash and cash equivalents were $14.5 million at June 30, 2018, compared with $29.1 million at December 31, 2017. Total assets were $28.3 million and accumulated deficit was $209.9 million.
- The company had $30.0 million of credit-facility borrowings outstanding, with net debt presented at approximately $30.0 million. The facility matures in March 2022, bears interest at the greater of 8.15% or 30-day LIBOR plus 7.38%, and is secured by substantially all assets other than intellectual property.
Material changes versus the prior comparable period
- Revenue growth outpaced gross-profit growth because system sales represented a larger portion of the mix and treatment-session pricing declined; six-month gross margin fell from 77.4% to 75.6%.
- Operating losses expanded substantially as commercial and corporate infrastructure investments increased faster than revenue.
- Net loss increased by $4.6 million in the quarter and $5.6 million for the six-month period.
- Interest expense increased 27% in the quarter and 44% year to date due to higher borrowings, higher interest rates, and additional non-cash financing costs.
- Other expense included a $1.4 million non-cash increase in the fair value of the convertible preferred stock warrant liability, compared with a $0.4 million gain in the second quarter of 2017.
- Operating cash use increased from $9.5 million to $13.4 million for the six-month period, and cash declined by $14.6 million during the first six months.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects operating losses to continue for the next several years as it expands sales and customer-support personnel, enters new markets, invests in research and development, and incurs additional public-company costs.
- Management stated that the IPO proceeds, June 30 cash balance, and anticipated product revenue should fund operations for at least 24 months after June 30, 2018. This expectation depends on revenue growth, reimbursement, market adoption, spending, competition, regulatory developments, and international expansion.
- The company expected to achieve the $45.0 million fiscal-year revenue milestone in the fourth quarter of 2018 and anticipated extending the credit facility’s interest-only period through March 2020. It elected not to draw the additional $5.0 million Term C tranche after completing the IPO.
- On July 2, 2018, after the reporting date, the company completed its IPO of 6.325 million shares at $17.00 per share and received approximately $100.0 million of net proceeds before other offering expenses. All outstanding convertible preferred stock converted into approximately 11.0 million common shares, and preferred-stock warrants converted into common-stock warrants.
- The company effected a 0.0345-for-1 reverse stock split on June 14, 2018; all share and per-share amounts were retroactively adjusted.
- The credit facility contains revenue-based financial covenants, collateral requirements, prepayment fees, and events of default. The company stated that it was in compliance with all covenants at June 30, 2018.
- Future principal payments were presented as $7.5 million in 2019, $10.0 million in 2020, $10.0 million in 2021, and $2.5 million in 2022.
- The company reported no material pending legal proceedings and no material changes to the risk factors in its IPO prospectus.
- The company is an emerging growth company and elected the extended transition period for adopting certain new accounting standards. It was evaluating the effect of revenue-recognition and lease-accounting changes.
Most important facts for investors to verify
- Whether revenue growth and treatment-session volume can continue while average pricing and gross margin remain under pressure.
- The pace at which sales and marketing spending converts into installed systems, treatment sessions, recurring revenue, and improved operating leverage.
- Post-IPO cash usage, including whether the approximately $100.0 million raised is sufficient to support the stated 24-month liquidity outlook.
- Compliance with the Oxford credit facility’s revenue covenant and the timing and amount of required principal amortization.
- Reimbursement coverage, particularly for Medicare, commercial payors, and the planned Japanese market expansion.
- Regulatory and commercial progress for potential additional indications, including bipolar depression and post-traumatic stress disorder.
- Dilution from approximately 11.0 million shares issued on conversion of preferred stock, common-stock warrants, stock options, and future equity financing.