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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 September 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 26,367,959 shares of the registrant’s common stock outstanding as of November 4, 2021.

Table of Contents

NEURONETICS, INC.

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

Table of Contents

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

3

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

3

Statements of Operations for the Three and Nine Months ended September 30, 2021 and 2020

4

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

5

Statements of Cash Flows for the Nine Months ended September 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.

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

38

Item 4.

Controls and Procedures.

38

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

40

Item 1A.

Risk Factors.

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

40

Item 3.

Defaults Upon Senior Securities.

40

Item 4.

Mine Safety Disclosures.

40

Item 5.

Other Information.

40

Item 6.

Exhibits.

41

SIGNATURES

42

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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

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

99,434

$

48,957

Accounts receivable, net

 

7,749

 

7,166

Inventory

 

5,355

 

3,720

Current portion of net investments in sales-type leases

 

2,142

 

1,887

Current portion of prepaid commission expense

 

1,313

 

1,096

Prepaid expenses and other current assets

 

3,454

 

2,186

Total current assets

 

119,447

 

65,012

Property and equipment, net

 

920

 

730

Operating lease right-of-use assets

 

3,131

 

3,418

Net investments in sales-type leases

 

1,735

 

2,331

Prepaid commission expense

 

5,685

 

5,300

Long-term note receivable

10,000

 

Other assets

 

2,150

 

1,866

Total Assets

$

143,068

$

78,657

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

3,306

$

3,749

Accrued expenses

 

6,913

 

7,319

Deferred revenue

 

1,870

 

2,020

Current portion of operating lease liabilities

 

616

 

594

Current portion of long-term debt, net

 

35,104

 

Total current liabilities

 

47,809

 

13,682

Long-term debt, net

 

 

34,620

Deferred revenue

 

1,361

 

1,741

Operating lease liabilities

 

2,822

 

3,121

Total Liabilities

 

51,992

 

53,164

Commitments and contingencies (Note 17)

 

 

Stockholders’ Equity:

 

  

 

  

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

 

  

 

  

outstanding at September 30, 2021 and December 31, 2020

 

 

Common stock, $0.01 par value: 200,000 shares authorized; 26,335 and 19,114

 

  

 

  

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

 

263

 

191

Additional paid-in capital

 

391,910

 

302,842

Accumulated deficit

 

(301,097)

 

(277,540)

Total Stockholders' Equity

 

91,076

 

25,493

Total Liabilities and Stockholders’ Equity

$

143,068

$

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

Nine Months Ended

September 30, 

September 30, 

2021

2020

2021

2020

Revenues

    

$

13,799

    

$

12,448

$

40,290

    

$

33,665

Cost of revenues

 

3,144

 

2,657

 

8,115

 

7,791

Gross Profit

 

10,655

 

9,791

 

32,175

 

25,874

Operating expenses:

 

  

 

  

 

  

 

  

Sales and marketing

 

9,827

 

6,053

 

27,431

 

24,926

General and administrative

 

6,435

 

4,210

 

19,220

 

13,508

Research and development

 

1,575

 

1,952

 

6,179

 

7,089

Total operating expenses

 

17,837

 

12,215

 

52,830

 

45,523

Loss from Operations

 

(7,182)

 

(2,424)

 

(20,655)

 

(19,649)

Other (income) expense:

 

  

 

  

 

  

 

  

Interest expense

 

993

 

1,002

 

2,955

 

3,511

Loss on extinguishment of debt

 

 

 

 

924

Other income, net

 

(24)

 

(8)

 

(53)

 

(288)

Net Loss

$

(8,151)

$

(3,418)

$

(23,557)

$

(23,796)

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

$

(0.31)

$

(0.18)

$

(0.94)

$

(1.27)

Weighted-average common shares outstanding, basic and diluted

 

26,301

 

18,890

 

25,179

 

18,773

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

Share-based awards and options exercises

 

150

 

1

 

409

 

 

410

Share-based compensation expense

 

 

 

1,046

 

 

1,046

Net loss

 

 

 

 

(3,418)

 

(3,418)

Balance at September 30, 2020

 

18,959

$

189

$

301,172

$

(273,883)

$

27,478

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

Share-based awards and options exercises

 

168

 

1

 

99

 

 

100

Share-based compensation expense

 

 

 

1,961

 

 

1,961

Net loss

 

 

 

 

(8,151)

 

(8,151)

Balance at September 30, 2021

 

26,335

$

263

$

391,910

$

(301,097)

$

91,076

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:

    

  

    

  

Net loss

$

(23,557)

$

(23,796)

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

 

  

 

  

Depreciation and amortization

 

768

 

741

Share-based compensation

 

6,166

 

2,888

Non-cash interest expense

 

484

 

1,113

Cost of rental units purchased by customers

 

137

 

150

Loss on extinguishment of debt

 

 

622

Changes in certain assets and liabilities:

 

  

 

  

Accounts receivable, net

 

(3,097)

 

1,005

Inventory

 

(1,870)

 

(1,004)

Net investments in sales-type leases

 

341

 

(1,271)

Leasehold reimbursement

 

 

875

Prepaid commission expense

 

(602)

 

(1,070)

Prepaid expenses and other assets

 

(453)

 

(1,263)

Accounts payable

 

(840)

 

(2,340)

Accrued expenses

 

(405)

 

(2,981)

Deferred revenue

 

(531)

 

(356)

Net Cash Used in Operating Activities

 

(23,459)

 

(26,687)

Cash Flows from Investing Activities:

 

  

 

  

Purchases of property and equipment and capitalized software

 

(1,552)

 

(615)

Issuance of promissory note

(7,486)

Net Cash Used in Investing Activities

 

(9,038)

 

(615)

 

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

 

2,403

 

534

Proceeds from the issuance of common stock

 

80,972

 

Payments of common stock offering issuance costs

 

(401)

 

Net Cash Provided by Financing Activities

 

82,974

 

2,313

Net Increase (Decrease) in Cash and Cash Equivalents

 

50,477

 

(24,989)

Cash and Cash Equivalents, Beginning of Period

 

48,957

 

75,708

Cash and Cash Equivalents, End of Period

$

99,434

$

50,719

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

2,471

$

3,060

Transfer of Inventory to PP&E

235

Supplemental disclosure of non-cash investing and financing activities:

 

  

 

  

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

$

398

$

83

Reduction of accounts receivable in long-term note receivable

2,514

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 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 $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 September 30, 2021, the Company had cash and cash equivalents of $99.4 million and an accumulated deficit of $301.1 million. The Company incurred negative cash flows from operating activities of $23.5 million for the nine months ended September 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 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 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 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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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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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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 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)

$

96,231

$

96,231

$

96,231

$

$

    

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 September 30, 2021 and December 31, 2020 (in thousands):

September 30, 

December 31, 

    

2021

    

2020

Gross accounts receivable - trade

$

8,907

$

8,178

Less: Allowances for doubtful accounts

 

(1,158)

 

(1,012)

Accounts receivable, net

$

7,749

$

7,166

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

$

214

$

150

Office equipment

 

497

 

487

Computer equipment and software

 

1,555

 

1,360

Manufacturing equipment

 

341

 

273

Leasehold improvements

 

459

 

459

Rental equipment

 

366

 

405

Property and equipment, gross

 

3,432

 

3,134

Less: Accumulated depreciation

 

(2,512)

 

(2,404)

Property and equipment, net

$

920

$

730

As of September 30, 2021 and December 31, 2020, the Company had capitalized software costs, net of $2.0 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 $0.2 million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively, and $0.8 million and $0.7 million for the nine months ended September 30, 2021 and 2020, respecitvely.

8.     NOTE RECEIVABLE

On September 29, 2021, Neuronetics, Inc. the Company entered into an exclusive, five-year master sales agreement (the “Commercial Agreement”) with Check Five, LLC d/b/a Success TMS (“Success TMS”). In connection with the Commercial Agreement, the Company agreed to loan Success TMS the principal amount of $10.0 million for a period of five years pursuant to a secured promissory note (the “Note”). The Note will bear interest at a floating rate equal to the prime rate plus 6.00% per annum. The Note includes an interest-only period through October 1, 2022, after which time Success TMS will be required to make monthly payments of principal and interest. The interest-only period can be extended by the Company to October 1, 2023 upon satisfaction of certain conditions by Success TMS after which time Success TMS will be required to make payments of principal and interest. Under the terms of the Note, the Company has received a first priority security interest in substantially all of the assets of Success TMS. Success TMS has also granted the Company an observer seat on the Board of Managers of Success TMS.

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 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 $0.2 million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively, and $0.4 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the weighted-average remaining lease term of operating leases was 6.4 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.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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:

 

  

 

  

Operating cash flows from operating leases

$

526

$

575

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

September 30, 2021

Remainder of 2021

$

157

2022

639

2023

 

636

2024

 

646

2025

 

660

Thereafter

 

1,487

Total lease payments

 

4,225

Less imputed interest

 

(787)

Present value of operating lease liabilities

$

3,438

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):

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Profit recognized at commencement, net

$

262

$

81

$

543

$

807

Interest income

 

 

 

 

Total sales-type lease income

$

262

$

81

$

543

$

807

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

$

445

2022

2,001

2023

 

998

2024

 

290

2025

143

Total sales-type lease receivables

$

3,877

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

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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 $0.03 million and $0.1 million, respectively. For the nine months ended September 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 September 30, 2021 (in thousands):

    

September 30, 

2021

Remainder of 2021

$

4

Total lease receivables

$

4

The Company maintained Rental Equipment, net of $0.3 million and $0.2 million as of September 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 September 30, 2021 and 2020, respectively, and $0.03 million and $0.1 million for the nine months ended September 30, 2021 and 2020.

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 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 September 30, 2021 and 2020, respectively, and $0.9 million and $0.6 million for the nine months ended September 30, 2021 and 2020, respectively.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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

$

4,035

$

5,023

Consulting and professional fees

 

779

 

292

Research and development expenses

 

362

 

138

Sales and marketing expenses

312

73

Warranty

 

300

 

536

Sales and other taxes payable