Neuronetics, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Neuronetics is a commercial-stage medical technology company focused on neurohealth disorders. Its primary product is the NeuroStar Advanced Therapy System, a transcranial magnetic stimulation system used primarily to treat major depressive disorder. The FDA also cleared the system in 2022 for obsessive-compulsive disorder and anxious depression. The company generates revenue from system sales and rentals, recurring Treatment Sessions, and service, repair, and warranty contracts.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The company reported 141,070 global patients treated and more than 5.1 million Treatment Sessions through September 30, 2022. It had 198 employees at period end.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $16.5 million | $13.8 million | +20% |
| Gross profit | $12.9 million | $10.7 million | +21% |
| Gross margin | 78.4% | 77.2% | +120 basis points |
| Operating loss | $7.5 million | $7.2 million | Loss increased $0.3 million |
| Net loss | $7.6 million | $8.2 million | Improved $0.5 million |
| Net loss per share | $0.28 | $0.31 | Improved |
| Metric | Nine months 2022 | Nine months 2021 | Change |
|---|---|---|---|
| Revenue | $47.0 million | $40.3 million | +17% |
| Gross profit | $35.9 million | $32.2 million | +12% |
| Gross margin | 76.4% | 79.9% | Down 350 basis points |
| Operating loss | $27.4 million | $20.7 million | Loss increased $6.7 million |
| Net loss | $28.9 million | $23.6 million | Loss increased $5.3 million |
| Net loss per share | $1.08 | $0.94 | Loss per share increased |
U.S. revenue was $16.2 million in Q3 and $45.9 million for the nine-month period, representing 98% of total revenue in each period. International revenue declined to $0.3 million in Q3 and $1.1 million year to date. For the nine months, U.S. system revenue increased 72% to $12.0 million, while U.S. Treatment Session revenue increased 6% to $32.6 million.
As of September 30, 2022, cash and cash equivalents were $73.7 million, down from $94.1 million at December 31, 2021. The company had total assets of $119.2 million, total liabilities of $56.2 million, and stockholders’ equity of $63.0 million. Accounts receivable increased to $12.0 million from $7.7 million, and inventory increased to $8.6 million from $6.6 million.
Operating cash flow was negative $27.6 million for the first nine months of 2022, compared with negative $23.5 million in the prior-year period. Investing activities provided $7.2 million, primarily from repayment of a $10.0 million promissory note, while financing activities used $0.04 million. Cash declined $20.4 million during the period.
Debt consisted of $35.0 million of borrowings under the Solar credit facility, presented net at $35.8 million after accrued fees and debt discounts. The facility matures in February 2025; $8.8 million was classified as current at September 30, 2022. Management stated that cash and anticipated product revenue are expected to fund operations for at least 12 months from issuance of the financial statements.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher U.S. Treatment Session sales and increased U.S. system placements. The company recognized 153 U.S. systems in the first nine months of 2022 versus 92 in the prior-year period.
- Q3 U.S. system revenue increased 50%, while Q3 U.S. Treatment Session revenue increased 16%. Treatment Session volume in local per-click accounts using the PHQ 10 tool increased 36.9% in Q3 and 36.3% year to date.
- Sales and marketing expense increased 18% in Q3 and 38% year to date, reflecting trade shows, digital media, market research, and higher sales personnel costs.
- Research and development expense increased 49% in Q3 to $2.3 million but was essentially flat year to date at $6.2 million.
- Year-to-date gross margin declined because of product mix, despite a modest Q3 improvement.
- The company’s accumulated deficit increased to $337.6 million from $308.7 million at year-end 2021.
- Interest income increased materially following repayment of the Success TMS note. Success TMS repaid the $10.0 million principal in July 2022 with a $10.5 million cash payment, including premium and accrued interest.
Guidance, outlook, risks, and unusual items
The filing does not provide specific numerical revenue, margin, or earnings guidance. Management expects continued operating losses as it expands sales and marketing, develops additional indications, and invests in product development. Sales and marketing and research and development expenses were expected to increase during the remainder of 2022, while general and administrative expense was expected to remain relatively flat.
- COVID-19 continued to affect customer purchasing decisions, patient treatment starts, system utilization, supply chains, and operating plans. Management stated that the ultimate impact remains uncertain.
- The company remains dependent on NeuroStar system sales and Treatment Session utilization, physician and patient demand, and third-party reimbursement coverage.
- Competition, product defects, intellectual property protection, regulatory developments, additional-indication development, inflation, and high interest rates could adversely affect results.
- The company relies substantially on U.S. revenue and had one customer representing 20% of nine-month 2022 revenue and $4.9 million of accounts receivable at September 30, 2022.
- The Solar facility is secured by substantially all company assets, including intellectual property, includes financial covenants and subjective acceleration provisions, and carries variable-rate interest. The company stated that it was in compliance with all covenants at September 30, 2022.
- Management stated that no legal proceedings, commitments, or contingencies were expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Share-based compensation was $6.6 million for the first nine months, and $11.0 million of unrecognized restricted-stock compensation remained at September 30, 2022.
Important facts for investors to verify
- Whether U.S. Treatment Session growth and system placements can offset continued international weakness and COVID-19-related utilization pressure.
- Whether revenue growth can outpace sales and marketing investment and restore the nine-month gross margin decline.
- The company’s cash burn, liquidity runway, and ability to refinance or repay the $35.0 million Solar facility before its February 2025 maturity.
- Compliance with Solar facility revenue covenants and exposure to variable interest rates, secured collateral, and acceleration provisions.
- Customer concentration, accounts receivable collectability, and the $1.8 million allowance for doubtful accounts.
- Adoption, reimbursement, and revenue contribution from the 2022 FDA clearances for obsessive-compulsive disorder and anxious depression.
- Potential dilution from 1.4 million outstanding stock options, 4.1 million restricted stock units and performance units, warrants, and other reserved shares.