Neuronetics, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020; filed November 2, 2020. Neuronetics markets the NeuroStar Advanced Therapy System, a non-invasive transcranial magnetic stimulation system for major depressive disorder. The company operates as one business segment and derives most revenue from recurring treatment sessions.
Business Context and Operating Metrics
- As of September 30, 2020, the U.S. installed base was 1,143 active systems across approximately 909 psychiatrist offices, compared with 1,032 systems a year earlier.
- The company reported approximately 94,609 patients treated and 3.4 million treatment sessions through September 30, 2020.
- U.S. revenue represented 96% of nine-month revenue; international revenue represented 4%.
- One customer accounted for more than 10% of revenue in both the three- and nine-month 2020 periods.
Financial Performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $12.4 million | $16.0 million | $33.7 million | $45.3 million |
| Gross profit | $9.8 million | $11.8 million | $25.9 million | $34.1 million |
| Gross margin | 78.7% | 73.8% | 76.9% | 75.3% |
| Operating loss | $(2.4) million | $(6.3) million | $(19.6) million | $(20.0) million |
| Net loss | $(3.4) million | $(6.9) million | $(23.8) million | $(21.5) million |
| Loss per share | $(0.18) | $(0.37) | $(1.27) | $(1.17) |
| Operating cash flow | Not separately provided | Not separately provided | $(26.7) million | $(24.1) million |
- Q3 revenue declined 22%, while nine-month revenue declined 26%, primarily due to COVID-19-related reductions in patient treatment starts, system utilization and capital purchase decisions.
- U.S. treatment-session revenue declined 11% in Q3 and 20% for the nine-month period. U.S. system revenue declined 45% in Q3 and 41% for the nine-month period.
- The company sold 39 systems in Q3 2020 versus 68 in Q3 2019, and 112 systems in the first nine months of 2020 versus 172 in the comparable 2019 period.
- Gross margin improved because of product mix and lower personnel costs supporting installations.
- Q3 sales and marketing expense decreased 42%, and research and development expense decreased 44%. Nine-month sales and marketing expense decreased 21%, while research and development expense decreased 25%.
- Nine-month general and administrative expense increased 3%, partly due to severance costs.
Cash, Debt and Liquidity
- Cash and cash equivalents were $50.7 million at September 30, 2020, down from $75.7 million at December 31, 2019.
- Net cash used in operating activities was $26.7 million for the first nine months of 2020. Investing cash use was $0.6 million, and financing activities provided $2.3 million.
- The company had $35.0 million of outstanding principal under the Solar credit facility, with a final maturity in February 2025. Interest is variable and the facility includes a 5.5% final payment fee, prepayment fees and potential exit fees.
- The Solar facility is secured by substantially all company assets, including intellectual property, and includes financial and other covenants.
- Although the company was in compliance with its covenants at September 30, 2020, management believed it was probable that the minimum trailing-revenue covenant beginning December 31, 2020 would not be met. The debt was therefore classified as current, and the company was negotiating a waiver or amendment with lenders; no formal agreement had been executed.
- Management stated that available cash and anticipated product revenue should fund operations for at least 12 months from issuance of the financial statements, including potential repayment of the credit facility if a waiver or amendment is not obtained. The filing also stated that the current business plan supported cash requirements through November 2, 2021.
- The company’s accumulated deficit was $273.9 million at September 30, 2020.
Material Changes, Outlook and Risks
- COVID-19 caused significant business disruption from March through September 2020 and materially reduced treatment-session revenue, system utilization and capital equipment sales. The full duration and financial impact remained uncertain.
- In April 2020, the company implemented a reduction in force affecting 95 employees, recorded $2.1 million of related charges and estimated net savings of approximately $18 million through December 31, 2020. The workforce totaled 122 employees at September 30, 2020.
- The company expects operating losses to continue for the next several years while it invests in commercial activities, product development and additional indications.
- The company received a $6.4 million Paycheck Protection Program loan in April 2020 but repaid it in full, including accrued interest, on May 7, 2020.
- Neuronetics entered into a new Solar credit facility in March 2020, repaid the prior Oxford facility and recorded a $0.9 million loss on extinguishment of debt for the nine-month period.
- Key risks include continued COVID-19 effects, failure to achieve profitability, dependence on NeuroStar sales and treatment utilization, reimbursement and coverage, competition, product defects, regulatory approvals, intellectual property protection and covenant compliance.
- Management reported that disclosure controls and internal control over financial reporting were effective as of September 30, 2020. No material changes to internal controls were reported.
Facts Investors Should Verify
- Whether the lender granted a waiver or amendment for the December 31, 2020 minimum-revenue covenant and whether the debt classification subsequently changed.
- Actual cash burn, revenue recovery and treatment-session utilization as the COVID-19 impact evolved.
- Whether the company generated sufficient revenue growth to avoid additional equity or debt financing and potential shareholder dilution.
- Progress toward profitability, including the sustainability of reduced operating expenses and the effect of lower system sales on future recurring treatment revenue.
- Customer concentration, reimbursement developments, competitive therapies and regulatory progress for additional indications.