Neuronetics, Inc. — Q3 2023 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 cleared by the FDA for certain adults with major depressive disorder. The company generates revenue primarily from recurring treatment sessions, system sales and rentals, service, repair and warranty contracts.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods. The company reported 28.9 million common shares outstanding as of November 2, 2023 and operated as a single business segment.
Financial performance and key metrics
| Metric | Three months ended September 30 | Change | Nine months ended September 30 | Change |
|---|---|---|---|---|
| Revenue | $17.9 million | Up 8% | $51.0 million | Up 9% |
| Gross profit | $11.8 million | Down 9% | $35.9 million | Essentially flat |
| Gross margin | 65.8% | Down from 78.4% | 70.4% | Down from 76.4% |
| Loss from operations | $(8.9) million | Loss widened 19% | $(26.1) million | Loss narrowed 5% |
| Net loss | $(9.4) million | Loss widened 23% | $(24.8) million | Loss narrowed 14% |
| Net loss per share | $(0.33) | $(0.28) prior year | $(0.87) | $(1.08) prior year |
- U.S. revenue was $17.2 million in the quarter and $49.5 million year to date; international revenue was $0.7 million and $1.6 million, respectively.
- U.S. treatment-session revenue increased 10% in both the quarter and year-to-date periods, reaching $13.1 million and $36.0 million, respectively.
- U.S. system revenue declined 9% in the quarter to $3.6 million and was approximately flat year to date at $11.9 million. Systems recognized as capital revenue totaled 43 in the quarter and 146 year to date, versus 49 and 155, respectively, in 2022.
- Operating expenses were $20.6 million in the quarter, up 1%, and $62.1 million year to date, down 2%. Year-to-date sales and marketing expense declined 6%, while research and development expense increased 18%.
- Share-based compensation was $1.9 million in the quarter and $5.7 million year to date.
Cash flow, liquidity and debt
- Cash and cash equivalents were $35.8 million at September 30, 2023, down from $70.3 million at December 31, 2022.
- Cash used in operating activities was $34.2 million for the nine months ended September 30, compared with $27.6 million in the prior-year period.
- Investing activities used $0.8 million, principally for property, equipment and capitalized software. Financing activities provided $0.4 million.
- Total debt, net, was $36.9 million at September 30, 2023, with $37.5 million of principal outstanding. The credit facility matures in March 2028 and requires interest-only payments through March 2026, with principal and interest payments beginning in April 2026.
- After September 30, 2023, the company borrowed an additional $22.5 million under the amended credit facility. This borrowing was not reflected in the September 30 balance sheet or cash balance.
- Management stated that cash on hand and anticipated product revenue are sufficient to fund operations for at least 12 months from issuance of the financial statements. The company was in compliance with its credit-facility covenants at September 30, 2023.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher treatment-session volume and utilization, while system sales were weaker or broadly unchanged.
- Gross margin declined materially because of a $1.9 million inventory impairment related to specialized components for discontinued systems, higher costs associated with transitioning to a new contract manufacturer, increased software amortization and higher international SenStar costs.
- Quarterly operating and net losses widened despite revenue growth. Year-to-date losses improved, aided in part by higher other income.
- Year-to-date other income increased to $4.9 million from $1.6 million, primarily due to a $2.9 million Employee Retention Credit receivable recognized during the year and higher money-market interest income.
- Accounts receivable increased to $15.0 million from $13.6 million at year-end, while accrued expenses declined to $10.0 million from $14.8 million.
- Notes receivable increased to $6.0 million, primarily reflecting a $6.0 million secured note issued to a Greenbrook TMS subsidiary. The note bears interest at daily SOFR plus 7.65% and is secured by substantially all relevant borrower and guarantor assets, subject to an intercreditor agreement.
Outlook, commentary, risks and unusual items
- Management expects continued operating losses in the near term, and the filing states that losses may continue for several years while the company invests in its commercial organization, product development and additional indications.
- Key risks include the company’s history of losses and negative operating cash flow, dependence on NeuroStar system sales and treatment-session utilization, reimbursement and coverage decisions, physician and patient demand, competition, product defects, intellectual-property protection, regulatory developments and inflationary cost pressures.
- Future funding needs depend on revenue growth, margin improvement, compliance with debt covenants, sales and marketing investment, reimbursement developments, research and development spending and international expansion. Additional equity or debt financing may be required if cash generation is insufficient and could cause dilution or impose restrictive covenants.
- The $1.9 million inventory impairment was an unusual quarterly cost related to discontinued systems. The $2.9 million Employee Retention Credit was an unusual year-to-date contributor to other income and remained a receivable at September 30.
- One customer accounted for 15% of quarterly revenue and 17% of year-to-date revenue. International revenue remained limited at 4% of quarterly revenue and 3% year to date.
- The company reported no material changes to previously disclosed risk factors, no material legal proceedings and effective disclosure controls as of September 30, 2023.
- After quarter-end, the board directed amendments to the CEO’s employment agreement, including extending change-in-control severance benefits from 18 to 24 months. The amendments were expected to be executed during the quarter ending December 31, 2023.
Most important facts for investors to verify
- Whether treatment-session growth can offset slower system sales and support sustained revenue growth.
- Whether gross margin recovers after the inventory impairment, manufacturing transition and software-amortization effects.
- The company’s ongoing cash burn, projected liquidity runway and need for additional financing.
- Terms, interest costs, covenant requirements and repayment schedule for the expanded credit facility, including the post-quarter-end $22.5 million draw.
- Collectability and credit risk related to the Greenbrook secured note and other notes receivable.
- The sustainability of results excluding the $2.9 million Employee Retention Credit and other non-recurring or non-cash items.
- Customer concentration, reimbursement trends and international expansion, particularly in Japan.