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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 |
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ |
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
(Address of principal executive offices) | (Zip Code) |
( | |
(Registrant’s telephone number, including area code) |
Not applicable.
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading |
| Name on each exchange on which registered |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
There were
NEURONETICS, INC.
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021
Table of Contents
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NEURONETICS, INC.
Balance Sheets
(Unaudited; In thousands, except per share data)
September 30, | December 31, | |||||
| 2021 |
| 2020 | |||
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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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 note receivable | |
| — | |||
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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outstanding at September 30, 2021 and December 31, 2020 |
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Common stock, $ |
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shares and at September 30, 2021 and December 31, 2020, respectively |
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Additional paid-in capital |
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Accumulated deficit |
| ( |
| ( | ||
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.
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NEURONETICS, INC.
Statements of Operations
(Unaudited; In thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Revenues |
| $ | |
| $ | | $ | |
| $ | | |
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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Loss on extinguishment of debt |
| — |
| — |
| — |
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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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| Total | ||||||
Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Balance at December 31, 2019 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| — |
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Share-based compensation expense |
| — |
| — |
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| — |
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Net loss |
| — |
| — |
| — |
| ( |
| ( | ||||
Balance at March 31, 2020 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| — |
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Share-based compensation expense |
| — |
| — |
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| — |
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Net loss |
| — |
| — |
| — |
| ( |
| ( | ||||
Balance at June 30, 2020 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| — |
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Share-based compensation expense |
| — |
| — |
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| — |
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Net loss |
| — |
| — |
| — |
| ( |
| ( | ||||
Balance at September 30, 2020 |
| | $ | | $ | | $ | ( | $ | | ||||
Balance at December 31, 2020 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| — |
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Issuance of common stock, net of issuance costs of $ | | | | — | | |||||||||
Share-based compensation expense |
| — |
| — |
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Net loss |
| — |
| — |
| — |
| ( |
| ( | ||||
Balance at March 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 |
| — |
| — |
| — |
| ( |
| ( | ||||
Balance at June 30, 2021 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based awards and options exercises |
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| — |
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Share-based compensation expense |
| — |
| — |
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| — |
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Net loss |
| — |
| — |
| — |
| ( |
| ( | ||||
Balance at September 30, 2021 |
| | $ | | $ | | $ | ( | $ | | ||||
The accompanying notes are an integral part of these unaudited interim financial statements.
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NEURONETICS, INC.
Statements of Cash Flows
(Unaudited; In thousands)
Nine Months Ended September 30, | |||||||
2021 | 2020 | ||||||
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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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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Loss on extinguishment of debt |
| — |
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Changes in certain assets and liabilities: |
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Accounts receivable, net |
| ( |
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Inventory |
| ( |
| ( | |||
Net investments in sales-type leases |
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Leasehold reimbursement |
| — |
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Prepaid commission expense |
| ( |
| ( | |||
Prepaid expenses and other assets |
| ( |
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Accounts payable |
| ( |
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Accrued expenses |
| ( |
| ( | |||
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 |
| ( |
| ( | |||
Issuance of promissory note | ( | — | |||||
Net Cash Used in Investing Activities |
| ( |
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Cash Flows from Financing Activities: |
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Proceeds from issuance of long-term debt |
| — |
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Repayment of long-term debt |
| — |
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Payments of debt issuance costs |
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Proceeds from exercises of stock options |
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Proceeds from the issuance of common stock |
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Payments of common stock offering issuance costs |
| ( |
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Net Cash Provided by Financing Activities |
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Net Increase (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 PP&E | | — | |||||
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 long-term note receivable | | — | |||||
The accompanying notes are an integral part of these unaudited interim financial statements.
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1. DESCRIPTION OF BUSINESS
Neuronetics, Inc., or 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 psychiatric 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, or 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 Food and Drug Administration, or the FDA, to treat adult patients with major depressive disorder, or MDD, who have failed to achieve satisfactory improvement from prior antidepressant medication in the current episode. NeuroStar Advanced Therapy 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 its NeuroStar Advanced Therapy System for additional indications.
COVID-19
The Company is continuing to monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will continue to impact the Company’s customers, supply chain, employees and other business partners. While the Company has experienced significant disruptions in March 2020 through the end of September 30, 2021 from the COVID-19 pandemic, it is unable to predict the full impact that the pandemic may have on its financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The pandemic has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets, and may contribute to periods of economic uncertainty in the future.
The Company applied for and received a $
Liquidity
As of September 30, 2021, the Company had cash and cash equivalents of $
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP. Any reference in these notes to applicable guidance is meant to
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refer to GAAP as found in the Accounting Standards Codification, or ASC, and Accounting Standards Updates, or ASUs, promulgated by the Financial Accounting Standards Board, or 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 United States Securities and Exchange Commission, or 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’ deficit 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 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, 2021 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 2, 2021, wherein a more complete discussion of significant accounting policies and certain other information can be found.
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 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, including those related to the COVID-19 pandemic, and given the subjective element of the estimates and assumptions made, actual results may differ materially from estimated results.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company accounts for its note receivable in accordance with ASC Topic 310, Receivables, ("Topic 310") and is reported on the Company’s balance sheet at amortized cost basis. The Company will recognize interest income within other income, net within the statements of operations. See "Note 8. Note Receivable" in our unaudited financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
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 2, 2021.
4. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Standards Not Yet 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
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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 amends the mandatory effective date for Topic 326.
These ASUs are effective for fiscal years beginning after December 15, 2022 for entities that are eligible to be defined by the SEC as a smaller reporting company. The Company is a smaller reporting company. Although the impact upon adoption will depend on the financial instruments held by the Company at that time, the Company does not anticipate a significant impact on its financial statements based on the instruments currently held and its historical trend of bad debt expense relating to trade accounts receivable.
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.
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, 2021 and December 31, 2020 due to their short-term nature. The carrying values of the Company’s credit facility approximated its fair value as of September 30, 2021 and December 31, 2020 due to its variable interest rate. The carrying value of the Company’s note receivable approximated its fair value as of September 30, 2021 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. |
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The following tables set forth the carrying amounts and fair values of the Company’s financial instruments as of September 30, 2021 and December 31, 2020 (in thousands):
| September 30, 2021 | ||||||||||||||
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, 2020 | ||||||||||||||
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) | $ | $ | | $ | | $ | — | $ | — | ||||||
6. ACCOUNTS RECEIVABLE
The following table presents the composition of accounts receivable, net as of September 30, 2021 and December 31, 2020 (in thousands):
September 30, | December 31, | ||||||
| 2021 |
| 2020 | ||||
Gross accounts receivable - trade | $ | | $ | | |||
Less: Allowances for doubtful accounts |
| ( |
| ( | |||
Accounts receivable, net | $ | | $ | | |||
7. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE
The following table presents the composition of property and equipment, net as of September 30, 2021 and December 31, 2020 (in thousands):
September 30, | December 31, | ||||||
| 2021 |
| 2020 | ||||
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, 2021 and December 31, 2020, the Company had capitalized software costs, net of $
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Depreciation and amortization expense was $
8. NOTE RECEIVABLE
On September 29, 2021, Neuronetics, Inc. the Company entered into an exclusive,
In the Note, Success TMS has made certain representations and warranties and is required to comply with certain customary affirmative and negative covenants during the term of the Note. The Note contains events of default, including, without limitation: (i) failure to make payment pursuant to the terms of the Note; (ii) violation of covenants; (iii) breach of any representation or warranty; (iv) breach or default under the Commercial Agreement; (v) material adverse changes to Success TMS’s business; (vi) any impairment of the Company’s security interest in collateral; (vii) attachment or levy on Success TMS’s assets or judicial restraint on its business; (viii) commencement of insolvency proceedings; (ix) material cross-defaults; (x) significant judgments, orders or awards for payment against Success TMS; (xi) a change of control of Success TMS; and (xii) the invalidity or unenforceability of the Note or the Commercial Agreement. The owner of Success TMS, 6214 Riverwalk LLC, has provided a limited guarantee and pledge of its equity in Success TMS in connection with the Note.
As of September 30, 2021, Success TMS has represented to the Company that Success TMS is in compliance with all covenants of the Note.
9. LEASES
Lessee:
The Company has operating leases for its corporate headquarters and office equipment, including copiers. The Company leases an approximately
Operating lease rent expense was $
In the first quarter of 2020, the Company received a reimbursement of $
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The following table presents the supplemental cash flow information as a lessee related to leases (in thousands):
| Nine Months Ended | ||||||
September 30, 2021 |
| September 30, 2020 | |||||
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, 2021 | |||
Remainder of 2021 | $ | | |
2022 | | ||
2023 |
| | |
2024 |
| | |
2025 |
| | |
Thereafter |
| | |
Total lease payments |
| | |
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, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Profit recognized at commencement, net | $ | | $ | | $ | | $ | | ||||
Interest income |
| — |
| — |
| — |
| — | ||||
Total sales-type lease income | $ | | $ | | $ | | $ | | ||||
The following table sets forth a maturity analysis of the undiscounted lease receivables related to sales-type leases (in thousands):
| September 30, | ||
2021 | |||
Remainder of 2021 | $ | | |
2022 | | ||
2023 |
| | |
2024 |
| | |
2025 | | ||
Total sales-type lease receivables | $ | | |
As of September 30, 2021, the carrying amount of the lease receivables is $
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Lessor operating leases:
NeuroStar Advanced Therapy Systems sold on a rent-to-own basis prior to January 1, 2019 are accounted for as operating leases. NeuroStar Advanced Therapy Systems sold subsequent to January 1, 2019 for which collection is not probable are also accounted for as operating leases. For the three months ended September 30, 2021 and 2020, the Company recognized operating lease income of $
The following table sets forth a maturity analysis of its undiscounted lease receivables related to operating leases as of September 30, 2021 (in thousands):
| September 30, | ||
2021 | |||
Remainder of 2021 | $ | | |
Total lease receivables | $ | | |
The Company maintained Rental Equipment, net of $
10. PREPAID COMMISSION EXPENSE
The Company pays a commission on both NeuroStar Advanced 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 $
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11. ACCRUED EXPENSES
The following table presents the composition of accrued expenses as of September 30, 2021 and December 31, 2020 (in thousands):
| September 30, |
| December 31, | |||
2021 | 2020 | |||||
Compensation and related benefits | $ | | $ | | ||
Consulting and professional fees |
| |
| | ||
Research and development expenses |
| |
| | ||
Sales and marketing expenses | | | ||||
Warranty |
| |
| | ||
Sales and other taxes payable |
| |
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Other |
| |
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Accrued expenses | $ | | $ | | ||
12. DEFERRED REVENUE
Payment terms typically require payment upon shipment or installation of the System and additional payments as access codes for Treatment Sessions are delivered, which can span several years after the System is first delivered and installed. The timing of revenue recognition compared to billings and cash collections typically results in accounts receivable. However, sometimes customer advances and deposits might be required for certain customers and are recorded as deferred revenue. For multi-year agreements, the Company generally invoices customers annually at the beginning of each annual coverage period and recognizes revenue over the term of the coverage period.
As of September 30, 2021, the Company expects to recognize approximately the following percentages of deferred revenue by year:
| Revenue |
| |
Year: | Recognition |
| |
| % | ||
| | % | |
| | % | |
| | % | |
| | % | |
| — | % | |
Total |
| | % |
Revenue recognized for the three and nine months ended September 30, 2021 that was included in the contract liability balance at the beginning of the year was $
Customers
For the three months ended September 30, 2021 and 2020,
14
13. DEBT
The following table presents the composition of debt as of September 30, 2021 and December 31, 2020 (in thousands):
September 30, | December 31, | ||||||
| 2021 |
| 2020 | ||||
Outstanding principal | $ | | $ | | |||
Accrued final payment fees |
| |
| | |||
Less debt discounts |
| ( |
| ( | |||
Total debt, net |
| |
| | |||
Less current portion |
| ( |
| — | |||
Long-term debt, net | $ | — | $ | | |||
For the three months ended September 30, 2021, the Company recognized interest expense of $
For the nine months ended September 30, 2021, the Company recognized interest expense of $
Solar Credit Facility
On March 2, 2020, the Company entered into a loan and security agreement with Solar Capital Ltd., or Solar, as collateral agent, and other lenders defined in the agreement, for a credit facility, or the Solar Facility, that replaced the Company’s previous $
The Solar Facility permits the Company to borrow up to an aggregate amount of $
15
Each of the Term A Loan and Term B Loan accrue interest from the date of borrowing through the date of repayment at a floating per annum rate of interest, which resets monthly and is equal to
In addition to the principal and interest payments due under the Solar Facility, the Company is required to pay a final payment fee to Solar due upon the earlier of prepayment, acceleration or the maturity date of the Term A Loan or Term B Loan portion of the Solar Facility equal to
The Company is also required to pay Solar an exit fee upon the occurrence, prior to March 2, 2030, of (a) any liquidation, dissolution or winding up of the Company, (b) transaction that results in a person obtaining control over the Company, (c) the Company achieving $
On December 8, 2020, the Company, Solar Capital Ltd., and our other lenders defined in the Solar Facility, executed an amendment to the Solar Facility (the “Solar Amendment”). The Solar Amendment divides the aggregate Term B Loan borrowing amount of $
The Solar Amendment also reduces the trailing twelve-month net product revenue requirement for the Amended Term B Loan portion of the facility. Subject to certain conditions, the Company has the ability to extend the interest-only period on the initial Term A Loan to from upon achieving the revenue targets associated with the Amended Term B Loan. As of September 30, 2021, the Company is in compliance with the required minimum net product revenue covenant and anticipates electing to extend the interest-only period through March 1, 2023 for the Term A Loan, subject to continuing to meet the required conditions through and as of March 1, 2022. The Company is projected to be in compliance with the required covenant. The Company was required to pay an amendment fee of $
16
The Company’s obligations under the Solar Facility are secured by a first priority security interest in substantially all of its assets, including its intellectual property. The loan and security agreement requires the Company to comply with certain financial covenants as well as customary affirmative and negative covenants.
The Solar Facility contains events of default, including, without limitation, events of default upon: (i) failure to make payment pursuant to the terms of the agreement; (ii) violation of covenants; (iii) material adverse changes to the Company’s business; (iv) attachment or levy on the Company’s assets or judicial restraint on its business; (v) insolvency; (vi) material cross-defaults; (vii) significant judgments, orders or decrees for payments by the Company not covered by insurance; (viii) incorrectness of representations and warranties; (ix) incurrence of subordinated debt; (x) a termination or breach of a guaranty; (xi) revocation of governmental approvals necessary for the Company to conduct its business; and (xii) failure by the Company to maintain a valid and perfected lien on the collateral securing the borrowing. The Solar Facility includes subjective acceleration clauses which permit the lenders to accelerate the maturity date under certain circumstances, including, but not limited to, material adverse effects on a Company’s financial status or otherwise.
The Solar Facility includes a financial covenant requiring the attainment of a minimum trailing net revenue amount beginning on December 31, 2020. The Company and lenders executed the Solar Amendment in December 2020 that reduced the minimum trailing net revenue covenant requirement amounts beginning on December 31, 2020 to allow the Company to maintain compliance with the covenant as of December 31, 2020. As of September 30, 2021, the Company is in compliance with the financial covenant and is projected to be in compliance with the reduced minimum revenue covenant amounts going forward.
As of September 30, 2021, the Company is in compliance with all covenants in the Solar Facility.
The Solar Facility includes a financial covenant requiring the attainment of a minimum trailing net revenue amount. Based upon the Company’s projected revenues for the remainder of 2021, the Company believes that it is probable that this minimum revenue covenant will not be achieved. The Company is in discussions with the lenders for a potential covenant waiver or amendment, however, no formal agreement has been executed. The Solar Facility also includes subjective acceleration clauses which permit the lenders to accelerate the maturity date under certain circumstances, including, but not limited to, material adverse effects on a Company’s financial status or otherwise. In accordance with FASB ASC 470 as the Solar Facility contains subjective acceleration clauses and the assessment that it is probable that the revenue covenant will not be met as of December 31, 2021, the outstanding principal under the Solar Facility is classified as a current liability in the accompanying balance sheet as of September 30, 2021.
Oxford Credit Facility
Prior to March 2020, the Company had a $
In addition to principal and interest payments due under the $
17
The Company evaluated whether the Solar Facility entered into in March 2020 represented a debt modification or extinguishment in accordance with ASC 470-50, Debt—Modifications and Extinguishments and determined that the existing debt was extinguished as a result of the full repayment of the existing facility and concurrent issuance of a new credit facility with a new lender. The unamortized balance of the Company’s combined debt discount and deferred issuance costs of $
14. COMMON STOCK
Common Stock Offering
On February 2, 2021, we closed on our public offering and sale (the “Offering) of our common stock in which we issued and sold
Common Stock
The following table summarizes the total number of shares of the Company’s common stock issued and reserved for issuance as of September 30, 2021 and December 31, 2020 (in thousands):
| September 30, 2021 |
| December 31, 2020 | |
Shares of common stock issued |
| |
| |
Shares of common stock reserved for issuance for: |
|
|
|
|
Common stock warrants outstanding |
| |
| |
Stock options outstanding |
| |
| |
Restricted stock units outstanding |
| |
| |
Shares available for grant under stock incentive plan |
| |
| |
Shares available for sale under employee stock purchase plan |
| |
| |
Total shares of common stock issued and reserved for issuance |
| |
| |
Common Stock Warrants
The following tables summarize the Company’s outstanding common stock warrants as of September 30, 2021, and December 31, 2020:
September 30, 2021 |
|
|
|
| |
Warrants |
|
|
|
| |
Outstanding | |||||
(in thousands) | Exercise Price | Expiration Date | |||
$ | |
| |||
$ | |
| |||
$ | |
| |||
$ | |
| |||
|
|
|
| ||
18
December 31, 2020 |
|
|
|
| |
Warrants |
|
|
|
| |
Outstanding | |||||
(in thousands) | Exercise Price | Expiration Date | |||
$ | |
| |||
$ | |
| |||
$ | |
| |||
$ | |
| |||
$ | |
| |||
|
|
|
| ||
15. LOSS PER SHARE
The Company’s basic loss per common share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. The Company’s restricted stock awards (non-vested shares) are issued and outstanding at the time of grant but are excluded from the Company’s computation of weighted-average shares outstanding in the determination of basic loss per share until vesting occurs.
A net loss cannot be diluted, so when the Company is in a net loss position, basic and diluted loss per common share are the same. If in the future the Company achieves profitability, the denominator of a diluted earnings per common share calculation will include both the weighted-average number of shares outstanding and the number of common stock equivalents, if the inclusion of such common stock equivalents would be dilutive. Dilutive common stock equivalents potentially include warrants, stock options, non-vested restricted stock units and non-vested performance restricted stock units using the treasury stock method, along with the effect, if any, from the potential conversion of outstanding securities, such as convertible preferred stock.
The following potentially dilutive securities outstanding as of September 30, 2021 and 2020 have been excluded from the denominator of the diluted loss per share of common stock outstanding calculation (in thousands):
September 30, | |||||
| 2021 |
| 2020 | ||
Stock options | | | |||
Non-vested performance restricted stock units |
| |
| | |
Non-vested restricted stock units |
| |
| | |
Common stock warrants |
| |
| | |
16. SHARE-BASED COMPENSATION
The amount of share-based compensation expense recognized by the Company by location in its statements of operations for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2021 |
| 2020 |
| 2021 |
| 2020 | |||||||
Cost of revenues | $ | | $ | | $ | | $ | | |||||
Sales and marketing |
| |
| |
| |
| | |||||
General and administrative |
| |
| |
| |
| | |||||
Research and development |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | |||||
19
2018 Equity Incentive Plan
In June 2018, the Company adopted the 2018 Equity Incentive Plan, or 2018 Plan, which authorized the issuance of up to
2020 Inducement Incentive Plan
In December 2020, the Company adopted the 2020 Inducement Incentive Plan, which authorized the issuance of up to
Stock Options
The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2021:
|
|
|
|
|
|
| Aggregate | |||
Number of | Weighted- | Weighted- | average | |||||||
Shares under | average | Remaining | Intrinsic | |||||||
Option | Exercise Price | Contractual | Value | |||||||
(in thousands) | per Option | Life (in years) | (in thousands) | |||||||
Outstanding at December 31, 2020 |
| | $ | |
|
| ||||
Granted |
| — | $ | — |
|
|
|
| ||
Exercised |
| ( | $ | |
|
|
| |||
Forfeited |
| ( | $ | |
|
|
|
| ||
Outstanding at September 30, 2021 |
| | $ | |
|
| $ | | ||
Exercisable at September 30, 2021 |
| | $ | |
|
| $ | | ||
Vested and expected to vest at September 30, 2021 |
| | $ | |
|
| $ | | ||
The Company recognized share-based compensation expense related to stock options of $
20
stock options which the Company expects to recognize over a weighted-average period of
Restricted Stock Units and Performance Restricted Stock Units
The following table summarizes the Company’s restricted stock unit and performance restricted stock unit activity for September 30, 2021:
| Non-vested |
| Weighted- |
| Non-vested |
| Weighted- | |||
Restricted | average | Performance Restricted | average | |||||||
Stock Units | Grant-date | Stock Units | Grant-date | |||||||
(in thousands) | Fair Value | (in thousands) | Fair Value | |||||||
Non-vested at December 31, 2020 | | $ | |
| | $ | | |||
Granted |
| | $ | |
| | $ | | ||
Vested |
| ( | $ | |
| ( | $ | | ||
Forfeited |
| ( | $ | |
| — | $ | — | ||
Non-vested at September 30, 2021 |
| | $ | |
| | $ | |
The Company recognized $
For the period ended September 30, 2021 and December 31, 2020, the grant-date fair value of the performance restricted stock units was estimated at the time of grant using the following inputs and assumptions in the Monte Carlo simulation valuation model:
| September 30, 2021 | December 31, 2020 |
| ||||
Closing price of common stock | $ | | $ | | |||
Risk-free interest rate |
| | % | | % | ||
Expected volatility |
| | % | | % | ||
17. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is subject from time to time to various claims and legal actions arising during the ordinary course of its business. Management believes that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on the Company’s results of operations, financial condition, or cash flows.
18. GEOGRAPHICAL SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company currently operates in
21
material separate lines of business or separate business entities with respect to its products or product development.
The following geographic data includes revenue generated from the Company’s third-party distributors. The Company’s revenue was generated in the following geographic regions and by product line for the periods indicated (in thousands):
Revenues by Geography |
| ||||||||||
Three Months Ended September 30, |
| ||||||||||
2021 | 2020 |
| |||||||||
% of | % of |
| |||||||||
Amount | Revenues | Amount | Revenues |
| |||||||
(in thousands, except percentages) | |||||||||||
United States |
| $ | |
| | % | $ | |
| | % |
International |
| |
| | % |
| |
| | % | |
Total revenues | $ | |
| | % | $ | |
| | % | |
U.S. Revenues by Product Category |
| ||||||||||
Three Months Ended September 30, |
| ||||||||||
2021 | 2020 |
| |||||||||
% of | % of |
| |||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| |||
| (in thousands, except percentages) | ||||||||||
NeuroStar Advanced Therapy System | $ | | | % | $ | | | % | |||
Treatment sessions |
| |
| | % |
| |
| | % | |
Other |
| |
| | % |
| |
| | % | |
Total U.S. revenues | $ | |
| | % | $ | |
| | % | |
International Revenues by Product Category |
| ||||||||||
Three Months Ended September 30, |
| ||||||||||
2021 | 2020 |
| |||||||||
% of | % of |
| |||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| |||
| (in thousands, except percentages) | ||||||||||
NeuroStar Advanced Therapy System | $ | |
| | % | $ | |
| | % | |
Treatment sessions |
| |
| | % |
| |
| | % | |
Other |
| |
| | % |
| |
| | % | |
Total International revenues | $ | |
| | % | $ | |
| | % | |
Revenues by Geography |
| |||||||||||
Nine Months Ended September 30, |
| |||||||||||
2021 | 2020 |
| ||||||||||
% of | % of |
| ||||||||||
Amount | Revenues | Amount | Revenues |
| ||||||||
(in thousands, except percentages) | ||||||||||||
United States |
| $ | |
| | % | $ | |
| | % | |
International |
| |
| | % |
| |
| | % | ||
Total revenues | $ | |
| | % | $ | |
| | % | ||
22
U.S. Revenues by Product Category |
| |||||||||||
Nine Months Ended September 30, |
| |||||||||||
2021 | 2020 |
| ||||||||||
% of | % of |
| ||||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| ||||
| (in thousands, except percentages) | |||||||||||
NeuroStar Advanced Therapy System | $ | | | % | $ | | | % | ||||
Treatment sessions |
| |
| | % |
| |
| | % | ||
Other |
| |
| | % |
| |
| | % | ||
Total U.S. revenues | $ | |
| | % | $ | |
| | % | ||
International Revenues by Product Category |
| |||||||||||
Nine Months Ended September 30, |
| |||||||||||
2021 | 2020 |
| ||||||||||
% of | % of |
| ||||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| ||||
| (in thousands, except percentages) | |||||||||||
NeuroStar Advanced Therapy System | $ | |
| | % | $ | |
| | % | ||
Treatment sessions |
| |
| | % |
| |
| | % | ||
Other |
| |
| | % |
| |
| | % | ||
Total International revenues | $ | |
| | % | $ | |
| | % | ||
19. SEVERANCE
On April 8, 2020, the Company took action to reduce expenses through a reduction in force (“RIF”). As part of this action the Company terminated
The Company entered into transition agreements outlining the separation with its former chief executive officer in March 2020, the vice president of medical operations in September 2020, the chief commercial officer and director of medical operations in December 2020, the VP of sales and five business development managers in January 2021, the director of strategic clinical development in February 2021, and the vice president of marketing in August 2021. In connection with these agreements, the Company recorded $
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with our unaudited interim financial statements and related notes thereto included elsewhere herein. In addition to historical financial information, some of the information contained in the following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts, including statements regarding our future results of operations and financial position, business strategy, current and prospective products, product approvals, research and development costs, current and prospective collaborations, timing and likelihood of success, plans and objectives of management for future operations and future results of current and anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, without limitation, risks and uncertainties related to: the ongoing impact of the novel coronavirus, or COVID-19, pandemic on general political and economic uncertainty, including as a result of efforts by governmental authorities to mitigate the COVID-19 pandemic and the related impact on resource allocations, manufacturing and supply chains and patient access to commercial products; our ability to execute our business continuity as well as our operational and budget plans in light of the COVID-19 pandemic; our ability to achieve or sustain profitable operations due to our history of losses; our reliance on the sale and usage of our NeuroStar Advanced Therapy System to generate revenues; the scale and efficacy of our salesforce; availability of coverage and reimbursement from third-party payors for treatments using our products; physician and patient demand for treatments using our products; developments in respect of competing technologies and therapies for the indications that our products treat; product defects; our ability to obtain and maintain intellectual property protection for our technology; developments in clinical trials or regulatory review of NeuroStar Advanced Therapy System for additional indications; and developments in regulation in the United States and other applicable jurisdictions. For a discussion of these and other related risks, please refer to our recent SEC filings which are available on the SEC’s website at www.sec.gov. These forward-looking statements are based on our expectations and assumptions as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no duty or obligation to update any forward-looking statements contained in this Quarterly Report on Form 10-Q as a result of new information, future events or changes in our expectations.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC, on March 2, 2021. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
24
Overview
We are a commercial stage medical technology company focused on designing, developing and marketing products that improve the quality of life for patients who suffer from psychiatric disorders. Our first commercial product, the NeuroStar® Advanced Therapy System, is a non-invasive and non-systemic office-based treatment that uses transcranial magnetic stimulation, or 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 is cleared by the United States Food and Drug Administration, or FDA, to treat adult patients with major depressive disorder, or MDD, that have failed to achieve satisfactory improvement from prior antidepressant medication in the current MDD episode. NeuroStar Advanced Therapy is also available in other parts of the world, including Japan, where it is listed under Japan’s national health insurance. NeuroStar Advanced Therapy is safe, clinically effective, reproducible and precise and we believe is supported by the largest clinical data set of any competing TMS system. We are the market leader in TMS therapy based on the estimated 115,935 global patients treated with over 4.0 million of our treatment sessions through such date. We generated revenues of $13.8 million and $12.4 million for the three months ended September 30, 2021 and 2020, respectively, and $40.3 million and $33.7 million for the nine months ended September 30, 2021 and 2020, respectively.
We designed the NeuroStar Advanced Therapy System as a non-invasive therapeutic alternative to treat patients who suffer from MDD and to address many of the key limitations of other treatment options. We generate revenues from initial capital sales of our systems, recurring Treatment Sessions and service and repair and extended warranty contracts. We derive the majority of our revenues from recurring Treatment Sessions. For the three months ended September 30, 2021, revenues from sales of our Treatment Sessions and NeuroStar Advanced Therapy Systems represented 77% and 20% of our U.S. revenues, respectively, and 79% and 18% for the nine months ended September 30, 2021 and 2020 of our U.S. revenues, respectively.
We currently sell our NeuroStar Advanced Therapy System and recurring Treatment Sessions in the United States with the collaborative support of our 165 employees as of September 30, 2021. Our sales force targets an estimated 50,000 psychiatrists across 26,000 psychiatric practices in the United States, based on data from Symphony Health and our own internal estimates that treat approximately 42% of the total MDD patients in the United States who meet our labeled indication and are insured. Some of our customers have and may purchase more than one NeuroStar Advanced Therapy System. Based on our commercial data, on average, we believe our customers can recoup their initial capital investment in our system by providing a standard course of treatment to approximately 12 patients. We believe psychiatrists can generate approximately $7,500 to $10,000 of revenue per patient for a standard course of treatment, which may provide meaningful incremental income to their practices. We have a diverse customer base of psychiatrists in group psychiatric practices in the United States. For the three and nine months ended September 30, 2021, one customer accounted for more than 10% of our revenues.
We market our products in a few select markets outside the United States through independent distributors. International revenues represented 4% and 3% of our total revenues for the three months ended September 30, 2021 and 2020, respectively, and 3% and 4% for the nine months ended September 30, 2021 and 2020, respectively. In October 2017, we entered into an exclusive distribution agreement with Teijin Pharma Limited, or Teijin, for the distribution of our NeuroStar Advanced Therapy Systems and Treatment Sessions to customers who will treat patients with MDD in Japan. We received regulatory approval for our system in Japan in September 2017 and we received the initial reimbursement of JPY 12,000 per Treatment Session, which went into effect on June 1, 2019. We expect our international revenues to increase over time as a percentage of our total revenues as we grow system placements and utilization in Japan.
Our research and development efforts are focused on the following: hardware and software product developments and enhancements of our NeuroStar Advanced Therapy System and clinical development relating to expansion of our label and additional indications, which may include bipolar depression and post-traumatic stress disorder. We outsource the manufacture of components of our NeuroStar Advanced Therapy
25
Systems that are produced to our specifications, and individual components are either shipped directly from our third-party contract manufacturers to our customers or consolidated into pallets at our Malvern, Pennsylvania facility prior to shipment. Final installation of these systems occurs at the customer site.
Our total revenues increased by $1.4 million, or 11%, from $12.4 million for the three months ended September 30, 2020 to $13.8 million for the three months ended September 30, 2021 and increased by $6.6 million, or 20%, from $33.7 million for the nine months ended September 30, 2020 to $40.3 million for the nine months ended September 30, 2021. For the three and nine months ended September 30, 2021, our U.S. revenues were $13.3 million and $38.9 million compared to $12.0 million and $32.5 million for three and nine months ended September 30, 2020, which represents an increase of 10% and 20% period over period. The increase was primarily attributable to an increase in U.S. treatment session revenue period over period. We incurred net losses of $8.2 million and $23.6 million for the three and nine months ended September 30, 2021 compared to net losses of $3.4 million and $23.8 million for three and nine months ended September 30, 2020. We expect to continue to incur losses for the next several years as we invest in our commercial organization to support our planned sales growth and while continuing to invest in our pipeline indications. As of September 30, 2021, we had an accumulated deficit of $301.1 million.
COVID-19
Throughout 2020 and the nine months ended September 30, 2021, the Company experienced a material impact to revenue, particularly with regards to U.S. treatment session revenues as a result of the COVID-19 pandemic. The Company expects that capital equipment sales and treatment session revenues will continue to be materially impacted by this pandemic as customers are deferring capital purchase decisions and new patient treatment starts. System utilization has also declined compared to pre-COVID-19 projections.
We have monitored the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it has and will continue to impact the Company’s customers, supply chain, employees and other business partners. While we experienced significant disruptions in 2020 and the nine months ended September 30, 2021 from the COVID-19 pandemic, we are unable to predict the ultimate impact that the COVID-19 pandemic may have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the ongoing pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic, vaccination rates and containment measures, among others. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity.
The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with business partners and assessing potential impacts to our financial position and operating results, as well as potential adverse developments in our business. For further information regarding the impact of COVID-19 on the Company, see Part II, Item 1A titled “Risk Factors” of our Quarterly Report on Form 10-Q for the period ended September 30, 2021.
Components of Our Results of Operations
Revenues
To date, we have generated revenues primarily from the capital portion of our business and related sales and rentals of the NeuroStar Advanced Therapy System and the recurring revenues from our sale of treatment sessions in the United States.
NeuroStar Advanced Therapy System Revenues. NeuroStar Advanced Therapy System revenues consist primarily of sales or rentals of a capital component, including upgrades to the equipment attributable to the initial sale of the system. NeuroStar Advanced Therapy Systems can be purchased outright or on a rent-to-own basis by certain customers.
26
Treatment Session Revenues. Treatment session revenues primarily include sales of NeuroStar Treatment Sessions and SenStar treatment links. The NeuroStar Treatment Sessions are access codes that are delivered electronically in the United States. The SenStar treatment links are disposable units containing single-use access codes that are sold and used outside the United States. Access codes are purchased separately by our customers, primarily on an as-needed basis, and are required by the NeuroStar Advanced Therapy System in order to deliver treatment sessions.
Other Revenues. Other revenues are derived primarily from service and repair and extended warranty contracts with our existing customers.
We refer you to the section titled “Critical Accounting Policies and Use of Estimates—Revenue Recognition” appearing in our Form 10-K filed with the SEC on March 2, 2021. We also refer you to “Note 3. Summary of Significant Accounting Policies.”
Cost of Revenues and Gross Margin
Cost of revenues primarily consists of the costs of components and products purchased from our third-party contract manufacturers of our NeuroStar Advanced Therapy Systems as well as the cost of treatment packs for individual treatment sessions. We use third-party contract manufacturing partners to produce the components for and assemble the completed NeuroStar Advanced Therapy Systems. Cost of revenues also includes costs related to personnel, royalties, warranty, shipping, and our operations and field service departments. We expect our cost of revenues to increase in absolute dollars as and to the extent our revenues grow.
Our gross profit is calculated by subtracting our cost of revenues from our revenues. We calculate our gross margin as our gross profit divided by our revenues. Our gross margin has been and will continue to be affected by a variety of factors, primarily product sales mix, pricing and third-party contract manufacturing costs. Our gross margins on revenues from sales of NeuroStar Advanced Therapy Systems are lower than our gross margins on revenues from sales of treatment sessions and, as a result, the sales mix between NeuroStar Advanced Therapy Systems and treatment sessions can affect the gross margin in any reporting period.
Sales and Marketing Expenses
Sales and marketing expenses consist of market research and commercial activities related to the sale of our NeuroStar Advanced Therapy Systems and treatment sessions and salaries and related benefits, sales commissions and share-based compensation for employees focused on these efforts. Other significant sales and marketing costs include conferences and trade shows, promotional and marketing activities, including direct and online marketing, practice support programs, travel and training expenses.
We anticipate that our sales and marketing expenses will increase as we continue to execute on our growth initiatives and expand our business in the United States.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel expenses, including salaries and related benefits, share-based compensation and travel expenses, for employees in executive, finance, information technology, legal and human resource functions. General and administrative expenses also include the cost of insurance, outside legal fees, accounting and other consulting services, audit fees from our independent registered public accounting firm, board of directors’ fees and other administrative costs, such as corporate facility costs, including rent, utilities, depreciation and maintenance not otherwise included in cost of revenues.
27
We anticipate that our general and administrative expenses will increase in fiscal year 2021 from fiscal year 2020.
Research and Development Expenses
Research and development expenses consist primarily of personnel expenses, including salaries and related benefits and share-based compensation for employees in clinical development, product development, regulatory and quality assurance functions, as well as expenses associated with outsourced professional scientific development services and costs of investigative sites and consultants that conduct our preclinical and clinical development programs. We typically use our employee, consultant and infrastructure resources across our research and development programs.
We plan to incur research and development expenses for the near future as we expect to continue our development of TMS Therapy for the treatment of additional patient populations and new indications, which may include bipolar depression, post-traumatic stress disorder and potential other clinical indications yet to be determined, as well as for various hardware and software development projects. As a result, we expect our research and development expenses to remain similar to our fiscal year 2020 expenses.
Interest Expense
Interest expense consists of cash interest payable under our credit facility and non-cash interest attributable to the accrual of final payment fees and the amortization of deferred financing costs related to our indebtedness.
Other Income, Net
Other income, net consists primarily of interest income earned on our money market account balances.
Results of Operations
Comparison of the three months ended September 30, 2021 and 2020
Three Months Ended |
| |||||||||||
September 30, | Increase / (Decrease) | |||||||||||
| 2021 |
| 2020 |
| Dollars |
| Percentage |
| ||||
(in thousands, except percentages) |
| |||||||||||
Revenues | $ | 13,799 | $ | 12,448 | $ | 1,351 |
| 11 | % | |||
Cost of revenues |
| 3,144 |
| 2,657 |
| 487 |
| 18 | % | |||
Gross Profit |
| 10,655 |
| 9,791 |
| 864 |
| 9 | % | |||
Gross Margin |
| 77.2 | % |
| 78.7 | % |
|
|
| |||
| ||||||||||||
Operating expenses: |
|
|
|
|
|
|
| |||||
Sales and marketing |
| 9,827 |
| 6,053 |
| 3,774 |
| 62 | % | |||
General and administrative |
| 6,435 |
| 4,210 |
| 2,225 |
| 53 | % | |||
Research and development |
| 1,575 |
| 1,952 |
| (377) |
| (19) | % | |||
Total operating expenses |
| 17,837 |
| 12,215 |
| 5,622 | 46 | % | ||||
Loss from Operations |
| (7,182) | (2,424) |
| (4,758) |
| (196) | % | ||||
Other (income) expense: |
|
|
|
|
|
| ||||||
Interest expense |
| 993 |
| 1,002 |
| (9) |
| (1) | % | |||
Other income, net |
| (24) |
| (8) |
| (16) |
| 200 | % | |||
Net Loss | $ | (8,151) | $ | (3,418) | $ | (4,733) |
| (138) | % | |||
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Revenues by Geography |
| ||||||||||
Three Months Ended September 30, |
| ||||||||||
2021 | 2020 |
| |||||||||
% of | % of |
| |||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| |||
(in thousands, except percentages) |
| ||||||||||
United States | $ | 13,280 | 96 | % | $ | 12,029 | 97 | % | |||
International |
| 519 |
| 4 | % |
| 419 |
| 3 | % | |
Total revenues | $ | 13,799 |
| 100 | % | $ | 12,448 |
| 100 | % | |
U.S. Revenues by Product Category |
| ||||||||||
Three Months Ended September 30, |
| ||||||||||
2021 | 2020 |
| |||||||||
% of | % of |
| |||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| |||
(in thousands, except percentages) |
| ||||||||||
NeuroStar Advanced Therapy System | $ | 2,612 | 20 | % | $ | 2,541 | 21 | % | |||
Treatment sessions |
| 10,259 |
| 77 | % |
| 9,083 |
| 76 | % | |
Other |
| 409 |
| 3 | % |
| 405 |
| 3 | % | |
Total U.S. revenues | $ | 13,280 |
| 100 | % | $ | 12,029 |
| 100 | % | |
U.S. NeuroStar Advanced Therapy System |
| ||||||||||
Revenues by Type |
| ||||||||||
Three Months Ended September 30, |
| ||||||||||
2021 | 2020 |
| |||||||||
% of | % of |
| |||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| |||
(in thousands, except percentages) |
| ||||||||||
NeuroStar Capital | $ | 2,277 | 87 | % | $ | 2,438 | 96 | % | |||
Operating lease | 30 |
| 1 | % |
| 88 |
| 3 | % | ||
Other | 305 |
| 12 | % |
| 15 |
| 1 | % | ||
Total United States NeuroStar Advanced Therapy System revenues | $ | 2,612 |
| 100 | % | $ | 2,541 |
| 100 | % | |
Revenues
Total revenue for the three months ended September 30, 2021 was $13.8 million, an increase of 11% compared to the three months ended September 30, 2020 revenue of $12.4 million. During the quarter, total U.S. revenue increased by 10% and international revenue increased by 24% over the prior year quarter. The U.S. revenue growth was driven by an increase in U.S. treatment session revenue and the international revenue growth was driven by an increase in international NeuroStar Advanced Therapy System sales.
U.S. NeuroStar Advanced Therapy System revenue for the three months ended September 30, 2021 was $2.6 million, an increase of 3% compared to the three months ended September 30, 2020 revenue of $2.5 million. For the three months ended September 30, 2021 and 2020, the Company sold 33 and 39 systems, respectively, during each period. Additionally, for the three months ended September 30, 2021, the Company executed 7 operating lease agreements.
U.S. treatment session revenue for the three months ended September 30, 2021 was $10.3 million, an increase of 13% compared to the three months ended September 30, 2020 revenue of $9.1 million. The revenue growth was primarily driven by an increase in treatment session volume over the prior year quarter.
Cost of Revenues and Gross Margin
Cost of revenues increased by $0.4 million, or 18%, from $2.7 million for the three months ended September 30, 2020 to $3.1 million for the three months ended September 30, 2021. Gross margin decreased from 78.7% for the three months ended September 30, 2020 to 77.2% for the three months ended
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September 30, 2021. The decrease was primarily a result of increased supply chain costs in the current quarter compared to the prior year quarter.
Sales and Marketing Expenses
Sales and marketing expenses increased by $3.7 million, or 62%, from $6.1 million for the three months ended September 30, 2020 to $9.8 million for the three months ended September 30, 2021. The increase was primarily due to marketing and sales expenses, digital paid media costs, travel expenses and trade show costs incurred in the current period versus the prior year quarter.
General and Administrative Expenses
General and administrative expenses increased by $2.2 million, or 53%, from $4.2 million for the three months ended September 30, 2020 to $6.4 million for the three months ended September 30, 2021. The increase was primarily due to increased personnel expenses, including salary and share based compensation, IT consulting costs and insurance premiums in the current period versus the prior year quarter.
Research and Development Expenses
Research and development expenses decreased by $0.4 million, or 19%, from $2.0 million for the three months ended September 30, 2020 to $1.6 million for the three months ended September 30, 2021. The decrease was primarily due to reduced clinical and product development personnel expenses offset by an increase in regulatory costs in the current period versus the prior year quarter.
Interest Expense
Interest expense remained constant from $1.0 million for the three months ended September 30, 2020 to $1.0 million for the three months ended September 30, 2021.
Other Income, Net
Other income, net increased by $0.01 million from $0.01 million for the three months ended September 30, 2020 to $0.02 million for the three months ended September 30, 2021, primarily as a result of increased interest income earned on the Company’s money market accounts.
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Comparison of the nine months ended September 30, 2021 and 2020
Nine Months Ended |
| ||||||||||||
September 30, | Increase / (Decrease) | ||||||||||||
| 2021 |
| 2020 |
| Dollars |
| Percentage |
| |||||
(in thousands, except percentages) |
| ||||||||||||
Revenues | $ | 40,290 | $ | 33,665 | $ | 6,625 |
| 20 | % | ||||
Cost of revenues |
| 8,115 |
| 7,791 |
| 324 |
| 4 | % | ||||
Gross Profit |
| 32,175 |
| 25,874 |
| 6,301 |
| 24 | % | ||||
Gross Margin |
| 79.9 | % |
| 76.9 | % |
|
|
| ||||
| |||||||||||||
Operating expenses: |
|
|
|
|
|
|
| ||||||
Sales and marketing |
| 27,431 |
| 24,926 |
| 2,505 |
| 10 | % | ||||
General and administrative |
| 19,220 |
| 13,508 |
| 5,712 |
| 42 | % | ||||
Research and development |
| 6,179 |
| 7,089 |
| (910) |
| (13) | % | ||||
Total operating expenses |
| 52,830 |
| 45,523 |
| 7,307 |
| 16 | % | ||||
Loss from Operations |
| (20,655) |
| (19,649) |
| (1,006) |
| (5) | % | ||||
Other (income) expense: |
|
|
|
|
|
|
| ||||||
Interest expense |
| 2,955 |
| 3,511 |
| (556) |
| (16) | % | ||||
Loss on extinguishment of debt |
| — |
| 924 |
| (924) |
| 100 | % | ||||
Other income, net |
| (53) |
| (288) |
| 235 |
| 82 | % | ||||
Net Loss | $ | (23,557) | $ | (23,796) | $ | 239 |
| 1 | % | ||||
Revenues by Geography |
| |||||||||||
Nine Months Ended September 30, |
| |||||||||||
2021 | 2020 |
| ||||||||||
% of | % of |
| ||||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| ||||
(in thousands, except percentages) |
| |||||||||||
United States | $ | 38,891 | 97 | % | $ | 32,473 | 96 | % | ||||
International |
| 1,399 |
| 3 | % |
| 1,192 |
| 4 | % | ||
Total revenues | $ | 40,290 |
| 100 | % | $ | 33,665 |
| 100 | % | ||
U.S. Revenues by Product Category |
| ||||||||||||||||||||||||
Nine Months Ended September 30, |
| ||||||||||||||||||||||||
2021 | 2020 |
| |||||||||||||||||||||||
% of | % of |
| |||||||||||||||||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| |||||||||||||||||
(in thousands, except percentages) |
| ||||||||||||||||||||||||
NeuroStar Advanced Therapy System | $ | 6,945 | 18 | % | $ | 7,474 | 23 | % | |||||||||||||||||
Treatment sessions |
| 30,688 |
| 79 | % |
| 23,823 |
| 73 | % | |||||||||||||||
Other |
| 1,258 |
| 3 | % |
| 1,176 |
| 4 | % | |||||||||||||||
Total U.S. revenues | $ | 38,891 |
| 100 | % | $ | 32,473 |
| 100 | % | |||||||||||||||
31
U.S. NeuroStar Advanced Therapy System |
| |||||||||||
Revenues by Type |
| |||||||||||
Nine Months Ended September 30, |
| |||||||||||
2021 | 2020 |
| ||||||||||
% of | % of |
| ||||||||||
| Amount |
| Revenues |
| Amount |
| Revenues |
| ||||
(in thousands, except percentages) |
| |||||||||||
NeuroStar Capital | $ | 6,307 | 91 | % | $ | 7,072 | 95 | % | ||||
Operating lease | 194 |
| 3 | % |
| 358 |
| 5 | % | |||
Other | 444 |
| 6 | % |
| 44 |
| 1 | % | |||
Total United States NeuroStar Advanced Therapy System revenues | $ | 6,945 |
| 100 | % | $ | 7,474 |
| 100 | % | ||
Revenues
Total revenue for the nine months ended September 30, 2021 was $40.3 million, an increase of 20% compared to the nine months ended September 30, 2020 revenue of $33.7 million. During the nine months ended September 30, 2021, total U.S. revenue increased by 20% and international revenue increased by 17% over the nine months ended September 30, 2020. The U.S. revenue growth was driven by an increase in U.S. treatment session revenue and the international revenue growth was driven by an increase in NeuroStar Advanced Therapy System sales.
U.S. NeuroStar Advanced Therapy System revenue for the nine months ended September 30, 2021 was $6.9 million, a decrease of 7% compared to the nine months ended September 30, 2020 revenue of $7.5 million. The decrease was primarily driven by a lower number of NeuroStar systems sold in the nine months ended September 30, 2021, which was partially offset by an increase in the blended NeuroStar system average selling price over the nine months ended September 30, 2020. For the nine months ended September 30, 2021 and 2020, the Company sold 92 and 112 systems, respectively, during each period. Additionally, for the nine months ended September 30, 2021, the Company executed 7 operating lease agreements.
U.S. treatment session revenue for the nine months ended September 30, 2021 was $30.7 million, an increase of 29% compared to the nine months ended September 30, 2020 revenue of $23.8 million. The revenue growth was primarily driven by an increase in treatment session volume period over period.
Cost of Revenues and Gross Margin
Cost of revenues increased by $0.3 million, or 4%, from $7.8 million for the nine months ended September 30, 2020 to $8.1 million for the nine months ended September 30, 2021. Gross margin increased from 76.9% for the nine months ended September 30, 2020 to 79.9% for the nine months ended September 30, 2021. The increase was primarily a result of a change in the product mix of revenues versus the prior year period.
Sales and Marketing Expenses
Sales and marketing expenses increased by $2.5 million, or 10%, from $24.9 million for the nine months ended September 30, 2020 to $27.4 million for the nine months ended September 30, 2021. The increase was primarily due to marketing and sales expenses, digital paid media costs, travel expenses and trade show costs versus the prior year period.
General and Administrative Expenses
General and administrative expenses increased by $5.7 million, or 42%, from $13.5 million for the nine months ended September 30, 2020 to $19.2 million for the nine months ended September 30, 2021. The increase was primarily due to increased personnel expenses related to bonus, salary and share based compensation versus the prior year period.
32
Research and Development Expenses
Research and development expenses decreased by $0.9 million, or 13%, from $7.1 million for the nine months ended September 30, 2020 to $6.2 million for the nine months ended September 30, 2021. The decrease was primarily due to reduced clinical and product development personnel expenses offset by an increase in regulatory costs versus the prior year period.
Interest Expense
Interest expense decreased by $0.5 million, or 16%, from $3.5 million for the nine months ended September 30, 2020 to $3.0 million for the nine months ended September 30, 2021. The decrease in interest expense was due to the loss on extinguishment of debt charge recognized in the first quarter of 2020 as part of Oxford debt facility. Refer to “Note 13. Debt” in the financial statements included in this Quarterly Report on Form 10-Q for information regarding the Oxford debt facility.
Other Income, Net
Other income, net decreased by $0.2 million, or 82%, from $0.3 million for the nine months ended September 30, 2020 to $0.1 million for the nine months ended September 30, 2021, primarily as a result of decreased interest income earned on the Company’s money market accounts.
Liquidity and Capital Resources
Overview
On February 2, 2021, we closed on the Offering of our common stock in which we issued and sold 5,566,000 shares of our common stock, which included shares pursuant to an option granted to underwriters to purchase additional shares, at a public offering price of $15.50 per share. We received net proceeds of $80.6 million after deducting underwriting discounts, commissions and offering expenses.
As of September 30, 2021, we had cash and cash equivalents of $99.4 million and an accumulated deficit of $301.1 million, compared to cash and cash equivalents of $49.0 million and an accumulated deficit of $277.5 million as of December 31, 2020. We incurred negative cash flows from operating activities of $23.5 million and $26.7 million for the nine months ended September 30, 2021 and 2020, respectively. We have incurred operating losses since our inception, and we anticipate that our operating losses will continue in the near term as we seek to expand our sales and marketing initiatives to support our growth in existing and new markets, invest funds in additional research and development activities and utilize cash for other corporate purposes. Our primary sources of capital to date have been from our IPO, private placements of our convertible preferred securities, borrowings under our credit facilities, sales of our products and other public offerings of our common stock. As of September 30, 2021, the Company had $35.0 million of borrowings outstanding under its credit facility, which has a final maturity in February 2025. As discussed in Note 13, the outstanding balance under the credit facility is classified as a current liability as of September 30, 2021. Management believes that the Company’s cash and cash equivalents as of September 30, 2021 and anticipated revenues from sales of its products are sufficient to fund the Company’s operations for at least 12 months from the issuance of these financial statements.
If our cash and cash equivalents and anticipated revenues from sales or our products are insufficient to satisfy our liquidity requirements, we may seek to sell additional common or preferred equity or debt securities or enter into a new credit facility or another form of third-party funding or seek other debt financing. If we raise additional funds by issuing equity or equity-linked securities, our stockholders would experience dilution and any new equity securities could have rights, preferences and privileges superior to those of holders of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us or our stockholders, or at all. It is also possible that we may allocate significant amounts of capital towards products or technologies for which market demand is lower than
33
expected and, as a result, abandon such efforts. If we are unable to maintain our current financing or obtain adequate additional financing when we require it, or if we obtain financing on terms which are not favorable to us, or if we expend capital on products or technologies that are unsuccessful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may be required to delay the development, commercialization and marketing of our products.
Our current and future funding requirements will depend on many factors, including:
| ● | the impact of COVID-19 and related governmental responses; |
| ● | our ability to achieve revenue growth and improve operating margins; |
| ● | our ability to execute on our new sales and marketing strategy |
| ● | compliance with the terms and conditions, including covenants, set forth in our credit facility; |
| ● | the cost of expanding our operations and offerings, including our sales and marketing efforts; |
| ● | our ability to improve or maintain coverage and reimbursement arrangements with domestic third-party and government payors, particularly in Japan; |
| ● | our rate of progress in establishing coverage and reimbursement arrangements from international commercial third-party and government payors; |
| ● | our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of our products and maintaining or improving our sales to our current customers; |
| ● | the cost of research and development activities, including research and development relating to additional indications, which may include bipolar depression; |
| ● | the effect of competing technological and market developments; |
| ● | costs related to international expansion; and |
| ● | the potential cost of and delays in product development as a result of any regulatory oversight applicable to our products. |
Cash Flows
The following table sets forth a summary of our cash flows for the nine months ended September 30, 2021 and 2020:
Nine Months Ended September 30, | |||||||
| 2021 |
| 2020 | ||||
(in thousands) | |||||||
Net Cash Used in Operating Activities | $ | (23,459) | $ | (26,687) | |||
Net Cash Used in Investing Activities |
| (9,038) |
| (615) | |||
Net Cash Provided by Financing Activities |
| 82,974 |
| 2,313 | |||
Net Increase (Decrease) in Cash and Cash Equivalents | $ | 50,477 | $ | (24,989) | |||
Net Cash Used in Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2021 was $23.5 million, consisting primarily of a net loss of $23.6 million and an increase in net operating assets of $7.5 million, partially offset by non-cash charges of $7.6 million. The increase in net operating assets was primarily due to
34
increases in accounts receivable and inventory and decreases in accounts payable and accrued expenses as a result of timing and the 2021 payment of the 2020 bonus compensation accrued as of December 31, 2020. Non-cash charges consisted of depreciation and amortization, non-cash interest expense, share-based compensation, and the cost of rental units purchased by customers.
Net cash used in operating activities for the nine months ended September 30, 2020 was $26.7 million, consisting primarily of a net loss of $23.8 million and a decrease in net operating liabilities of $8.4 million, partially offset by non-cash charges of $5.5 million. The decrease in net operating liabilities was primarily due to decreases in accounts payable and accrued expenses as a result of timing and the 2020 payments of 2019 incentive compensation and commissions accrued as of December 31, 2019. Non-cash charges consisted of loss on debt extinguishment, depreciation and amortization, non-cash interest expense, share-based compensation, and the cost of rental units purchased by customers.
Net Cash Used in Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2021 and 2020 was $9.0 million and $0.6 million, respectively. Net cash used in investing activities for the the nine months ended September 30, 2021 was due to the issuance of our promissory note and purchases of property and equipment and capitalized software costs. Net cash used in investing activities for the the nine months ended September 30, 2020 was due to purchases of property and equipment and capitalized software costs.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2021 was $83.0 million and primarily consisted of additional proceeds from our Offering and cash proceeds related to stock option exercises. Net cash provided by financing activities for the nine months ended September 30, 2020 was $2.3 million and consisted of additional proceeds from our loan refinance and cash proceeds related to stock option exercises.
Indebtedness
Solar Credit Facility
On March 2, 2020, the “Company entered into a loan and security agreement with Solar Capital Ltd., or Solar, as collateral agent, and other lenders defined in the agreement, for a credit facility, or the Solar Facility, that replaced the Company’s previous $35.0 million credit facility with Oxford Finance LLC, or Oxford, and such facility, the Oxford Facility.
The Solar Facility permits the Company to borrow up to an aggregate amount of $50.0 million in two tranches of term loans, a “Term A Loan” and “Term B Loan.” On March 2, 2020, the Company borrowed an aggregate amount of $35.0 million, which was the aggregate amount available under the Term A Loan portion of the Solar Facility. The Term A Loan portion of the Solar Facility matures, and all amounts borrowed thereunder are due, on February 28, 2025. Under the Term B Loan portion of the Solar Facility, the Company is permitted to borrow, at its election, up to an aggregate amount of $15.0 million, (i) upon the Company achieving a specified amount of trailing twelve months net product revenue, and (ii) assuming there has been no event of default under the Solar Facility prior to such election. Once the net product revenue condition has been satisfied, the Company may only make an election to borrow under the Term B Loan portion of the Solar Facility until the earlier of (a) December 15, 2021, (b) 30 days following achievement of the net product revenue condition or (c) the occurrence of an event of default.
35
Each of the Term A Loan and Term B Loan accrue interest from the date of borrowing through the date of repayment at a floating per annum rate of interest, which resets monthly and is equal to 7.65% plus the greater of (a) 1.66% or (b) the rate per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd. The Term A Loan and the Term B Loan both include an interest-only period through March 1, 2022, after which time the Company will be required to make monthly payments of principal and interest. Monthly principal payments are to be paid in equal amounts on a pro rata basis to lenders. At the Company’s election, the interest only period may be extended through February 2023 if the Company satisfies a minimum net product revenue covenant through March 1, 2022 and no event of default shall have occurred.
In addition to the principal and interest payments due under the Solar Facility, the Company is required to pay a final payment fee to Solar due upon the earlier of prepayment, acceleration or the maturity date of the Term A Loan or Term B Loan portion of the Solar Facility equal to 5.50% of the principal amount of the term loans actually funded. The Company is accruing the final payment fees using the effective interest rate, with a charge to non-cash interest expense, over the term of borrowing. If the Company prepays either the of the Term A Loan or Term B Loan prior to their respective scheduled maturities, the Company will also be required to pay prepayment fees to Solar equal to 3% of the principal amount of such term loan then-prepaid if prepaid on or before the first anniversary of funding, 2% of the principal amount of such term loan then-prepaid if prepaid after the first anniversary and on or before the second anniversary of funding, or 1% of the principal amount of such term loan then-prepaid if prepaid after the second anniversary of funding of the principal amounts borrowed.
The Company is also required to pay Solar an exit fee upon the occurrence, prior to March 2, 2030, of (a) any liquidation, dissolution or winding up of the Company, (b) transaction that results in a person obtaining control over the Company, (c) the Company achieving $100 million in trailing twelve month net product revenue or (d) the Company achieving $125 million in trailing twelve month net product revenue. The exit fee for liquidation, dissolution, winding up or change of control of the Company is equal to 4.50% of the principal amount of the term loans actually funded. The exit fee for achieving either $100 million or $125 million in trailing twelve-month net product revenue is equal to 2.25% of the principal amount of the term loans actually funded or, if both net product revenue milestones are achieved, 4.50% of the principal amount of the term loans actually funded. The exit fee is capped at 4.50% of the principal amount of the term loans actually funded.
On December 8, 2020, the Company, Solar Capital Ltd., and our other lenders defined in the Solar Facility, executed an amendment to the Solar Facility (the “Solar Amendment”). The Solar Amendment divides the aggregate Term B Loan borrowing amount of $15.0 million allowable upon our achievement of specific trailing twelve-month net product revenue targets into three separate $5.0 million tranches (“Amended Term B Loan”, “Term C Loan” and “Term D Loan”). The three tranches are available through June 20, 2021, December 20, 2021, and June 20, 2022, respectively, based on the achievement of agreed upon trailing twelve-month net product revenue targets for each tranche.
The Solar Amendment also reduces the trailing twelve-month net product revenue requirement for the Amended Term B Loan portion of the facility. Subject to certain conditions, the Company has the ability to extend the interest-only period on the initial Term A Loan to 36 months from 24 months upon achieving the revenue targets associated with the Amended Term B Loan. As of September 30, 2021, the Company is in compliance with the required minimum net product revenue covenant and anticipates electing to extend the interest-only period through March 1, 2023 for the Term A Loan, subject to continuing to meet the required conditions through and as of March 1, 2022. The Company is projected to be in compliance with the required covenant. The Company was required to pay an amendment fee of $0.1 million to Solar, which has been recognized as a deferred debt issuance cost as of December 31, 2020 that will be amortized to interest expense using the effective interest method.
36
The Company’s obligations under the Solar Facility are secured by a first priority security interest in substantially all of its assets, including its intellectual property. The loan and security agreement requires the Company to comply with certain financial covenants as well as customary affirmative and negative covenants.
The Solar Facility contains events of default, including, without limitation, events of default upon: (i) failure to make payment pursuant to the terms of the agreement; (ii) violation of covenants; (iii) material adverse changes to the Company’s business; (iv) attachment or levy on the Company’s assets or judicial restraint on its business; (v) insolvency; (vi) material cross-defaults; (vii) significant judgments, orders or decrees for payments by the Company not covered by insurance; (viii) incorrectness of representations and warranties; (ix) incurrence of subordinated debt; (x) a termination or breach of a guaranty; (xi) revocation of governmental approvals necessary for the Company to conduct its business; and (xii) failure by the Company to maintain a valid and perfected lien on the collateral securing the borrowing. The Solar Facility includes subjective acceleration clauses which permit the lenders to accelerate the maturity date under certain circumstances, including, but not limited to, material adverse effects on a Company’s financial status or otherwise.
The Solar Facility includes a financial covenant requiring the attainment of a minimum trailing net revenue amount beginning on December 31, 2020. The Company and lenders executed the Solar Amendment in December 2020 that reduced the minimum trailing net revenue covenant requirement amounts beginning on December 31, 2020 to allow the Company to maintain compliance with the covenant as of December 31, 2020. As of September 30, 2021, the Company is in compliance with the financial covenant and is projected to be in compliance with the reduced minimum revenue covenant amounts going forward.
As of September 30, 2021, the Company is in compliance with all covenants in the Solar Facility.
The Solar Facility includes a financial covenant requiring the attainment of a minimum trailing net revenue amount. Based upon the Company’s projected revenues for the remainder of 2021, the Company believes that it is probable that this minimum revenue covenant will not be achieved. The Company is in discussions with the lenders for a potential covenant waiver or amendment, however, no formal agreement has been executed. The Solar Facility also includes subjective acceleration clauses which permit the lenders to accelerate the maturity date under certain circumstances, including, but not limited to, material adverse effects on a Company’s financial status or otherwise. In accordance with FASB ASC 470 as the Solar Facility contains subjective acceleration clauses and the assessment that it is probable that the revenue covenant will not be met as of December 31, 2021, the outstanding principal under the Solar Facility is classified as a current liability in the accompanying balance sheet as of September 30, 2021.
Cash and Non-Cash Interest Expense
For the nine months ended September 30, 2021, we recognized interest expense of $3.0 million, of which $2.5 million was cash and $0.5 million was non-cash interest expense related to the amortization of deferred financing costs and accrual of final payment fees. For the nine months ended September 30, 2020, we recognized interest expense of $3.5 million, of which $3.1 million was cash and $0.4 million was non-cash interest expense related to the amortization of deferred financing costs and accrual of final payment fees.
Common Stock Offering
On February 2, 2021, we closed on our public offering and sale of our common stock in which we issued and sold 5,566,000 shares of our common stock, which included shares pursuant to an option granted to underwriters to purchase additional shares, at a public offering price of $15.50 per share. We received net proceeds of $80.6 million after deducting underwriting discounts, commissions and offering expenses.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, partnerships or other relationships with unconsolidated entities, often referred to as structured finance or special-purpose entities, which are
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established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Commitments and Contractual Obligations
As of September 30, 2021, there were no significant changes to our commitments and future minimum contractual obligations as set forth in our Form 10-K, filed with the SEC on March 2, 2021.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, or Securities Act, for complying with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.
Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (b) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous six years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
Recent Accounting Pronouncements
We refer you to “Note 3. Summary of Significant Accounting Policies” and “Note 4. Recent Accounting Pronouncements” in “Notes to Interim Financial Statements” located in “Part I – FINANCIAL INFORMATION, Item 1. Financial Statements”.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We refer you to the information described in the “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” section of the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2021. There have been no material changes to our market risk described therein.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
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procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Principal Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Principal Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2021, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject from time to time to various claims and legal actions arising during the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on our results of operations, financial condition, or cash flows.
Item 1A. Risk Factors.
You should carefully consider the information described in the “Risk Factors” section of the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2021. There have been no material changes to the risk factors described therein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Issuances of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q. Where so indicated, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated.
Exhibit |
| Description |
10.1◊ | ||
10.2 | ||
31.1* | ||
31.2* | ||
32.1** | ||
32.2** | ||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because iXBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (Formatted as Inline XBRL and contained Exhibit 101). |
* | Filed herewith. |
◊ | Portions of this exhibit (indicated by a diamond) have been omitted pursuant to a request for confidential treatment and have been separately filed with the Securities and Exchange Commission. |
** | This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C Section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing of the registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NEURONETICS, INC. | ||
(Registrant) | |||
Date: November 9, 2021 | By: | /s/ Keith J. Sullivan | |
Name: | Keith J. Sullivan | ||
Title: | President and Chief Executive Officer | ||
(Principal Executive Officer) | |||
Date: November 9, 2021 | By: | /s/ Stephen Furlong | |
Name: | Stephen Furlong | ||
Title: | SVP, Chief Financial Officer and Treasurer | ||
(Principal Financial and Accounting Officer) | |||
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