Thank you for standing by, welcome to the Neuronetics Second Quarter 2023 Financial and Operating Results Conference Call. At this time al participants’ are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [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 second 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 later today. 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. We delivered a solid performance during the second quarter as our commercial and customer education initiatives have continued to gain traction. U.S. capital sales remain consistent and despite some of the ongoing headwinds associated with the integration of our two largest customers. Our treatment session revenues continued to increase. Total revenue was $17.6 million, up 8% over the second quarter of 2022, primarily driven by strong treatment session growth combined with an on plan NeuroStar system expansion. NeuroStar system revenue was $4.5 million. As previously mentioned, our objective is to ship 45 to 50 systems per quarter. As we believe, this range enables our team to dedicate sufficient time and resources to ensure the long-term success of our customers within NeuroStar. Consistent with this plan, we concluded the quarter by shipping a total of 54 systems. Importantly, nearly half of the NeuroStar shift during the quarter were to customers buying their second systems, which points to the value we are delivering to these practices by helping them educate and treat patients in need. The sustained strength of our capital equipment sales can be attributed to the continued execution by our experienced capital sales team, as well as the positive impacts of our NeuroStar Summit. Our most recent Summit held in Scottsdale, Arizona was again sold out and ultimately resulted in approximately 20 system sales during the event. These NeuroStar Summits remain a crucial element of our strategy, providing a platform to educate customers about the impact NeuroStar can have on improving patient’s…

Thank you, Keith. Unless otherwise noted, all performance comparisons are being made for the second of 2023 versus the second quarter of 2022. Total revenue was $17.6 million, an increase of 8% over prior year revenue of $16.3 million. U.S. NeuroStar Advanced Therapy System revenue was $4.5 million versus $4.4 million in the prior year. We shipped 54 systems, down from 58 systems in 2022. As Keith noted, our current strategy is to ship between 45 and 50 systems per quarter. U.S. treatment session revenue was $12.3 million, an increase of 9% over 2022 revenue of $11.3 million. The revenue growth was primarily driven by strong performance within our consumable customer segment. In the second quarter of 2023, revenue per active site was approximately $11,390 compared to approximately $11,280 in the prior year quarter. We are highly encouraged by the fact that despite a material increase in active sites, compared to this time last year, we were able to maintain revenue per site. We see this as evidence that our programs and initiatives are working. Gross margins were 72.5%, compared to 75.3% in the prior year quarter. The decline in gross margin was driven by an increase in amortization expense associated with the latest product release. We also incurred one-time expenses related to our transition to a new contract manufacturer. Without these expenses, gross margins would have been 75.6%. Operating expenses during the quarter were $20.1 million, a decrease of $2 million or 9%, compared to $22.1 million in the second quarter of 2022. In May, our ELT met to review and justify 2023 operating expenses. Consistent with the results achieved with a similar exercise in 2022, the team identified over $4.5 million in expense savings in the balance of 2023, some of which will be offset by increased co-marketing…

Thank you, Steve. We've made significant progress in the first-half of the year. The list of achievements is long, and it reflects our team's dedication and hard work towards achieving our goals. Some of our accomplishments include focusing on maximizing revenue growth, while efficiently reducing expenses, surpassing our targets on capital placements, heightened attention on Greenbrook, aiming to bring their utilization back up to previous high levels and receiving excellent reviews and fully booking all NSU classes, which has increased attendee utilization, compared to non-attendees. Additionally, our clinical data supports the efficacy of NeuroStar for adult patients with anxious depression. And we've achieved positive policy decisions, reducing prior medication failures for TMS eligibility and enabling non-physician practitioners to order and administer TMS therapy. We've also made notable product developments, enhanced Internet connectivity capabilities and software for TrakStar. On the regulatory front, we obtained 510(k) clearance for the OCD, MT cap and recently submitted for a new label expansion. Furthermore, we secured $60 million in new debt financing and successfully improved gross margins by switching contract manufacturers. As we move into the second-half, we are eager to build upon the momentum. Our proven track record of execution gives us confidence in our ability to continue to deliver solid results. We remain focused on growing the number of customers, who take part in NeuroStar University, working to incorporate a higher percentage of customers into co-op marketing programs and create a network of accounts across the country that follow NeuroStar best practices. With a well-defined strategy in place, we aim to accelerate the adoption of NeuroStar and provide relief to more patients suffering from mental health disorders. With that, I'd like to open the line for questions.

Thank you. [Operator Instructions] Our first question is going to come from the line of Margaret Kaczor with William Blair. Your line is open. Please go ahead.

Hey, good morning, everyone. Thanks for taking the question.

Hey, Margaret.

I wanted to start -- hey, to talk about the accounts that purchased the second system. So half of the placements this quarter coming from that is -- really seems like a meaningful increase. Is this -- are these national accounts or group practices? And then how should we think about their kind of productivity ramp relative to more traditional new sites?

How are you doing, Margaret. This is Keith. The accounts that purchased second systems were mostly private offices. National accounts have not purchased any systems in the last couple of quarters. So these are physicians that have gotten to the level where they're doing six or seven treatments per day on their device. And at that level, they're starting to run into scheduling conflicts with patients and they need a second system to support that demand.

Okay. And the productivity ramp and increase seems like maybe that should be a little faster than normal given they're already familiar with the system. Is that fair?

Yes, it is. And I think they've already -- most of these accounts have already been to NSU. They’ve understand exactly how to speak to their patients and get them into the chair. So these are the accounts that have really accelerated. I think we've said in the past that it typically takes six months for accounts to get their system and get it up and running. And we have worked hard over the past several quarters to reduce that. So we're now in the 90 to 120 days range to get new accounts up and running.

Okay. That's helpful. And what I'm trying to tear into, you referenced the 68% increase in utilization for attendees from NSU. That's a pretty meaningful increase. You're referencing those sites are the ones that are coming back, I guess, for second system purchases. So as we think about both the next several quarters in 2024, is this something that can continue to pick-up traction where more of the accounts attend NSU? And then I have one more follow-up and I'll hop back in the queue.

The simple answer is yes. We're putting an emphasis and we're using the staff that you just mentioned, the 68% increase, to get more accounts there. Quite honestly, we've held 15 classes now and they have -- we are getting repeat customers coming back. So we are using this data to get our legacy accounts and all the new accounts to come to NSU as soon as possible.

Okay. So just last question for me just, because these steps do seem pretty meaningful. Can you give us a sense of, I guess, what the revenue per account would have been this quarter or this year, excluding Greenbrook or excluding the national accounts, as we kind of lap the Greenbrook headwinds, obviously, that will maybe be a better signal of what that underlying business can do. Thank you.

Hi, Margaret, this is Steve. We haven't done that math yet, but we did have 50 or so Greenbrook office closures. So the revenue per site would obviously be a bit lower. But we'll have to go back and quantify that for you and get back to you.

Okay. Thank you, guys.

Thank you. [Operator Instructions] Our next question is going to come from the line of Bill Plovanic with CG. Your line is open. Please go ahead.

Hi, it’s Zachary Day on for Bill today. Thank you taking the question. So you've talked a lot about easier payer rules with BlueCross BlueShield and the Aetna improvements. Can you possibly quantify that importance and think about when it comes to other commercial payers beyond Aetna, what percent of them do you think will get a similar policy update? And how can that drive revenue and other financial metrics? Thank you.

Well, good morning. We are very encouraged by the changes in the policies. The biggest one that we had was back in March when UnitedHealthcare went from four drugs to two. And I think most of the other payers are going to follow suit with it. I think we've said in the past that there are plenty of patients out there that have failed four drugs and we are making a concerted effort to drive awareness to those patients. What the reduction in failed drugs means to those patients is they can get into the chair sooner. So we have a large patient population for us to treat. The payers are just making it easier for them to get it. So I think our job and the physician's job is to help drive that awareness.

Great, thank you very much.

Thank you. And our next question is going to come from the line of Adam Maeder with Piper Sandler. Your line is open. Please go ahead.

Hey, Keith. Hey Steve. This is Simran on for Adam. Thank you for taking the questions. I guess I'll start off on just the sessions business. Can you provide a bit more color on what you saw from treatment sessions volumes and how that progressed over Q2 and into July and August so far? And I'd be curious to know what your expectations for this part of the business look like once you kind of have the rest of different Greenbrook systems relocated and sort of ramping back up?

Good morning. This is Keith. The systems that have been moved for Greenbrook have, as I said, over 35 of them have been shipped to new locations. Not all of them have been trained yet and so we are working through getting all of the systems placed, and we have prioritized getting training to those sites that have been using competitive systems, so that we can get them up and running. In the past, Greenbrook was able to generate in the neighborhood of four to six patients per day per system and we want to get them back to that level, and we're working with Bill Leonard and his team to help get them to that level. For the -- our other accounts that are growing in utilization, the ones that per-click accounts at the 19% growth, those accounts are the ones that are following our road map to success, which includes going to NSU, which includes following through on the PHQ-10s and using our co-op marketing to be able to make sure that their website is in shape, make sure that their social media platform follows ours and they're buying the proper Google AdWords to drive greater awareness.

Okay, perfect. That's helpful. And then for my follow-up, the guidance kind of implies a sequential step-up of around 16% from Q3 to Q4 at the midpoint, which is perhaps a bit steeper than what we've seen in past years. So I guess, what kind of informs that level of confidence? And can you walk us through your assumptions baked in for the fourth quarter?

Hi, this is Steve. Yes, if I go back and look at 2022, for example, the third quarter was slightly higher than the second quarter and that's what we're anticipating this year. And then Q4 was up just under $2 million from Q3 to Q4. And that's the similar assumption and seasonality we're expecting in 2023. Q4 was always our strongest capital quarter. And we do have a significant number of treatment session programs that accompany the capital sales. And so it's really just the normal cadence for the final six months. We do see Greenbrook their performance to be consistent, compared to the first-half of this year. As Keith alluded to, the transition from moving NeuroStars from storage into active units is a little time consuming. We do have to have our field service engineers deinstall and install. Many of these accounts that the systems are going into were formerly Brainsway sites. So there is a significant training effort that goes into these. And so there could be upside depending upon the speed and training activities. But again, we really don't think the lift in Q4 is significant. As a reminder, we've been growing almost double digits and that's, again, reflective in that Q4 performance forecast.

Okay. Thank you. And if I could just squeeze one last one on gross margin really quickly. So you hit on some of the impacts with the one-time expenses related to the new contract manufacturer. But just how should we think about the levels of gross margin as we look out over the second-half of the year and into 2024?

Yes. We'll see. I would say, gradual improvements in Q3 and Q4 of this year. And then once our new contract manufacturer is really up and running in 2024, again, we're going to see gross margins inching up to that 80% range. And so we have a number of cost reduction efforts underway, that transition, as well as an increasing treatment session revenue versus capital revenue, product mix, which also helps margins. So we are confident we're going to get up to that 80% range in 2024.

Thank you.

You’re welcome.

Thank you. [Operator Instructions] Our next question is going to come from the line of Daniel Stauder with JMP Securities. Your line is open. Please go ahead.

Great, thanks. So just real quick, revenue per active site you talked about is up modestly this quarter, back into that mid-$11,000. But I guess, could you just remind us how you think about this metric? Any expectations for this year? Or as you exit into exit 2023, any broader near to mid-term targets for these levels? And what's the comfortable cohort here that you expect to reach over time? Thanks.

Hey Danny, it's Steve. I mean this is one of the key metrics. It really does highlight the performance of an individual site. I would say with a lot of the activities and initiatives we have, that number will continue to increase. It is a bit variable depending upon the system sold into existing sites and also the different customer segments. So the local consumables segment continues to shine for us, and that's really the focus of many of our initiatives. And so we would expect that to get maybe 20% higher as we work through next year.

That's great. And then just…

So I was going to say, Dan, if you look at the average treatment sessions done on a system, it's still the upside getting to that $6 or $7 per system, which is pretty much capacity. There is significant runway in that number, compared to where we are right now. And obviously, that will translate into a much higher revenue per site calculation.

Great. Thank you for that. And then just one more on cash usage. You had some one-time items here in the first-half of the year, but just any more color you could give us on cash burn rate in the back half of this year, as well as your rate exiting 2023 would be very helpful. Thanks.

Sure. So we actually had a very good push in AR collections this quarter, but it was masked by, I would say, a pretty healthy June. And so you can see in our zero to 30-day receivable balance, it's up significantly, which is reflective of the number of systems we shipped in the final month. We do expect leverage with AR and also inventory as we work towards Q4. You also saw in the press release that we did submit for our employee retention credit with the IRS. So that was prepared by KPMG. So we're pretty confident we'll have that in hand either late Q4 or early Q1. So that will help. And so we're expecting a modest burn in Q3. Again, pretty much a function of shipment timing and also collections of the activity in June. It's usually a lower burn for us anyway. And then Q4 should be pretty close to cash burn-neutral. Again, we're going to have historically the strongest quarter of the year and it will be somewhat subjected to timing of the revenue mix that goes out the door in December. So we think we're going to end the year low to mid-40s in cash. Again, as we've been communicating, the plan is to hold operating expenses flat in 2024 and then continue to grow the top line. And so if we can get, for example, Greenbrook and some other accounts back to their normal cadence, we think our top line can get to where -- the top line growth can get to where we were expecting this year, in that mid-teen range.

Great. Thank you very much.

You’re welcome.

Thank you. And I'm showing no further questions, and I would like to hand the conference back over to Keith Sullivan for any closing remarks.

Thanks you very much, operator. Thank you all for your interest in Neuronetics. We look forward to updating you on our next quarterly call.

This concludes today's conference call. Thank you for participating. You may now disconnect.