Thank you for standing by, and welcome to the Neuronetics First Quarter 2023 Financial and Operating Results. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Mark Klausner. Please go ahead, sir.

Good morning, and thank you for joining us for the Neuronetics first quarter 2023 conference call. Joining me on today's call are Neuronetics' President and Chief Executive Officer, Keith Sullivan; and Chief Financial Officer, Steve Furlong. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our business, strategy, financial and revenue guidance, the impact of COVID-19 and other operational issues and metrics. Actual results can differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. For a discussion of risks and uncertainties associated with Neuronetics business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K filed in March 2023, as well as the company's quarterly report on Form 10-Q, which will be filed on May 15. The company disclaims any obligation to update any forward-looking statements made during the course of this call, except as required by law. During the call, we'll also discuss certain information on a non-GAAP basis, including EBITDA. Management believes that non-GAAP financial information taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non-cash and other expenses that are not indicative of trends in our operating results. Management uses non-GAAP financial measures to compare our performance relative to forecast and strategic plans to benchmark our performance externally against competitors and for certain compensation decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in the tables accompanying our press release, which can be viewed on our website. With that, it's my pleasure to turn the call over to Neuronetics' President and Chief Executive Officer, Keith Sullivan.

Thank you, Mark. Good morning, and thank you for joining us. I'll begin by providing an overview of our recent performance, followed by an operational update. Steve will then review our financial results and I'll conclude with some thoughts on the rest of 2023, before turning to Q&A. The first quarter was solid as we continued to cleanly execute across the organization, delivering results that were in line with our expectations notwithstanding some industry headwinds. As Steve will detail in his remarks, based on our first quarter results, and increasing confidence in treatment session revenue growth, in the past three quarters of the year, we have raised our annual guidance. Total revenue was $15.5 million, up 10% over the first quarter of 2022, primarily driven by strong treatment session performance, combined with an on-plan NeuroStar system expansion. NeuroStar system revenue was $3.9 million. As previously noted, our plan was to ship 45 to 50 systems per quarter, which we believe is the optimal range to allow our teams to devote the appropriate amount of time and resources to set our customers up for long-term success using a NeuroStar. In line with that plan, we ended the quarter with 49 systems shipped. This success and steady system expansion is due to the ongoing hard work of our strong team of area sales managers who are firing on all cylinders and are strengthened by yet another sold-out NeuroStar Summit in Charlotte, North Carolina, which was attended by 54 participants from 31 different practices. These NeuroStar summits continue to be the cornerstone of our strategy to educate customers about the impact NeuroStar can have on patients' lives. Orders coming directly as a result of customers attending a summit contributed meaningfully to the capital sales in the quarter. The U.S. treatment session revenue was…

Thank you, Keith. Unless otherwise noted, all performance comparisons are being made for the first quarter of 2023 versus the first quarter of 2022. Total revenue was $15.5 million, an increase of 10% over prior year revenue of $14.2 million. U.S. NeuroStar Advanced Therapy System revenue was $3.9 million versus $3.6 million in the prior year. We shipped 49 systems, up from 48 in 2022. As Keith noted, our current strategy is to ship between 45 and 50 systems per quarter. U.S. treatment session revenue was $10.6 million, an increase of 12% over 2022 revenue of $9.5 million. The revenue growth was primarily driven by strong performance within our local per-click customer segments. In the first quarter of 2023, revenue per active site was approximately $9,700, compared to approximately $9,900 in the prior year quarter. The decline was primarily a result of the material increase in active sites compared to the prior year over the last year. As a reminder, treatment session revenues are typically lowest during the first quarter of the year due to seasonality. Gross margins were 73.3%, compared to 75.4% in the prior year quarter. The decline in gross margin was primarily driven by revenue mix, as well as an increase in capitalized software and the corresponding amortization expense associated with the latest product release. Beginning on January 1, 2023, we instituted a new accounting policy, which slightly impacted our gross margin in the first quarter. As our NeuroStar products are developed, we continuously make software improvements to each new version and capitalize these software expenses. Upon completion of the software upgrade, we begin amortizing the capitalized software over a period of two years. Beginning this year, we are recording this amortization expense as part – as cost of goods sold rather than in R&D, where it…

Looking to the balance of 2023, I'm excited about the opportunities that lie ahead and about our ability to continue to execute. We remain focused on increasing the number of customers who participate in NeuroStar University, working to incorporate a higher percentage of customers into the co-op marketing program and creating a network of accounts across the country that follow NeuroStar best practices. To help execute on these initiatives, I'm pleased to announce that Lisa Rosas has joined our senior leadership team as Senior Vice President and Chief Marketing Officer, effective May 1, 2023. With over 20 years of experience in marketing, Lisa brings a wealth of knowledge and expertise to our team, having previously held leadership roles at Sientra, Obalon Therapeutics, ZELTIQ, Metasys and Allergan. I can personally attest to her extensive experience in driving practice success, building awareness, and increasing market share capabilities, which are highly beneficial at Neuronetics. We are excited to have Lisa on board and look forward to strengthening our position as the leader in TMS for mental disorders. With that, I'd like to open the line for questions.

[Operator Instructions] Our first question comes from the line of William Plovanic from Canaccord. Your question please.

Hi, great. Thanks. Good morning. And thanks for taking my questions. First off, just I was wondering if - what gives you the conviction to raise guidance given that Q1 was in line and Q2 is actually - guide is in line with your original guidance or with consensus there. Just considering it's an in-line quarter, a solid quarter, but in line, why raise guidance at this point?

Bill, it’s Steve. So basically, we saw positive signs from Greenbrook during the quarter. Even though their store closures didn't really commence until late March, early April, the metrics that we track being utilization and also purchases were stronger than we thought. They were partially offset by some weakness in our fixed price accounts, which is actually a good thing, all things considered. So, just looking at how they're doing and how they're doing through the early part of Q2 gave us that conviction that we're comfortable increasing the low end by $2 million and the high end by $1 million.

Okay, great. And then, congrats on bringing Lisa on board. You've got a great VP of Marketing there. Just the new co-op program that you talked about with internal external that you're kicking off, just wondering if you could give us a little more color on that on what exactly you're changing specifically? Thanks.

Bill, this is Keith. On the co-op marketing program, as you know, that's a key piece to our program. We have tried to smooth it out to make it easier for our accounts to sign up, to participate, to submit their ads and then get reimbursed for it. So, I think when we first rolled it out, our accounts felt as though it was – it had too many rules and regulations and now we are just smoothing it out to make it simpler for them.

That answer your question?

Yes. Thanks, Steve. Thanks, Keith.

Thank you. One moment for our next question. Thank you. Our next question comes from the line of Margaret Kaczor from William Blair. Your question please.

Hey, good morning, guys. Thanks for taking the questions. I wanted to maybe go a little bit deeper into guidance, a follow-up on Bill's question and maybe start a little bit with Q2, What is the Q2 guide, I guess, implied for utilization or revenue per active site both with Greenbrook and without Greenbrook and kind of normalizing for that? And then, as we go on throughout the year, as we kind of look at Q3 and Q4 growth rates for a total company basis obviously, we can back out the first half of the year. But it doesn't imply a little bit of a slowdown. So I just wanted to walk through those dynamics, how you all are thinking about that and what gets you to that high and low end? Thanks.

Hi, Margaret, it’s Steve. Yes, so, I guess, dissecting our guidance, Q2 in particular is usually our second strongest quarter for the year. And then it's consistent in Q3 and then historically Q4 is our strongest quarter. Analyzing some of the metrics that you mentioned revenue per site, it's difficult to pinpoint that right now, because a lot of the Greenbrook sites are still influx. We know they've closed 40 so far, relocated a number of our systems that are actually up and running already. So we are anticipating that momentum to continue through Q2. I do expect revenue per active site to increase in Q2, again, to remain somewhat steady in Q3 and increase in Q4. That was a long question. So I'm not sure if I answered it totally.

That was helpful and part of it is, again, as we go towards the back half of the year, what that exit rate looks like and what it could imply for '24?

Yes. So we – utilization continues to be strong in our Local Consumables segment and that's really the target that we're after. Assuming the Greenbrook transition continues positively the way it is, they're going to start contributing more to the – to our treatment session revenues towards the second half of the year. So, the co-marketing programs are working. NeuroStar University is working immensely. So exiting 2023, we will have the momentum going into 2024 that will help us get to that cash flow breakeven target.

Okay. And that’s helpful. And then, as we look at some of the reimbursement policy changes, obviously, it's been encouraging to see that this year and the comps and press releases. But maybe you guys can true us up on a year-over-year basis, and again, on a net basis, what's been the change in terms of better coverage policies and AV policies that would decrease and take down the number of drugs failed before covering? Thanks.

So, Margaret, we have a reimbursement team that has focused on policy changes. And as each one of the payers comes up for review, we are actively working with physicians to suggest changes going from four drugs to two drugs and even adding non-physician practitioners to the list. So, it's an ongoing process for us. Honestly, there are enough patients out there that have failed for drugs to keep all of the companies that provide TMS active. But I think our focus is trying to get greater access to care for these patients that are suffering with depression. So if we can do that, then we have a solid pipeline of patients. But quite honestly, there are plenty that have failed four, so.

Okay. And sorry, I'm going to squeeze one last one and then I'll hop back in the queue. But just as a follow-up to that. Is there – have you been able to see any kind of change in momentum or utilization in those regional geographies maybe where you do see some of those fair coverage changes make a positive impact on you?

Yes, one of the challenges that we have is, as an example, with the Medicare change allowing nurse practitioners is, then we – now we have to go out and educate the nurse practitioners on the benefits of TMS and the NeuroStar treatment. So we have begun that process. The newest one was up in New England and we are seeing a lot of attention from the nurse practitioners in that region. So we are trying to expand the practitioners on a wider basis and then it's an education process.

Thank you. Our next question. One moment for our next question. Our next question comes from the line of Adam Maeder from Piper Sandler. Your question please.

Hi, Keith. Hi, Steve. Good morning. Congrats on the solid start and thanks for taking the questions. Maybe just a couple of follow-ups to Bill and Margaret's question. So I guess, first, just on the momentum in the business and kind of as you – as we think about the guidance raised here coming out of Q1, just curious if you're willing to provide a little bit more color on how the business kind of progressed over the course of Q1 and the exit velocity that you saw kind of exiting March and into April on the treatment side? Just any more color you could provide there would be helpful. And then I had a follow-up or two. Thanks.

Thanks, Adam. One of the key metrics that we look at specifically in the first quarter, are the benefits investigations. Historically, we see a peak usually around the third week in January of around 375 to 400 benefits investigations, which is really a key metric because if a doctor is requesting a BI for their patients, it's usually a good indication that they're going to be treated with NeuroStar. That peak is still peaking towards the end of April and into early May and the team is still doing around 350 BIs this month. So that is the key indicator that there is no slowdown in site, which really goes in line with the historical performance of Q2 and Q3. And so, once the deductibles and the programs are reset at the beginning of the year, there is a lot of administrative paperwork that has to occur by our physicians but once that's behind them, the treatment session, again, historically really start to accelerate and that's what we've seen this quarter and into Q2. Again, the other metrics, we look at utilization, another strong quarter really in every segment. The only segment that was down was the fixed price. Those customers are historically the older ones and so, we're really targeting helping them, but also really focusing on that Local Consumable segment.

That’s helpful color, Steve. Thank you for that. And I guess, my next question would be on Greenbrook and just wanted to make sure I had some of the specifics there in terms of number of systems that have been pulled from the field, number of systems that have been already placed at different centers and then how many are currently on the sidelines? And how do you think about those kind of going back into the field? And I have one more follow-up.

So, Greenbrook has announced that they're going to close 50 stores. They're in the 40s at the moment. Not all of those stores have completely shut down. They're still working their way through the patients that were in treatment. So we have moved several systems from stores that have completely shut down to active stores and we're continuing to do that. We're able to monitor that because we are the ones that send a service engineer, pack it up and then reinstall it in the new stores.

Okay. That’s helpful, Keith, thanks for the color. And then, maybe just one last one on reimbursement changes and specifically non-physician practitioners or NPPs. Just wanted to, I guess, get a little bit more of a level setting or baseline. What percentages of covered lives have this type of policy today? How do you think about that kind of trending over time? And is this something that impacts the business near term? Or do you think we need a little bit of time for just to kind of ultimately lift access?

Well, I think as we're able to provide education to the non-physician practitioners, I think we see a pickup in those nurse practitioners in particular. We have seen an increased number of nurse practitioners attend our NeuroStar summits to be educated on NeuroStar and how they would incorporate it into their practices. So, as far as covered lives, it's actually increasing as – I think, as you know, when the Medicare Max adopt a new policy, then the – our commercial payers over time will adopt similar policy. So - and that's just starting. So, I think we're encouraged by it. I think it opens up a whole new market for us. But we're at the infancy of educating this group of practitioners.

Thanks for taking the questions.

Thank you. One moment for our next question. And our next question comes from the line of Daniel Stauder from JMP Securities. Your question please.

Yeah, great. Thanks. So just first off on the 100 incremental sites you introduced into your installed base. I'm assuming that's on a year-over-year basis. But just first off, could you give us an idea of how many of those were per-click sites? And then secondly, could you just remind us on the timing as far as how long it typically takes to get a new or newer site ramped up to more typical treatment session run rate? Thanks.

Good morning. How are you doing? So, Daniel, we introduced those 100 sites, all of them are per-click. We don't offer the fixed price anymore. So the accounts that were fixed price are grandfathered in, but any new accounts that we open up are all per-click. And right now, from the time that they place the order to when they get on a regular run rate is somewhere around 90 to 180 days it takes them to get to full strength. So there's a ramp-up period. In many cases, we have to help them get their credentials and get on to the payers. So it takes a little bit of time to get them ramped up.

Great. Thank you very much. And then just one quick one. You touched on it a little bit before, but gross margin, you hit on some of the impacts as well as some of the accounting changes. But just how should we think about levels of gross margin as we look out through the rest of the year? Any cadence or additional commentary there would be much appreciated. Thank you.

Sure. Yes, the reclassification of the amortization expense, we're forecasting almost a two point hit to gross margins. We do see tailwinds with respect to margins as we work through the year. So as treatment sessions continue to accelerate and become a larger part of our revenue base, margins will increase. We also have some cost reduction strategies that we're working on that will lower the cost of goods on the system. And then, I would say our operating expenses within cost of goods sold are consistent throughout the year. So as revenues increase, our margins will also increase. So, we continue to expect mid to high 70s as we exit the year for gross margins and then continue to expand upon that into 2024.

Great. Thanks a lot.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Keith Sullivan for any further remarks.

Thank you, operator. Thank you again for joining us today. We look forward to updating you on our next quarterly call.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.