Neuronetics(STIM) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents Neuronetics, Inc.'s unaudited interim financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements. This section presents Neuronetics, Inc.'s unaudited interim financial statements, including Balance Sheets, Statements of Operations, Statement of Changes in Stockholders' Equity, Statements of Cash Flows, and comprehensive Notes to Interim Financial Statements for the periods ended September 30, 2020, and December 31, 2019 (for balance sheet) or September 30, 2019 (for income and cash flow statements) Balance Sheets This section presents the Company's unaudited Balance Sheets as of September 30, 2020, and December 31, 2019, detailing assets, liabilities, and stockholders' equity | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | Change (2020 vs 2019) | | :-------------------- | :----------- | :----------- | :-------------------- | | Total Assets | $78,339 | $100,168 | $(21,829) | | Total Liabilities | $50,861 | $52,316 | $(1,455) | | Total Stockholders' Equity | $27,478 | $47,852 | $(20,374) | | Cash and cash equivalents | $50,719 | $75,708 | $(24,989) | | Current portion of long-term debt, net | $34,542 | $11,250 | $23,292 | - The increase in current portion of long-term debt is due to the reclassification of the outstanding principal under the Solar Facility as a current liability as of September 30, 2020, due to a probable breach of a minimum revenue covenant and subjective acceleration clauses[23][74] Statements of Operations This section provides the Company's unaudited Statements of Operations for the three and nine months ended September 30, 2020 and 2019, detailing revenues, expenses, and net loss | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change (2020 vs 2019) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (2020 vs 2019) | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Revenues | $12,448 | $16,000 | $(3,552) (-22%) | $33,665 | $45,300 | $(11,635) (-26%) | | Gross Profit | $9,791 | $11,808 | $(2,017) (-17%) | $25,874 | $34,130 | $(8,256) (-24%) | | Total Operating Expenses | $12,215 | $18,136 | $(5,921) (-33%) | $45,523 | $54,121 | $(8,598) (-16%) | | Loss from Operations | $(2,424) | $(6,328) | $3,904 (62%) | $(19,649) | $(19,991) | $342 (2%) | | Net Loss | $(3,418) | $(6,867) | $3,449 (50%) | $(23,796) | $(21,490) | $(2,306) (-11%) | | Net loss per share (basic & diluted) | $(0.18) | $(0.37) | $0.19 | $(1.27) | $(1.17) | $(0.10) | Statement of Changes in Stockholders' Equity This section outlines changes in stockholders' equity for the three and nine months ended September 30, 2020 and 2019, including common stock, additional paid-in capital, and accumulated deficit | Metric (in thousands) | Balance at Dec 31, 2019 | Balance at Sep 30, 2020 | Change | | :-------------------- | :---------------------- | :---------------------- | :----- | | Common Stock (Amount) | $186 | $189 | $3 | | Additional Paid-in Capital | $297,753 | $301,172 | $3,419 | | Accumulated Deficit | $(250,087) | $(273,883) | $(23,796) | | Total Stockholders' Equity | $47,852 | $27,478 | $(20,374) | - The accumulated deficit increased by $23.8 million from December 31, 2019, to September 30, 2020, primarily due to the net loss incurred during the nine-month period[14] Statements of Cash Flows This section presents the Company's unaudited Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, detailing operating, investing, and financing activities | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Net Cash Used in Operating Activities | $(26,687) | $(24,079) | $(2,608) | | Net Cash Used in Investing Activities | $(615) | $(454) | $(161) | | Net Cash Provided by Financing Activities | $2,313 | $2,320 | $(7) | | Net Decrease in Cash and Cash Equivalents | $(24,989) | $(22,213) | $(2,776) | | Cash and Cash Equivalents, End of Period | $50,719 | $82,370 | $(31,651) | - The company experienced a larger net decrease in cash and cash equivalents in 2020 compared to 2019, primarily driven by increased net cash used in operating activities[17] Notes to Interim Financial Statements This section provides detailed explanatory notes supporting the interim financial statements, covering accounting policies, fair value measurements, and other financial disclosures 1. DESCRIPTION OF BUSINESS This note describes Neuronetics, Inc.'s core business as a medical technology company, its primary product, and the impact of the COVID-19 pandemic - Neuronetics, Inc. is a commercial-stage medical technology company focused on products for psychiatric disorders, with its primary product being the FDA-cleared NeuroStar Advanced Therapy System for Major Depressive Disorder (MDD)[20] - The COVID-19 pandemic significantly disrupted business operations from March to September 2020, with unpredictable full impacts on financial condition, results of operations, and cash flows[21] - The company repaid a $6.4 million Paycheck Protection Program (PPP) loan in May 2020 due to eligibility questions for public companies[22] - As of September 30, 2020, the company had $50.7 million in cash and cash equivalents and an accumulated deficit of $273.9 million, with negative operating cash flows of $26.7 million for the nine months ended September 30, 2020; management believes current cash and anticipated revenues are sufficient for at least 12 months[23] 2. BASIS OF PRESENTATION This note explains the preparation of the unaudited interim financial statements in accordance with GAAP and SEC rules, including estimates and assumptions - The interim financial statements are unaudited and prepared in accordance with GAAP and SEC Rule 10-01 of Regulation S-X, permitting reduced disclosures for interim periods, and include normal recurring adjustments for fair presentation[25] - The preparation of financial statements involves estimates and assumptions, which are based on historical experience and management's judgment, but actual results may differ due to business risks and evolving market conditions[27] 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note refers to the Company's Form 10-K for a complete summary of its significant accounting policies - A complete summary of significant accounting policies is available in the Company's Form 10-K filed on March 3, 2020[28] 4. RECENT ACCOUNTING PRONOUNCEMENTS This note details the adoption of new accounting standards and the effective dates for future pronouncements relevant to the Company - The Company adopted ASU 2018-15 (Intangibles - Goodwill and Other - Internal-Use Software) prospectively on January 1, 2020, aligning capitalization requirements for cloud computing arrangement implementation costs[29][30] - ASU 2016-13 (Financial Instruments - Credit Losses) and related ASUs are effective for the Company, a smaller reporting company, for fiscal years beginning after December 15, 2022[31][33] 5. FAIR VALUE MEASUREMENT AND FINANCIAL INSTRUMENTS This note discusses the fair value of financial instruments and assets, including cash equivalents, accounts receivable, and the credit facility - The carrying values of cash equivalents, accounts receivable, prepaids, other current assets, accounts payable, and the credit facility approximated their fair values due to their short-term nature or variable interest rates[34] | Asset (in thousands) | Sep 30, 2020 Carrying Amount | Sep 30, 2020 Fair Value | Dec 31, 2019 Carrying Amount | Dec 31, 2019 Fair Value | | :------------------- | :--------------------------- | :---------------------- | :--------------------------- | :---------------------- | | Money market funds (cash equivalents) | $48,115 | $48,115 | $67,650 | $67,650 | 6. ACCOUNTS RECEIVABLE This note provides a breakdown of gross accounts receivable and allowances for doubtful accounts, presenting the net accounts receivable balance | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | Change | | :-------------------- | :----------- | :----------- | :----- | | Gross accounts receivable - trade | $6,620 | $7,117 | $(497) | | Less: Allowances for doubtful accounts | $(1,056) | $(548) | $(508) | | Accounts receivable, net | $5,564 | $6,569 | $(1,005) | 7. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE This note details the Company's property and equipment, accumulated depreciation, and capitalized software costs, along with related depreciation and amortization expenses | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | Change | | :-------------------- | :----------- | :----------- | :----- | | Property and equipment, gross | $3,132 | $3,314 | $(182) | | Less: Accumulated depreciation | $(2,345) | $(2,207) | $(138) | | Property and equipment, net | $787 | $1,107 | $(320) | | Capitalized software costs, net | $1,300 | $1,200 | $100 | - Depreciation and amortization expense for the three months ended September 30, 2020, was $0.2 million, down from $0.3 million in 2019; for the nine months, it was $0.7 million, down from $0.8 million in 2019[41] 8. LEASES This note outlines operating lease expenses, weighted-average lease terms, discount rates, and sales-type lease profit recognized by the Company - Operating lease rent expense for the three and nine months ended September 30, 2020, was $0.2 million and $0.5 million, respectively; the weighted-average remaining lease term was 7.3 years with a 6.5% discount rate as of September 30, 2020[43] - In Q1 2020, the Company received a $0.8 million reimbursement for leasehold expenses, offsetting a non-current lease liability[44] | Sales-Type Lease Profit (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Profit recognized at commencement, net | $81 | $506 | $807 | $768 | - Operating lease income for the three and nine months ended September 30, 2020, was $0.1 million and $0.2 million, respectively, a decrease from $0.2 million and $0.6 million in the prior year[50] 9. PREPAID COMMISSION EXPENSE This note explains the capitalization and amortization policy for prepaid commission expenses related to System sales and future Treatment Session orders - The Company capitalizes commission expense for System sales that are incremental to future Treatment Session orders, amortizing these costs on a straight-line basis over a seven-year average customer term[54][55] - Amortization expense for prepaid commission was $0.2 million for the three months ended September 30, 2020 (up from $0.1 million in 2019) and $0.6 million for the nine months ended September 30, 2020 (up from $0.2 million in 2019)[56] 10. ACCRUED EXPENSES This note provides a breakdown of accrued expenses, including compensation and related benefits, as of September 30, 2020, and December 31, 2019 | Accrued Expense (in thousands) | Sep 30, 2020 | Dec 31, 2019 | Change | | :----------------------------- | :----------- | :----------- | :----- | | Compensation and related benefits | $3,704 | $5,724 | $(2,020) | | Accrued expenses, total | $6,171 | $9,031 | $(2,860) | 11. DEFERRED REVENUE This note explains the nature of deferred revenue, primarily from customer advances and multi-year agreements, and its expected recognition schedule - Deferred revenue primarily arises from customer advances and deposits for multi-year agreements, with revenue generally invoiced annually and recognized over the coverage period[58] | Year of Revenue Recognition | Percentage of Deferred Revenue | | :-------------------------- | :----------------------------- | | Remainder of 2020 | 25% | | 2021 | 29% | | 2022 | 14% | | 2023 | 14% | | 2024 | 14% | | Thereafter | 4% | | Total | 100% | - Revenue recognized from the beginning-of-year contract liability balance was $0.4 million for the three months and $1.7 million for the nine months ended September 30, 2020, mainly from extended warranties, rent-to-own, milestone, and clinical training revenue[61] 12. DEBT This note details the Company's debt structure, including outstanding principal, accrued fees, debt discounts, and the reclassification of long-term debt to current liability | Debt Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | Change | | :------------------------- | :----------- | :----------- | :----- | | Outstanding principal | $35,000 | $30,000 | $5,000 | | Accrued final payment fees | $1,925 | $1,838 | $87 | | Less debt discounts | $(2,383) | $(690) | $(1,693) | | Total debt, net | $34,542 | $31,148 | $3,394 | | Less current portion | $(34,542) | $(11,250) | $(23,292) | | Long-term debt, net | $- | $19,898 | $(19,898) | - Interest expense for the three months ended September 30, 2020, was $1.0 million ($0.8 million cash, $0.2 million non-cash), an increase from $0.9 million in 2019; for the nine months, it was $3.5 million ($3.1 million cash, $0.4 million non-cash), up from $2.8 million in 2019[63][64] - On March 2, 2020, the Company entered into a new $50.0 million Solar Credit Facility, replacing the previous Oxford Facility; the Term A Loan of $35.0 million was drawn, maturing February 28, 2025, with an interest-only period through March 1, 2022 (extendable to February 2023)[65][66][67] - The Solar Facility includes a final payment fee of 5.50% of the principal and potential prepayment fees; it also has exit fees tied to liquidation, change of control, or achieving net product revenue milestones ($100 million or $125 million), capped at 4.50% of funded principal[69][70] - As of September 30, 2020, the Company was in compliance with all covenants; however, due to a probable failure to meet a minimum trailing net revenue covenant by December 31, 2020, and subjective acceleration clauses, the entire $35.0 million outstanding principal is classified as a current liability[73][74] 13. COMMON STOCK This note provides information on common stock issued, shares reserved for issuance, and the total shares outstanding and reserved | Common Stock Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | Change | | :--------------------------------- | :----------- | :----------- | :----- | | Shares of common stock issued | 18,959 | 18,645 | 314 | | Shares reserved for issuance (total) | 7,007 | 4,086 | 2,921 | | Total shares issued and reserved | 25,970 | 23,046 | 2,924 | - The increase in reserved shares is primarily due to a significant increase in restricted stock units and awards outstanding (from 245 thousand to 2,350 thousand shares)[79] 14. LOSS PER SHARE This note explains the calculation of basic and diluted loss per share, including the treatment of potentially dilutive securities in a net loss position - Basic loss per common share is calculated by dividing net loss by weighted-average common shares outstanding; since the company is in a net loss position, basic and diluted loss per share are the same[82][83] | Potentially Dilutive Securities (in thousands) | Sep 30, 2020 | Sep 30, 2019 | | :--------------------------------------------- | :----------- | :----------- | | Stock options | 2,594 | 2,434 | | Non-vested performance restricted stock units | 500 | - | | Non-vested restricted stock units | 1,850 | 240 | | Common stock warrants | 105 | 105 | - These potentially dilutive securities are excluded from diluted loss per share calculations because the company is in a net loss position[83][84] 15. SHARE-BASED COMPENSATION This note details the Company's share-based compensation expense, equity incentive plan, and unrecognized compensation costs for stock options and restricted stock units | Share-Based Compensation (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total | $1,046 | $934 | $2,888 | $2,458 | - The 2018 Equity Incentive Plan authorized 1.4 million shares (subject to annual 4% increase) for restricted stock, stock appreciation rights, and stock options; as of September 30, 2020, 1.4 million shares were available for future issuance[86] - Unrecognized compensation cost for non-vested stock options was $3.3 million (expected over 2.8 years) and for non-vested restricted stock awards/units was $6.1 million (expected over 2.6 years) as of September 30, 2020[89][91] - In July 2020, 500,000 performance restricted stock units (PRSUs) were awarded to the CEO, vesting based on stock price appreciation ($10, $15, $20, $25); the aggregate estimated fair value was $0.9 million, to be recognized over 3.9 years[93] 16. COMMITMENTS AND CONTINGENCIES This note addresses the Company's exposure to various claims and legal actions, asserting no material adverse effect on financial results is expected - The Company is subject to various claims and legal actions in the ordinary course of business, but management believes none are expected to have a material adverse effect on financial results[94] 17. GEOGRAPHICAL SEGMENT INFORMATION This note provides revenue breakdown by geographical region and product category, confirming the Company operates as a single business segment - The Company operates as a single business segment, managed by a single team[95] | Revenue by Geography (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | $12,029 (97%) | $15,294 (96%) | $32,473 (96%) | $43,730 (97%) | | International | $419 (3%) | $706 (4%) | $1,192 (4%) | $1,570 (3%) | | Total revenues | $12,448 (100%) | $16,000 (100%) | $33,665 (100%) | $45,300 (100%) | | U.S. Revenue by Product Category (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | NeuroStar Advanced Therapy System | $2,541 (21%) | $4,616 (30%) | $7,474 (23%) | $12,594 (29%) | | Treatment sessions | $9,083 (76%) | $10,252 (67%) | $23,823 (73%) | $29,877 (68%) | | Other | $405 (3%) | $426 (3%) | $1,176 (4%) | $1,259 (3%) | 18. SEVERANCE This note details severance charges incurred due to workforce reductions and agreements with former executives, including remaining accrued liabilities - In April 2020, the Company reduced its workforce by 95 employees, incurring a $2.1 million separation-related charge, which was paid out by June 15, 2020[99] - Additional charges of $0.2 million (three months) and $1.3 million (nine months) were recorded for severance agreements with the former CEO and VP of medical operations; as of September 30, 2020, $0.8 million remained in accrued liabilities for unpaid separation benefits[100] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's perspective on the Company's financial condition and results of operations for the three and nine months ended September 30, 2020, compared to the same periods in 2019, highlighting the impact of the COVID-19 pandemic, revenue streams, cost structures, operating expenses, liquidity, and capital resources, including recent debt refinancing Overview This section provides a general business description, key revenue drivers, and overall financial performance for the reporting period - Neuronetics is a commercial-stage medical technology company marketing the NeuroStar Advanced Therapy System for MDD, with 1,143 active systems in approximately 909 psychiatrist offices as of September 30, 2020[105] - The majority of revenues are derived from recurring Treatment Sessions (76% of U.S. revenues for Q3 2020, 73% for 9M 2020), with initial system sales contributing 21% (Q3 2020) and 23% (9M 2020) of U.S. revenues[106] - Total revenues decreased by 22% for the three months and 26% for the nine months ended September 30, 2020, primarily due to the COVID-19 pandemic; the company incurred net losses of $3.4 million (Q3 2020) and $23.8 million (9M 2020) and expects continued losses due to investments in commercial organization and R&D[110] COVID-19 This section discusses the significant disruptions caused by the COVID-19 pandemic on the Company's operations, supply chain, and financial results - The COVID-19 pandemic caused significant disruptions from March through September 2020, impacting customers, supply chain, and employees, with the full financial impact remaining uncertain due to ongoing uncertainties[111] - In April 2020, the Company implemented a reduction in force (RIF) across all functions, resulting in $2.1 million in separation-related charges and an estimated net savings of approximately $18 million through December 31, 2020; the workforce totaled 122 employees as of September 30, 2020[112] Components of Our Results of Operations This section details the primary revenue streams, cost of revenues, and operating expense categories that constitute the Company's financial performance - Revenues are primarily generated from NeuroStar Advanced Therapy System sales/rentals, recurring Treatment Sessions (access codes/links), and other services like repair and extended warranties[114][115][116][117] - Cost of revenues includes components, manufacturing, personnel, royalties, warranty, and shipping; gross margin is influenced by product sales mix (system sales have lower margins than treatment sessions), pricing, and manufacturing costs[118][119] - Operating expenses (Sales & Marketing, G&A, R&D) are expected to decrease in absolute dollars for G&A due to RIF, but R&D will continue to be incurred for new indications and product development[120][121][122][123][124] Results of Operations This section provides a detailed comparison of the Company's financial performance for the three and nine months ended September 30, 2020 and 2019 Comparison of the Three Months ended September 30, 2020 and 2019 This section compares the Company's financial performance for the three months ended September 30, 2020, against the same period in 2019, highlighting revenue and expense changes | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change (Dollars) | Change (Percentage) | | :-------------------- | :-------------------------- | :-------------------------- | :--------------- | :------------------ | | Revenues | $12,448 | $16,000 | $(3,552) | -22% | | Cost of revenues | $2,657 | $4,192 | $(1,535) | -37% | | Gross Profit | $9,791 | $11,808 | $(2,017) | -17% | | Gross Margin | 78.7% | 73.8% | 4.9% pts | | | Sales and marketing | $6,053 | $10,362 | $(4,309) | -42% | | General and administrative | $4,210 | $4,285 | $(75) | -2% | | Research and development | $1,952 | $3,489 | $(1,537) | -44% | | Loss from Operations | $(2,424) | $(6,328) | $3,904 | 62% | | Net Loss | $(3,418) | $(6,867) | $3,449 | 50% | - The 22% decrease in total revenues was driven by a 21% reduction in U.S. revenue and a 41% reduction in International revenue, primarily attributed to the COVID-19 pandemic[129] - U.S. NeuroStar Advanced Therapy System revenue decreased by 45% due to lower capital system sales (39 systems sold in Q3 2020 vs. 68 in Q3 2019) and fewer HP Coil upgrades; U.S. Treatment Session revenues decreased by 11% due to volume decline from COVID-19[130][131] - Gross margin increased from 73.8% to 78.7% due to a favorable product mix shift and reduced personnel supporting installation efforts[132] - Operating expenses significantly decreased, with Sales and Marketing down 42% due to reduced marketing, travel, and personnel costs, and R&D down 44% due to reduced product development, personnel, and travel[133][135] Comparison of the Nine Months ended September 30, 2020 and 2019 This section compares the Company's financial performance for the nine months ended September 30, 2020, against the same period in 2019, detailing revenue and expense trends | Metric (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (Dollars) | Change (Percentage) | | :-------------------- | :-------------------------- | :-------------------------- | :--------------- | :------------------ | | Revenues | $33,665 | $45,300 | $(11,635) | -26% | | Cost of revenues | $7,791 | $11,170 | $(3,379) | -30% | | Gross Profit | $25,874 | $34,130 | $(8,256) | -24% | | Gross Margin | 76.9% | 75.3% | 1.6% pts | | | Sales and marketing | $24,926 | $31,477 | $(6,551) | -21% | | General and administrative | $13,508 | $13,145 | $363 | 3% | | Research and development | $7,089 | $9,499 | $(2,410) | -25% | | Loss from Operations | $(19,649) | $(19,991) | $342 | 2% | | Net Loss | $(23,796) | $(21,490) | $(2,306) | -11% | - Total revenues decreased by 26% for the nine months, with U.S. and International revenues down 26% and 24% respectively, primarily due to the COVID-19 pandemic[140] - U.S. NeuroStar Advanced Therapy System revenue decreased by 41% due to fewer capital system sales (112 systems in 9M 2020 vs. 172 in 9M 2019); the active installed base increased by 11% to 1,143 units[141][142] - Treatment Session revenues decreased by 20% due to volume decline from COVID-19; gross margin increased from 75.3% to 76.9% due to product mix and reduced installation personnel[143][144] - General and administrative expenses increased by 3% due to $0.8 million in severance costs related to the RIF, partially offset by reductions in legal, patent, and travel expenses[146] Liquidity and Capital Resources This section analyzes the Company's cash position, debt obligations, and ability to meet short-term and long-term financial commitments Overview This section provides a summary of the Company's cash position, accumulated deficit, operating cash flows, and assessment of liquidity for the next 12 months - As of September 30, 2020, the Company had $50.7 million in cash and cash equivalents and an accumulated deficit of $273.9 million; operating cash flows were negative $26.7 million for the nine months ended September 30, 2020[151] - The Company has $35.0 million outstanding under its credit facility, classified as a current liability due to a probable covenant breach; management believes current cash and anticipated revenues are sufficient for at least 12 months[151] - Future funding requirements depend on revenue growth, operating margins, credit facility compliance, expansion costs, reimbursement arrangements, R&D, and regulatory oversight; the Company may seek additional equity or debt financing if current sources are insufficient[152][153] Cash Flows This section analyzes the Company's cash flow activities, including operating, investing, and financing, for the nine months ended September 30, 2020 and 2019 | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Net Cash Used in Operating Activities | $(26,687) | $(24,079) | $(2,608) | | Net Cash Used in Investing Activities | $(615) | $(454) | $(161) | | Net Cash Provided by Financing Activities | $2,313 | $2,320 | $(7) | | Net Decrease in Cash and Cash Equivalents | $(24,989) | $(22,213) | $(2,776) | - Net cash used in operating activities increased by $2.6 million, primarily due to a higher net loss and a decrease in net operating liabilities (accounts payable and accrued expenses)[154] - Net cash provided by financing activities was $2.3 million in both periods, driven by loan refinancing proceeds and stock option exercises in 2020, and stock option exercises in 2019[157] Indebtedness This section details the Company's new credit facility, loan terms, fees, covenants, and the reclassification of outstanding principal to a current liability - The Company entered into a new $50.0 million Solar Credit Facility on March 2, 2020, replacing the Oxford Facility; a $35.0 million Term A Loan was drawn, maturing February 28, 2025, with an interest-only period through March 1, 2022 (extendable)[158][159][160] - The Solar Facility includes a 5.50% final payment fee and potential prepayment fees (3%, 2%, or 1% depending on timing); exit fees (up to 4.50%) are also applicable upon certain events like liquidation or revenue milestones[161][162] - The facility is secured by substantially all Company assets and contains financial and customary covenants; as of September 30, 2020, the Company was compliant, but the entire outstanding principal is classified as a current liability due to a probable revenue covenant breach and subjective acceleration clauses[163][165][166] - The previous Oxford Credit Facility was extinguished in March 2020 upon repayment, resulting in a $0.6 million loss on extinguishment of debt from unamortized debt discount and deferred issuance costs[169] Off-Balance Sheet Arrangements This section confirms that the Company does not maintain any off-balance sheet arrangements, partnerships, or relationships with unconsolidated entities - The Company does not maintain any off-balance sheet arrangements, partnerships, or relationships with unconsolidated entities[171] Commitments and Contractual Obligations This section notes the significant change in commitments and contractual obligations due to the new debt agreement (Solar Credit Facility) - There was one significant change to commitments and contractual obligations as of September 30, 2020, related to the new debt agreement (Solar Credit Facility)[172] JOBS Act Accounting Election This section explains the Company's election as an 'emerging growth company' to use an extended transition period for new accounting standards - As an 'emerging growth company' under the JOBS Act, Neuronetics has elected to use the extended transition period for complying with new or revised accounting standards, which means it will not be subject to the same new standards as other public companies[173] - The Company will remain an emerging growth company until the earliest of reaching $1.07 billion in annual revenue, the fifth anniversary of its IPO, issuing over $1.0 billion in nonconvertible debt, or becoming a large accelerated filer[174] Recent Accounting Pronouncements This section refers to specific notes in the interim financial statements for details on recent accounting pronouncements - Refer to Note 3 and Note 4 in the Interim Financial Statements for details on recent accounting pronouncements[175] Item 3. Quantitative and Qualitative Disclosures About Market Risk. This section discusses the Company's exposure to market risks, including credit risk, interest rate risk, and inflationary factors, and reiterates the material impact of the COVID-19 pandemic on revenues - The Company's credit risk is limited for cash equivalents by investing in highly-rated money market funds and for accounts receivable by performing credit evaluations without requiring collateral[178] - The credit facility bears a floating interest rate (7.65% plus a benchmark rate), exposing the Company to interest rate risk[179] - Inflationary factors could adversely affect operating results if product selling prices do not increase sufficiently to offset rising costs; the Company has no exposure to foreign currency fluctuations[180][181] - The COVID-19 pandemic has materially impacted revenue, particularly U.S. treatment session revenues, as customers defer capital purchases and patient treatment starts/system utilization have declined[182] Item 4. Controls and Procedures. This section details the evaluation of the Company's disclosure controls and procedures and management's report on internal control over financial reporting, concluding on their effectiveness as of September 30, 2020 - The Principal Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020[183] - Management concluded that the Company's internal control over financial reporting was effective as of September 30, 2020, at the reasonable assurance level, based on the COSO 2013 framework[186] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, the Company's internal control during the quarter ended September 30, 2020[187] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings. This section states that the Company is subject to various legal claims in the ordinary course of business but does not expect any to have a material adverse effect on its financial condition or results of operations - Management believes there are no current 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[190] Item 1A. Risk Factors This section refers readers to the comprehensive risk factors detailed in the Company's Annual Report on Form 10-K and previous Quarterly Reports on Form 10-Q, noting no material changes since those filings - There have been no material changes to the risk factors described in the Company's Annual Report on Form 10-K filed on March 3, 2020, and Quarterly Reports on Form 10-Q filed on May 5, 2020, and August 4, 2020[191] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. This section indicates that there were no recent issuances of unregistered equity securities during the reporting period - There were no recent issuances of unregistered securities[192] Item 3. Defaults Upon Senior Securities. This section states that there were no defaults upon senior securities during the reporting period - Not applicable[193] Item 4. Mine Safety Disclosures. This section indicates that mine safety disclosures are not applicable to the Company - Not applicable[194] Item 5. Other Information. This section states that there is no other information to report under this item - None[195] Item 6. Exhibits. This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications and XBRL documents | Exhibit Number | Description | | :------------- | :---------- | | 31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 31.2* | Certification of Chief 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 | | 104 | Cover Page Interactive Data File (Formatted as Inline XBRL and contained Exhibit 101). | SIGNATURES This section contains the official signatures of the Company's principal executive and financial officers, certifying the report's accuracy - The report was signed on November 2, 2020, by Keith J. Sullivan, President and Chief Executive Officer, and Stephen Furlong, VP, Finance and Chief Financial Officer[202]