Neuronetics, Inc. — Q2 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 treatment for adults with major depressive disorder. The company generates revenue from system sales and rentals, recurring treatment sessions, service, repair and extended-warranty contracts. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $14.2 million, up 46% | $26.5 million, up 25% |
| Gross profit | $11.5 million | $21.5 million |
| Gross margin | 80.6%, versus 76.2% | 81.2%, versus 75.8% |
| Operating loss | $6.6 million | $13.5 million |
| Net loss | $7.5 million, or $0.29 per share | $15.4 million, or $0.63 per share |
| Net cash used in operating activities | Not provided for the quarter | $14.9 million |
- Second-quarter U.S. revenue was $13.8 million, up 49%; international revenue was $0.4 million, down 17%. Six-month U.S. revenue was $25.6 million, up 25%, while international revenue was $0.9 million, up 14%.
- U.S. treatment-session revenue increased 65% in the quarter to $10.8 million and 39% for the six months to $20.4 million. U.S. system revenue increased 10% in the quarter to $2.6 million but declined 12% for the six months to $4.3 million.
- Operating expenses were $18.0 million in the quarter and $35.0 million for the six months. Six-month sales and marketing expense declined 7%, while general and administrative expense increased 38%, primarily from personnel, bonus, salary and share-based compensation costs.
- Cash and cash equivalents were $115.8 million at June 30, 2021, compared with $49.0 million at December 31, 2020. Total assets were $148.1 million and stockholders’ equity was $97.2 million.
- Outstanding borrowings were $35.0 million principal, presented as $34.9 million of net long-term debt. The facility matures in February 2025 and has interest-only payments through March 2022, with a potential extension through March 2023 subject to conditions.
- Financing activities provided $82.9 million during the six months, primarily from the February 2021 public offering. The company issued 5.566 million shares at $15.50 per share and received $80.6 million of net proceeds.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher U.S. treatment-session volume and a more favorable revenue mix. Treatment sessions represented 78% of U.S. revenue in the quarter and 80% for the six months, versus 71% and 72%, respectively, in 2020.
- Gross margin improved by 4.4 percentage points in the quarter and 5.4 percentage points for the six months, primarily because of product mix.
- The quarterly operating loss improved modestly despite higher operating expenses. The six-month operating loss improved by $3.8 million, reflecting higher gross profit partially offset by increased general and administrative spending.
- The six-month net loss improved by $5.0 million, partly because 2020 included a $0.9 million loss on extinguishment of debt and higher interest expense.
- Operating cash burn improved from $23.1 million in the first half of 2020 to $14.9 million in the first half of 2021, but the company remained loss-making and cash-flow negative.
- COVID-19 continued to affect capital-equipment decisions, new patient starts and system utilization. Management stated that system sales and treatment-session revenue remained materially below pre-pandemic expectations.
Guidance, outlook, risks and unusual items
- Management expects operating losses to continue in the near term and potentially for the next several years while investing in commercial expansion, product development and additional indications, including potential bipolar depression and post-traumatic stress disorder applications.
- Management believes existing cash and anticipated product revenue are sufficient to fund operations for at least the next 12 months. Additional equity or debt financing may be required if liquidity becomes insufficient; such financing could dilute shareholders or impose restrictive covenants.
- The company was in compliance with all Solar credit-facility covenants at June 30, 2021 and projected continued compliance. The facility is secured by substantially all company assets, including intellectual property, and contains subjective acceleration provisions and revenue covenants.
- COVID-19 remains a significant uncertainty affecting customers, supply chain, patient access, demand, utilization and financial results. The company repaid its $6.4 million PPP loan in May 2020, including accrued interest.
- Share-based compensation expense increased to $4.2 million for the six months, compared with $1.8 million in 2020, including $3.8 million related to restricted and performance restricted stock units.
- Transition and severance-related charges were $0.2 million for the six months, with $0.4 million remaining accrued at June 30, 2021. Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
- One customer accounted for more than 10% of revenue in both the quarter and six-month period. The company operates as one business segment and relies predominantly on the U.S. market.
Important facts for investors to verify
- Whether treatment-session growth and system utilization can remain strong as COVID-19 effects and patient-access constraints evolve.
- The sustainability of the improved gross margin, given the company’s dependence on product and revenue mix.
- The pace of operating cash use relative to the $115.8 million cash balance and the company’s continuing operating losses.
- Compliance with Solar facility revenue covenants and the timing of principal repayments beginning after the interest-only period.
- Potential future equity or debt financing, including dilution, financing costs and restrictions.
- Customer concentration, reimbursement availability, competitive technologies, regulatory approvals for additional indications and dependence on the NeuroStar system and recurring treatment-session revenue.