Neuronetics, Inc.

Good day, and thank you for standing by. Welcome to the Neuronetics Report Third Quarter 2022 Financial and Operating Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star-1-1 on your telephone, and you will then hear an automated message advising your hand is raised. 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 from ICR Westwick. Please go ahead.

Good morning and thank you for joining us for Neuronetics third quarter 2022 conference call. Joining me on today's call are Neuronetics President and Chief Executive Officer Keith Sullivan and the Senior Vice President, Chief Financial Officer and Treasurer 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 Neuronetic's 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 and 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.

Good morning, and thank you for joining us. I'll begin by providing an overview of the third quarter performance, followed by an operational update. Steve will then review our financial results. And I'll conclude with our thoughts on the balance of 2022 before turning to Q&A. Starting with our financial review for the third quarter, total revenue was $16.5 million, up 20% over the third quarter of 2021. This represents the third straight quarter of over 15% year-over-year growth, and the second straight quarter during which we delivered revenue of over $16 million. bringing us back to consistent levels of top line performance that the business has not seen since 2019. The strong performance was primarily driven by increased utilization in our per click accounts and the continued capital equipment sales growth. It is clear that the investments made over the last two years in the various marketing programs, our practice development team, and the patient awareness tools are paying off. U.S. Neurostar revenue was $3.9 million, up 51% over the third quarter of 2021. The performance comes as a result of the continued excellence from our commercial organization, who hit their stride in cultivating and converting a strong pipeline, which was bolstered by yet another sold-out Neurostar summit. The U.S. treatment session revenue was an all-time record of $11.9 million, up 16% over the third quarter of 2021. The reckoned revenue was the result of improving utilization due in large part to the local per-click customer utilization rates increasing 20% year over year. These positive trends come as a result of our investment in the five-star training program, the expansion of our PHQ-10 tool into more offices, and greater availability of practice management training. Now turning to operational highlights. Our first focus area is increasing customer and patient awareness. Similar to previous quarters, we hosted another completely sold-out Neurostar Summit. held in Charlotte, North Carolina at our recently opened Neurostar University. This event included over 60 attendees representing 42 practices. Feedback from this event was phenomenal and resulted in the conversion of a number of highly qualified prospective customers, as well as the highest number of systems sold in a single day. Our newly launched patient marketing campaigns have delivered tremendous value, both in terms of increasing our overall patient awareness of NeuroStar and in providing patients better access to information. For example, our recently launched Tap into New Possibilities campaign aimed at driving awareness among patients and their caregivers drove over 30 million impressions in Q3. a 150% increase as compared to campaigns run in a prior year, resulting in thousands of new patients beginning their search for a NeuroStar treatment. Our relationships with NeuroStar partners, including Drew Robinson, a former Major League Baseball player, and Dr. Melissa Shepherd, have steadily gained traction. Drew continues to share his depression journey and the role Neurostar had in giving him a new possibility and a hopeful future. He continued to post social media content in September on World Suicide Prevention Day, and in July to draw attention to the need for increased focus on mental health in the athletic community. These partnerships drove nearly 2,000 potential patients directly to our website. to learn more and help drive significant increases in NeuroStar-related web searches, both sequentially and year-over-year. The implementation of the proprietary PHQ-10 tool, a digital patient assessment tool which allows our NeuroStar practices to easily identify patients within their practice who are candidates for and expressed interest in a NeuroStar treatment have been extremely fruitful. To increase the tool's impact, we will keep expanding it to more and more practices. To support this rollout, we released a number of TrackStar upgrades, which helped streamline the patient journey by bridging our PHQ-10 tool with our HIPAA-compliant TrackStar patient data management system. making it even easier to identify new patients and those needing retreatment. In September, we hosted a ribbon-cutting ceremony to celebrate the grand opening of Neurostar University in Charlotte, North Carolina, where we were joined by 75 attendees, including local government officials, Neurostar patients and providers, and leaders in the mental health industry. The event was highly successful, underscoring the need for an interest in advanced mental health treatments. It also garnered attention from local media sources, with segments on both NBC and Fox Evening News, which generated over 20 million combined impressions. NSU will teach new and existing customers how to become NeuroStar experts, connect with other specialists in their field, and grow their practices using clinical education, enhanced patient awareness, and consultation techniques. To date, we have hosted four sold-out customer classes, and the two additional classes scheduled during the remainder of the year, both of which are already at capacity. One attendee who has been utilizing NeuroStar for over 12 years said, and I quote, I thought I knew everything there was to know about Neurostar and connecting with patients until I attended NSU. This was a wonderful testimonial from one of our best customers. As we continue to evolve the capabilities of the platform, as well as the support services that we offer our customers, These classes will continue to be highly beneficial for both new and existing customers as they seek to leverage the power of NeuroStar to help more patients suffering from mental disorders. Our second focus area is the continued optimization of our commercial organization. In the quarter, we implemented new Salesforce reporting tools to help our PDMs better understand our customers. their patient base, and utilization trends. These tools allow the PDMs to help our accounts set goals and measure their progress towards achieving them. In particular, the NeuroStar Business Review gives accounts a new way to look at and innovate their practices in ways they were not able to before, allowing them to more efficiently and more effectively tap into their existing patient base. and help those who would benefit from a non-drug alternative to manage their depression and anxiety. Additionally, due to the new account growth over the course of the year, we will follow the plan we previously outlined by adding four additional PDMs early next year. These additions will support the growth in our install base and ensure we provide our customers with the highest level of service and support. Our third focus area is growing the number of exclusive commercial partnerships. We will continue to be excited by the strong relationships we have built with our service provider customers. Now that the word is out about our excellent ongoing support, training, and marketing initiative, Several providers with NeuroStar and competitive systems have reached out to benefit from the support we provide. Most recently, Alleviant Health Centers, an Arkansas-based network of full-service mental health clinics, signed a four-year agreement and switched from a competitive system to NeuroStar, primarily due to the level of support we provide to help them achieve their growth target. We have seen good traction from the partnerships and expect a more material impact on the business throughout the rest of the year and in 2023. Lastly, I want to provide an update on our clinical and regulatory progress. In May, we received FDA clearance for NeuroStar as an adjunct treatment for the adult patients suffering from obsessive compulsive disorder. Our two-stage launch has been going smoothly, and we have heard good feedback from our physicians. The first stage started in early July with the training at 40 pilot sites. The major finding was the motor threshold training has been easier than anticipated. The next phase of our launch has begun, where we plan to roll out this indication to all of our customers over the next several months. In August, we received 510 clearance for Detect, a motor threshold accessory. Detect simplifies the motor threshold determination for physicians by visually reporting the magnitude of the finger movement during the motor threshold test. As a result of this automated determination, it now only requires one person to do this testing versus two on all other systems. DTECH is compatible with all new and existing Neurostar systems and was rolled out nationally in mid-September. The initial demand for DTECH was high, with over 100 sold in the quarter. We have now integrated it into our training programs and at Neurostar University. Now for a quick update on the expanded Medicare coverage. Two Macs recently published and proposed Medicare coverage updates which would increase TMS eligibility by nearly 8 million covered lives. The number of prior medication failures for TMS eligibility for individuals with major depressive disorder has been reduced from four to two under a new coverage policy published by CGS, which will take effect on December 4th, 2022. The same reduction from four to two prior medication failures is being considered by the NGS, who is also considering TMS coverage for OCD. The Neuronetics Health Policy and Reimbursement Team was crucial in working with Neurostar providers to address payer policy limitations, which has been a major factor in these favorable covered decisions. We are encouraged to see the payers adopting policies that reflect TMS as a standard of non-drug treatment for mental health. We are delighted by the performance in the quarter, as we are seeing the benefits from our revamped Salesforce, marketing programs, and physician and patient education initiatives. These successes further support Neuronetics' longstanding market leadership position in the TMS space, underlined by Neurostar having been used to deliver over 5 million treatment sessions on more than 141,000 patients to date. With that, I'd like to turn the call over to Steve.

Thank you, Keith. Total revenue for the third quarter was $16.5 million. an increase of 20% over third quarter 2021 revenue of $13.8 million. U.S. Neurostar advanced therapy system revenue was $3.9 million, representing a 51% increase as compared to the prior year revenue of $2.6 million. In the quarter, the company shipped 50 systems, Of these systems shipped, 49 were recognized as Neurostar capital revenue, and one system was recognized as an operating lease. Up from 40 systems shipped in the third quarter of 2021. U.S. treatment session revenue was $11.9 million, an increase of 16% over third quarter 2021 revenue of $10.3 million. Of note in the quarter, Local per click customer utilization, which excludes service providers, increased 20% year over year. In the third quarter of 2022, revenue per active site was approximately $11,400 compared to approximately $11,200 in the prior year quarter. Gross margins were 78%. compared to the third quarter 2021 gross margin of 77%. Operating expenses during the quarter were $20.4 million, an increase of $2.6 million compared to the third quarter of 2021. The increase was primarily driven by our expanded sales force, the opening of NSU, some additional headcount in product development and clinical, as well as increased costs from inflationary pressures. During the quarter, we incurred approximately $2.1 million of non-cash stock-based compensation expense. Net loss for the third quarter of 2022 was $7.6 million, or 28 cents per share, as compared to a net loss of $8.2 million, or 31 cents per share, during the third quarter of 2021. EBITDA for the third quarter of 2022 was negative $6.1 million as compared to negative $6.9 million for the third quarter of 2021. Moving now to the balance sheet. As of September 30, 2022, cash and cash equivalents were $73.7 million. Now turning to guidance. For the full year 2022, we now expect revenue in the range of $63 million to $64 million. For the fourth quarter of 2022, we expect revenue of $16 million to $17 million. We continue to expect total operating expenses for the full year 2022 to be in the range of $86 million to $88 million. In line with our previously announced path to profitability, we remain confident in our ability to reach cash flow positive during 2024. Between our top line growth expectations, our strong gross margin profile, and the prudent management of our operating expenses, our path to profitability remains on track. I would now like to turn the call back over to Keith.

Thank you, Steve. We are pleased to see the impact of the initiatives we've rolled out over the past two years taking hold with sustained results, and we are in great shape to round out the year. As you can see from our guidance, we expect to finish out 2022 demonstrating strong growth. We will continue to focus our efforts on increased customer and patient awareness, the continued optimization of our commercial organization, leveraging exclusive commercial partnerships, and continuing to advance our clinical and regulatory programs. Our team has demonstrated significant progress and I am confident in the team's ability to take advantage of this opportunity over the years to come. Before turning to Q&A, I wanted to highlight a significant achievement as part of our customer and patient awareness efforts. Yesterday, Neurostar spokesperson Drew Robinson was featured in a segment called Mind Matters with Carson Daly on the Today Show. His message of encouragement to people struggling with mental disorders was that help is always there, and it takes strength to reach out and ask for it. We are proud that Neurostar is part of Drew's mental health recovery, And we look forward to a continued partnership with Drew as we collectively seek to bring relief to as many patients as possible who are suffering from treatment-resistant depression and other mental disorders. With that, I'd like to open the line for questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from the line of Adam Mater of Piper. Your line is now open.

Great. Well, thank you for taking the questions here, Keith and Steve, and congrats on the progress. Maybe just to start on Q4 and the implied, well, I guess you provided Q4 guidance I think that implies flattish sequential revenue at the midpoint quarter over quarter versus Q3. That seems maybe a bit conservative to us as I think we typically see more of a sequential step up quarter over quarter, you know, in Q4 looking at past years. So maybe just talk about the exit momentum that you had in the third quarter, what you're seeing thus far in Q4, just any key assumptions in that outlook. Maybe it's just a little bit of conservatism. Thank you.

Thanks, Adam. Yeah, I would just classify the guidance as being responsible. We still are faced with three health issues out there with COVID, the flu, and RSV. And so we certainly didn't want to get ahead of ourselves. We do agree that Q4 is traditionally our strongest quarter from both capital and treatment session perspectives. So calling me conservative, I guess, is flattering. And, you know, I think, like I said, I think it's just a responsible setup for another beat and raise as we end the year.

Okay. Understood. That's helpful, Steve. Thank you for that. And then, you know, we're at the time of the year when folks are starting to look ahead to 23 and certainly recognize you're not at a point to give guidance at this juncture, but wondering if you're willing to give us some puts and takes around the setup for 2023. I show consensus, pre-call estimates at around $73 million. I think that's 19% growth every year. Any reaction to that figure or just any broader puts and takes that you can provide, you know, sessions growth versus

versus systems would be much appreciated thank you yes Adam I think our recent performance really speaks to itself at the beginning of the year we still had you know some impacts from Omicron we had a very slow January and really have rebounded very nicely since q1 you know I would say if you look at our growth rates year-over-year for q2 q3 And even what's implied for Q4, I think you get a sense of, you know, where we're heading for 2023. We certainly don't anticipate any steps backwards. You know, the headwind should continue to lessen. And, again, I would be comfortable with, you know, our current year-over-year performance into 2030.

Very helpful. Thank you, Steve.

Thank you, Adam.

Please stand by for our next question. Our next question comes in the line, Margaret Tazor of William Blair. Your line is now open.

Hey, good morning, everyone. Thanks for taking the questions. I wanted to start with utilization, because obviously a really nice pickup here is like on the consumable side. And I'd imagine there's very minimal impact from Neurostar University, at least at this point. So I guess I'm just trying to figure out what's the primary driver. Is it the PDMs are finally picking up traction, and so that's a durable benefit that you can see to see going forward? You know, is it something that you saw in maybe the larger TMS centers or something else? It's obviously a nice number.

Yeah, thanks for the question, Margaret. So our utilization has been steadily ticking up. I think our practice development managers in the field have been doing a great job putting out our five stars to success, talking about the precision pulse program, and really helping the accounts focus their education and marketing onto patients that can benefit from NeuroStar treatment. So our biggest growth this quarter was really in our per-click accounts.

which is demonstrating to us that the uh the programs that we have put forth are working okay yeah and so you know i think part of the the other piece of this is try and understand the durability of that and we've seen you know some stronger quarters and the next quarter maybe a tick down in part because of coven and other things so I'm just trying to see if you guys can give us any color in terms of the durability of that, any leading indicators that support, you know, the forward look. And I'll sneak in a third question on the side just to follow up on Adam. When you talk about kind of seeing the same growth as implied kind of year to date, is that kind of a mid-teens number? Am I doing that quick math the right way? And is that what you guys are looking for for 23? Thanks, and congrats.

Hi, Margaret, Steve. Just regarding the 2023 expectation, I would weight the Q2, Q3, and Q4 performance more heavily than what we saw in Q1. And so, I think you're looking at the mid-teens maybe slightly higher into next year.

And I'll take the other part of your question, Margaret. I think on the durability of the utilization and the revenue, and we look at both. So we want to make sure that our sell-in is equal to the revenue and to the utilization. When we look at these accounts and using our PHQ-10, we're helping these accounts identify patients that are not only candidates because they failed the proper number of drugs, but are waving their hand saying we want a non-drug alternative. We are still just scratching the surface on deploying those PHQ-10s into our accounts and getting the accounts educated on how to capture those patients. So from a durability standpoint, I think we will see our normal seasonality next year, but I believe that we will continue to grow on our per-click business.

Thank you, guys.

Please stand by for our next question. Our next question comes from the line of Bill Klovanek of Canaccord. Your line is now open.

Great. Thanks. Good morning. Just a couple questions here just on kind of operations in cash to start with. SG&A was down pretty significantly on a sequential basis with revenues that were slightly up. I was wondering if you could just help us understand the moving parts there. And then it was nice to see the cash go up sequentially this quarter. And I think some of that was getting some cash back from one of your prior partner investments. But how should we think about just cash usage over the next 12, 18 months? and maybe major uses of cash.

Hey, Bill, Steve. Yeah, you're correct with the Q3 cash positivity. We did receive repayment of the $10 million term loan from Success TMS as part of their transaction with Greenbrook. So that did help us with a decent influx. You know, historically Q3 and Q4 are lower cash burn quarters. We are forecasting a significantly lower burn in Q4 than we traditionally see. You know, we've started the operating planning process for 2023. Our cash target is quite a bit lower than what it was for 2022. We've repeatedly stated that our OpEx was artificially high in 2022. A lot of one-time events surrounding the sales team and some marketing initiatives, those will not recur in 2023. We're going to be able to leverage OpEx and bring that cash burn down. Obviously, it's a function of working capital and the revenue growth next year. I don't want to be pinned down to a number, but it will be, I would say, significantly lower than 22 and really set us up for that cash flow break-even target in 2024.

Thanks. And then if I could just ask on the PHQ-10 tool, you bring that up a lot. I think we've had some discussions. My understanding, and correct me if I'm wrong, is really the difference between PHQ-9 and 10 is one extra question that they're asking the patient. So it's a pretty simple tool. One, do I understand that right? Two, I think how penetrated or how many of the account base do you have it into today? And is this something do you think will be 100%? And if so, when or kind of what's the final target of penetration? for utilization of that tool in existing accounts and new accounts. Thanks for taking my questions.

Yes. Hi, Bill. This is Keith. You have the PHQ-10 right. There are many pieces to it, though, so we do add that 10th question onto it, but it's the way that we also capture the information and bring it back to the account that helps them identify that patient and then educate them. So right now we have PHQ-10s in just slightly less than 25% of our accounts. And we are growing that on a daily basis. So we have seen that it is the number one tool to help us drive awareness to these accounts. But we are deploying it in a way that we have to do education so that they the accounts know how to then talk to the patient itself. So it's a great tool, but it's not just something that we can put into an account and have them know how to use it, know how to talk to the patient.

Thanks for taking my questions.

Please stand by for our final question. Our final question comes from the line of Marie Thibault of BTIG. Your line is now open.

Hi, good morning. Thank you for taking the questions, and congrats on a strong quarter. I want to ask my first question here on the system side. Notice that ASPs seem to step up meaningfully. Wondered if that was linked to the DETECT motor threshold tool and what might have been driving some of those stronger ASPs. I noticed that you did talk about Detect Revenue, so wondered how that's being priced or what sort of contribution we might expect from that going forward.

Hi, Marie. This is Keith. I think your question on our system sales is one that we look at on a weekly basis. Our ASPs are going up because Honestly, the price of the system is not the impediment to them putting a system into their office. So most of our accounts lease them, and the reps are able to sell at a higher level because of the value of the programs that we are bringing to the table. So ASPs are steadily creeping up, and our accounts are continuing to pay it without a big issue. So I missed your second question.

Yeah, it's on DETECT.

So DETECT we launched in the second week of September was when we were able to get our first systems out the door. It generated a little over $100,000 in revenue for us in the quarter. We sell the system for a little more than $2,100. and it is in the new system pricing as of October 1st. We have raised the price of the system and are including Detect with it.

Okay, that's very helpful. And then I wanted to ask my second question here on treatment volumes, and I think you called out revenue, treatment revenue per active site, $11,400. I think that's up about 2% year-over-year, maybe 1% sequentially. I want to get an understanding of just how high that could go or what maybe your best sites are doing in terms of revenue per active site at this point, just to give us sort of a target to work toward long-term. And thanks for taking the questions.

Hi, Marie, Steve. Yeah, I mean, that number on a traditional per-click perspective is just under $45,000 annually and treatment session revenue, you know, that represents two and a half or so patients per day over the course of the year. You know, we think we should be able to get that to four or five. So essentially doubling where we are and getting patients or customers to that 75 to $90,000 annually in treatment session revenue. The per click segment, which is about 20% of our overall sites, their utilization was up 20% quarter over quarter. So the programs that our practice development managers are employing, along with the PHQ-10 and some other tools, are certainly paying dividends. And I guess the most simplistic view of this, if we can get a customer to add one patient per day, There's no reason why they can't add two. The data certainly supports it. The programs support it. The support that we give our customers supports it. So we've been in that $45,000 range, I think, since I've been here. And now it really feels like we have the traction and really the support from the PDM. So I think we're going to see nice increases over the next few years.

At this time, I would like to turn it back to Neuronetics President and CEO, Keith Sullivan.

Thank you, Operator. Thank you again for joining us on the call today, and we look forward to updating you on the next quarterly call.

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