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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 March 31, 2022

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 26,772,249 shares of the registrant’s common stock outstanding as of May 5, 2022.

Table of Contents

NEURONETICS, INC.

Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022

Table of Contents

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

3

Balance Sheets as of March 31, 2022 and December 31, 2021

3

Statements of Operations for the Three Months ended March 31, 2022 and 2021

4

Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, 2022 and 2021

5

Statements of Cash Flows for the Three Months ended March 31, 2022 and 2021

6

Notes to Interim Financial Statements

7

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

31

Item 4.

Controls and Procedures.

32

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

33

Item 1A.

Risk Factors.

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

33

Item 3.

Defaults Upon Senior Securities.

33

Item 4.

Mine Safety Disclosures.

33

Item 5.

Other Information.

33

Item 6.

Exhibits.

34

SIGNATURES

35

2

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements.

NEURONETICS, INC.

Balance Sheets

(Unaudited; In thousands, except per share data)

March 31, 

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

80,837

$

94,141

Accounts receivable, net

 

8,251

 

7,706

Inventory

 

7,551

 

6,563

Current portion of net investments in sales-type leases

 

2,136

 

2,198

Current portion of prepaid commission expense

 

1,660

 

1,559

Current portion of note receivables

90

74

Prepaid expenses and other current assets

 

2,589

 

3,090

Total current assets

 

103,114

 

115,331

Property and equipment, net

 

1,822

 

1,220

Operating lease right-of-use assets

 

3,750

 

3,884

Net investments in sales-type leases

 

1,369

 

1,697

Prepaid commission expense

 

6,956

 

6,763

Long-term note receivable

10,094

 

10,110

Other assets

 

2,839

 

2,218

Total Assets

$

129,944

$

141,223

Liabilities and Stockholders’ Equity

 

  

 

Current liabilities:

 

  

 

Accounts payable

$

2,757

$

4,299

Accrued expenses

 

7,785

 

8,233

Deferred revenue

 

1,912

 

2,501

Current portion of operating lease liabilities

 

729

 

670

Current portion of long-term debt, net

 

 

Total current liabilities

 

13,183

 

15,703

Long-term debt, net

 

35,442

 

35,335

Deferred revenue

 

1,326

 

1,471

Operating lease liabilities

 

3,395

 

3,539

Total Liabilities

 

53,346

 

56,048

Commitments and contingencies (Note 17)

 

 

Stockholders’ Equity:

 

  

 

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

 

  

 

outstanding on March 31, 2022 and December 31, 2021

 

 

Common stock, $0.01 par value: 200,000 shares authorized; 26,717 and 26,395

 

  

 

shares issued and outstanding on March 31, 2022 and December 31, 2021, respectively

 

267

 

264

Additional paid-in capital

 

395,902

 

393,644

Accumulated deficit

 

(319,571)

 

(308,733)

Total Stockholders' Equity

 

76,598

 

85,175

Total Liabilities and Stockholders’ Equity

$

129,944

$

141,223

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

3

Table of Contents

NEURONETICS, INC.

Statements of Operations

(Unaudited; In thousands, except per share data)

Three Months Ended

March 31, 

2022

2021

Revenues

    

$

14,181

    

$

12,288

Cost of revenues

 

3,485

 

2,221

Gross Profit

 

10,696

 

10,067

Operating expenses:

 

 

  

Sales and marketing

 

12,649

 

8,561

General and administrative

 

6,379

 

6,104

Research and development

 

1,803

 

2,311

Total operating expenses

 

20,831

 

16,976

Loss from Operations

 

(10,135)

 

(6,909)

Other (income) expense:

 

 

  

Interest expense

 

978

 

985

Other income, net

 

(275)

 

(13)

Net Loss

$

(10,838)

$

(7,881)

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

$

(0.41)

$

(0.31)

Weighted-average common shares outstanding, basic and diluted

 

26,597

 

25,150

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

4

Table of Contents

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, 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

Balance at December 31, 2021

 

26,395

$

264

$

393,644

$

(308,733)

$

85,175

Share-based awards and options exercises

 

322

 

3

 

6

 

 

9

Share-based compensation expense

 

 

 

2,252

 

 

2,252

Net loss

 

 

 

 

(10,838)

 

(10,838)

Balance at March 31, 2022

 

26,717

$

267

$

395,902

$

(319,571)

$

76,598

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

5

Table of Contents

NEURONETICS, INC.

Statements of Cash Flows

(Unaudited; In thousands)

Three Months Ended March 31, 

2022

2021

Cash Flows from Operating Activities:

    

  

    

  

Net loss

$

(10,838)

$

(7,881)

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

 

  

 

  

Depreciation and amortization

 

319

 

281

Share-based compensation

 

2,252

 

2,196

Non-cash interest expense

 

164

 

171

Cost of rental units purchased by customers

 

 

99

Changes in certain assets and liabilities:

 

  

 

  

Accounts receivable, net

 

(545)

 

202

Inventory

 

(1,021)

 

(1,681)

Net investments in sales-type leases

 

389

 

330

Prepaid commission expense

 

(295)

 

6

Prepaid expenses and other assets

 

801

 

206

Accounts payable

 

(2,226)

 

(694)

Accrued expenses

 

(447)

 

(2,168)

Deferred revenue

 

(735)

 

(235)

Net Cash Used in Operating Activities

 

(12,182)

 

(9,168)

Cash Flows from Investing Activities:

 

  

 

  

Purchases of property and equipment and capitalized software

 

(1,074)

 

(675)

Net Cash Used in Investing Activities

 

(1,074)

 

(675)

 

Cash Flows from Financing Activities:

 

  

 

  

Payments of debt issuance costs

 

(57)

 

Proceeds from exercises of stock options

 

9

 

1,592

Proceeds from the issuance of common stock

 

 

80,972

Payments of common stock offering issuance costs

 

 

(401)

Net Cash (Used) Provided by Financing Activities

 

(48)

 

82,163

Net (Decrease) Increase in Cash and Cash Equivalents

 

(13,304)

 

72,320

Cash and Cash Equivalents, Beginning of Period

 

94,141

 

48,957

Cash and Cash Equivalents, End of Period

$

80,837

$

121,277

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

814

$

814

Transfer of Inventory to PP&E

33

Supplemental disclosure of non-cash investing and financing activities:

 

  

 

  

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

$

685

$

186

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 neurohealth disorders. The Company’s first commercial product, the NeuroStar Advanced Therapy System, is a non-invasive and non-systemic office-based treatment that uses transcranial magnetic stimulation, 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 experienced significant disruptions in March 2020 through the end of March 31, 2022 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 ongoing pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic, vaccination rates and containment measures, among others. The 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.

Liquidity

As of March 31, 2022, the Company had cash and cash equivalents of $80.8 million and an accumulated deficit of $319.6 million. The Company incurred negative cash flows from operating activities of $12.2 million for the three months ended March 31, 2022 and $28.0 million for the year ended December 31, 2021. 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 facility, proceeds from its secondary public offering of common stock and revenues from sales of its products. As of March 31, 2022, 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 March 31, 2022, 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 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

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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’ equity and cash flows have been made. Although these interim financial statements do not include all of the information and footnotes required for complete annual financial statements, management believes the disclosures are adequate to make the information presented not misleading. Unaudited interim results of operations and cash flows for the three months ended March 31, 2022 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 8, 2022, 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 8, 2022.

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 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

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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 March 31, 2022 and December 31, 2021 due to their short-term nature. The carrying values of the Company’s credit facility approximated its fair value as of March 31, 2022 and December 31, 2021 due to its variable interest rate. The carrying value of the Company’s note receivable approximated its fair value as of March 31, 2022 and December 31, 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.

The following tables set forth the carrying amounts and fair values of the Company’s financial instruments as of March 31, 2022 and December 31, 2021 (in thousands):

    

March 31, 2022

Fair Value Measurement Based on

Quoted

Significant

Prices In

other

Significant

Active

Observable

Unobservable

Carrying

Markets

Inputs

Inputs

    

Amount

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Assets

Money market funds (cash equivalents)

$

78,746

$

78,746

$

78,746

$

$

    

December 31, 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)

$

91,236

$

91,236

$

91,236

$

$

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

6.     ACCOUNTS RECEIVABLE

The following table presents the composition of accounts receivable, net as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 

December 31, 

    

2022

    

2021

Gross accounts receivable - trade

$

10,054

$

9,168

Less: Allowances for doubtful accounts

 

(1,803)

 

(1,462)

Accounts receivable, net

$

8,251

$

7,706

7.     PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE

The following table presents the composition of property and equipment, net as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 

December 31, 

    

2022

    

2021

Laboratory equipment

$

305

$

249

Office equipment

 

502

 

497

Computer equipment and software

 

1,645

 

1,598

Manufacturing equipment

 

341

 

341

Leasehold improvements

 

1,049

 

471

Rental equipment

 

634

 

601

Property and equipment, gross

 

4,476

 

3,757

Less: Accumulated depreciation

 

(2,654)

 

(2,537)

Property and equipment, net

$

1,822

$

1,220

As of March 31, 2022 and December 31, 2021, the Company had capitalized software costs, net of $3.1 million and $2.5 million, respectively, which are included in “Prepaid expenses and other current assets” and “Other assets” on the balance sheet.

Depreciation and amortization expense was $0.3 million for the three months ended March 31, 2022 and 2021, respectively.

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.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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.

On April 29, 2022, the Company entered into a Subordination Agreement (the “Subordination Agreement”) with ZW Partners, LLC, a New Jersey limited liability company (“ZW Partners”), pursuant to which the Company agreed to subordinate its rights under the Note to the rights of ZW Partners under a revolving promissory note, dated as of April 29, 2022 (the “Senior Note”), issued by Success TMS to ZW Partners in an amount up to $10.0 million. As a result, payments in respect of the Note are now subordinate and subject in right and time of payment to payment in full of the Senior Note, and ZW Partners’ liens and security interests upon the collateral securing both the Senior Note and the Note are superior in priority to the Company’s liens and security interests upon such collateral. Under the Agreement, the Company has the right to purchase, at par, the entire aggregate amount of debt under the Senior Note at any time.

As of March 31, 2022, Success TMS has represented to the Company that Success TMS is in compliance with all covenants of the Note.

Interest income recognized by the Company was $0.2 million for the three months ended March 31, 2022.

9.     LEASES

Lessee:

The Company has operating leases for its corporate headquarters, a training facility 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 leases an approximately 9,600 square foot facility in Charlotte, North Carolina as a training facility for its NeuroStar Advanced Therapy Systems. 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 March 31, 2022 and 2021, respectively. As of March 31, 2022, the weighted-average remaining lease term of operating leases was 5.8 years and the weighted-average discount rate was 7.1%.

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

    

Three Months Ended

March 31, 2022

    

March 31, 2021

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

 

  

 

  

Operating cash flows from operating leases

$

216

$

132

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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

March 31, 2022

Remainder of 2022

$

552

2023

880

2024

 

886

2025

 

898

2026

 

921

Thereafter

 

999

Total lease payments

 

5,136

Less imputed interest

 

(1,012)

Present value of operating lease liabilities

$

4,124

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 March 31, 

    

2022

    

2021

Profit recognized at commencement, net

$

48

$

133

Interest income

 

 

Total sales-type lease income

$

48

$

133

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

    

March 31, 

2022

Remainder of 2022

$

1,703

2023

1,236

2024

 

520

2025

 

46

Total sales-type lease receivables

$

3,505

As of March 31, 2022, the carrying amount of the lease receivables is $3.5 million. The Company does not have any unguaranteed residual assets.

Lessor operating leases:

NeuroStar Advanced Therapy Systems sold for which collection is not probable are accounted for as operating leases. For the three months ended March 31, 2022 and 2021, the Company recognized operating lease income of $0.05 million and $0.1 million, respectively.

The Company maintained Rental Equipment, net of $0.6 million as of March 31, 2022 and December 31, 2021, respectively, which are included in “Property and equipment, net” on the balance sheet. Rental equipment depreciation expense was $0.03 million and $0.01 million for the three months ended March 31, 2022 and 2021, respectively.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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 $0.4 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively.

11.     ACCRUED EXPENSES

The following table presents the composition of accrued expenses as of March 31, 2022 and December 31, 2021 (in thousands):

    

March 31, 

    

December 31, 

2022

2021

Compensation and related benefits

$

4,112

$

5,090

Consulting and professional fees

 

717

 

537

Research and development expenses

 

400

 

388

Sales and marketing expenses

544

268

Warranty

 

299

 

306

Sales and other taxes payable

 

563

 

664

Interest payable

281

Other

 

869

 

980

Accrued expenses

$

7,785

$

8,233

12.     DEFERRED REVENUE

Payment terms typically require payment upon shipment or installation of the System and additional payments as access codes for Treatment Sessions are delivered, which can span several years after the System is first delivered and installed. The timing of revenue recognition compared to billings and cash collections typically results in accounts receivable. However, sometimes customer advances and deposits might be required for certain customers and are recorded as contract liabilities (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.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

As of March 31, 2022, the Company expects to recognize approximately the following percentages of deferred revenue by year:

    

Revenue

 

Year:

Recognition

 

Remainder of 2022

50

%

2023

 

23

%

2024

 

21

%

2025

 

6

%

Total

 

100

%

GraphicRevenue recognized for the three months ended March 31, 2022 that was included in the contract liability balance at the beginning of the year was $1.4 million and $1.2 million, respectively, and primarily represented revenue earned from separately priced extended warranties, customer deposits, milestone revenue, and clinical training.

Customers

For the three months ended March 31, 2022 and 2021, one customer accounted for more than 10% of the Company’s revenues, respectively.

13.     DEBT

The following table presents the composition of debt as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 

December 31, 

    

2022

    

2021

Outstanding principal

$

35,000

$

35,000

Accrued final payment fees

 

1,925

 

1,925

Less debt discounts

 

(1,483)

 

(1,590)

Total debt, net

 

35,442

 

35,335

Less current portion

 

 

Long-term debt, net

$

35,442

$

35,335

For the three months ended March 31, 2022 and March 31, 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, respectively.

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 originally permitted 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

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

no event of default under the Solar Facility prior to such election. Once the net product revenue condition has been satisfied, the Company may 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.

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 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.

The Company’s obligations under the Solar Facility are secured by a first priority security interest in substantially all of its assets, including its intellectual property. The loan and security agreement requires the Company to comply with certain financial covenants, including the attainment of a minimum trailing net revenue amount beginning on December 31, 2020, as well as customary affirmative and negative covenants.

The Solar Facility contains events of default, including, without limitation, events of default upon: (i) failure to make payment pursuant to the terms of the agreement; (ii) violation of covenants; (iii) material adverse changes to the Company’s business; (iv) attachment or levy on the Company’s assets or judicial restraint on its business; (v) insolvency; (vi) material cross-defaults; (vii) significant judgments, orders or decrees for payments by the Company not covered by insurance; (viii) incorrectness of representations and warranties; (ix) incurrence of subordinated debt; (x) a termination or breach of a guaranty; (xi) revocation of governmental approvals necessary for the Company to conduct its business; and (xii) failure by the Company to maintain a valid and perfected lien on the collateral securing the borrowing. The Solar Facility includes subjective acceleration clauses which permit the lenders to accelerate the maturity date under certain circumstances, including, but not limited to, material adverse effects on a Company’s financial status or otherwise.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

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 divided 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 reduced 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. The Company was required to pay an amendment fee of $0.1 million to Solar, which was recognized as a deferred debt issuance cost as of December 31, 2020 that will be amortized to interest expense using the effective interest method.

On February 15, 2022, the Company, SLR Investment Corp. (formerly known as Solar Capital Ltd.) (“Solar”).,and our other lenders defined in the Solar Facility, executed an amendment to the Solar Facility and the Solar Amendment (the “2022 Solar Amendment”). The 2022 Solar Amendment waived any default under the Solar Facility and Solar Amendment that resulted from the Company’s failure to comply with the minimum monthly trailing twelve months net product revenue financial covenant, beginning with the testing period for the calendar month ending December 31, 2021 and continuing to the execution date of the 2022 Solar Amendment; (ii) decreased the amount of trailing twelve months net product revenue that the Company is required to achieve, for testing periods on and from the calendar month ending January 31, 2022; (iii) modified the definition of the fourth draw period with respect to the Company’s ability to borrow the Term D Loan portion of the Solar Facility, such that after giving effect to the 2022 Solar Amendment, the Term D Loan portion of the Solar Facility is no longer available to be drawn by the Company; and (iv) modified the definition of interest only extension conditions to allow commencement of loan principal amortization under the Solar Facility to be extended to March 1, 2023. The Company was required to pay an amendment fee of $0.06 million to Solar, which has been recognized as a deferred debt issuance cost as of March 31, 2022 that will be amortized to interest expense using the effective interest method.

As of March 31, 2022, the Company is in compliance with all covenants in the Solar Facility and is projected to be in compliance with the reduced minimum revenue covenant amounts going forward.

14.     COMMON STOCK

Common Stock Offering

On February 2, 2021, we closed on our public offering and sale (the “Offering”) of our common stock in which we issued and sold 5,566,000 shares of our common stock, which included shares pursuant to an option granted to underwriters to purchase additional shares, at a public offering price of $15.50 per share. We received net proceeds of $80.6 million after deducting underwriting discounts, commissions and offering expenses.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

Common Stock

The following table summarizes the total number of shares of the Company’s common stock issued and reserved for issuance as of March 31, 2022 and December 31, 2021 (in thousands):

    

March 31, 2022

    

December 31, 2021

Shares of common stock issued

 

26,717

 

26,395

Shares of common stock reserved for issuance for:

 

  

 

  

Common stock warrants outstanding

 

75

 

75

Stock options outstanding

 

1,488

 

1,499

Restricted stock units outstanding

 

4,061

 

2,124

Shares available for grant under stock incentive plan

 

1,345

 

2,037

Shares available for sale under employee stock purchase plan

 

1,063

 

799

Total shares of common stock issued and reserved for issuance

 

34,749

 

32,929

Common Stock Warrants

The following tables summarize the Company’s outstanding common stock warrants as of March 31, 2022, and December 31, 2021:

March 31, 2022

    

    

    

    

Warrants

    

    

    

    

Outstanding

(in thousands)

Exercise Price

Expiration Date

14

$

19.55

 

Dec-2022

20

$

9.73

 

Aug-2023

20

$

9.73

 

Mar-2024

21

$

9.73

 

Dec-2024

75

 

  

 

  

December 31, 2021

    

    

    

    

Warrants

    

    

    

    

Outstanding

(in thousands)

Exercise Price

Expiration Date

14

$

19.55

 

Dec-2022

20

$

9.73

 

Aug-2023

20

$

9.73

 

Mar-2024

21

$

9.73

 

Dec-2024

75

 

  

 

  

15.     LOSS PER SHARE

The Company’s basic loss per common share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. The Company’s restricted stock awards (non-vested shares) are issued and outstanding at the time of grant but are excluded from the Company’s computation of weighted-average shares outstanding in the determination of basic loss per share until vesting occurs.

A net loss cannot be diluted, so when the Company is in a net loss position, basic and diluted loss per common share are the same. If in the future the Company achieves profitability, the denominator of a diluted earnings per common share calculation will include both the weighted-average number of shares outstanding and the number of common stock equivalents, if the inclusion of such common stock equivalents would be dilutive. Dilutive common stock equivalents potentially include warrants, stock options, non-vested restricted

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

stock units and non-vested performance restricted stock units using the treasury stock method, along with the effect, if any, from the potential conversion of outstanding securities, such as convertible preferred stock.

The following potentially dilutive securities outstanding as of March 31, 2022 and 2021 have been excluded from the denominator of the diluted loss per share of common stock outstanding calculation (in thousands):

March 31, 

    

2022

    

2021

Stock options

1,488

1,806

Non-vested performance restricted stock units

 

395

 

395

Non-vested restricted stock units

 

3,666

 

1,942

Common stock warrants

 

75

 

75

16.     SHARE-BASED COMPENSATION

The amount of share-based compensation expense recognized by the Company by location in its statements of operations for the three months ended March 31, 2022 and 2021 is as follows (in thousands):

    

Three Months Ended March 31, 

2022

    

2021

Cost of revenues

$

25

$

20

Sales and marketing

 

1,135

 

575

General and administrative

 

1,009

 

1,518

Research and development

 

83

 

83

Total

$

2,252

$

2,196

2018 Equity Incentive Plan

In June 2018, the Company adopted the 2018 Equity Incentive Plan, or 2018 Plan, which authorized the issuance of up to 1.4 million shares, subject to an annual 4% increase based on the number of shares of common stock outstanding, in the form of restricted stock, stock appreciation rights and stock options to the Company’s directors, employees and consultants. The amount and terms of grants are determined by the Company’s board of directors. All stock options granted to date have had exercise prices equal to the fair value, as determined by the closing price as reported by the Nasdaq Global Market, of the underlying common stock on the date of grant. The contractual term of stock options is up to 10 years, and stock options are exercisable in cash or as otherwise determined by the board of directors. Generally, stock options vest 25% upon the first anniversary of the date of grant and the remainder ratably monthly thereafter for 36 months. Restricted stock units generally vest ratably in three equal installments on the first, second and third anniversaries of the grant date. Performance restricted stock units (“PRSUs”) generally vest based on appreciation of the Company’s common stock to a certain price as determined by the Company’s board of directors measured using a trailing 30-day volume weighted average price of a share of the Company’s common stock. The fair value of the PRSU awards are determined using a risk neutral Monte Carlo simulation valuation model. As of March 31, 2022, there were 0.7 million shares available for future issuance under the 2018 Plan.

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

2020 Inducement Incentive Plan

In December 2020, the Company adopted the 2020 Inducement Incentive Plan, which authorized the issuance of up to 0.4 million shares, subject to increase by approval of the Company’s board of directors, in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards and other stock awards to eligible employees who satisfy the standards for inducement grants under Nasdaq Global Market rules. In March 2022, the Company’s board of directors approved an additional 500,000 shares for the issuance under the plan. An individual who previously served as an employee or director of the Company is not eligible to receive awards under this plan. The amount and terms of grants are determined by the Company’s board of directors. As of March 31, 2022, there were 0.6 million shares available for future issuance under the 2020 Inducement Incentive Plan.

Stock Options

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2022:

    

    

    

    

    

    

    

Aggregate

Number of

Weighted-

Weighted-

average

Shares under

average

Remaining

Intrinsic

Option

Exercise Price

Contractual

Value

(in thousands)

per Option

Life (in years)

(in thousands)

Outstanding at December 31, 2021

 

1,499

$

4.01

 

 

Granted

 

$

 

  

 

  

Exercised

 

(4)

$

2.08

 

 

  

Forfeited

 

(7)

$

12.66

 

  

 

  

Outstanding at March 31, 2022

 

1,488

$

3.98

 

7.4

 

$

1,197

Exercisable at March 31, 2022

 

819

$

4.70

 

6.8

 

$

583

Vested and expected to vest at March 31, 2022

 

1,488

$

3.98

 

7.4

 

$

1,197

The Company recognized share-based compensation expense related to stock options of $0.2 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, there was $1.1 million of total unrecognized compensation cost related to non-vested stock options which the Company expects to recognize over a weighted-average period of 1.8 years. The total intrinsic value of stock options exercised during the three months ended March 31, 2022 was $0.004 million.

For the periods ended March 31, 2022 and December 31, 2021, the Company did not grant stock options.

Restricted Stock Units and Performance Restricted Stock Units

The following table summarizes the Company’s restricted stock unit and performance restricted stock unit activity for March 31, 2022:

    

Non-vested

    

Weighted-

    

Non-vested

    

Weighted-

Restricted

average

Performance Restricted

average

Stock Units

Grant-date

Stock Units

Grant-date

(in thousands)

Fair Value

(in thousands)

Fair Value

Non-vested at December 31, 2021

1,729

$

7.29

 

395

$

6.77

Granted

 

2,275

$

3.43

 

$

Vested

 

(318)

$

8.08

 

$

Forfeited

 

(20)

$

9.86

 

$

Non-vested at March 31, 2022

 

3,666

$

4.81

 

395

$

6.77

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

The Company recognized $2.1 million and $1.9 million in share-based compensation expense related to the restricted stock units and performance restricted stock units for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, there was $14.8 million of unrecognized compensation cost related to non-vested restricted stock units and performance restricted stock units, which the Company expects to recognize over a weighted-average period of 2.2 years. The total fair value at the vesting date of restricted stock units and performance restricted stock units vested during the three months ended March 31, 2022, was $1.2 million.

The Company did not grant performance restricted stock units during the period ended March 31, 2022. For the period ended December 31, 2021, the grant-date fair value of the performance restricted stock units was estimated at the time of grant using the following inputs and assumptions in the Monte Carlo simulation valuation model:

December 31, 2021

    

Closing price of common stock

$

15.92

Risk-free interest rate

1.15

%  

Expected volatility

99.7

%  

17.     COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company is subject from time to time to various claims and legal actions arising during the ordinary course of its business. Management believes that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on the Company’s results of operations, financial condition, or cash flows.

18.    GEOGRAPHICAL SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company currently operates in one business segment as it is managed and operated as one business. A single management team that reports to the chief operating decision maker comprehensively manages the entire business. The Company does not operate any material separate lines of business or separate business entities with respect to its products or product development.

The following geographic data includes revenue generated from the Company’s third-party distributors. The Company’s revenue was generated in the following geographic regions and by product line for the periods indicated (in thousands):

Revenues by Geography

 

Three Months Ended March 31, 

 

2022

2021

 

% of

% of

 

Amount

Revenues

Amount

Revenues

 

(in thousands, except percentages)

United States

    

$

13,517

    

95

%  

$

11,802

    

96

%

International

 

664

 

5

%  

 

486

 

4

%

Total revenues

$

14,181

 

100

%  

$

12,288

 

100

%

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NEURONETICS, INC.

Notes to Interim Financial Statements

(Unaudited)

U.S. Revenues by Product Category

 

Three Months Ended March 31, 

 

2022

2021

 

% of

% of

 

    

Amount

    

Revenues

    

Amount

    

Revenues

 

 

(in thousands, except percentages)

NeuroStar Advanced Therapy System

$

3,642

27

%

$

1,755

15

%

Treatment sessions

 

9,469

 

70

%

 

9,629

 

82

%

Other

 

406

 

3

%

 

418

 

3

%

Total U.S. revenues

$

13,517

 

100

%

$

11,802

 

100

%

International Revenues by Product Category

 

Three Months Ended March 31, 

 

2022

2021

 

% of

% of

 

    

Amount

    

Revenues

    

Amount

    

Revenues

 

 

(in thousands, except percentages)

NeuroStar Advanced Therapy System

$

313

 

47

%  

$

207

 

43

%

Treatment sessions

 

170

 

26

%  

 

131

 

27

%

Other

 

181

 

27

%  

 

148

 

30

%

Total International revenues

$

664

 

100

%  

$

486

 

100

%

19.     SEVERANCE

The Company entered into transition agreements outlining the separation with certain former employees during the period ended March 31, 2022 and 2021, respectively. In connection with these agreements, the Company recorded $0.1 million and $0.2 million of charges in salary, payroll tax and bonus expenses for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022 and 2021, $0.1 million and $0.5 million of termination benefits were paid associated with the termination of the employees and charged against this liability. As of March 31, 2022 and December 31, 2021, $0.1 million and $0.1 million, respectively, remain in accrued liabilities for the unpaid portion of the separation benefits.

20. SUBSEQUENT EVENTS

On May 11, 2022, the Company initiated litigation in federal court in the District of Delaware against Brainsway Ltd. and Brainsway USA, Inc. (collectively, “Brainsway”), alleging unfair competition under the Lanham Act. Specifically, the Company alleges that Brainsway deliberately manipulated and mischaracterized its data as well as the Company’s data for commercial gain. The Company seeks unspecified monetary damages and injunctive relief.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with our unaudited interim financial statements and related notes thereto included elsewhere herein. In addition to historical financial information, some of the information contained in the following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts, including statements regarding our future results of operations and financial position, business strategy, current and prospective products, product approvals, research and development costs, current and prospective collaborations, timing and likelihood of success, plans and objectives of management for future operations and future results of current and anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, without limitation, risks and uncertainties related to: the ongoing impact of the novel coronavirus, or COVID-19, pandemic on general political and economic uncertainty, including as a result of efforts by governmental authorities to mitigate the COVID-19 pandemic and the related impact on resource allocations, manufacturing and supply chains and patient access to commercial products; our ability to execute our business continuity as well as our operational and budget plans in light of the COVID-19 pandemic; our ability to achieve or sustain profitable operations due to our history of losses; our reliance on the sale and usage of our NeuroStar Advanced Therapy System to generate revenues; the scale and efficacy of our salesforce; availability of coverage and reimbursement from third-party payors for treatments using our products; physician and patient demand for treatments using our products; developments in respect of competing technologies and therapies for the indications that our products treat; product defects; our ability to obtain and maintain intellectual property protection for our technology; developments in clinical trials or regulatory review of NeuroStar Advanced Therapy System for additional indications; developments in regulation in the United States and other applicable jurisdictions; and the impacts on our operational and budget plans due to inflation. For a discussion of these and other related risks, please refer to our recent SEC filings which are available on the SEC’s website at www.sec.gov. These forward-looking statements are based on our expectations and assumptions as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no duty or obligation to update any forward-looking statements contained in this Quarterly Report on Form 10-Q as a result of new information, future events or changes in our expectations.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC, on March 8, 2022. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

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Overview

We are a commercial stage medical technology company focused on designing, developing and marketing products that improve the quality of life for patients who suffer from neurohealth disorders. Our first commercial product, the NeuroStar® Advanced Therapy System, is a non-invasive and non-systemic office-based treatment that uses transcranial magnetic stimulation, or TMS, to create a pulsed, MRI-strength magnetic field that induces electrical currents designed to stimulate specific areas of the brain associated with mood. The system is cleared by the United States Food and Drug Administration, or FDA, to treat adult patients with major depressive disorder, or MDD, that have failed to achieve satisfactory improvement from prior antidepressant medication in the current MDD episode. NeuroStar Advanced Therapy is also available in other parts of the world, including Japan, where it is listed under Japan’s national health insurance. NeuroStar Advanced Therapy is safe, clinically effective, reproducible and precise and we believe is supported by the largest clinical data set of any competing TMS system. We believe we are the market leader in TMS therapy based on over 127,500 global patients treated with over 4.5 million of our Treatment Sessions through such date. We generated revenues of $14.2 million and $12.3 million for the three months ended March 31, 2022 and 2021, respectively.

We designed the NeuroStar Advanced Therapy System as a non-invasive therapeutic alternative to treat patients who suffer from MDD and to address many of the key limitations of other treatment options. We generate revenues from initial capital sales of our systems, recurring Treatment Sessions and service and repair and extended warranty contracts. We derive the majority of our revenues from recurring Treatment Sessions. For the three months ended March 31, 2022, revenues from sales of our Treatment Sessions and NeuroStar Advanced Therapy Systems represented 70% and 27% of our U.S. revenues, respectively.

We currently sell our NeuroStar Advanced Therapy System and recurring Treatment Sessions in the United States with the collaborative support of our 187 employees as of March 31, 2022. Our sales force targets an estimated 50,000 psychiatrists across 26,000 psychiatric practices in the United States, based on data from Symphony Health and our own internal estimates that treat approximately 42% of the total MDD patients in the United States who meet our labeled indication and are insured. Some of our customers have and may purchase more than one NeuroStar Advanced Therapy System. Based on our commercial data, we believe our customers can recoup their initial capital investment in our system by providing a standard course of treatment to approximately 12 patients. We believe our customers can generate approximately $8,500 of average revenue per patient for a standard course of treatment, which may provide meaningful incremental income to their practices. We have a diverse customer base, including psychiatrists in group psychiatric practices, pain management physicians and other medical professionals in the United States. For the three months ended March 31, 2022, one customer accounted for more than 10% of our revenues.

We market our products in a few select markets outside the United States through independent distributors. International revenues represented 5% and 4% of our total revenues for the three months ended March 31, 2022 and 2021, respectively. In October 2017, we entered into an exclusive distribution agreement with Teijin Pharma Limited, or Teijin, for the distribution of our NeuroStar Advanced Therapy Systems and Treatment Sessions to customers who will treat patients with MDD in Japan. We received regulatory approval for our system in Japan in September 2017 and we received the initial reimbursement of JPY 12,000 per Treatment Session, which went into effect on June 1, 2019. We expect our international revenues to increase over time as a percentage of our total revenues as we grow system placements and utilization in Japan.

Our research and development efforts are focused on the following: hardware and software product

developments and enhancements of our NeuroStar Advanced Therapy System and clinical developments relating to additional indications. We outsource the manufacture of components of our NeuroStar Advanced Therapy Systems that are produced to our specifications, and individual components are either shipped directly from our third-party contract manufacturers to our customers or consolidated into pallets at our Malvern, Pennsylvania facility prior to shipment. Final installation of these systems occurs at the customer site.

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Our total revenues increased by $1.9 million, or 15%, from $12.3 million for the three months ended March 31, 2021 to $14.2 million for the three months ended March 31, 2022. For the three months ended March 31, 2022, our U.S. revenues were $13.5 million compared to $11.8 million for three months ended March 31, 2021, which represents an increase of 15% period over period. The increase was primarily attributable to an increase in U.S. NeuroStar Advanced Therapy System sales period over period. We incurred net losses of $10.8 million for the three months ended March 31, 2022 compared to net losses of $7.9 million for three months ended March 31, 2021. We expect to continue to incur losses for the next several years as we invest in our commercial organization to support our planned sales growth and while continuing to invest in our pipeline indications. As of March 31, 2022, we had an accumulated deficit of $319.6 million.

COVID-19

Throughout 2020, 2021 and the three months ended March 31, 2022, the Company experienced a material impact to revenue, particularly with regards to U.S. Treatment Session revenues as a result of the COVID-19 pandemic. The Company expects that capital equipment sales and Treatment Session revenues will continue to be impacted by the pandemic as customers defer capital purchase decisions and delay new patient treatment starts. System utilization has also declined compared to pre-COVID-19 projections.

We have monitored the impact of the COVID-19 pandemic on all aspects of our business and geographies,

including how it has and will continue to impact the Company’s customers, supply chain, employees and other business partners. While we experienced significant disruptions in the current period and in the years ended 2021 and 2020 from the COVID-19 pandemic, we are unable to predict the ultimate impact that the COVID-19 pandemic may have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the ongoing pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic, vaccination rates and containment measures, among others. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity.

The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with business partners and assessing potential impacts to our financial position and operating results, as well as potential adverse developments in our business. For further information regarding the impact of COVID-19 on the Company, see Item 1A titled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021.

Components of Our Results of Operations

Revenues

To date, we have generated revenues primarily from the capital portion of our business and related sales and rentals of the NeuroStar Advanced Therapy System and the recurring revenues from our sale of Treatment Sessions in the United States.

NeuroStar Advanced Therapy System Revenues. NeuroStar Advanced Therapy System revenues consist primarily of sales or rentals of a capital component, including upgrades to the equipment attributable to the initial sale of the system. NeuroStar Advanced Therapy Systems can be purchased outright or on a rent-to-own basis by certain customers.

Treatment Session Revenues. Treatment Session revenues primarily include sales of NeuroStar Treatment Sessions and SenStar treatment links. The NeuroStar Treatment Sessions are access codes that are delivered electronically in the United States. The SenStar treatment links are disposable units containing single-use access codes that are sold and used outside the United States. Access codes are purchased separately by our customers, primarily on an as-needed basis, and are required by the NeuroStar Advanced Therapy System in order to deliver Treatment Sessions.

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Other Revenues. Other revenues are derived primarily from service and repair and extended warranty contracts with our existing customers.

We refer you to the section titled “Critical Accounting Policies and Use of Estimates—Revenue Recognition” appearing in our Form 10-K filed with the SEC on March 8, 2022. We also refer you to “Note 3. Summary of Significant Accounting Policies.”

Cost of Revenues and Gross Margin

Cost of revenues primarily consists of the costs of components and products purchased from our third-party contract manufacturers of our NeuroStar Advanced Therapy Systems as well as the cost of treatment packs for individual Treatment Sessions. We use third-party contract manufacturing partners to produce the components for and assemble the completed NeuroStar Advanced Therapy Systems. Cost of revenues also includes costs related to personnel, warranty, shipping, and our operations and field service departments. We expect our cost of revenues to increase to the extent our revenues grow.

Our gross profit is calculated by subtracting our cost of revenues from our revenues. We calculate our gross margin as our gross profit divided by our revenues. Our gross margin has been and will continue to be affected by a variety of factors, primarily product sales mix, pricing and third-party contract manufacturing costs. Our gross margins on revenues from sales of NeuroStar Advanced Therapy Systems are lower than our gross margins on revenues from sales of Treatment Sessions and, as a result, the sales mix between NeuroStar Advanced Therapy Systems and Treatment Sessions can affect the gross margin in any reporting period.

Sales and Marketing Expenses

Sales and marketing expenses consist of market research and commercial activities related to the sale of our NeuroStar Advanced Therapy Systems and Treatment Sessions and salaries and related benefits, sales commissions and share-based compensation for employees focused on these efforts. Other significant sales and marketing costs include conferences and trade shows, promotional and marketing activities, including direct and online marketing, practice support programs and radio media campaigns, travel and training expenses.

We anticipate that our sales and marketing expenses will increase in 2022 compared to 2021 expenses as we continue to execute on our growth initiatives and expand our business in the United States.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel expenses, including salaries and related benefits, share-based compensation and travel expenses, for employees in executive, finance, information technology, legal and human resource functions. General and administrative expenses also include the cost of insurance, outside legal fees, accounting and other consulting services, audit fees from our independent registered public accounting firm, board of directors’ fees and other administrative costs, such as corporate facility costs, including rent, utilities, depreciation and maintenance not otherwise included in cost of revenues.

We anticipate that our general and administrative expenses will remain flat compared to our 2021 expenses.

Research and Development Expenses

Research and development expenses consist primarily of personnel expenses, including salaries and related benefits and share-based compensation for employees in clinical development, product development, regulatory and quality assurance functions, as well as expenses associated with outsourced professional scientific development services and costs of investigative sites and consultants that conduct our preclinical

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and clinical development programs. We typically use our employee, consultant and infrastructure resources across our research and development programs.

We plan to incur additional research and development expenses for the near future as we expect to continue our development of TMS Therapy for the treatment of additional patient populations and new indications related to neurohealth disorders, as well as for various hardware and software development projects. As a result, we expect our research and development expenses to increase during 2022 compared to our 2021 expenses.

Interest Expense

Interest expense consists of cash interest payable under our credit facility and non-cash interest attributable to the accrual of final payment fees and the amortization of deferred financing costs related to our indebtedness.

Other Income, Net

Other income, net consists primarily of interest income earned on our money market account balances and note receivables.

Results of Operations

Comparison of the three months ended March 31, 2022 and 2021

Three Months Ended

 

March 31, 

Increase / (Decrease)

    

2022

    

2021

    

Dollars

    

Percentage

 

(in thousands, except percentages)

 

Revenues

$

14,181

$

12,288

$

1,893

 

15

%

Cost of revenues

 

3,485

 

2,221

 

1,264

 

57

%

Gross Profit

 

10,696

 

10,067

 

629

 

6

%

Gross Margin

 

75.4

%  

 

81.9

%  

 

 

  

 

Operating expenses:

 

  

 

  

 

 

  

Sales and marketing

 

12,649

 

8,561

 

4,088

 

48

%

General and administrative

 

6,379

 

6,104

 

275

 

5

%

Research and development

 

1,803

 

2,311

 

(508)

 

(22)

%

Total operating expenses

 

20,831

 

16,976

 

3,855

23

%

Loss from Operations

 

(10,135)

(6,909)

 

(3,226)

 

(47)

%

Other (income) expense:

 

 

  

 

 

  

Interest expense

 

978

 

985

 

(7)

 

(1)

%

Other income, net

 

(275)

 

(13)

 

(262)

 

2,015

%

Net Loss

$

(10,838)

$

(7,881)

$

(2,957)

 

(38)

%

Revenues by Geography

 

Three Months Ended March 31, 

 

2022

2021

 

% of

% of

 

    

Amount

    

Revenues

    

Amount

    

Revenues

 

(in thousands, except percentages)

 

United States

$

13,517

95

%  

$

11,802

96

%

International

 

664

 

5

%  

 

486

 

4

%

Total revenues

$

14,181

 

100

%  

$

12,288

 

100

%

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U.S. Revenues by Product Category

 

Three Months Ended March 31, 

 

2022

2021

 

% of

% of

 

    

Amount

    

Revenues

    

Amount

    

Revenues

 

(in thousands, except percentages)

 

NeuroStar Advanced Therapy System

$

3,642

27

%  

$

1,755

15

%

Treatment sessions

 

9,469

 

70

%  

 

9,629

 

82

%

Other

 

406

 

3

%  

 

418

 

3

%

Total U.S. revenues

$

13,517

 

100

%  

$

11,802

 

100

%

U.S. NeuroStar Advanced Therapy System

 

Revenues by Type

 

Three Months Ended March 31, 

 

2022

2021

 

% of

% of

 

    

Amount

    

Revenues

    

Amount

    

Revenues

 

(in thousands, except percentages)

 

NeuroStar Capital

$

3,485

96

%  

$

1,589

91

%

Operating lease

67

 

2

%  

 

108

 

6

%

Other

90

 

2

%  

 

58

 

3

%

Total United States NeuroStar Advanced Therapy System revenues

$

3,642

 

100

%  

$

1,755

 

100

%

Revenues

Total revenue for the three months ended March 31, 2022 was $14.2 million, an increase of 15% compared to the three months ended March 31, 2021 revenue of $12.3 million. During the quarter, total U.S. revenue increased by 15% and international revenue increased by 37% over the prior year quarter. The U.S. and international revenue growth were each driven by an increase in NeuroStar Advanced Therapy System sales.

U.S. NeuroStar Advanced Therapy System revenue for the three months ended March 31, 2022 was $3.6 million, an increase of 108% compared to the three months ended March 31, 2021 revenue of $1.8 million. For the three months ended March 31, 2022 and 2021, the Company shipped 48 and 23 systems, respectively. Of the 48 systems shipped in the first quarter of 2022, 45 units were recognized as NeuroStar capital revenue, 1 unit was recognized as an operating lease contributing to operating lease revenue and 2 units we expect to recognize as NeuroStar capital revenue in the second quarter of 2022. For the period ended March 31, 2021, the Company recognized the 23 units shipped as NeuroStar capital revenue.

U.S. Treatment Session revenue for the three months ended March 31, 2022 was $9.5 million, a decrease of 2% compared to the three months ended March 31, 2021 revenue of $9.6 million. The revenue decline was primarily driven by a decrease in Treatment Session volume over the prior year quarter due to the impact of the spike in COVID-19 Omicron variant infections and related business and government responses in January and February 2022.

Cost of Revenues and Gross Margin

Cost of revenues increased by $1.3 million, or 57%, from $2.2 million for the three months ended March 31, 2021 to $3.5 million for the three months ended March 31, 2022. Gross margin decreased from 81.9% for the three months ended March 31, 2021 to 75.4% for the three months ended March 31, 2022. The decrease was primarily a result of the change in product mix and higher international capital sales in the current quarter compared to the prior year quarter.

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Sales and Marketing Expenses

Sales and marketing expenses increased by $4.0 million, or 48%, from $8.6 million for the three months ended March 31, 2021 to $12.6 million for the three months ended March 31, 2022. The increase was expected and primarily due to new marketing initiative related costs, including trade shows, digital paid media costs and market research, and sales personnel expenses related to salary, benefits, commissions and share-based compensation incurred in the current period versus the prior year quarter.

General and Administrative Expenses

General and administrative expenses increased by $0.3 million, or 5%, from $6.1 million for the three months ended March 31, 2021 to $6.4 million for the three months ended March 31, 2022. The increase was primarily due to planned increases in IT personnel expenses and software license costs in the current period versus the prior year quarter.

Research and Development Expenses

Research and development expenses decreased by $0.5 million, or 22%, from $2.3 million for the three months ended March 31, 2021 to $1.8 million for the three months ended March 31, 2022. The decrease was primarily due to a reduction in product development costs related to the capitalization of certain of the Company’s software project costs in addition to a decrease in quality assurance costs in the current period versus the prior year quarter.

Interest Expense

Interest expense remained constant from $1.0 million for the three months ended March 31, 2021 to $1.0 million for the three months ended March 31, 2022.

Other Income, Net

Other income, net increased by $0.3 million from $0.01 million for the three months ended March 31, 2021 to $0.3 million for the three months ended March 31, 2022, primarily as a result of increased interest income earned on the Company’s note receivables.

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Liquidity and Capital Resources

Overview

On February 2, 2021, we closed on the Offering of our common stock in which we issued and sold 5,566,000 shares of our common stock, which included shares pursuant to an option granted to underwriters to purchase additional shares, at a public offering price of $15.50 per share. We received net proceeds of $80.6 million after deducting underwriting discounts, commissions and offering expenses. Our common stock is listed on the Nasdaq Global Market under the trading symbol “STIM”.

As of March 31, 2022, we had cash and cash equivalents of $80.8 million and an accumulated deficit of $319.6 million, compared to cash and cash equivalents of $94.1 million and an accumulated deficit of $308.7 million as of December 31, 2021. We incurred negative cash flows from operating activities of $12.2 million and $9.2 million for the three months ended March 31, 2022 and 2021, respectively. We have incurred operating losses since our inception, and we anticipate that our operating losses will continue in the near term as we seek to expand our sales and marketing initiatives to support our growth in existing and new markets, invest funds in additional research and development activities and utilize cash for other corporate purposes. 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 facility, proceeds from its secondary public offering of common stock and revenues from sales of its products. As of March 31, 2022, 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 March 31, 2022 and anticipated revenues from sales of its products are sufficient to fund the Company’s operations for at least 12 months from the issuance of these financial statements.

If our cash and cash equivalents and anticipated revenues from sales or our products are insufficient to satisfy our liquidity requirements, we may seek to sell additional common or preferred equity or debt securities or enter into a new credit facility or another form of third-party funding or seek other debt financing. If we raise additional funds by issuing equity or equity-linked securities, our stockholders would experience dilution and any new equity securities could have rights, preferences and privileges superior to those of holders of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us or our stockholders, or at all. It is also possible that we may allocate significant amounts of capital towards products or technologies for which market demand is lower than expected and, as a result, abandon such efforts. If we are unable to maintain our current financing or obtain adequate additional financing when we require it, or if we obtain financing on terms which are not favorable to us, or if we expend capital on products or technologies that are unsuccessful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may be required to delay the development, commercialization and marketing of our products.

Our current and future funding requirements will depend on many factors, including:

the impact of COVID-19 and related governmental responses;
our ability to achieve revenue growth and improve operating margins;
compliance with the terms and conditions, including covenants, set forth in our credit facility;
the cost of expanding our operations and offerings, including our sales and marketing efforts;
our ability to improve or maintain coverage and reimbursement arrangements with domestic third-party and government payors, particularly in Japan;
our rate of progress in establishing coverage and reimbursement arrangements from international commercial third-party and government payors;

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our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of our products and maintaining or improving our sales to our current customers;
the cost of research and development activities, including research and development relating to additional indications of neurohealth disorders;
the effect of competing technological and market developments;
costs related to international expansion; and
the potential cost of and delays in product development as a result of any regulatory oversight applicable to our products.

As of March 31, 2022, there were no significant changes to our material cash requirements as set forth in our Form 10-K, filed with the SEC on March 8, 2022.

Cash Flows

The following table sets forth a summary of our cash flows for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, 

    

2022

    

2021

(in thousands)

Net Cash Used in Operating Activities

$

(12,182)

$

(9,168)

Net Cash Used in Investing Activities

 

(1,074)

 

(675)

Net Cash (Used) Provided by Financing Activities

 

(48)

 

82,163

Net (Decrease) Increase in Cash and Cash Equivalents

$

(13,304)

$

72,320

Net Cash Used in Operating Activities

Net cash used in operating activities for the three months ended March 31, 2022 was $12.2 million, consisting primarily of a net loss of $10.8 million and a decrease in net operating liabilities of $4.1 million, partially offset by non-cash charges of $2.7 million. The decrease in net operating liabilities was primarily due to increases in accounts receivable and inventory and decreases in accounts payable and accrued expenses as a result of timing and the 2022 payment of the 2021 bonus compensation accrued as of December 31, 2021. Non-cash charges consisted of depreciation and amortization, non-cash interest expense and share-based compensation.

Net cash used in operating activities for the three months ended March 31, 2021 was $9.2 million, consisting primarily of a net loss of $7.9 million and a decrease in net operating liabilities of $4.0 million, partially offset by non-cash charges of $2.7 million. The decrease in net operating liabilities was primarily due to an increase in inventory and decreases in accounts payable and accrued expenses as a result of timing and the 2021 payment of the 2020 bonus compensation accrued as of December 31, 2020. Non-cash charges consisted of depreciation and amortization, non-cash interest expense, share-based compensation, and the cost of rental units purchased by customers.

Net Cash Used in Investing Activities

Net cash used in investing activities for the three months ended March 31, 2022 and 2021 was $1.1 million and $0.7 million, respectively. Each was attributable to purchases of property and equipment and capitalized software costs.

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Net Cash (Used) Provided by Financing Activities

Net cash used by financing activities for the three months ended March 31, 2022 was $0.05 million and primarily consisted of the amendment fee paid in relation to the 2022 Solar Amendment. Net cash provided by financing activities for the three months ended March 31, 2021 was $82.2 million and primarily consisted of additional proceeds from the Offering and cash proceeds related to stock option exercises.

Indebtedness

Refer to “Note 13. Debt” in our unaudited financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q for information regarding our current Solar credit facility.

Common Stock Offering

Refer to “Note 14. Common Stock” in our unaudited financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q for information regarding our secondary public offering of our common stock.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, or Securities Act, for complying with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.

Recent Accounting Pronouncements

We refer you to “Note 3. Summary of Significant Accounting Policies” and “Note 4. Recent Accounting Pronouncements” in “Notes to Interim Financial Statements” located in “Part I – FINANCIAL INFORMATION, Item 1. Financial Statements”.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

We refer you to the information described in the “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” section of the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2022. There have been no material changes to our market risk described therein.

We continue to monitor inflationary factors, such as increases in our cost of revenues and operating expenses that may adversely affect our operating results. Although we do not believe inflation has had a material impact on our financial condition, results of operations or cash flows to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin or decrease our operating expenses as a percentage of our revenues if our selling prices of our products do not increase as much or more than our costs increase.

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Item 4.     Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Principal Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Principal Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2022.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2022, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.     Legal Proceedings.

We are subject from time to time to various claims and legal actions arising during the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on our results of operations, financial condition, or cash flows.

Item 1A.     Risk Factors.

You should carefully consider the information described in the “Risk Factors” section of the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2022. There have been no material changes to the risk factors described therein.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3.     Defaults Upon Senior Securities.

Not applicable.

Item 4.     Mine Safety Disclosures.

Not applicable.

Item 5.     Other Information.

Not applicable.

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Item 6.     Exhibits.

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q. Where so indicated, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated.

Exhibit
Number

    

Description

10.1◊

Third Amendment to Loan and Security Agreement, dated February 15, 2022, by and among SLR Investment Corp. (formerly known as Solar Capital Ltd.), as collateral agent, the lenders listed on the signature pages thereto, and Neuronetics, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 22, 2022).

10.2

Subordination Agreement, dated April 29, 2022, by and among ZW Partners, LLC and Neuronetics, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 5, 2022).

31.1*

Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because iXBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (Formatted as Inline XBRL and contained Exhibit 101).

*

Filed herewith.

Certain portions of this exhibit have been omitted to preserve the confidentiality of such information. The Company will furnish copies of any such information to the SEC or its staff upon request.

**

This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C Section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing of the registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    

NEURONETICS, INC.

(Registrant)

Date: May 12, 2022

By:

/s/ Keith J. Sullivan

Name:

Keith J. Sullivan

Title:

President and Chief Executive Officer

(Principal Executive Officer)

Date: May 12, 2022

By:

/s/ Stephen Furlong

Name:

Stephen Furlong

Title:

SVP, Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

35

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Keith J. Sullivan, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Neuronetics, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report, any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 12, 2022

By:

/s/ Keith J. Sullivan

Name:

Keith J. Sullivan

Title:

President and Chief Executive Officer

(Principal Executive Officer)


Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Stephen Furlong, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Neuronetics, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report, any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

s

Date: May 12, 2022

By:

/s/ Stephen Furlong

Name:

Stephen Furlong

Title:

SVP, Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)


Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Neuronetics, Inc. (the “Company”) for the fiscal quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: May 12, 2022

By:

/s/ Keith J. Sullivan

Name:

Keith J. Sullivan

Title:

President and Chief Executive Officer

(Principal Executive Officer)


Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Neuronetics, Inc. (the “Company”) for the fiscal quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: May 12, 2022

By:

/s/ Stephen Furlong

Name:

Stephen Furlong

Title:

SVP, Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)