Neuronetics, Inc. 2022 Q2 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 non-invasive transcranial magnetic stimulation treatment for major depressive disorder and, following 2022 FDA clearance, obsessive-compulsive disorder. Revenue is generated primarily from system sales or rentals and recurring Treatment Session sales. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Revenue | $16.3 million | $14.2 million | $30.5 million | $26.5 million |
| Gross profit | $12.3 million | $11.5 million | $23.0 million | $21.5 million |
| Gross margin | 75.3% | 80.6% | 75.3% | 81.2% |
| Operating loss | $9.8 million | $6.6 million | $19.9 million | $13.5 million |
| Net loss | $10.4 million | $7.5 million | $21.3 million | $15.4 million |
| Net loss per share | $0.39 | $0.29 | $0.80 | $0.63 |
| Cash flow from operations | Not separately provided | Not separately provided | $(21.1) million | $(14.9) million |
- Q2 revenue increased 15%; U.S. revenue increased 17% to $16.1 million, while international revenue declined 50% to $0.2 million.
- YTD U.S. revenue increased 16% to $29.6 million; international revenue declined 2% to $0.9 million.
- U.S. NeuroStar system revenue increased 70% in Q2 and 85% year to date. The company recognized 58 systems in Q2 and 104 systems year to date, compared with 36 and 59, respectively, in the prior-year periods.
- U.S. Treatment Session revenue increased 5% in Q2 to $11.3 million but only 2% year to date to $20.8 million.
- Sales and marketing expense increased 51% in Q2 and 50% year to date, reflecting expanded marketing initiatives and sales personnel costs.
- Share-based compensation was $2.2 million in Q2 and $4.5 million year to date.
- Cash and cash equivalents were $70.9 million at June 30, 2022, down from $94.1 million at December 31, 2021. The accumulated deficit was $330.0 million.
- Total debt, net, was $35.6 million, including $35.0 million of outstanding principal. The credit facility matures in February 2025, with $4.4 million classified as current.
Material changes versus the prior comparable periods
- Revenue growth was driven primarily by higher U.S. system sales, while recurring Treatment Session growth was modest.
- Gross margin declined by 5.3 percentage points in Q2 and 5.9 percentage points year to date, primarily because of product mix.
- Operating losses increased 49% in Q2 and 48% year to date as operating expenses grew faster than gross profit, particularly sales and marketing expense.
- Net losses increased 38% in both Q2 and the first six months.
- Operating cash use increased by $6.2 million year to date, and investing cash use increased from $1.1 million to $2.0 million, primarily for property, equipment and capitalized software.
- Shares outstanding increased to 26.9 million at June 30, 2022 from 26.4 million at December 31, 2021. The company also had 3.9 million non-vested restricted stock units and 1.4 million outstanding stock options.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. It expects operating losses to continue for the next several years while expanding the commercial organization, investing in sales and marketing, and developing additional indications. Management expects 2022 sales and marketing expense to increase versus 2021, general and administrative expense to remain approximately flat, and research and development expense to increase over the near term.
- Management stated that cash, cash equivalents and anticipated product revenue are sufficient to fund operations for at least 12 months from issuance of the financial statements.
- The company remains exposed to COVID-19-related effects on customer purchasing, patient treatment starts, system utilization, supply chains and operating plans. Inflation and higher costs could further pressure margins.
- Other key risks include continued operating losses, dependence on NeuroStar system adoption and Treatment Session utilization, reimbursement and coverage, competition, product defects, regulatory approvals, intellectual property protection and compliance with debt covenants.
- The company was in compliance with its Solar credit facility covenants at June 30, 2022. The facility is secured by substantially all company assets, including intellectual property, and includes minimum revenue covenants and potential acceleration provisions.
- On July 14, 2022, Success TMS repaid the company’s $10.0 million secured note in full for $10.5 million, including accrued interest. The repayment terminated the related subordination agreement.
- One customer represented more than 10% of revenue in both the Q2 and year-to-date periods. Two customers together represented 20% of year-to-date revenue and $5.3 million of accounts receivable at June 30, 2022.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2022.
Important facts for investors to verify
- Whether system placements and Treatment Session utilization can sustain revenue growth after the unusually strong increase in system sales.
- Whether gross margin can recover from the 75.3% year-to-date level as product mix, manufacturing costs and pricing evolve.
- The pace of cash burn and the company’s ability to reach profitability before its cash balance declines materially.
- Compliance with the Solar facility’s revenue covenants and the timing of required principal amortization.
- The effect of COVID-19, inflation, reimbursement conditions and customer concentration on future demand.
- The commercial impact of the new FDA clearance for obsessive-compulsive disorder and the timing and cost of further indication development.