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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2021

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

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

incorporation or organization)

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 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 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

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 No

There were 26,318,346 shares of the registrant’s common stock outstanding as of July 28, 2021.

Table of Contents

NEURONETICS, INC.

Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021

Table of Contents

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

3

Balance Sheets as of June 30, 2021 and December 31, 2020

3

Statements of Operations for the Three and Six Months ended June 30, 2021 and 2020

4

Statements of Changes in Stockholders’ Equity for the Three and Six Months ended June 30, 2021 and 2020

5

Statements of Cash Flows for the Six Months ended June 30, 2021 and 2020

6

Notes to Interim Financial Statements

7

Item 2.

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

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

35

Item 4.

Controls and Procedures.

35

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

36

Item 1A.

Risk Factors.

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

36

Item 3.

Defaults Upon Senior Securities.

36

Item 4.

Mine Safety Disclosures.

36

Item 5.

Other Information.

36

Item 6.

Exhibits.

37

SIGNATURES

38

2

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements.

NEURONETICS, INC.

Balance Sheets

(Unaudited; In thousands, except per share data)

June 30, 

December 31, 

    

2021

    

2020

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

115,783

$

48,957

Accounts receivable, net

 

9,002

 

7,166

Inventory

 

5,393

 

3,720

Current portion of net investments in sales-type leases

 

2,034

 

1,887

Current portion of prepaid commission expense

 

1,219

 

1,096

Prepaid expenses and other current assets

 

1,447

 

2,186

Total current assets

 

134,878

 

65,012

Property and equipment, net

 

708

 

730

Operating lease right-of-use assets

 

3,228

 

3,418

Net investments in sales-type leases

 

1,854

 

2,331

Prepaid commission expense

 

5,454

 

5,300

Other assets

 

1,976

 

1,866

Total Assets

$

148,098

$

78,657

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

2,425

$

3,749

Accrued expenses

 

6,604

 

7,319

Deferred revenue

 

1,937

 

2,020

Current portion of operating lease liabilities

 

612

 

594

Current portion of long-term debt, net

 

 

Total current liabilities

 

11,578

 

13,682

Long-term debt, net

 

34,944

 

34,620

Deferred revenue

 

1,488

 

1,741

Operating lease liabilities

 

2,922

 

3,121

Total Liabilities

 

50,932

 

53,164

Commitments and contingencies (Note 16)

 

 

Stockholders’ Equity:

 

  

 

  

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

 

  

 

  

outstanding at June 30, 2021 and December 31, 2020

 

 

Common stock, $0.01 par value: 200,000 shares authorized; 26,167 and 19,114

 

  

 

  

shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

 

262

 

191

Additional paid-in capital

 

389,850

 

302,842

Accumulated deficit

 

(292,946)

 

(277,540)

Total Stockholders' Equity

 

97,166

 

25,493

Total Liabilities and Stockholders’ Equity

$

148,098

$

78,657

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

Six Months Ended

June 30, 

June 30, 

2021

2020

2021

2020

Revenues

    

$

14,203

    

$

9,741

$

26,491

    

$

21,217

Cost of revenues

 

2,750

 

2,323

 

4,971

 

5,134

Gross Profit

 

11,453

 

7,418

 

21,520

 

16,083

Operating expenses:

 

  

 

  

 

  

 

  

Sales and marketing

 

9,042

 

8,151

 

17,604

 

18,874

General and administrative

 

6,681

 

4,010

 

12,785

 

9,298

Research and development

 

2,294

 

2,116

 

4,604

 

5,137

Total operating expenses

 

18,017

 

14,277

 

34,993

 

33,309

Loss from Operations

 

(6,564)

 

(6,859)

 

(13,473)

 

(17,226)

Other (income) expense:

 

  

 

  

 

  

 

  

Interest expense

 

977

 

986

 

1,962

 

2,509

Loss on extinguishment of debt

 

 

 

 

924

Other income, net

 

(16)

 

(80)

 

(29)

 

(281)

Net Loss

$

(7,525)

$

(7,765)

$

(15,406)

$

(20,378)

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

$

(0.29)

$

(0.41)

$

(0.63)

$

(1.09)

Weighted-average common shares outstanding, basic and diluted

 

25,903

 

18,747

 

24,608

 

18,714

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

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NEURONETICS, INC.

Statements of Changes in Stockholders’ Equity

(Unaudited; In thousands)

    

    

    

    

Additional

    

    

    

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity 

Balance at December 31, 2019

 

18,645

$

186

$

297,753

$

(250,087)

$

47,852

Share-based awards and options exercises

 

81

 

1

 

75

 

 

76

Share-based compensation expense

 

 

 

1,196

 

 

1,196

Net loss

 

 

 

 

(12,613)

 

(12,613)

Balance at March 31, 2020

 

18,726

$

187

$

299,024

$

(262,700)

$

36,511

Share-based awards and options exercises

 

83

 

1

 

47

 

 

48

Share-based compensation expense

 

 

 

646

 

 

646

Net loss

 

 

 

 

(7,765)

 

(7,765)

Balance at June 30, 2020

 

18,809

$

188

$

299,717

$

(270,465)

$

29,440

Balance at December 31, 2020

 

19,114

$

191

$

302,842

$

(277,540)

$

25,493

Share-based awards and options exercises

 

1,076

 

11

 

1,581

 

 

1,592

Issuance of common stock, net of issuance costs of $401

5,566

56

80,515

80,571

Share-based compensation expense

 

 

 

2,196

 

 

2,196

Net loss

 

 

 

 

(7,881)

 

(7,881)

Balance at March 31, 2021

 

25,756

$

258

$

387,134

$

(285,421)

$

101,971

Share-based awards and options exercises

 

411

 

4

 

707

 

 

711

Share-based compensation expense

 

 

 

2,009

 

 

2,009

Net loss

 

 

 

 

(7,525)

 

(7,525)

Balance at June 30, 2021

 

26,167

$

262

$

389,850

$

(292,946)

$

97,166

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)

Six Months Ended June 30, 

2021

2020

Cash Flows from Operating Activities:

    

  

    

  

Net loss

$

(15,406)

$

(20,378)

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

 

  

 

  

Depreciation and amortization

 

552

 

534

Share-based compensation

 

4,205

 

1,842

Non-cash interest expense

 

324

 

944

Cost of rental units purchased by customers

 

137

 

122

Loss on extinguishment of debt

 

 

622

Changes in certain assets and liabilities:

 

  

 

  

Accounts receivable, net

 

(1,835)

 

(66)

Inventory

 

(1,673)

 

(557)

Net investments in sales-type leases

 

330

 

(777)

Leasehold reimbursement

 

 

836

Prepaid commission expense

 

(278)

 

(723)

Prepaid expenses and other assets

 

1,120

 

356

Accounts payable

 

(1,365)

 

(2,408)

Accrued expenses

 

(715)

 

(3,492)

Deferred revenue

 

(336)

 

14

Net Cash Used in Operating Activities

 

(14,940)

 

(23,131)

Cash Flows from Investing Activities:

 

  

 

  

Purchases of property and equipment and capitalized software

 

(1,108)

 

(484)

Net Cash Used in Investing Activities

 

(1,108)

 

(484)

 

Cash Flows from Financing Activities:

 

  

 

  

Proceeds from issuance of long-term debt

 

 

41,360

Repayment of long-term debt

 

 

(38,860)

Payments of debt issuance costs

 

 

(721)

Proceeds from exercises of stock options

 

2,303

 

124

Proceeds from the issuance of common stock

 

80,972

 

Payments of common stock offering issuance costs

 

(401)

 

Net Cash Provided by Financing Activities

 

82,874

 

1,903

Net Increase (Decrease) in Cash and Cash Equivalents

 

66,826

 

(21,711)

Cash and Cash Equivalents, Beginning of Period

 

48,957

 

75,708

Cash and Cash Equivalents, End of Period

$

115,783

$

53,997

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

1,638

$

2,227

Supplemental disclosure of non-cash investing and financing activities:

 

  

 

  

Purchases of property and equipment and capitalized software in accounts payable and accrued expenses

$

41

$

80

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

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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.

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 began to experience significant disruptions in March 2020 through the end of June 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 $6.4 million loan in April 2020 under the Paycheck Protection Program (the “PPP”) established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020. Due to questions concerning the eligibility of public companies similarly situated to the Company, on May 7, 2020, the Company repaid the loan in full, including interest accrued to date.

Liquidity

As of June 30, 2021, the Company had cash and cash equivalents of $115.8 million and an accumulated deficit of $292.9 million. The Company incurred negative cash flows from operating activities of $14.9 million for the six months ended June 30, 2021 and $28.4 million for the year ended December 31, 2020. 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 continues to invest in sales, marketing and product 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, proceeds from its secondary public offering of common stock, revenues from sales of its products and other public offerings of the Company’s common stock. As of June 30, 2021, the Company had $35.0 million of borrowings outstanding under its credit facility, which has a final maturity in February 2025. Management believes that the Company’s cash and cash equivalents as of June 30, 2021, and anticipated revenues from sales of its products are sufficient to fund the Company’s operations for at least the next 12 months from the issuance of these financial statements.

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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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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 six months ended June 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’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 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

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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 June 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 June 30, 2021 and December 31, 2020 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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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

The following tables set forth the carrying amounts and fair values of the Company’s financial instruments as of June 30, 2021 and December 31, 2020 (in thousands):

    

June 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)

$

114,626

$

114,626

$

114,626

$

$

    

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

    

  

    

  

    

  

    

  

    

  

Money market funds (cash equivalents)

$

47,117

$

47,117

$

47,117

$

$

6.     ACCOUNTS RECEIVABLE

The following table presents the composition of accounts receivable, net as of June 30, 2021 and December 31, 2020 (in thousands):

June 30, 

December 31, 

    

2021

    

2020

Gross accounts receivable - trade

$

9,926

$

8,178

Less: Allowances for doubtful accounts

 

(924)

 

(1,012)

Accounts receivable, net

$

9,002

$

7,166

7.     PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE

The following table presents the composition of property and equipment, net as of June 30, 2021 and December 31, 2020 (in thousands):

June 30, 

December 31, 

    

2021

    

2020

Laboratory equipment

$

184

$

150

Office equipment

 

497

 

487

Computer equipment and software

 

1,541

 

1,360

Manufacturing equipment

 

327

 

273

Leasehold improvements

 

459

 

459

Rental equipment

 

131

 

405

Property and equipment, gross

 

3,139

 

3,134

Less: Accumulated depreciation

 

(2,431)

 

(2,404)

Property and equipment, net

$

708

$

730

As of June 30, 2021 and December 31, 2020, the Company had capitalized software costs, net of $1.6 million and $1.2 million, respectively, which are included in “Prepaid expenses and other current assets” and “Other assets” on the balance sheet.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

Depreciation and amortization expense was $0.3 million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively, and $0.6 million and $0.5 million for the six months ended June 30, 2021 and 2020, respectively.

8.     LEASES

Lessee:

The Company has operating leases for its corporate headquarters and office equipment, including copiers. The Company leases an approximately 32,000 square foot facility in Malvern, Pennsylvania for its corporate headquarters, which includes office and warehouse space. The Company does not currently have any finance leases or executed leases that have not yet commenced.

Operating lease rent expense was $0.1 million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively, and $0.3 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, the weighted-average remaining lease term of operating leases was 6.6 years and the weighted-average discount rate was 6.5%.

In the first quarter of 2020, the Company received a reimbursement of $0.8 million for leasehold expenses previously incurred in connection with the lease agreement for its Malvern facility. The reimbursement was recorded as an offset to the non-current lease liability that was established when the lease agreement was executed.

The following table presents the supplemental cash flow information as a lessee related to leases (in thousands):

    

Six Months Ended

June 30, 2021

    

June 30, 2020

Cash paid for amounts included in the measurement of lease liabilities:

 

  

 

  

Operating cash flows from operating leases

$

392

$

394

The following table sets forth by year the required future payments of operating lease liabilities (in thousands):

June 30, 2021

Remainder of 2021

$

313

2022

639

2023

 

636

2024

 

646

2025

 

660

Thereafter

 

1,487

Total lease payments

 

4,381

Less imputed interest

 

(847)

Present value of operating lease liabilities

$

3,534

Lessor sales-type leases:

Certain customers have purchased NeuroStar Advanced Therapy Systems on a rent-to-own basis. The lease term is three or four years with a customer option to purchase the NeuroStar Advanced Therapy System at the end of the lease or automatic transfer of ownership of the NeuroStar Advanced Therapy System at the end of the lease.

The following table sets forth the profit recognized on sales-type leases (in thousands):

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

Profit recognized at commencement, net

$

148

$

474

$

281

$

726

Interest income

 

 

 

 

Total sales-type lease income

$

148

$

474

$

281

$

726

The following table sets forth a maturity analysis of the undiscounted lease receivables related to sales-type leases (in thousands):

    

June 30, 

2021

Remainder of 2021

$

1,176

2022

1,804

2023

 

729

2024

 

140

2025

39

Total sales-type lease receivables

$

3,888

As of June 30, 2021, the carrying amount of the lease receivables is $3.9 million. The Company does not have any unguaranteed residual assets.

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. For the three months ended June 30, 2021 and 2020, the Company recognized operating lease income of $0.1 million and $0.1 million, respectively. For the six months ended June 30, 2021 and 2020, the Company recognized operating lease income of $0.2 million and $0.2 million, respectively.

The following table sets forth a maturity analysis of its undiscounted lease receivables related to operating leases as of June 30, 2021 (in thousands):

    

June 30, 

2021

Remainder of 2021

$

18

Total lease receivables

$

18

The Company maintained Rental Equipment, net of $0.1 million and $0.2 million as of June 30, 2021 and December 31, 2020, respectively, which are included in “Property and equipment, net” on the balance sheet. Rental equipment depreciation expense was $0.01 million and $0.02 million for the three months ended June 30, 2021 and 2020, respectively, and $0.02 million and $0.05 million for the six months ended June 30, 2021 and 2020.

9.     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.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

NeuroStar Advanced Therapy System commissions are deferred and amortized on a straight-line basis over a seven year period equal to the average customer term, which the Company deems to be the expected period of benefit for these costs.

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 $0.3 million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively, and $0.6 million and $0.4 million for the six months ended June 30, 2021 and 2020, respectively.

10.     ACCRUED EXPENSES

The following table presents the composition of accrued expenses as of June 30, 2021 and December 31, 2020 (in thousands):

    

June 30, 

    

December 31, 

2021

2020

Compensation and related benefits

$

3,707

$

5,023

Consulting and professional fees

 

525

 

292

Research and development expenses

 

539

 

138

Sales and marketing expenses

344

73

Warranty

 

381

 

536

Sales and other taxes payable

 

680

 

726

Other

 

428

 

531

Accrued expenses

$

6,604

$

7,319

11.     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 June 30, 2021, the Company expects to recognize approximately the following percentages of deferred revenue by year:

    

Revenue

 

Year:

Recognition

 

Remainder of 2021

38

%

2022

 

23

%

2023

 

17

%

2024

 

17

%

2025

 

5

%

Thereafter

 

%

Total

 

100

%

GraphicRevenue recognized for the three and six months ended June 30, 2021 that was included in the contract liability balance at the beginning of the year was $0.3 million and $1.5 million, respectively, and primarily represented revenue earned from separately priced extended warranties, rent-to-own revenue, milestone revenue, and clinical training.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

Customers

For the three months ended June 30, 2021 and 2020, one customer accounted for more than 10% of the Company’s revenues, respectively. For the six months ended June 30, 2021 and 2020, one customer accounted for more than 10% of the Company’s revenues, respectively.

12.     DEBT

The following table presents the composition of debt as of June 30, 2021 and December 31, 2020 (in thousands):

June 30, 

December 31, 

    

2021

    

2020

Outstanding principal

$

35,000

$

35,000

Accrued final payment fees

 

1,925

 

1,925

Less debt discounts

 

(1,981)

 

(2,305)

Total debt, net

 

34,944

 

34,620

Less current portion

 

 

Long-term debt, net

$

34,944

$

34,620

For the three months ended June 30, 2021, the Company recognized interest expense of $1.0 million, of which $0.8 million was cash and $0.2 million was non-cash interest expense related to the amortization of deferred debt issuance costs and accrual of final payment fees. For the three months ended June 30, 2020, the Company recognized interest expense of $1.0 million, of which $0.8 million was cash paid for interest during the period and $0.2 million was non-cash interest expense related to the amortization of deferred debt issuance costs and accrual of final payment fees.

For the six months ended June 30, 2021, the Company recognized interest expense of $2.0 million, of which $1.7 million was cash and $0.3 million was non-cash interest expense related to the amortization of deferred debt issuance costs and accrual of final payment fees. For the six months ended June 30, 2020, the Company recognized interest expense of $2.5 million, of which $2.2 million was cash paid for interest during the period and $0.3 million was non-cash interest expense related to the amortization of deferred debt issuance costs and accrual of final payment fees.

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.

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Notes to Interim Financial Statements

(Unaudited)

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 June 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.

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