UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ |
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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There were
NEURONETICS, INC.
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023
Table of Contents
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NEURONETICS, INC.
Balance Sheets
(Unaudited; In thousands, except per share data)
September 30, | December 31, | ||||||
| 2023 |
| 2022 | ||||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | |||
Accounts receivable, net |
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Inventory |
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Current portion of net investments in sales-type leases |
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Current portion of prepaid commission expense |
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Current portion of notes receivable | | | |||||
Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Net investments in sales-type leases |
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Prepaid commission expense |
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Long-term notes receivable | |
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Other assets |
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Total Assets | $ | | $ | | |||
Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | |||
Accrued expenses |
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Deferred revenue |
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Current portion of operating lease liabilities |
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Current portion of long-term debt, net |
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Total current liabilities |
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Long-term debt, net |
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Deferred revenue |
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Operating lease liabilities |
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Total Liabilities |
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Commitments and contingencies (Note 17) |
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Stockholders’ Equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total Stockholders' Equity |
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Total Liabilities and Stockholders’ Equity | $ | | $ | | |||
The accompanying notes are an integral part of these unaudited interim financial statements.
3
NEURONETICS, INC.
Statements of Operations
(Unaudited; In thousands, except per share data)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||
Revenues |
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Cost of revenues |
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Gross Profit |
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Operating expenses: |
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Sales and marketing |
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General and administrative |
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Research and development |
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Total operating expenses |
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Loss from operations |
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Other (income) expense: |
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Interest expense |
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Other income, net |
| ( |
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Net Loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Net loss per share of common stock outstanding, basic and diluted | ( | ( | ( | ( | |||||||||
Weighted-average common shares outstanding, basic and diluted |
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The accompanying notes are an integral part of these unaudited interim financial statements.
4
NEURONETICS, INC.
Statements of Changes in Stockholders’ Equity
(Unaudited; In thousands)
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| Additional |
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Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Balance at December 31, 2021 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| — |
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Share-based compensation expense |
| — |
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Net loss |
| — |
| — |
| — |
| ( |
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Balance at March 31, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| — |
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Share-based compensation expense |
| — |
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Net loss |
| — |
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| — | ( |
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Balance at June 30, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| ( |
| — |
| — | ||||
Share-based compensation expense |
| — |
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Net loss |
| — |
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| — |
| ( |
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Balance at September 30, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Balance at December 31, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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Share-based compensation expense |
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Net loss |
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| ( |
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Balance at March 31, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| — |
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Share-based compensation expense |
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Net loss |
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| ( |
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Balance at June 30, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| ( |
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Share-based compensation expense |
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Net loss |
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| — |
| ( |
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Balance at September 30, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
The accompanying notes are an integral part of these unaudited interim financial statements.
5
NEURONETICS, INC.
Statements of Cash Flows
(Unaudited; In thousands)
Nine Months Ended September 30, | |||||||
2023 | 2022 | ||||||
Cash Flows from Operating Activities: |
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Net loss | $ | ( | $ | ( | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Allowance for credit losses | | | |||||
Inventory impairment | | — | |||||
Share-based compensation |
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Non-cash interest expense |
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Cost of rental units purchased by customers |
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Changes in certain assets and liabilities: |
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Accounts receivable, net |
| ( |
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Inventory |
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Net investments in sales-type leases |
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Prepaid commission expense |
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Prepaid expenses and other assets |
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Accounts payable |
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Accrued expenses |
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Deferred revenue |
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Net Cash Used in Operating Activities |
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Cash Flows from Investing Activities: |
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Purchases of property and equipment and capitalized software |
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Repayment of notes receivable | | | |||||
Net Cash (Used in) Provided by Investing Activities |
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Cash Flows from Financing Activities: |
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Payments of debt issuance costs |
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Proceeds from issuance of long-term debt | | — | |||||
Repayment of long-term debt | ( | — | |||||
Proceeds from exercises of stock options |
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Net Cash Provided by (Used in) Financing Activities |
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Net Decrease in Cash and Cash Equivalents |
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Cash and Cash Equivalents, Beginning of Period |
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Cash and Cash Equivalents, End of Period | $ | | $ | | |||
Supplemental disclosure of cash flow information: |
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Cash paid for interest | $ | | $ | | |||
Transfer of inventory to property and equipment | — | | |||||
Supplemental disclosure of non-cash investing and financing activities: |
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Purchases of property and equipment and capitalized software in accounts payable and accrued expenses | $ | | $ | | |||
Reduction of accounts receivable in current and long-term notes receivable | | — | |||||
The accompanying notes are an integral part of these unaudited interim financial statements.
6
1. DESCRIPTION OF BUSINESS
Neuronetics, Inc. (the “Company”) is a commercial stage medical technology company focused on designing, developing and marketing products that improve the quality of life for patients who suffer from neurohealth disorders. The Company’s first commercial product, the NeuroStar Advanced Therapy System, is a non-invasive and non-systemic office-based treatment that uses transcranial magnetic stimulation (“TMS”) to create a pulsed, MRI-strength magnetic field that induces electrical currents designed to stimulate specific areas of the brain associated with mood. The system was cleared in 2008 by the United States (“U.S.”) Food and Drug Administration (the “FDA”) to treat adult patients with major depressive disorder (“MDD”) who have failed to achieve satisfactory improvement from prior antidepressant medication in the current MDD episode. The NeuroStar Advanced Therapy System is also available in other parts of the world, including Japan, where it is listed under Japan’s national health insurance. The Company intends to continue to pursue development of the NeuroStar Advanced Therapy System for additional indications.
Liquidity
As of September 30, 2023, the Company had cash and cash equivalents of $
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) promulgated by the Financial Accounting Standards Board (“FASB”).
Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared from the books and records of the Company in accordance with GAAP for interim financial information and Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (the “SEC”), which permit reduced disclosures for interim periods. All adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the accompanying balance sheets and statements of operations and stockholders’ equity and cash flows have been made. Although these interim financial statements do not include all of the information and footnotes required for complete annual financial statements, management believes that the disclosures are adequate to make the information presented not misleading. Unaudited interim results of operations and cash flows for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full year. Unaudited interim financial statements and footnotes should be read in conjunction with the audited financial statements and footnotes included in the Company’s Form 10-K filed with the SEC on March 7, 2023, wherein a more complete discussion of significant accounting policies and certain other information can be found.
7
Use of Estimates
The preparation of financial statements in accordance with GAAP and the rules and regulations of the SEC requires the use of estimates and assumptions, based on judgments considered reasonable, which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and assumptions on historical experience, known trends and events and various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Although management believes that its estimates and assumptions are reasonable when made, they are based upon information available at the time they are made. Management evaluates the estimates and assumptions on an ongoing basis and, if necessary, makes adjustments. Due to the risks and uncertainties involved in the Company’s business and evolving market conditions, and given the subjective element of the estimates and assumptions, actual results may differ materially from estimated results.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s complete summary of significant accounting policies can be found in “Note 3. Summary of Significant Accounting Policies” in the audited financial statements included in the Company’s Form 10-K filed with the SEC on March 7, 2023.
4. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Standards Adopted by the Company
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”). This ASU provides guidance for recognizing credit losses on financial instruments based on an estimate of current expected credit losses model. The FASB subsequently issued ASU 2019-04, to clarify and address certain items related to the amendments in Topic 326.
ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, was issued to provide entities that have certain instruments within the scope of ASC 326 with an option to irrevocably elect the fair value option under ASC 825-10, Financial Instruments - Overall, applied on an instrument-by-instrument basis for eligible instruments. ASU 2019-10, Topic 326, Topic 815, and Topic 842 amend the mandatory effective date for Topic 326.
The Company adopted Topic 326 with an adoption date of January 1, 2023 using the modified retrospective approach. As a result, the Company changed its accounting policy for allowance for credit losses. The Company monitors accounts receivable and long-term notes receivable and estimates the allowance for lifetime expected credit losses. Estimates of expected credit losses are based on historical collection experience and other factors, including those related to current market conditions and events. The adoption did not have a material effect on the Company's financial statements.
Other than the items noted above, there have been no new accounting pronouncements not yet effective or adopted in the current year that we believe have a significant impact, or potential significant impact, to our unaudited interim financial statements.
8
5. FAIR VALUE MEASUREMENT AND FINANCIAL INSTRUMENTS
The carrying values of cash equivalents, accounts receivable, prepaids and other current assets, and accounts payable on the Company’s balance sheets approximated their fair values as of September 30, 2023 and December 31, 2022 due to their short-term nature. The carrying values of the Company’s credit facility approximated its fair value as of September 30, 2023 and December 31, 2022 due to its variable interest rate. The carrying value of the Company’s notes receivable approximated its fair value as of September 30, 2023 and December 31, 2022 due to its variable interest rate.
Certain of the Company’s financial instruments are measured at fair value using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1: | Inputs are quoted prices for identical instruments in active markets. |
Level 2: | Inputs are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
Level 3: | Inputs are unobservable and reflect the Company’s own assumptions, based on the best information available, including the Company’s own data. |
The following tables set forth the carrying amounts and fair values of the Company’s financial instruments as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | ||||||||||||||
Fair Value Measurement Based on | |||||||||||||||
Quoted | Significant | ||||||||||||||
Prices In | other | Significant | |||||||||||||
Active | Observable | Unobservable | |||||||||||||
Carrying | Markets | Inputs | Inputs | ||||||||||||
| Amount |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||
Assets | |||||||||||||||
Money market funds (cash equivalents) | $ | | $ | | $ | | $ | — | $ | — | |||||
| December 31, 2022 | ||||||||||||||
Fair Value Measurement Based on | |||||||||||||||
Quoted | Significant | ||||||||||||||
Prices In | other | Significant | |||||||||||||
Active | Observable | Unobservable | |||||||||||||
Carrying | Markets | Inputs | Inputs | ||||||||||||
Amount | Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||
Assets |
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Money market funds (cash equivalents) | $ | $ | | $ | | $ | — | $ | — | ||||||
9
6. ACCOUNTS RECEIVABLE
The following table presents the composition of accounts receivable, net as of September 30, 2023 and December 31, 2022 (in thousands):
September 30, | December 31, | ||||||
| 2023 |
| 2022 | ||||
Gross accounts receivable - trade | $ | | $ | | |||
Less: Allowances for credit losses |
| ( |
| ( | |||
Accounts receivable, net | $ | | $ | | |||
7. INVENTORY
Inventory is stated at the lower of cost and net realizable value, with cost being determined on a first in, first out basis. The Company’s inventory is primarily comprised of finished goods. During the three months ended September 30, 2023, the Company recorded a $
8. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE
The following table presents the composition of property and equipment, net as of September 30, 2023 and December 31, 2022 (in thousands):
September 30, | December 31, | ||||||
| 2023 |
| 2022 | ||||
Laboratory equipment | $ | | $ | | |||
Office equipment |
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Computer equipment and software |
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Manufacturing equipment |
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Leasehold improvements |
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Rental equipment |
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Property and equipment, gross |
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Less: Accumulated depreciation |
| ( |
| ( | |||
Property and equipment, net | $ | | $ | | |||
As of September 30, 2023 and December 31, 2022, the Company had capitalized software costs, net of $
Depreciation and amortization expense was $
10
9. NOTES RECEIVABLE
Greenbrook TMS Inc.
On March 31, 2023, the Company entered into a Secured Promissory Note and Guaranty Agreement (the “Promissory Note”) with TMS Neurohealth Centers Inc. (the “Maker”) and Greenbrook TMS Inc. and its subsidiaries, excluding the Maker (the “Guarantors”), in the principal amount of $
The Promissory Note will bear interest at a rate equal to the sum of (a) the floating interest rate of daily secured overnight financing rate as administered by the Federal Reserve Bank of New York on its website (“SOFR”) plus (b)
Pursuant to the terms of the Promissory Note, in the event of an event of default thereunder, the Maker will be required to issue common share purchase warrants to the Company equal to (i)
Under the Promissory Note and related loan documents, the Maker and the Guarantors have granted to the Company a security interest in substantially all of the Maker’s and the Guarantors’ assets and the Guarantors have guaranteed the Maker’s obligations under the Promissory Note. The Company’s security interest pursuant to the Promissory Note and related loan documents ranks pari passu with the Maker’s senior lender, Madryn Fund Administration, LLC, and is subject to an intercreditor agreement.
Success TMS
On September 29, 2021, the Company entered into an exclusive,
On July 14, 2022, Success TMS repaid in full the Note with a cash payment of $
Interest income recognized by the Company related to notes receivable was $
Interest income recognized by the Company related to notes receivable was $
September 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Current portion of notes receivable | $ | | $ | | ||
Long-term notes receivable |
| |
| | ||
Less: Allowances for credit losses | ( | — | ||||
Notes receivable, net | $ | | $ | | ||
11
10. LEASES
Lessee:
The Company has operating leases for its corporate headquarters, a training facility and office equipment, including copiers. The Company leases an approximately
Operating lease rent expense was $
The following table presents the supplemental cash flow information as a lessee related to leases (in thousands):
| Nine Months Ended | ||||||
September 30, 2023 |
| September 30, 2022 | |||||
Cash paid for amounts included in the measurement of lease liabilities: |
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Operating cash flows from operating leases | $ | | $ | | |||
The following table sets forth by year the required future payments of operating lease liabilities (in thousands):
September 30, 2023 | ||||
Remainder of 2023 | $ | | ||
2024 | | |||
2025 |
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2026 |
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2027 |
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2028 |
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Total lease payments |
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Less imputed interest |
| ( | ||
Present value of operating lease liabilities | $ | | ||
Lessor sales-type leases:
Certain customers have purchased NeuroStar Advanced Therapy Systems on a rent-to-own basis. The lease term is or
The following table sets forth the profit recognized on sales-type leases (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Profit recognized at commencement, net | $ | | $ | | $ | | $ | | |||||
Interest income |
| — |
| — |
| — |
| — | |||||
Total sales-type lease income | $ | | $ | | $ | | $ | | |||||
12
The following table sets forth a maturity analysis of the undiscounted lease receivables related to sales-type leases (in thousands):
| September 30, | ||
2023 | |||
Remainder of 2023 | $ | | |
2024 | | ||
2025 |
| | |
2026 |
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2027 | | ||
Total sales-type lease receivables | $ | | |
As of September 30, 2023, the carrying amount of the lease receivables is $
Lessor operating leases:
NeuroStar Advanced Therapy Systems sold for which collection is not probable are accounted for as operating leases. For the three months ended September 30, 2023 and 2022, the Company recognized operating lease income of $
The Company maintained rental equipment, net of $
11. PREPAID COMMISSION EXPENSE
The Company pays a commission on both NeuroStar Advanced Therapy System sales and treatment session sales. Since the commission paid for system sales is not commensurate with the commission paid for treatment sessions, the Company capitalizes commission expense associated with NeuroStar Advanced Therapy System sales commissions paid that is incremental to specifically anticipated future treatment session orders. In developing this estimate, the Company considered its historical treatment session sales and customer retention rates, as well as technology development life cycles and other industry factors. These costs are periodically reviewed for impairment.
NeuroStar Advanced Therapy System commissions are deferred and amortized on a straight-line basis over a
On the Company’s balance sheets, the current portion of capitalized contract costs is represented by the current portion of prepaid commission expense, while the long-term portion is included in prepaid commission expense. Amortization expense was $
13