Neuronetics, Inc. Q1 2022 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 cleared by the FDA for adults with major depressive disorder. The company generates revenue from system sales and rentals, recurring Treatment Sessions, and service and warranty contracts. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $14.2 million | $12.3 million | 15% increase |
| Gross profit | $10.7 million | $10.1 million | 6% increase |
| Gross margin | 75.4% | 81.9% | Down 6.5 percentage points |
| Operating loss | $10.1 million | $6.9 million | Loss increased $3.2 million |
| Net loss | $10.8 million | $7.9 million | Loss increased $3.0 million |
| Net loss per share | $0.41 | $0.31 | Higher loss per share |
| Cash used in operations | $12.2 million | $9.2 million | Use increased $3.0 million |
- U.S. revenue was $13.5 million, or 95% of total revenue; international revenue was $0.7 million, or 5%.
- U.S. NeuroStar system revenue increased 108% to $3.6 million, with 48 systems shipped versus 23 in the prior-year quarter. U.S. Treatment Session revenue declined 2% to $9.5 million.
- Cost of revenue increased 57% to $3.5 million, primarily reflecting product mix and higher international capital sales.
- Sales and marketing expense increased 48% to $12.6 million due to marketing initiatives, trade shows, digital media, market research, and higher sales personnel costs.
- General and administrative expense increased 5% to $6.4 million, while research and development expense decreased 22% to $1.8 million.
- Share-based compensation expense was $2.3 million, compared with $2.2 million in Q1 2021.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $80.8 million at March 31, 2022, down from $94.1 million at December 31, 2021.
- Total assets were $129.9 million and total stockholders’ equity was $76.6 million at March 31, 2022.
- Operating cash outflow was $12.2 million; investing cash outflow was $1.1 million, primarily for property, equipment, and capitalized software. Financing cash outflow was $0.05 million.
- Outstanding principal under the credit facility was $35.0 million, with $35.4 million of debt reported net of discounts and other adjustments. The facility matures in February 2025 and is secured by substantially all company assets, including intellectual property.
- The February 2022 amendment waived prior covenant defaults, reduced minimum revenue covenant requirements, eliminated availability of the Term D Loan, and extended the potential commencement of principal amortization to March 1, 2023. Management stated that the company was in compliance with its debt covenants at March 31, 2022.
- Management believes cash and anticipated product revenue are sufficient to fund operations for at least 12 months from issuance of the financial statements, although the company expects continuing operating losses and may require additional financing in the future.
Material changes, outlook, and risks
- Revenue growth was driven primarily by increased system sales, while recurring Treatment Session revenue remained pressured by COVID-19-related reductions in utilization.
- The Omicron surge and related responses in January and February 2022 reduced Treatment Session volume. Management stated that COVID-19 continued to affect customers, patient starts, capital purchase decisions, supply chains, and system utilization.
- Management expects continued losses as it expands sales and marketing and invests in product development and additional indications. Sales and marketing expense is expected to increase in 2022; general and administrative expense is expected to remain approximately flat; and research and development expense is expected to increase compared with 2021.
- Inflation may increase cost of revenues and operating expenses and pressure gross margins if pricing does not offset cost increases.
- The company relies substantially on NeuroStar system sales and Treatment Sessions, third-party reimbursement, physician and patient demand, its sales force, contract manufacturers, regulatory approvals, and intellectual property protection. Competition, product defects, supply-chain disruption, and COVID-19 remain material risks.
- One customer accounted for more than 10% of revenue in the quarter.
- The company had loaned Success TMS $10.0 million under a secured note. On April 29, 2022, the company subordinated its rights and liens under that note to a new senior revolving note of up to $10.0 million, while retaining a right to purchase the senior debt at par.
- On May 11, 2022, the company sued Brainsway in federal court, alleging unfair competition and seeking unspecified monetary damages and injunctive relief. The filing does not provide a clear estimate of potential financial exposure or recovery.
Most important facts for investors to verify
- Whether system placements and Treatment Session utilization recover as COVID-19 effects diminish.
- Whether the company can reduce cash burn and improve gross margin despite continued commercial investment and inflationary pressure.
- Compliance with the amended credit facility’s minimum revenue covenants and the timing of required principal amortization.
- The company’s ability to fund operations beyond the stated 12-month liquidity horizon without dilutive equity or restrictive debt financing.
- Credit and collateral risk related to the subordinated Success TMS note.
- Customer concentration, reimbursement developments, international growth—particularly Japan—and competitive positioning in TMS therapy.
- The potential effect and cost of the Brainsway litigation and any other legal or regulatory matters.