Neuronetics, Inc. 2019 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 transcranial magnetic stimulation treatment for adults with major depressive disorder. The unaudited filing covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.
As of June 30, 2019, the company had 222 employees, 976 active U.S. systems installed in approximately 778 psychiatrist offices, and an estimated 71,200 patients treated through approximately 2.5 million treatment sessions. Treatment sessions generated the majority of U.S. revenue.
Financial performance and position
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $16.6 million | $13.3 million | $29.3 million | $23.4 million |
| Gross profit | $12.4 million | $10.0 million | $22.3 million | $17.7 million |
| Gross margin | 74.8% | 75.5% | 76.2% | 75.6% |
| Loss from operations | $(6.6) million | $(5.2) million | $(13.7) million | $(9.8) million |
| Net loss | $(7.1) million | $(7.5) million | $(14.6) million | $(13.0) million |
| Net loss per share | $(0.39) | $(30.60) | $(0.80) | $(55.29) |
Revenue increased 25% year over year in both the quarter and six-month period. U.S. revenue increased 23% in the quarter and 24% year to date. For the six months, U.S. treatment-session revenue was $19.6 million, or 69% of U.S. revenue, while NeuroStar system revenue was $8.0 million, or 28%. International revenue increased to $0.9 million from $0.5 million, primarily due to a multi-unit order in Japan.
Quarterly gross margin declined modestly because of a higher mix of system revenue and lower average selling prices. Six-month gross margin improved due to operating leverage in service and operations, partly offset by product mix and pricing pressure.
Operating expenses increased 25% in the quarter and 31% year to date. Six-month sales and marketing expense rose 18% to $21.1 million, while general and administrative expense and research and development expense each rose 55%, to $8.9 million and $6.0 million, respectively. The increases reflected commercial expansion, public-company infrastructure, next-generation system and TrakStar development, and clinical development.
Cash and cash equivalents were $89.6 million at June 30, 2019, compared with $104.6 million at December 31, 2018. Net cash used in operating activities was $16.4 million for the six months, compared with $13.4 million in the prior-year period. Investing cash use was $0.4 million, and financing activities provided $1.9 million, primarily from stock-option exercises. The resulting net decrease in cash was $14.9 million.
The company had $30.0 million of outstanding principal under its Oxford Finance credit facility, with $30.8 million recorded as net debt including accrued final payment fees and debt discounts. The facility matures in March 2022; principal payments are scheduled to begin in April 2020, with $11.25 million due in 2020, $15.0 million in 2021, and $3.75 million in 2022. The company was in compliance with its debt covenants at June 30, 2019.
Total assets were $109.4 million and total liabilities were $49.6 million at June 30, 2019. The accumulated deficit was $235.7 million. The balance sheet includes $4.0 million of operating lease right-of-use assets and $4.2 million of operating lease liabilities following adoption of the new lease standard.
Material changes versus the prior comparable period
- Revenue increased 25% year over year in both the quarter and first half, supported by higher system sales and treatment-session volumes.
- U.S. system revenue increased 30% in the quarter and 34% year to date; capital units sold increased 26% and 31%, respectively, while average selling prices declined 9% and 8%.
- U.S. treatment-session revenue increased 22% in the quarter and 21% year to date, driven by higher session volumes, but average selling prices declined approximately 7% and 5% because of volume discounts.
- The active U.S. installed base increased to 976 systems from 816 at June 30, 2018.
- Operating losses widened substantially year to date as operating expenses grew faster than gross profit. The quarterly net loss improved primarily because 2018 included a warrant fair-value expense, while 2019 benefited from interest income and the absence of that revaluation expense.
- Share-based compensation increased to $1.5 million for the first six months from $0.3 million in the prior-year period.
- The company adopted ASC 606 and ASC 842 on January 1, 2019. ASC 606 resulted in $1.6 million of lower reported sales and marketing expense and lower net loss for the six-month period compared with presentation under the prior revenue standard; it did not affect opening retained earnings or revenue.
- In Japan, reimbursement for NeuroStar treatment became effective June 1, 2019 at JPY12,000 per treatment session for qualifying facilities. The company earned a $0.7 million milestone under its Teijin distribution agreement, with milestone payments deferred and recognized over the agreement term.
Guidance, outlook, risks and unusual items
Management expects operating losses to continue for the next several years while it expands sales and customer support, invests in research and development, develops additional indications, and grows internationally. The filing does not provide specific numerical revenue, earnings, or margin guidance.
Management believes cash and cash equivalents plus anticipated product revenue will fund operations for at least 24 months after June 30, 2019. This assessment depends on revenue growth, operating-margin improvement, reimbursement and market adoption, continued access to financing, and control of sales, research and development, regulatory, and international expansion costs.
- Revenue is concentrated in the United States and depends heavily on recurring treatment-session sales, psychiatrist adoption, patient volumes, and reimbursement.
- Pricing pressure and volume discounts may reduce average selling prices and margins.
- The company remains loss-making and cash-flow negative, with significant debt amortization beginning in 2020.
- The credit facility carries a floating interest rate with a minimum rate of 8.15% and is secured by substantially all assets other than intellectual property. It includes a revenue-based financial covenant and events of default.
- Expansion in Japan depends on Teijin’s performance, reimbursement levels, minimum purchases, regulatory approvals, and commercial viability.
- Competition, product development, clinical research, regulatory oversight, reimbursement changes, and the ability to obtain additional financing could materially affect results.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
- Disclosure controls and procedures were assessed as effective at the reasonable assurance level as of June 30, 2019.
Important facts for investors to verify
- Whether revenue growth and the 976-system installed base translate into sustained growth in recurring treatment-session volume.
- The durability of average selling prices, volume discounts, and gross margins as system sales expand.
- Operating cash burn and whether the stated 24-month liquidity outlook remains valid as expenses and debt amortization increase.
- Compliance with the Oxford Finance revenue covenant and the company’s ability to fund scheduled principal payments beginning in 2020.
- The pace and economics of Japanese commercialization following the June 2019 reimbursement implementation.
- The effect of ASC 606 commission capitalization and other accounting changes on comparability with prior periods.
- Execution and costs associated with the next-generation NeuroStar system, TrakStar, and potential additional indications.