Neuronetics, Inc. — Q3 2021 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 system cleared by the FDA for adults with major depressive disorder. Revenue is generated primarily from NeuroStar system sales and recurring treatment sessions. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $13.8 million | $12.4 million | $40.3 million | $33.7 million |
| Gross profit | $10.7 million | $9.8 million | $32.2 million | $25.9 million |
| Gross margin | 77.2% | 78.7% | 79.9% | 76.9% |
| Operating loss | $7.2 million | $2.4 million | $20.7 million | $19.6 million |
| Net loss | $8.2 million | $3.4 million | $23.6 million | $23.8 million |
| Loss per share | $0.31 | $0.18 | $0.94 | $1.27 |
As of September 30, 2021, cash and cash equivalents were $99.4 million, compared with $49.0 million at December 31, 2020. Total assets were $143.1 million and stockholders’ equity was $91.1 million. The accumulated deficit was $301.1 million.
- Operating cash flow was negative $23.5 million for the first nine months of 2021, compared with negative $26.7 million in the prior-year period.
- Investing cash flow was negative $9.0 million, including $7.5 million of cash advanced under a promissory note to Success TMS and $1.6 million for property, equipment and capitalized software.
- Financing cash flow was positive $83.0 million, primarily from the February 2021 common stock offering.
- The company had $35.0 million of outstanding principal under its Solar credit facility, with a February 2025 maturity. The debt was classified as current because management believed a minimum revenue covenant would probably not be met at December 31, 2021 and the facility contains subjective acceleration provisions.
Material Changes Versus the Prior Comparable Period
- Revenue increased 11% in Q3 and 20% for the first nine months. Growth was primarily driven by higher U.S. treatment-session revenue.
- U.S. treatment-session revenue increased 13% in Q3 and 29% year to date. U.S. system revenue increased 3% in Q3 but declined 7% year to date; systems sold declined to 92 from 112 in the nine-month comparison.
- Sales and marketing expense increased 62% in Q3 and 10% year to date, reflecting higher marketing, digital media, travel and trade-show spending.
- General and administrative expense increased 53% in Q3 and 42% year to date, including higher personnel, bonus, share-based compensation, consulting and insurance costs.
- Research and development expense declined 19% in Q3 and 13% year to date due primarily to lower clinical and product-development personnel costs.
- Q3 gross margin declined 150 basis points, primarily from higher supply-chain costs. Year-to-date gross margin improved 300 basis points due to revenue mix.
- Share-based compensation increased to $6.2 million for the first nine months from $2.9 million in the prior-year period.
- On February 2, 2021, the company issued 5.6 million common shares for net proceeds of $80.6 million, increasing shares outstanding to 26.3 million at September 30, 2021 from 19.1 million at December 31, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management expects operating losses to continue in the near term and states that losses may continue for several years while it invests in sales, marketing, product development and additional indications.
- Management believes available cash and expected product revenue will fund operations for at least 12 months from issuance of the financial statements; no specific revenue or earnings guidance is provided in the filing.
- COVID-19 materially affected customer demand, treatment-session utilization, capital purchases, patient starts, supply chains and operations. Management cannot predict the pandemic’s ultimate financial impact.
- The company believes it is probable that it will not meet a future minimum revenue covenant under the Solar Facility. It was negotiating a waiver or amendment, but no formal agreement had been executed as of the filing date.
- The company entered into a five-year commercial agreement with Success TMS and issued a secured $10.0 million note receivable bearing interest at prime plus 6%. The note is secured by substantially all of Success TMS’s assets and supported by a limited guarantee and equity pledge.
- Additional risks include reliance on NeuroStar sales and utilization, reimbursement and payer coverage, competition, product defects, intellectual property protection, regulatory approvals, international expansion and the company’s history of operating losses.
- One customer accounted for more than 10% of revenue in both the quarter and nine-month periods. The filing does not identify the customer.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls as of September 30, 2021.
Most Important Facts for Investors to Verify
- Whether the Solar Facility revenue covenant was ultimately waived or amended and whether the $35.0 million debt remains subject to acceleration or current classification.
- Cash burn and liquidity relative to the company’s continuing operating losses and expected investment in commercial activities.
- Whether treatment-session growth can offset lower system placements and COVID-19-related utilization pressure.
- The credit quality, repayment performance and collectability of the $10.0 million Success TMS note receivable.
- The effect of higher sales, marketing, administrative and share-based compensation costs on the path to profitability.
- Customer concentration, reimbursement developments and the sustainability of U.S. treatment-session demand.