Neuronetics, Inc. — Q1 2023 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 primarily used for major depressive disorder. The unaudited filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company operates in one business segment and generated 96% of revenue in the United States.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $15.5 million | $14.2 million | +10% |
| Gross profit | $11.4 million | $10.7 million | +7% |
| Gross margin | 73.3% | 75.4% | Down 2.1 percentage points |
| Operating expenses | $21.3 million | $20.8 million | +2% |
| Loss from operations | $(9.9) million | $(10.1) million | Improved $0.2 million |
| Net loss | $(10.5) million | $(10.8) million | Improved $0.3 million |
| Net loss per share | $(0.38) | $(0.41) | Improved $0.03 |
| Cash used in operating activities | $(15.2) million | $(12.2) million | Higher use of $3.0 million |
U.S. revenue increased 11% to $15.0 million, including $10.6 million from treatment sessions and $3.9 million from NeuroStar system revenue. The company sold 49 U.S. systems in Q1 2023 versus 45 in the prior-year quarter. International revenue declined 13% to $0.6 million.
Cash and cash equivalents were $55.4 million at March 31, 2023, down from $70.3 million at December 31, 2022. Total assets were $103.6 million and stockholders’ equity was $48.3 million. The accumulated deficit was $356.4 million.
Outstanding principal under the credit facility was $37.5 million, with net debt reported at $36.6 million after discounts and accrued final payment fees. The facility matures in March 2028. Interest expense was $1.3 million, including $0.2 million of non-cash expense.
Material changes versus the prior comparable period
- Revenue grew 10%, driven primarily by higher U.S. system and treatment-session sales.
- Gross margin declined from 75.4% to 73.3%, primarily due to product mix, increased system sales and higher capitalized software amortization.
- Sales and marketing expense declined 6% to $11.9 million, reflecting lower marketing initiative costs and sales personnel expenses.
- Research and development expense increased 55% to $2.8 million, primarily due to lower capitalization of software development costs and higher quality-assurance costs.
- Interest expense increased 28% due to higher interest rates, partly offset by higher interest income.
- Operating cash use increased, primarily because of payments of accrued 2022 bonus compensation and other working-capital movements.
Guidance, outlook, risks and unusual items
Management expects operating losses to continue for the next several years while it invests in its commercial organization, product development and additional indications. Management expects 2023 sales and marketing expense to decrease from 2022 levels, general and administrative expense to remain approximately flat, and research and development expense to increase.
Management believes existing cash and anticipated product revenue are sufficient to fund operations for at least 12 months from issuance of the financial statements. The company has a history of operating losses and negative operating cash flow and may require additional equity or debt financing. Additional financing may be unavailable or unfavorable and could dilute shareholders or impose restrictive covenants.
On March 29, 2023, the company amended its Solar credit facility, borrowed an additional $2.5 million and extended the loan maturity to March 2028. Interest-only payments continue until March 2026, with principal and interest payments beginning in April 2026. The company paid a $1.2 million final payment fee in connection with the amendment and reported compliance with all facility covenants.
On March 31, 2023, Neuronetics issued a four-year, $6.0 million secured promissory note to TMS Neurohealth Centers and Greenbrook TMS. The note bears interest at daily SOFR plus 7.65%, is secured by substantially all relevant borrower and guarantor assets, and ranks pari passu with the borrower’s senior lender. This financing increased note receivables and introduces counterparty and collection risk.
Key business risks include continued losses, reliance on NeuroStar system sales and treatment utilization, reimbursement and coverage decisions, physician and patient demand, competition, product defects, regulatory and clinical-development risk, intellectual-property protection, inflation, financial-market disruption and dependence on third-party manufacturers. One customer represented 18% of revenue in both comparative periods.
The company adopted the current expected credit loss standard on January 1, 2023; adoption had no material effect. Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Facts investors should verify
- Whether revenue growth and treatment-session utilization can continue while system-sales mix pressures gross margin.
- The company’s path to reducing the $15.2 million quarterly operating cash burn and achieving profitability.
- Cash runway relative to the $37.5 million credit facility, interest-rate exposure and principal payments beginning in 2026.
- Compliance with Solar facility covenants and the terms, collateral and collectability of the $6.0 million Greenbrook-related note.
- Reimbursement trends, particularly in Japan and other international markets, and the effect of competing TMS and alternative therapies.
- Customer concentration and accounts-receivable collection trends, including the adoption of expected-credit-loss estimates.
- Potential shareholder dilution from equity financing, stock-based compensation and approximately 5.0 million outstanding options, restricted units and performance units excluded from diluted loss per share.