Neuronetics, Inc. (STIM) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. 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 should be read in conjunction with our audited financial statements and related notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, some of the information contained in the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the ‘‘Risk Factors’’ section of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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 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 FDA to treat adult patients with MDD that have failed to achieve satisfactory improvement from prior antidepressant medication in the current MDD episode. NeuroStar Advanced Therapy System 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 the estimated 169,068 global patients treated with over 6.1 million of our treatment sessions through December 31, 2023. We generated revenues of $71.3 million and $65.2 million for the years ended December 31, 2023 and 2022, 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 existing treatment options. We generate revenues from initial capital sales of our systems, sales of our recurring treatment sessions and from service and repair and extended warranty contracts. We derive the majority of our revenues from recurring treatment sessions. For the year ended December 31, 2023, revenues from sales of our treatment sessions and NeuroStar Advanced Therapy Systems represented 73% and 24% of our U.S. revenues, respectively. For the year ended December 31, 2022, revenues from sales of our treatment sessions and NeuroStar Advanced Therapy Systems represented 71% and 26% of our U.S. revenues, respectively.
We currently sell our NeuroStar Advanced Therapy System and recurring treatment sessions in the United States through our sales and customer support team. Our sales force targets an estimated 53,000 psychiatrists across 26,000 practices. We expect to continue to expand our direct sales and customer support team to further penetrate the market by demonstrating the benefits of our NeuroStar Advanced Therapy System to psychiatrists and their MDD patients. Some of our customers have and may purchase more than one NeuroStar Advanced Therapy System. Based on our commercial data, we believe psychiatrists can recoup their initial capital investment in our system by providing a standard course of treatment to approximately 12 patients. We believe psychiatrists can generate approximately $8,500 of average revenue per patient for a standard course of treatment, which may provide meaningful incremental income to their
67
Table of Contents
practices. We have a diverse customer base of psychiatrists in group psychiatric practices in the United States. For the years ended December 31, 2023, 2022 and 2021 one customer accounted for 15%, 17% and 20% respectively, of the Company’s revenue. Patients are reimbursed by federal healthcare programs and the vast majority of commercial payors in the United States for treatment sessions utilizing our NeuroStar Advanced Therapy System.
We market our products in a few select markets outside the United States through independent distributors. International revenues represented 3% of our total revenues for the years ended December 31, 2023 and 2022, respectively. In October 2017, we entered into an exclusive distribution agreement with 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. We obtained reimbursement coverage for NeuroStar Advanced Therapy System in Japan, which went into effect on June 1, 2019 and covers patients who are treated in the largest inpatient and outpatient psychiatric facilities in Japan. We expect our international revenues to be consistent as a percentage of our total revenue.
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 development 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.
Our total revenues increased by $6.1 million, or 9%, from $65.2 million for the year ended December 31, 2022 to $71.3 million for the year ended December 31, 2023. For the year ended December 31, 2023, our U.S. revenues were $69.3 million, compared to $63.4 million for the year ended December 31, 2022, which represented an increase of 9% period over period. As of December 31, 2023, we had an accumulated deficit of $376.1 million.
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 equipment upgrades 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.
Other Revenues. Other revenues are derived primarily from service and repair extended warranty contracts with our existing customers.
68
Table of Contents
We refer you to the section titled “Critical Accounting Policies and Use of Estimates—Revenue Recognition” appearing elsewhere in this Annual Report on Form 10-K for additional information regarding how we account for revenues.
Sales in the United States represented 97% of our total revenues for the years ending December 31, 2023 and 2022, respectively, and have been generated by our direct sales force. Outside the United States, our sales are made through local third-party distributors. International revenues were 3% for the years ended December 31, 2023 and 2022, respectively. We expect that both our United States and international revenues will increase in the near term as we continue to expand active customer sites utilizing our NeuroStar Advanced Therapy Systems and increase the related patient utilization in the United States, as well as grow our presence in Japan. We expect our revenues to be positively impacted to the extent our direct sales force is successful in increasing the rate of adoption and utilization of treatment with TMS Therapy as an alternative to other MDD treatments.
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, royalties, warranty, shipping, amortization of capitalized software and our operations and field service departments. We expect our cost of revenues to decrease as our product mix changes and we realize efficiencies with our new contract manufacturer.
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, primarily digital media campaigns, travel and training expenses.
We anticipate that our sales and marketing expenses will remain materially consistent during 2024 compared to 2023 expenses, with the exception of the planned growth in our co-op marketing program.
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.
69
Table of Contents
We anticipate that our general and administrative expenses will remain relatively consistent during 2024 compared to our 2023 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 and clinical development programs. We typically use our employee, consultant and infrastructure resources across our research and development programs.
We plan to incur 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 2024 compared to our 2023 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 notes receivable.
Results of Operations
Comparison of the Years ended December 31, 2023 and 2022
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | |
| | | Years ended December 31, | | Increase / (Decrease) | | |||||||
| | | 2023 | 2022 | Dollars | Percentage | |||||||
| | | (in thousands, except percentages) | ||||||||||
| Revenues | | $ | 71,348 | | $ | 65,206 | | $ | 6,142 | 9 | % | |
| Cost of revenues | | 19,643 | | 15,483 | | 4,160 | 27 | % | ||||
| Gross Profit | | 51,705 | | 49,723 | | 1,982 | 4 | % | ||||
| Gross Margin | | 72.5 | % | 76.3 | % | | ||||||
| | | | | | | | | | | | | |
| Operating expenses: | | | | | ||||||||
| Sales and marketing | | 47,318 | | 49,982 | | (2,664) | (5) | % | ||||
| General and administrative | | 25,426 | | 25,516 | | (90) | (0) | % | ||||
| Research and development | | 9,515 | | 9,336 | | 179 | 2 | % | ||||
| Total operating expenses | | 82,259 | | 84,834 | | (2,575) | (3) | % | ||||
| Loss from Operations | | (30,554) | | (35,111) | | 4,557 | 13 | % | ||||
| Other (income) expense: | | | | | ||||||||
| Interest expense | | 5,424 | | 4,251 | | 1,173 | 28 | % | ||||
| Other income, net | | (5,789) | | (2,203) | | (3,586) | (163) | % | ||||
| Net Loss | | $ | (30,189) | | $ | (37,159) | | $ | 6,970 | 19 | % |
70
Table of Contents
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Revenues by Geography | |||||||||
| | | Years ended December 31, | |||||||||
| | | 2023 | | 2022 | |||||||
| | | | | | % of | | | | | % of | |
| | | Amount | Revenues | Amount | Revenues | ||||||
| | | (in thousands, except percentages) | |||||||||
| United States | | $ | 69,336 | | 97 | % | $ | 63,406 | | 97 | % |
| International | | 2,012 | 3 | % | 1,800 | 3 | % | ||||
| Total revenues | | $ | 71,348 | 100 | % | $ | 65,206 | 100 | % |
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | U.S. Revenues by Product Category | |||||||||
| | | Years ended December 31, | |||||||||
| | | 2023 | | 2022 | |||||||
| | | | | | % of | | | | | % of | |
| | | Amount | Revenues | Amount | Revenues | ||||||
| | | (in thousands, except percentages) | |||||||||
| NeuroStar Advanced Therapy System | | $ | 16,460 | | 24 | % | $ | 16,575 | | 26 | % |
| Treatment sessions | | 50,896 | 73 | % | 45,077 | 71 | % | ||||
| Other | | 1,980 | 3 | % | 1,754 | 4 | % | ||||
| Total U.S. revenues | | $ | 69,336 | 100 | % | $ | 63,406 | 100 | % |
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | United States NeuroStar Advanced Therapy System | |||||||||
| | | Revenues by Type | |||||||||
| | | Years ended December 31, | |||||||||
| | | 2023 | | 2022 | |||||||
| | | | | | % of | | | | | % of | |
| | | Amount | Revenues | Amount | Revenues | ||||||
| | | (in thousands, except percentages) | |||||||||
| NeuroStar capital | | $ | 15,805 | | 96 | % | $ | 15,792 | | 95 | % |
| Operating lease | | | 162 | 1 | % | 222 | 1 | % | |||
| Other | | | 493 | 3 | % | 561 | 3 | % | |||
| Total United States NeuroStar Advanced Therapy System revenues | | | 16,460 | 100 | % | $ | 16,575 | 100 | % |
Revenues
Total revenues increased by $6.1 million, or 9%, from $65.2 million for the year ended December 31, 2022 to $71.3 million for the year ended December 31, 2023. For the period ended December 31, 2023, U.S. revenue increased by 9% and international revenue increased by 12% over the comparative prior year period. The U.S. revenue growth was primarily due to an increase in Treatment sessions revenues in connection with the growth of active customer sites and utilization.
Revenues in the United States increased by $5.9 million, or 9%, from $63.4 million for the year ended December 31, 2022 to $69.3 million for the year ended December 31, 2023. NeuroStar Advanced Therapy System revenue in the United States for year ended December 31, 2023 was $16.5 million which was in line with revenue at December 31, 2022 at $16.6 million. NeuroStar capital sales consisted of 204 units in NeuroStar Advanced Therapy Systems for the year ended December 31, 2023 compared to 213 units for the year ended December 31, 2022. The Company expects to recognize future recurring treatment session revenue related to the sale of 204 NeuroStar Advanced Therapy systems for the year ended December 31, 2023.
Treatment sessions revenues represented 73% and 71% of total revenues in the United States for the years ended December 31, 2023 and 2022, respectively, and increased by 13% from $45.1 million for the year ended December 31, 2022 to $50.9 million for the year ended December 31, 2023. The increase in U.S. treatment session revenue was primarily the result of an increase of 218,244 treatment sessions sold from 572,587 units for the year ended December 31, 2022 to 791,023 for the year ended December 31, 2023. We
71
Table of Contents
believe the increase in overall volume of treatment session revenue between these two periods was primarily due to the growth in active customer sites of 44 from 1,101 as of December 31, 2022 to 1,145 as of December 31, 2023 and increase in overall utilization. Due to the time it takes for the customer sites to become fully operational, treatment session revenue will lag in the growth of our active customer sites.
Cost of Revenues and Gross Margin
Cost of revenues increased by $4.2 million, or 27%, from $15.5 million for the year ended December 31, 2022 to $19.6 million for the year ended December 31, 2023. This increase was primarily due to the recording of a $1.9 million inventory impairment for specialized component parts secured for discontinued NeuroStar Advanced Therapy Systems for which costs exceed net realizable value. Also capitalized software and the corresponding amortization expense increased by $1.3 million associated with the latest product release. One-time expense relating to our transition to a new contract manufacturer amounted to $0.7 million. Gross margin was 72.5% for the year ended December 31, 2023 compared to 76.3% for the year ended December 31, 2022. The decrease in gross margin was driven by the one-time inventory impairment, the higher operational costs related to our transition to a new third-party contract manufacturing partner and software amortization expense from the latest product release.
Sales and marketing Expenses
Sales and marketing expenses decreased by $2.7 million, or 5%, from $50.0 million for the year ended December 31, 2022 to $47.3 million for the year ended December 31, 2023. The decrease was primarily driven by the discontinuation of a sales compensation program in 2023. Neuronetics offered a retention program to sales personnel in 2022 and did not continue the program in 2023, resulting in a decrease in sales personnel expense. The decrease was partially offset by an increase in marketing program spend, specifically the growth in the co-op marketing initiative.
General and Administrative Expenses
General and administrative expenses remained relatively consistent at $25.4 million for the year ended December 31, 2023 compared with $25.5 million for the year ended December 31, 2022.
Research and Development Expenses
Research and development expenses remained relatively consistent at $9.5 million for the year ended December 31, 2023 compared with $9.3 million for the year ended December 31, 2022
Interest Expense
Interest expense increased by $1.2 million, or 28%, from $4.2 million for the year ended December 31, 2022 to $5.4 million for the year ended December 31, 2023 due to interest rates and debt balance increases.
Other Income, Net
Other income, net increased by $3.5 million from $2.2 million for the year ended December 31, 2022 to $5.8 million for the year ended December 31, 2023, primarily as a result of the Employee Retention Credit (the “ERC”) of $2.9 million, increased interest income earned on the Company’s money market accounts and increase in notes receivable interest.
Comparison of the Years ended December 31, 2022 and 2021
The information required within this section is incorporated by reference to the information set forth in the section titled “Comparison of the Years ended December 31, 2022 and 2021” in “Management’s Discussion
72
Table of Contents
and Analysis of our Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K filed on March 7, 2023.
Liquidity and Capital Resources
Overview
As of December 31, 2023, we had cash and cash equivalents of $59.7 million and an accumulated deficit of $376.1 million, compared to cash and cash equivalents of $70.3 million and an accumulated deficit of $345.9 million as of December 31, 2022. We incurred negative cash flows from operating activities of $32.0 million and $30.7 million for the years ended December 31, 2023 and 2022, 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. Our primary sources of capital to date have been from our IPO, private placements of our convertible preferred securities, borrowings under our credit facility, sales of our products and a secondary public offering of our common stock. As of December 31, 2023, we had $60.0 million of borrowings outstanding under our credit facility, which has a final maturity in March 2028. Management believes that the Company’s cash and cash equivalents as of December 31, 2023 and anticipated revenues from sales of its products are sufficient to fund the Company’s operations for at least 12 months.
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:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | our ability to achieve revenue growth and improve operating margins; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | compliance with the terms and conditions, including covenants, set forth in our credit facility; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the cost of expanding our operations and offerings, including our sales and marketing efforts; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | our ability to improve or maintain coverage and reimbursement arrangements with domestic third-party and government payors, particularly in Japan; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | our rate of progress in establishing coverage and reimbursement arrangements from international commercial third-party and government payors; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 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; |
73
Table of Contents
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the cost of research and development activities, including research and development relating to additional indications of neurohealth disorders; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the effect of competing technological and market developments; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | costs related to international expansion; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the potential cost of and delays in product development as a result of any regulatory oversight applicable to our products. |
The Company’s material cash requirements include the following contractual and other obligations.
Debt
In March 2020, the Company entered into the Solar Facility. As of December 31, 2023, the Company had $60.0 million of borrowings outstanding under the Solar Facility, which has a final maturity in March 2028. The interest rate on borrowings under the credit facility is variable and resets monthly. The Company will commence principal payments on the facility starting April 2026 with total borrowings of $60.0 million due at maturity. In addition, the Company will make a final payment fee of $1.9 million at maturity. Future interest payments related to the facility total $22.0 million, including $6.7 million due within the next twelve months as of December 31, 2023.
On March 7, 2024, the Company entered into a sixth amendment (the “Solar Sixth Amendment”) to the Solar Facility.
Under the Solar Sixth Amendment, Solar (i) waived the specified events with respect to the Company’s non-compliance with the required revenue under the net product revenue covenant and (ii) amended the financial covenants to reflect current projections.
The foregoing summary of the Solar Sixth Amendment does not purport to be complete and is qualified in its entirety by reference to the Solar Sixth Amendment, a copy of which is filed as Exhibit 10.9 hereto and incorporated herein by reference.
Leases
The Company has lease arrangements for equipment and certain facilities, including corporate headquarters and our warehouse in Malvern, Pennsylvania and a training facility in Charlotte, North Carolina. As of December 31, 2023, the Company had fixed lease payment obligations of $3.7 million, including $0.9 million due within the next twelve months.
Cash Flows
The following table sets forth a summary of our cash flows for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | December 31, | |||||||
| | | 2023 | 2022 | 2021 | |||||
| | | | | | | | | | |
| Net Cash Used in Operating Activities | | $ | (32,038) | | $ | (30,739) | | $ | (27,983) |
| Net Cash (Used in) Provided by Investing Activities | | (1,322) | | 6,731 | | (9,839) | |||
| Net Cash Provided by Financing Activities | | 22,697 | | 207 | | 83,006 | |||
| Net (Decrease) in Cash and Cash Equivalents | | $ | (10,663) | | $ | (23,801) | | $ | 45,184 |
74
Table of Contents
Net Cash Used in Operating Activities
Net cash used in operating activities for 2023 was $32.0 million, consisting primarily of a net loss of $30.2 million and an increase in net operating assets of $14.1 million, partially offset by non-cash charges of $12.3 million. The increase in net operating assets was primarily due to increases in accounts receivable and prepaid commission expense, and decreases in accrued compensation. Non-cash charges consisted of depreciation and amortization, inventory impairment, non-cash interest expense, share-based compensation, and the cost of rental units purchased by customers.
Net cash used in operating activities for 2022 was $30.7 million, consisting primarily of a net loss of $37.2 million and an increase in net operating assets of $4.8 million, partially offset by non-cash charges of $11.2 million. The increase in net operating assets was primarily due to increases in accounts receivable, inventory and prepaid commission expense, which were offset by increases in accounts payable and accrued expenses as a result of timing and accrued 2022 compensation and commissions as of December 31, 2022. 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 operating activities for 2021 was $28.0 million, consisting primarily of a net loss of $31.2 million and an increase in net operating assets of $6.6 million, partially offset by non-cash charges of $9.8 million. The increase in net operating assets was primarily due to increases in accounts receivable, inventory and prepaid commission expense, which were offset by increases in accounts payable and accrued expenses as a result of timing and accrued 2021 compensation and commissions as of December 31, 2021. 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) Provided by Investing Activities
Net cash (used in) provided by investing activities for the years ended December 31, 2023, 2022 and 2021 was $(1.3) million, $6.7 million and $(9.8) million, respectively. Net cash used in investing activities for the year ended December 31, 2023 was due to payments received on our promissory notes offset partially by purchases of property and equipment and capitalized software costs. Net cash provided by investing activities for the year ended December 31, 2022 was attributable to repayment of a promissory note and purchases of property and equipment and capitalized software costs. Net cash used in investing activities for the year ended December 31, 2021 was attributable to issuance of our promissory note and purchase of property and equipment and capitalized software costs.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 was $22.7 million attributable primarily to additional debt net of final payment and amendment fee paid in connection with the two amendments of the Solar Facility in 2023.
Net cash provided by financing activities for the year ended December 31, 2022 was $0.2 million attributable primarily to proceeds related to stock option exercises.
Net cash provided by financing activities for the year ended December 31, 2021 was $83.0 million and primarily consisted of additional proceeds from our secondary public offering and sale of our common stock on February 2, 2021 and cash proceeds related to stock option exercises.
75
Table of Contents
Indebtedness
Refer to “Note 12. Debt” in our audited financial statements and related notes thereto appearing elsewhere in this Annual Report on Form 10-K for information regarding our current Solar Facility.
Solar Credit Facility
The following table sets forth by year our required future principal payments under the term loan portion of the Solar Facility (as discussed in “Note 12. Debt”) (in thousands):
| | | | |
|---|---|---|---|
| | Principal | ||
| Year: | | Payments | |
| 2024 | | $ | — |
| 2025 | | — | |
| 2026 | | 22,500 | |
| 2027 | | 30,000 | |
| 2028 | | 7,500 | |
| Total principal payments | | $ | 60,000 |
Common Stock Offering
On February 2, 2021, we closed a secondary public 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 approximately $80.6 million after deducting underwriting discounts, commissions and estimated offering expenses. The Company intends to use the net proceeds of the offering for general corporate purposes, including working capital, research and development, marketing and evaluating new clinical indications.
Critical Accounting Policies and Use of Estimates
The preparation of our financial statements in accordance with U.S. GAAP and the rules and regulations of the SEC requires us to make 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. We base our estimates and assumptions on historical experience, known trends and events and various other factors that we believe 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 we believe our estimates and assumptions are reasonable when made, they are based upon information available to us at the time they are made. We evaluate our estimates and assumptions on an ongoing basis and, if necessary, make adjustments. Due to the risks and uncertainties involved in our business and evolving market conditions and given the subjective element of the estimates and assumptions made, actual results may differ from estimated results.
We define our critical accounting policies as those accounting policies that are most important to the portrayal of our financial condition and results of operations and require our most difficult and subjective judgments. While our significant accounting policies are more fully described in “Note 3. Summary of Significant Accounting Policies” in our audited financial statements and related notes thereto appearing elsewhere in this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies.
76
Table of Contents
Revenue Recognition
We account for revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. Under ASC 606, we recognize revenue when control of the promised good or service is transferred to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those good or services. Accordingly, we determine revenue recognition by applying the following steps:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | identification of the contract, or contracts, with a customer; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | identification of the performance obligations in the contract; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | determination of the transaction price; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | allocation of the transaction price to the performance obligations in the contract; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | recognition of revenue when, or as, we satisfy a performance obligation. |
We primarily earn revenues from the sale of NeuroStar Advanced Therapy Systems, consumable use treatment sessions, and accessory products. A contract’s transaction price is allocated to each performance obligation and recognized as revenue when, or as, the performance obligation is satisfied, which generally is the point in time when the product is shipped or control is transferred. We sell to end users in the United States and to third-party distributors outside the United States and do not provide return rights. Sales to distributors outside the United States are made in U.S. dollars.
Revenue attributable to the NeuroStar Advanced Therapy Systems purchased on a rent-to-own basis are accounted for either (1) as operating leases and revenue is recognized on a straight-line basis over the term of the lease; or (2) as a sales-type lease and revenue is recognized upon installation.
Our NeuroStar Advanced Therapy System sales in the United States typically have a post-sale training obligation. This obligation is fulfilled after product shipment, and we defer recognizing revenue until training occurs. We defer the fair value attributable to the post shipment training and recognize such revenue when the obligation is fulfilled. We base the fair value of the training using stand-alone service rates. Our sales to our third-party distributors outside the United States do not have these post-sale obligations.
In addition, we provide a one-year warranty for systems sold in the United States. Terms of product warranty differ amongst our third-party distributors outside the United States, but are generally one year. We provide for the estimated cost to repair or replace products under any warranty at the time of sale. We also offer our customers in the United States annual service contracts. Revenue from the sale of annual service contracts is recognized on a straight-line basis over the period of the applicable contract. We also earn revenue from customers from services outside of their warranty term or annual service contracts. Such service revenue is recognized as the services are provided.
Recent Accounting Pronouncements
We refer you to “Note 4. Recent Accounting Pronouncements” in our audited financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.