Neuronetics, Inc. — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; comparative period is the three months ended March 31, 2019. Financial statements are unaudited and prepared under U.S. GAAP.
Business context
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. Revenue is generated primarily from system sales or rentals and recurring treatment sessions. As of March 31, 2020, the company reported 1,119 active U.S. systems, approximately 884 psychiatrist offices, 212 employees, and approximately 85,895 patients treated.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $11.5 million | $12.7 million | Down 10% |
| Gross profit | $8.7 million | $9.9 million | Down 13% |
| Gross margin | 75.5% | 77.9% | Down 2.4 percentage points |
| Operating loss | $10.4 million | $7.1 million | Loss increased $3.3 million |
| Net loss | $12.6 million | $7.5 million | Loss increased $5.1 million |
| Net loss per share | $0.68 | $0.42 | Loss per share increased |
| Cash flow from operations | $(13.7) million | $(9.6) million | Use increased $4.1 million |
| Capital expenditures and capitalized software | $0.3 million | $0.3 million | Approximately flat |
U.S. revenue was $11.2 million, down 11%, while international revenue increased to $0.3 million from $0.2 million. U.S. treatment-session revenue declined 7% to $8.2 million, and U.S. system revenue declined 23% to $2.6 million. The company sold 43 systems in each comparable quarter. The active U.S. installed base increased 20% year over year.
Operating expenses increased 12% to $19.0 million. Sales and marketing increased 12% to $10.7 million, general and administrative expense increased 15% to $5.3 million, and research and development increased 8% to $3.0 million. Share-based compensation increased to $1.2 million from $0.5 million.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $63.6 million at March 31, 2020, compared with $75.7 million at December 31, 2019.
- Total assets were $88.5 million and stockholders’ equity was $36.5 million at March 31, 2020.
- Outstanding debt principal was $35.0 million, with $34.2 million of debt reported net of discounts and issuance costs. The facility matures in February 2025.
- On March 2, 2020, the company replaced its Oxford facility with a Solar Capital facility permitting total borrowings of up to $50.0 million. The company drew $35.0 million under Term A; an additional $15.0 million may be available subject to revenue and other conditions.
- The Solar facility bears interest at 7.65% plus the greater of 1.66% or the applicable benchmark rate, includes interest-only payments through March 2022, and is secured by substantially all company assets, including intellectual property.
- The company stated that it was in compliance with all debt covenants at March 31, 2020. Required principal payments on the outstanding Term A loan begin in 2022.
- Management stated that cash and anticipated product revenue were expected to fund operations for at least 18 months after March 31, 2020, although the COVID-19 impact created substantial uncertainty.
Material changes and unusual items
- COVID-19 disrupted business during March, particularly U.S. treatment-session utilization, new patient starts, and capital purchase decisions. Management attributed the revenue decline primarily to the pandemic and related governmental responses.
- The company recognized a $0.9 million loss on extinguishment of the Oxford debt facility, including the write-off of approximately $0.6 million of unamortized debt discounts and deferred issuance costs and payment of $2.5 million in Oxford final payment fees.
- Interest expense increased 66% to $1.5 million, including $1.4 million of cash interest.
- General and administrative expense included $1.1 million related to the separation agreement with a former key executive.
- On April 8, 2020, the company adopted a COVID-19 cost-reduction plan and reduction in force. It estimated approximately $2.1 million of one-time separation charges and approximately $18 million of net savings through December 31, 2020. The workforce was expected to total 117 employees after the reduction in force.
- The company received a $6.4 million Paycheck Protection Program loan in April 2020 but notified the lender on May 1 of its intention to repay the loan by May 7 because of uncertainty regarding public-company eligibility.
Outlook, guidance, and risks
The company withdrew full-year 2020 guidance on April 8, 2020 and stated that it could not estimate the duration or scale of the pandemic’s effects. Management expects continuing operating losses in the near term while investing in sales, marketing, product development, and additional indications.
Principal risks include prolonged COVID-19 effects on patient access and system utilization, lower capital sales, reimbursement and payer coverage, competition, product and regulatory risks, reliance on the NeuroStar platform, customer concentration, and the company’s history of losses and negative operating cash flow. The Solar facility imposes revenue covenants beginning December 31, 2020 and permits acceleration under specified defaults, including certain material adverse effect circumstances. A default could result in acceleration and lender control over pledged assets.
The company reported no material legal proceedings and concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2020.
Investor verification points
- Assess post-quarter COVID-19 trends in treatment-session volume, system placements, patient starts, and revenue.
- Verify the timing, cash cost, and realized savings from the April reduction in force and related restructuring plan.
- Monitor repayment of the PPP loan and its effect on liquidity.
- Review compliance with Solar facility revenue covenants and the company’s ability to meet principal payments beginning in 2022.
- Reconcile cash burn against management’s stated 18-month liquidity expectation, especially after repayment of the PPP loan and any further revenue deterioration.
- Evaluate the effect of lower system selling prices, sales-type lease mix, and treatment-session pricing on future gross margins.