Good day, thank you for standing by. Welcome to the Neuronix(sic) [ Neuronetics ] First Quarter 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Klausner. Mark, go ahead.

Good morning, and thank you for joining us for the Neuronetics First Quarter 2024 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 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 Form 10-Q, which will be filed on or before May 7. 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 noncash 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.

Mark, thanks for the introduction. Good morning, everyone, and thank you for joining us today. I'll begin by providing an overview of the recent performance followed by an operational update. Steve will then review the financial results, and I'll conclude with some thoughts on 2024 before turning to Q&A. Building on the momentum we generated during 2023, we had a solid first quarter. Our efforts to drive increased utilization and broader adoption of NeuroStar are paying dividends. Total revenue was $17.4 million, an increase of 12% over the first quarter of 2023. This continued solid performance reflects the outstanding efficacy of NeuroStar therapy, the demand we are generating and the ongoing execution by our commercial team. NeuroStar system revenue was $3.3 million, reflecting steady demand for new systems. During the quarter, we shipped 41 systems slightly below our plan of 45 to 50 systems per quarter, partially due to a number of customers having challenges securing credit for capital purchases as well as the negative impact experienced by some customers as a result of the change healthcare cybersecurity incident in late February. As a result of this incident, providers have seen an impact on both collections on patient claim submissions as well as determination of patient eligibility due to the benefits investigation portal being shut down. During this time, provider's ability to collect cash has been significantly impaired and is still being negatively impacted as of today. As a result of reduced cash collections due to Change Healthcare situation, many psychiatry practices were forced to reallocate cash. They had planned to use to purchase a NeuroStar in order to cover essential costs like rent and payroll, which impacted our ability to collect from customers. To further emphasize the impact on providers, the American Medical Association published an article at the…

Thank you, Keith. Unless otherwise noted, all performance comparisons are being made for the first quarter of 2024 versus the first quarter of 2023. Total revenue was $17.4 million, an increase of 12% over prior year revenue of $15.5 million, primarily driven by increased treatment session sales in the quarter. U.S. NeuroStar Advanced Therapy System revenue was $3.3 million, and we shipped 41 systems in the quarter. U.S. treatment session revenue was a record for the company at $13 million, an increase of 22% year-over-year. The revenue growth was primarily driven by continued strong performance within our local consumable customer segment. Revenue per active site was approximately $11,300 in the quarter compared to approximately $9,700 in the prior year quarter. This double-digit increase in revenue per active site is due to the ongoing success of our commercial, education and awareness initiatives as well as the fact that we are continuing to see an increasing percentage of systems shipped per quarter going into existing customer sites where they are now operating multiple NeuroStars. Gross margin was 75.1% compared to 73.3% in the prior year quarter, up 180 basis points from the prior year, driven by a higher mix of treatment session revenue. We plan to continue this consistent improvement in gross margin as we work towards our longer-term target of being above 80%. Operating Expenses during the quarter were $20 million, a decrease of $1.4 million or 7% compared to $21.3 million in the first quarter of 2023. This year-over-year and sequential reduction in operating expenses comes directly as a result of our ongoing prudent cost management efforts. During the quarter, we incurred approximately $1.3 million of noncash stock-based compensation expense. Net loss for the first quarter was $7.9 million or $0.27 per share as compared to a net loss of…

Thank you, Steve. In conclusion, the momentum we built in the first quarter positions us very well for the remainder of 2024. Our commercial initiatives are clearly working, driving increased adoption and utilization of NeuroStar therapy across our installed base. We expect these programs and the better me guarantee provider program, in particular, to continue yielding strong results as we systematically roll them out more broadly. Looking ahead, we have several key growth catalysts. Most notably, our recent adolescent indication approval represents a significant market expansion opportunity that we are just beginning to unlock. With our focused education and awareness efforts ramping up, we anticipate interest and demand from the adolescent psychiatric community to ramp up over the course of the year with even more material impact in 2025. Additionally, our robust clinical data pipeline and collaborative partnerships should further increase NeuroStar's applicability across mental health conditions. Our financial outlook remains strong, and we are on a clear trajectory towards profitability and cash flow positivity. With our comprehensive commercialization strategy and expanding treatment indications, Neuronetics is uniquely positioned to drive long-term sustainable growth. Before we open up the line for questions, I'd like to thank everyone throughout the Neuronetics organization for their dedication and tireless work towards our mission of helping those suffering from mental health disorders. I'd also like to take a moment to thank 3 members of our Board of Directors: Joe Capper, John Bakewell and Will Jaeger for their dedication and contribution to Neuronetics and me personally as they will not be standing for reelection. We wish them the best as they move on to their next ventures. With that, I'd like to open the line for questions.

[Operator Instructions] Our first question comes from Bill Plovanic of Canaccord.

It's John on for Bill this morning. Congrats on the quarter. I just wanted to first touch on guidance. Why keep guidance flat if you're still expecting the full 200 system sales? You saw the strength in treatment revenues in Q1 despite all the headwinds that you highlighted on the call. And also, you still have the tailwinds now from the adolescent contribution in the second half that you highlighted. So I just want to understand the methodology keeping guidance flat there?

Yes. I mean, John, thanks for that question. It really comes down to the uncertainty due to the cyber breach. As we indicated, it did impact system sales in the quarter. Although we do think it will rebound in Q2 and Q3, it just felt like we'd be getting ahead of ourselves if we increase guidance at this point. The impact on adolescents this year is still unknown. It's still very early. And as a reminder, many of the private payers were already reimbursing for adolescent TMS down to either 17 or 18 years of age. So it is a nice tailwind, but we think the most significant impact of that is going to be in 25 and 26 million.

Okay. And then just as for the Q2 guidance, a little bit below the Street. Assuming most of it probably some these capital sales are being pushed out. But I saw the motor threshold test chart, it looks really strong towards the end of this quarter. So maybe just some puts and takes for what you expect for Q2 revenue?

Yes. Again, the capital equipment market is impacting all of med devices. And it's not that lenders are denying credit, but they're doing a lot more diligence. And so it's taking longer to get our transactions funded. That's one of the reasons why we continue to schedule our summits earlier in the quarter. Our first summit was scheduled 4 weeks before quarter end, and now we're scheduling them between 7 and 8 weeks before quarter end. And so we do forecast a rebound from Q1 for the NeuroStar sales. But again, 60% of our customers, or even slightly higher, are really single office doctors, and they are impacted by cash flow. And so not only are the claims being held up, but prior authorizations for new patients are also being held up. And so again, we do think it's going to recover, but some of the statistics that Keith mentioned previously, there's still some wood to chop before they fully recover. And then regarding MTs, you're right. It's -- that's a significant metric for us to watch. It was up nicely in the quarter. And quite frankly, it was very strong in April as well. So again, I think it's just more of a timing thing, which is why we're comfortable maintaining the full year guidance at this point.

Our next question comes from Adam Maeder of Piper and Sandler.

Solid start to the year and very nice U.S. treatment sessions number. I wanted to follow up on John's questions. And I guess just kind of wanted to see if we could get a little bit more granular with the temporal headwinds that arose in Q1 from Change, the cybersecurity issue, customer securing credit. Maybe just talk about kind of the impact in Q1 that you saw both from a system revenue and treatment session revenue standpoint? And then are you able to give us any numbers around kind of anticipated headwind in Q2? I think I heard modest impact. And then what's kind of baked into the full year guide for those transient headwinds?

Thanks, Adam. Yes, we do estimate that the Q1 impact was about $500,000 and it was primarily capital equipment sales. And again, with the reaffirmation of doing approximately 200 systems in the year, we do think there's going to be a recovery in Q2 through Q4. Not a big impact in treatment sessions. I would say the most significant impact that we saw was on collections. And so we had $20 million in U.S. revenue in Q4 of '23. You would like to think you'd be able to collect the lion's share of that in your first quarter, and we didn't. And so we estimate that we were probably short paid about $3 million. Again, we do forecast that to recover as the security issue was fixed, but it did have an impact on our balance sheet.

I'll just add one piece to it. On the capital equipment side, as Steve said earlier, -- the -- it's really getting the financing through. And it used to be that we could get financing done in 10 business days. And now we're looking at several weeks. So we do have a summit coming up. It's in Arizona. We have 75 providers coming to that summit. So it's -- the interest is certainly there. It's just, now with 7 weeks before the end of the quarter, are we able to get those systems through the financing process.

That's good color, guys. And a follow-up on the Q2 guidance, and sorry for the near-term focused question. The sequential quarter-over-quarter step-up is smaller than in past years and it certainly sounds like you guys anticipate, again, some kind of carryover impact from the temporal headwinds, but I guess I'm still kind of trying to square the $18 million to $19 million guidance range for Q2. Just any color that you can give us thus far on the trends in the business in Q2 and kind of how that may or may not be informing the Q2 outlook? And then I have one follow-up.

Yes. Again, the weekly metrics that we review as a team continue to be strong. But again, as I said to John, the majority of our patients are single-site offices, and they are very dependent upon reimbursement. And if they can't get cash in, it's difficult for them to spend money. And so again, we believe we took a responsible approach to setting guidance where it was, but it's by no means an indication that we're sensing weakness out there. It's -- this issue was out of our control. And until it's fixed, regretfully, it will have some impact near term on our business. Again, I think our reaffirmation a full year at this point, I mean, we're still only into early May tells you that it's going to be a good year.

And it's -- Adam, Keith again. You also said that our motor thresholds looked strong, and they continue to be strong. We just -- in speaking with several of our accounts and some of the big ones, their prior authorizations are taking longer to come through as a result of change health care. So we're seeing the activity out there, but we have to be sensitive to the situation with Change Healthcare.

Sure. That makes sense. And if I can squeeze in one more, just on the adolescence approval. Congratulations. I think I heard, Keith, you mentioned that this is the most newsworthy event since original FDA clearance. Maybe just talk about the strategy to kind of, I guess, pursue this new patient population, pursuing a new clinician base, which practices will you target? How do you grow the customer base but not the -- but at the same time, not lose focus on the existing customers, which have seen some pretty good utilization trends? So just talk about kind of the strategy and approach there.

Thanks, Adam. We submitted for this 510(k) approval back in June of last year. And we -- the soonest that we expected that approval was September 28. We have been geared up for it since that time and have a PR firm lined up, have a marketing plan all put together and have been adjusting it for the last 9 months. So we are ready to go to talk to adolescent psychiatrists with the adolescent nurse practitioners -- and we have a marketing campaign directed at the parents of the adolescents. So all of that will be kicked off on May 15th in New York City with our press event. So we're -- we think that there is significant interest. And as we said in the script, we have already seen it. And at our Summit, we have about 15 physicians that prior to the clearance had no knowledge of TMS in their practice and no thought that they would be able to use it to help the adolescents that they're treating. So I think this is a good opportunity for us.

Our next question comes from Margaret Kaczor at William and Blair.

I think I'd want to focus on treatment sales and use treatment growth. I mean, we're seeing an acceleration on a slightly tougher comps on a year-over-year basis relative to what we saw in Q4. You've got 2 quarters now of 20% plus, but I understand part of that is comps and so on. But it still seems pretty powerful. And then to the extent that you're talking about average local treatment growth over 30%, I mean, those are numbers that a few years back. I'm not sure anyone would have expected. So I don't know if that's Better Me Guarantee, if that's NSU, all of it all combined, obviously. But I guess, I'm just trying to dive into that a little bit more. It seems like if the average is over 30%, the folks in Better Me should be much higher than that. So one, is that the right assumption to be had? And then two, what does that mean for sustainable growth because that doesn't have adolescent it doesn't -- it assumes couple of hundred folks right now in Better Me Guarantee? So just trying to -- as we look towards 2025, understand what these trends could mean.

Thanks, Margaret. This is Keith. The Better Me Guarantee Program is working exactly as we had hoped. I actually think it's better than we had thought. With 204 sites in the program now, we are actually accelerating the access to the program. So we are going to add 50 new sites on May 15th and 50 more on June 3rd. We are seeing that if a site is not in the program, on average, they do about 3 patients a quarter. If a site has committed to be in the program and is working towards meeting all 5 of our standards, they treat about 6.2 patients a quarter. That if they're in the program, and they've met all the standards and they're keeping up with all of them, and we have to monitor them on a monthly basis, they are treating 10.7 patients a quarter. So we are doing everything we can right now to accelerate access into the program for the accounts that are trying to meet the standards. So I think now that we have a program that does incorporate NeuroStar University, which I would say probably has the greatest impact on the success of BMGP. I think we are demonstrating to these accounts that if they follow these steps, they will be successful in treating more patients and educating them and then getting them into treatment. So I think it is sustainable growth.

Okay. And maybe I'll keep going on this because it seems like a key topic, but now that you've had the tenure of folks going to NSU and the first tranche of BMG -- correct me if I'm wrong, I think, at least 6 months at this point. So are you seeing some of those trends and statistics that you had referenced to get even better, the longer that they are a part of it? And ultimately, where can you go? Because 200, 250, 300 by midyear as a part of the -- at least the BMG program -- or BMGP, sorry, of the 1,100 to 1,200 accounts that are out there, still seems like a sizable multiyear opportunity. Can you get most of them in there?

Our goal is by June 3, we'll have a little over 300 into the program. And I think that as we continue to get momentum, we will have somewhere 300, 350 to 450 in the program by the end of the year.

Okay. And does the kind of tranches or tenures of folks within these programs and NSU do their statistics continue better? Or do they top out at some point?

No, they get better and better, honestly. -- their motor thresholds on the people in the program continue to go up. Their -- We monitor whether they follow up with patient leads and follow up with [ PHE-10's ] and continue to be responsive to patients on the phone, and all of them are doing exactly what we need them to do and their business continues to grow. And now with adolescents, I think it is another opportunity for all of these accounts to be able to communicate with the parents of the adolescents.

Our final question comes from of Danny Stauder of Citizens JMP.

Yes. Great. Just wanted to ask quickly on average revenue per active site, nice to see another quarter of double-digit growth. It stepped down a bit sequentially. So I was just curious if this was more of a factor of normal seasonality? And then how should we think about this metric for the rest of the year, especially given the longer capital sales cycle we saw in first quarter and what's maybe implied in the second quarter?

Hey, Danny, it's Steve. Yes, there was some seasonality that impacted that. And then also, there's also, as always, a bit of variability in our overall site count. And so we are forecasting that metric to continue to improve. Again, with the increase in treatment session revenue and utilization, again, I think double-digit growth throughout the rest of the year, and that metric is not out of the realm of possibility.

Great. And then just one follow-up, touching back on the clearance in adolescents. Really good to see and you gave some great details on how you're approaching patient education and outreach here. But I just wanted to clarify, how should we be thinking about the impact of overall marketing spend? Is this already in your planned budget you're just shifting more dollars to this area? Or will the increase -- or will it increase the total? Just any more color there you could give would be great.

Thanks, Danny. This is Keith. Our marketing spend has been consistent for the last 3 years with the Better Me Guarantee Program, we are able to make those same dollars that we've been spending more efficient. So we're able to market directly around the better me guarantee providers and be able to monitor the patients as they go through the system into their practices and then whether they get treated or not. So our spend will be consistent with last year, and there is no plan to increase that budget.

This concludes the question-and-answer session. I would now like to turn it back to Keith Sullivan for closing remarks.

Thank you for your interest in Neuronetics, and we look forward to updating you on our next quarterly call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.