Neuronetics, Inc. — Q1 2019 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 adults with major depressive disorder who have not achieved satisfactory improvement from prior antidepressant medication. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
The company operated in one business segment and had 206 employees, 931 active U.S. systems in approximately 737 psychiatrist offices, and an estimated 63,900 patients treated through March 31, 2019. The company completed its IPO in July 2018 and trades on Nasdaq under the symbol STIM.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $12.7 million | $10.2 million | Up 25% |
| Gross profit | $9.9 million | $7.7 million | Up 29% |
| Gross margin | 77.9% | 75.8% | Up 2.1 percentage points |
| Operating expenses | $17.0 million | $12.3 million | Up 38% |
| Loss from operations | $(7.1) million | $(4.6) million | Loss increased |
| Net loss | $(7.5) million | $(5.5) million | Loss increased 37% |
| Basic and diluted loss per share | $(0.42) | $(24.43) | Not directly comparable due to share-count changes |
| Cash used in operating activities | $(9.6) million | $(8.3) million | Use increased |
U.S. revenue increased 26% to $12.5 million, while international revenue was $0.2 million and essentially unchanged. U.S. revenue consisted of $8.8 million from treatment sessions, $3.4 million from NeuroStar systems, and $0.4 million from other revenue. Treatment sessions represented 70% of U.S. revenue, compared with 73% in the prior-year quarter.
System revenue increased 41%, supported by higher capital and rent-to-own unit sales. Capital units sold increased 42%, although average selling price declined 8%. Treatment-session revenue increased 21%, driven by an approximately 18% increase in sessions sold, partly offset by a 3% decline in average selling price from volume discounts.
Sales and marketing expense increased 18% to $9.6 million. General and administrative expense increased 74% to $4.6 million, primarily reflecting personnel, legal, accounting, professional services, and public-company infrastructure costs. Research and development expense increased 79% to $2.8 million, reflecting next-generation system and TrakStar practice-management-system development and increased clinical-development spending.
At March 31, 2019, cash and cash equivalents were $96.1 million, down from $104.6 million at December 31, 2018. Total assets were $113.4 million, total liabilities were $48.0 million, and stockholders’ equity was $65.4 million. The accumulated deficit was $228.6 million.
Debt, liquidity, and cash flow
- The company had $30.0 million of principal outstanding under its Oxford Finance credit facility, presented as $30.6 million of net long-term debt after accrued final-payment fees and debt discounts.
- The credit facility bears interest at the greater of 8.15% or 30-day U.S. LIBOR plus 7.38% and matures in March 2022.
- The interest-only period was extended through March 2020. Scheduled principal payments are $11.25 million in 2020, $15.0 million in 2021, and $3.75 million in 2022.
- Cash interest expense was $0.7 million in Q1 2019, with an additional $0.2 million of non-cash interest expense. Total interest expense was $0.9 million.
- Net cash used in investing activities was $0.3 million, primarily for property, equipment, and capitalized software. Financing activities provided $1.4 million from stock-option exercises.
- Management stated that cash and anticipated product revenue were sufficient to fund operations for at least 24 months after March 31, 2019.
Material changes versus the prior comparable period
- Revenue grew 25%, led by higher U.S. system sales and treatment-session volume.
- Gross margin improved from 75.8% to 77.9%, primarily due to operating leverage in service and operations costs.
- Operating expenses grew faster than revenue, causing the operating loss to widen from $4.6 million to $7.1 million and the net loss to widen from $5.5 million to $7.5 million.
- Share-based compensation increased to $0.5 million from $0.1 million.
- Cash used in operations increased to $9.6 million from $8.3 million, and cash declined by $8.4 million during the quarter.
- The installed base increased to 931 active U.S. systems from 781 at March 31, 2018.
- The company adopted ASC 606 revenue recognition and ASC 842 lease accounting on January 1, 2019. ASC 606 had no impact on revenue or retained earnings, but reduced reported Q1 sales and marketing expense by $0.5 million and reduced the reported net loss by the same amount through capitalization of certain commissions.
- ASC 842 resulted in recognition of $4.1 million of operating lease right-of-use assets and $4.2 million of operating lease liabilities at March 31, 2019.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal numerical revenue or earnings guidance in the filing. It expects revenue and expenses to increase as it expands its sales and customer-support organization, invests in research and development, enters additional markets, and incurs public-company compliance costs. Management expects operating losses to continue for the next several years.
The company expects initial Japanese reimbursement of approximately JPY 12,000 per treatment session to begin on or about June 1, 2019, and expects international revenue, particularly from Japan, to increase over time. Potential development areas include bipolar depression and post-traumatic stress disorder.
- Liquidity depends on revenue growth, improved operating margins, reimbursement coverage, market adoption, international expansion, and access to additional financing if required.
- Additional equity financing could dilute existing shareholders; debt financing could impose restrictive covenants and may not be available on favorable terms.
- The credit facility includes a monthly financial maintenance covenant requiring achievement of at least 75% of forecasted trailing-twelve-month revenue. The company was in compliance as of March 31, 2019.
- The facility is secured by substantially all assets other than intellectual property and includes customary events of default, including covenant violations, insolvency, material adverse changes, and loss of required governmental approvals.
- The company is exposed to variable interest rates, customer credit risk, reliance on third-party manufacturers, reimbursement and regulatory risks, competition, and possible lower-than-expected demand for products under development.
- The company signed a lease modification extending its Malvern, Pennsylvania facility through February 2028 and adding approximately 10,000 square feet. Present-value operating lease liabilities were $4.2 million at quarter-end.
- Management reported no material legal proceedings and no material changes to the risk factors disclosed in the 2018 Form 10-K.
Important facts for investors to verify
- Whether revenue growth and the 931-system installed base translate into sustained growth in recurring treatment-session revenue.
- The impact of volume-based pricing discounts and declining average selling prices on future gross margin.
- Cash burn, the timing of the $30.0 million debt amortization beginning in 2020, and compliance with the Oxford Finance revenue covenant.
- The timing and commercial impact of Japanese reimbursement and the Teijin distribution arrangement.
- Whether sales, marketing, research and development, and public-company costs continue to grow faster than revenue.
- Future reimbursement coverage, regulatory approvals, clinical-development outcomes, competitive technologies, and manufacturing dependencies.
- The filing’s forward-looking statements and risk factors, which remain subject to material uncertainty; the filing provides no formal numerical earnings or revenue guidance.