stim-10q_20190930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

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: 001-38546

 

NEURONETICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

33-1051425

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

3222 Phoenixville Pike, Malvern, PA

19355

(Address of principal executive offices)

(Zip Code)

(610) 640-4202

(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

Symbol (s)

 

Name on each exchange on which registered

Common Stock ($0.01 par value)

 

STIM

 

The Nasdaq Global Market

 

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.   Yes [X]   No [   ]

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).   Yes [X]   No [   ]

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

[   ]

Non-accelerated filer

[X]

 

Smaller reporting company

[X]

 

 

 

Emerging growth company

[X]

 

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 [   ]  No [X]

There were 18,632,268 shares of the registrant’s common stock outstanding as of October 31, 2019.

 

 

 


 

NEURONETICS, INC.

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019

Table of Contents

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements.

 

3

 

 

 

 

 

 

 

Balance Sheets as of September 30, 2019 and December 31, 2018

 

3

 

 

 

 

 

 

 

Statements of Operations for the Three and Nine Months ended September 30, 2019 and 2018

 

4

 

 

 

 

 

 

 

Statement of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Nine Months ended September 30, 2019 and 2018

 

5

 

 

 

 

 

 

 

Statements of Cash Flows for the Nine Months ended September 30, 2019 and 2018

 

6

 

 

 

 

 

 

 

Notes to Interim Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk.

 

36

 

 

 

 

 

Item 4.

 

Controls and Procedures.

 

36

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

 

Legal Proceedings.

 

38

 

 

 

 

 

Item 1A.

 

Risk Factors.

 

38

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

 

38

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities.

 

38

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures.

 

38

 

 

 

 

 

Item 5.

 

Other Information.

 

38

 

 

 

 

 

Item 6.

 

Exhibits.

 

39

 

 

 

 

 

SIGNATURES

 

40

 

 

2


 

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

 

NEURONETICS, INC.

Balance Sheets

(Unaudited; In thousands, except per share data)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

82,370

 

 

$

104,583

 

Accounts receivable, net

 

 

7,552

 

 

 

5,620

 

Inventory

 

 

2,924

 

 

 

2,432

 

Current portion of net investments in sales-type leases

 

 

633

 

 

 

-

 

Current portion of prepaid commission expense

 

 

442

 

 

 

-

 

Prepaid expenses and other current assets

 

 

1,985

 

 

 

1,838

 

Total current assets

 

 

95,906

 

 

 

114,473

 

Property and equipment, net

 

 

1,007

 

 

 

1,378

 

Operating lease right-of-use assets

 

 

3,879

 

 

 

-

 

Net investments in sales-type leases

 

 

1,141

 

 

 

-

 

Prepaid commission expense

 

 

2,465

 

 

 

-

 

Other assets

 

 

1,083

 

 

 

1,171

 

Total Assets

 

$

105,481

 

 

$

117,022

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,109

 

 

$

3,756

 

Accrued expenses

 

 

7,612

 

 

 

7,548

 

Deferred revenue

 

 

2,252

 

 

 

2,255

 

Current portion of operating lease liabilities

 

 

529

 

 

 

-

 

Current portion of long-term debt, net

 

 

7,500

 

 

 

-

 

Total current liabilities

 

 

22,002

 

 

 

13,559

 

Long-term debt, net

 

 

23,450

 

 

 

30,395

 

Deferred revenue

 

 

2,229

 

 

 

1,940

 

Operating lease liabilities

 

 

3,470

 

 

 

-

 

Deferred rent

 

 

-

 

 

 

86

 

Total Liabilities

 

 

51,151

 

 

 

45,980

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000 shares authorized; no shares issued or

   outstanding at September 30, 2019 and December 31, 2018

 

 

-

 

 

 

-

 

Common stock, $0.01 par value: 200,000 shares authorized; 18,602 and 17,744

   shares issued and outstanding at September 30, 2019 and December 31, 2018,

   respectively

 

 

186

 

 

 

177

 

Additional paid-in capital

 

 

296,677

 

 

 

291,908

 

Accumulated deficit

 

 

(242,533

)

 

 

(221,043

)

Total Stockholders' Equity

 

 

54,330

 

 

 

71,042

 

Total Liabilities and Stockholders’ Equity

 

$

105,481

 

 

$

117,022

 

 

The accompanying notes are an integral part of these unaudited interim financial statements.  

3


 

NEURONETICS, INC.

Statements of Operations

(Unaudited; In thousands, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

$

16,000

 

 

$

13,737

 

 

$

45,300

 

 

$

37,141

 

Cost of revenues

 

 

4,192

 

 

 

3,034

 

 

 

11,170

 

 

 

8,736

 

Gross Profit

 

 

11,808

 

 

 

10,703

 

 

 

34,130

 

 

 

28,405

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

10,362

 

 

 

9,672

 

 

 

31,477

 

 

 

27,616

 

General and administrative

 

 

4,285

 

 

 

3,238

 

 

 

13,145

 

 

 

8,952

 

Research and development

 

 

3,489

 

 

 

2,125

 

 

 

9,499

 

 

 

6,010

 

Total operating expenses

 

 

18,136

 

 

 

15,035

 

 

 

54,121

 

 

 

42,578

 

Loss from Operations

 

 

(6,328

)

 

 

(4,332

)

 

 

(19,991

)

 

 

(14,173

)

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

930

 

 

 

928

 

 

 

2,780

 

 

 

2,749

 

Other (income) expense, net

 

 

(391

)

 

 

(299

)

 

 

(1,281

)

 

 

1,032

 

Net Loss

 

$

(6,867

)

 

$

(4,961

)

 

$

(21,490

)

 

$

(17,954

)

Net loss per share of common stock outstanding, basic and diluted

 

$

(0.37

)

 

$

(0.29

)

 

$

(1.17

)

 

$

(2.99

)

Weighted-average common shares outstanding, basic and diluted

 

 

18,508

 

 

 

17,382

 

 

 

18,296

 

 

 

6,014

 

 

The accompanying notes are an integral part of these unaudited interim financial statements.

4


 

 

NEURONETICS, INC.

Statement of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited; In thousands)

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity (Deficit)

 

Balance at December 31, 2017

 

 

304,958

 

 

$

187,136

 

 

 

231

 

 

$

2

 

 

$

4,292

 

 

$

(196,946

)

 

$

(192,652

)

Share-based awards and options exercises

 

 

-

 

 

 

-

 

 

 

20

 

 

 

1

 

 

 

30

 

 

 

-

 

 

 

31

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

144

 

 

 

-

 

 

 

144

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,497

)

 

 

(5,497

)

Balance at March 31, 2018

 

 

304,958

 

 

 

187,136

 

 

 

251

 

 

 

3

 

 

 

4,466

 

 

 

(202,443

)

 

 

(197,974

)

Share-based awards and options exercises

 

 

-

 

 

 

-

 

 

 

6

 

 

 

-

 

 

 

7

 

 

 

 

 

 

 

7

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

192

 

 

 

 

 

 

 

192

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,496

)

 

 

(7,496

)

Balance at June 30, 2018

 

 

304,958

 

 

 

187,136

 

 

 

257

 

 

 

3

 

 

 

4,665

 

 

 

(209,939

)

 

 

(205,271

)

Conversion of convertible preferred stock

   into common stock

 

 

(304,958

)

 

 

(187,136

)

 

 

10,994

 

 

 

109

 

 

 

187,027

 

 

 

-

 

 

 

187,136

 

Conversion of convertible preferred stock

   warrants into common stock warrants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,874

 

 

 

-

 

 

 

1,874

 

Issuance of common stock in initial public

   offering, net of issuance costs of $3,465

 

 

-

 

 

 

-

 

 

 

6,325

 

 

 

64

 

 

 

96,471

 

 

 

-

 

 

 

96,535

 

Exercises of stock options

 

 

-

 

 

 

-

 

 

 

3

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

7

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,028

 

 

 

-

 

 

 

1,028

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,961

)

 

 

(4,961

)

Balance at September 30, 2018

 

 

-

 

 

$

-

 

 

 

17,579

 

 

$

176

 

 

$

291,072

 

 

$

(214,900

)

 

$

76,348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

-

 

 

$

-

 

 

 

17,744

 

 

$

177

 

 

$

291,908

 

 

$

(221,043

)

 

$

71,042

 

Share-based awards and options exercises

 

 

-

 

 

 

-

 

 

 

483

 

 

 

5

 

 

 

1,402

 

 

 

-

 

 

 

1,407

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

501

 

 

 

-

 

 

 

501

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,529

)

 

 

(7,529

)

Balance at March 31, 2019

 

 

-

 

 

 

-

 

 

 

18,227

 

 

 

182

 

 

 

293,811

 

 

 

(228,572

)

 

 

65,421

 

Share-based awards and options exercises

 

 

-

 

 

 

-

 

 

 

218

 

 

 

2

 

 

 

468

 

 

 

-

 

 

 

470

 

Share-based compensation expense

 

 

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,022

 

 

 

-

 

 

 

1,022

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,094

)

 

 

(7,094

)

Balance at June 30, 2019

 

 

-

 

 

 

-

 

 

 

18,445

 

 

 

184

 

 

 

295,301

 

 

 

(235,666

)

 

 

59,819

 

Share-based awards and options exercises

 

 

-

 

 

 

-

 

 

 

157

 

 

 

2

 

 

 

441

 

 

 

-

 

 

 

443

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

935

 

 

 

-

 

 

 

935

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,867

)

 

 

(6,867

)

Balance at September 30, 2019

 

 

-

 

 

$

-

 

 

 

18,602

 

 

$

186

 

 

$

296,677

 

 

$

(242,533

)

 

$

54,330

 

 

The accompanying notes are an integral part of these unaudited interim financial statements.

5


 

 

NEURONETICS, INC.

Statements of Cash Flows

(Unaudited; In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(21,490

)

 

$

(17,954

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

765

 

 

 

671

 

Share-based compensation

 

 

2,458

 

 

 

1,364

 

Non-cash interest expense

 

 

555

 

 

 

642

 

Change in fair value of convertible preferred stock warrant liability

 

 

-

 

 

 

1,396

 

Cost of rental units purchased by customers

 

 

144

 

 

 

148

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,933

)

 

 

(1,016

)

Inventory

 

 

(455

)

 

 

(767

)

Net investments in sales-type leases

 

 

(1,774

)

 

 

-

 

Prepaid commission expense

 

 

(2,907

)

 

 

-

 

Prepaid expenses and other assets

 

 

183

 

 

 

(298

)

Accounts payable

 

 

10

 

 

 

(594

)

Accrued expenses

 

 

80

 

 

 

(1,461

)

Deferred revenue

 

 

285

 

 

 

(400

)

Deferred rent

 

 

-

 

 

 

(46

)

Net Cash Used in Operating Activities

 

 

(24,079

)

 

 

(18,315

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment and capitalized software

 

 

(454

)

 

 

(650

)

Net Cash Used in Investing Activities

 

 

(454

)

 

 

(650

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuances of common stock in initial public offering

 

 

-

 

 

 

99,998

 

Payments of public offering costs

 

 

-

 

 

 

(3,465

)

Proceeds from exercises of stock options

 

 

2,320

 

 

 

45

 

Net Cash Provided by Financing Activities

 

 

2,320

 

 

 

96,578

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

 

(22,213

)

 

 

77,613

 

Cash and Cash Equivalents, Beginning of Period

 

 

104,583

 

 

 

29,147

 

Cash and Cash Equivalents, End of Period

 

$

82,370

 

 

$

106,760

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,240

 

 

$

2,057

 

Transfer of inventory to property and equipment

 

$

37

 

 

$

235

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment and capitalized

   software in accounts payable and accrued expenses

 

$

31

 

 

$

-

 

Conversion of convertible preferred stock into common stock

 

 

 

 

 

$

187,136

 

Conversion of convertible preferred stock warrants into common stock warrants

 

$

-

 

 

$

1,874

 

 

The accompanying notes are an integral part of these unaudited interim financial statements.

 

6


NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)  

 

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.

Liquidity

As of September 30, 2019, the Company had cash and cash equivalents of $82.4 million and an accumulated deficit of $242.5 million. The Company incurred negative cash flows from operating activities of $20.6 million for the year ended December 31, 2018 and $24.1 million for the nine months ended September 30, 2019. The Company has incurred operating losses since its inception, and management anticipates that its operating losses will continue in the near term as the Company seeks to expand its sales and marketing initiatives to support its growth into existing and new markets and invest in additional research and development activities. The Company’s primary sources of capital to date have been proceeds from its IPO, private placements of its convertible preferred securities, borrowings under its credit facilities and revenues from sales of its products. As of September 30, 2019, the Company had $30.0 million of borrowings outstanding under its credit facility, which matures in March 2022. Management believes that the Company’s cash and cash equivalents as of September 30, 2019 and anticipated revenues from sales of its products are sufficient to fund the Company’s operations for at least the next 24 months after September 30, 2019.

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 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, changes in convertible preferred stock 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, 2019 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 5, 2019, 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 and given the subjective element of the estimates and assumptions made, actual results may differ from estimated results. The most significant estimates and judgments impact share-based compensation prior to the initial public offering (IPO).

7


NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

 

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s complete summary of significant accounting policies can be found in “Note 3. Summary of Significant Accounting Policies” in the audited financial statements included in the Company’s Form 10-K filed with the SEC on March 5, 2019.

As of January 1, 2019, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606) and ASU 2016-02, “Leases” (Topic 842). The Company’s accounting policies have been modified accordingly:

 

Revenue Recognition

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

On January 1, 2019, the Company adopted Topic 606 using the modified retrospective method applying the open contract practical expedient and accounted for those contracts which were not completed as of January 1, 2019 under Topic 606. Results for reporting periods beginning after January 1, 2019 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.

 

 

Impact of Topic 606 on Financial Statement Line Items

The adoption of ASC 606 had no impact to retained earnings or revenue as of January 1, 2019.

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on prepaid commissions expense on the balance sheet as of September 30, 2019 and the statement of operations for the three and nine months ended September 30, 2019 is as follows:

 

 

 

As of September 30, 2019

 

 

 

As Reported

 

 

Balance Without

Adoption of

ASC 606

 

 

Effect of Change

Higher/(Lower)

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of prepaid commission expense

 

$

442

 

 

$

-

 

 

$

442

 

Prepaid commission expense

 

 

2,465

 

 

 

-

 

 

 

2,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

As Reported

 

 

Balance Without

Adoption of

ASC 606

 

 

Effect of Change

Higher/(Lower)

 

Income Statement

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

10,362

 

 

$

11,690

 

 

$

(1,328

)

Net loss

 

 

(6,867

)

 

 

(8,195

)

 

 

1,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

As Reported

 

 

Balance Without

Adoption of

ASC 606

 

 

Effect of Change

Higher/(Lower)

 

Income Statement

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

31,477

 

 

$

34,384

 

 

$

(2,907

)

Net loss

 

 

(21,490

)

 

 

(24,397

)

 

 

2,907

 

 

8


NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

 

Topic 606 is principles-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

Sales and usage-based taxes are excluded from revenues. Other than the revenue recognized under the distribution agreement disclosed below, all but an immaterial amount of the Company’s revenue is recognized at a point in time.

 

Contract Formation

The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. For all sales, the Company uses either a signed agreement or a binding purchase order as evidence of an arrangement.

 

Performance Obligations

The unit of account for Topic 606 is the performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer or a series of distinct goods or services that are substantially the same and have the same pattern of transfer. A contract’s transaction price is allocated to each performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s contracts are comprised of the following performance obligations:

 

 

(1)

The NeuroStar TMS Therapy System (the “System”) which includes a chair, an electromagnet coil, a monitoring console and accessories. The various components are inputs that function together to deliver a combined output and together form one performance obligation (a NeuroStar Advanced Therapy System). Revenues from the sale of the System are satisfied at the point-in-time when delivered to the customer’s premises.

 

 

(2)

NeuroStar Treatment Session (the “Treatment Session”) is a single use consumable that is delivered via an encrypted activation code and is required in order for a clinician to perform trans-cranial magnetic stimulation (“TMS”) therapy.  Revenues from the sale of the Treatment Sessions are satisfied at the point-in-time when delivered to the customer. The Company determined that sales of Treatment Sessions are not part of the enforceable rights and obligations of the System sales, except when sold with System sales.  

 

 

(3)

Separately priced extended warranties and when-and-if-available upgrade rights are considered service-type warranties. Warranty services are considered stand-ready obligations satisfied over-time and recognized using a straight-line time-based measurement toward completion.

 

 

(4)

The System clinical and reimbursement training enable the clinician to provide patient treatment.  The trainings are not required in order to operate the System but are required in order to receive a certification from the Company and accordingly are not essential to the functionality of other performance obligations. Training services are recognized at a point-in-time when training is complete, typically simultaneous to or near the time of delivery of the System.

 

In addition, the Company has determined that there are various perfunctory deliverables such as installation of the System, the technical support hotline and marketing materials which the Company does not separately recognize as revenue nor does the Company accrue the estimated cost of providing these goods and services because they are not material. The Company provides a two-year warranty on all new System sales which were determined to be assurance-type warranties and thus not considered a separate performance obligation. The Company accrues the cost of providing these warranties.

 

There is no right of return or refund for any of the Company’s products or services and the Company has elected to treat shipping and handling as a fulfillment activity and expenses the costs as incurred.

 

Rent-to-Own

The System is typically purchased but the Company does offer certain customers the option to lease instead. The Company accounts for these leases under Topic 842, Leases. Under Topic 842 the leases are typically accounted for as a sales-type lease which results in the derecognition of the underlying asset, the recognition of profit or loss on the sale, and the recognition of an investment in sales-type lease. The investment is periodically increased for interest earned and reduced as lease payments are received.

 

9


NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

 

Distribution Agreement

The Company has an exclusive distribution agreement with a foreign entity for a period of 7 ½ years with two 2 year renewal options. As consideration for the right to be the sole distributor of the Company’s products and use of the Company’s intellectual property in the foreign territory, the distributor is required to make certain fixed milestone payments upon contract execution and regulatory approval. In addition, the distributor is required to make variable milestone payments depending upon regulatory reimbursement rates. Furthermore, the distributor is required to make certain minimum purchases based upon sales history and forecasts subject to a ceiling and floor. The Company assessed the potential performance obligations in this contract and concluded that the contract contained the following performance obligations:

 

 

Exclusive distribution and intellectual property license

 

NeuroStar TMS Therapy System (the “System”)

 

NeuroStar Treatment Session (the “Treatment Session”)

 

The distribution agreement contains pricing for the Company’s products and services. The contractual purchase prices were determined to be at the standalone selling prices based on the expected sales volumes of this customer type and thus the Company concluded that this agreement did not contain a separate performance obligation for the material right to discounted Systems and Treatments Sessions. The Company allocated the transaction price through a combination of the cost plus a margin approach and the residual method. For the System and Treatment Sessions the Company maximized the use of observable inputs by beginning with average historical contractual selling prices and adjusting on a consistent and rational basis for pricing trends, the customer type and expected sales volumes and the Company’s changing cost and margins. Since it was determined that the contractual selling prices for the Company’s products and services in the distribution agreement were at the standalone selling prices, the residual consideration which is made up of the fixed and variable milestone payments was allocated to the exclusive distribution and intellectual property license. The exclusive distribution and intellectual property rights were determined to be symbolic IP and thus recognized over time. The System and Treatment Sessions were determined to be performance obligations recognized at a point in time when delivered to the distributor.

 

Contract Estimates

Accounting for the Company’s contracts involves the use of significant judgments and estimates including determining the separate performance obligations, allocating the transaction price to the different performance obligations and determining the method to measure the entity’s performance toward satisfaction of performance obligations that most faithfully depicts when control is transferred to the customer. The Company allocates the contract’s transaction price to each performance obligation using the Company’s best estimate of the standalone selling price for each distinct good or service in the contract. The Company maximizes the use of observable inputs by beginning with average historical contractual selling prices and adjusting as necessary and on a consistent and rational basis for other inputs such as pricing trends, customer types, volumes and changing cost and margins.

 

Contract Balances

Payment terms typically require payment upon shipment of the System and additional payments as access codes 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 contract liabilities. Changes in the contract asset and liability balances during the three and nine months ended September 30, 2019 were not materially impacted by any other factors.

 

As of September 30, 2019, the Company expects to recognize approximately the following percentages of deferred revenue by year:

 

Year:

 

Revenue

Recognition

 

Remainder of 2019

 

 

30

%

2020

 

 

23

%

2021

 

 

11

%

2022

 

 

11

%

2023

 

 

11

%

Thereafter

 

 

14

%

Total

 

 

100

%

 

10


NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

 

Revenue recognized for the nine months ended September 30, 2019 that was included in the contract liability balance at the beginning of the year was $2.0 million, and primarily represented revenue earned from separately priced extended warranties and clinical training.  

 

Customers

For the three months ended September 30, 2019, no customer accounted for more than 10% of our revenues. For the nine months ended September 30, 2019, one customer accounted for 10% of our revenues. For the three and nine months ended September 30, 2018, no customer accounted for more than 10% of our revenues.

 

 

Leases

Adoption of ASC Topic 842, "Leases"

 

The Company accounts for leases in accordance with ASC Topic 842, Leases, (“Topic 842”). The Company determines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) the customer has the right to control the use of the identified asset.

 

The Company leases warehouse and office space, and office equipment pursuant to net operating leases. Operating leases where the Company is the lessor are included in revenue on the Statements of Operations.

 

From time to time the Company enters into sales-type lease arrangements that include a lessee obligation to purchase the leased equipment at the end of the lease term, automatic transfer of ownership of the leased equipment at the end of the lease, a bargain purchase option, or provides for minimum lease payments with a present value 90% or more of the fair value of the leased equipment at the date of lease inception. Sales-type leases where the Company is the lessor are included in revenue on the Statements of Operations.

 

Operating leases where the Company is the lessee are included in operating lease right-of-use assets and operating lease liabilities on the Balance Sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

 

The Company uses the following inputs in its lease calculations under Topic 842: (1) the discount rate the Company uses to discount the unpaid lease payments to present value, (2) lease term, and (3) lease payments.

 

 

(1)

Topic 842 requires a lessor to discount its unpaid lease payments using the interest rate implicit in the lease and a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As most leases where the Company is the lessee do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The Company uses the implicit rate when readily determinable.

 

 

(2)

The lease term for all leases includes the noncancelable period of the lease plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

 

 

(3)

Lease payments included in the measurement of the lease asset or liability comprise the following: fixed payments (including in-substance fixed payments), and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.

 

For operating leases where the Company is the lessor, the Company continues recognizing the underlying asset and depreciating it over its estimated useful life. Lease income from lessees is recognized on a straight-line basis over the terms of the relevant lease agreement in revenue. Operating leases for equipment with fixed rentals and step rentals are recognized on a straight-line basis over the term of the lease, assuming no renewals, in revenue. Revenue is not recognized when collection is not reasonably assured. When collectability is not reasonably assured, the customer is placed on non-accrual status and revenue is recognized when cash payments are received.

11


NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

 

 

The lease asset for sales-type leases is initially measured as the total net investment in the lease, which comprises the initial amount of the lease receivable plus the deferred initial direct costs.

 

The lease asset for sales-type leases is subsequently measured throughout the lease term at the carrying amount of the net investment in the lease which is increased by interest income and reduced by lease payments collected. The lease payments are segregated into principal and interest components similar to a loan. Equipment leasing revenues are recognized on an effective interest method over the lease term. The principal component of the lease payment is reflected as a reduction to the net investment in the lease.

 

For operating leases where the Company is the lessee, the right-of-use (ROU) asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

Lease assets for sales-type leases where the Company is the lessor and ROU assets for operating leases where the Company is the lessee are periodically reduced by impairment losses. The Company uses the loans impairment guidance in ASC Subtopic 330-10, Receivables, and the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment – Overall, to determine whether a lease asset or a ROU asset, respectively, is impaired, and if so, the amount of the impairment loss to recognize. As of September 30, 2019, the Company has not encountered any impairment losses.

 

The Company monitors for events or changes in circumstances that require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.

 

The Company has elected not to recognize ROU assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with the short-term leases as an expense on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in the same manner as for all other leases. The Company has elected to exclude sales and other similar taxes from lease payments in arrangements where the Company is a lessor.

 

The Company adopted ASU 2016-02 using a modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11, which provides an alternative modified retrospective transition method. As a result, the Company was not required to adjust comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. January 1, 2019). The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at the adoption date. Further, the Company does not expect the amendments in ASU 2018-01: Land Easement Practical Expedient to have an effect on us because the Company does not enter into land easement arrangements. There was no effect of the adoption of Topic 842 on retained earnings and other components of equity as of December 31, 2018.

4.

RECENT ACCOUNTING PRONOUNCEMENTS

The Company’s discussion of recently issued accounting pronouncements can be found in “Note 4. Recent Accounting Pronouncements” in the audited financial statements included in the Company’s Form 10-K filed with the SEC on March 5, 2019. Additionally, refer to “Note 3. Summary of Significant Accounting Policies” appearing on this Form 10-Q for additional information.

12


NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

 

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, 2019 and December 31, 2018 due to their short-term nature. The carrying values of the Company’s credit facility approximated its fair value as of September 30, 2019 and December 31, 2018 due to its variable interest rate.

Certain of the Company’s financial instruments are measured at fair value using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

Level 1:

Inputs are quoted prices for identical instruments in active markets.

 

 

Level 2:

Inputs are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

 

Level 3:

Inputs are unobservable and reflect the Company’s own assumptions, based on the best information available, including the Company’s own data.

The following tables set forth the carrying amounts and fair values of the Company’s financial instruments as of September 30, 2019 and December 31, 2018 (in thousands):

 

 

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Based on

 

 

 

Carrying

Amount

 

 

Fair Value

 

 

Quoted

Prices In

Active

Markets

(Level 1)

 

 

Significant

other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (cash equivalents)

 

$

71,365

 

 

$

71,365

 

 

$

71,365

 

 

$

-

 

 

$

-

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Based on

 

 

 

Carrying

Amount

 

 

Fair Value

 

 

Quoted

Prices In

Active

Markets

(Level 1)

 

 

Significant

other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets