Ladies and gentlemen thank you for standing by and welcome to the Second Quarter 2020 Financial and Operating Results 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 Mr. Mark Klausner. Thank you and please go ahead sir..

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 could 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 on March 3, 2020 and 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 the 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 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', Chief Financial Officer Steve Furlong..

Good morning everyone and thank you for joining us. With me on today's call is Neuronetics' newly appointed President and Chief Executive Officer Keith Sullivan.

After Keith provides an introduction, I will shift to a high-level overview of our second quarter performance and recent trends in the business after which I will review our second quarter results and then provide our thoughts on the balance of the year.

I will then turn the call back over to Keith for his thoughts on near-term initiatives before opening the line for questions. With that I would like to hand the call over to Keith.

Keith?.

Thanks Steve and thanks everyone for joining us for our call today. I want to begin by saying how excited I am to be joining Neuronetics. I'm incredibly enthusiastic about the long-term opportunity that exists for the company to improve the quality of life for patients suffering from psychiatric disorders.

Let me give you a brief overview of my background. I've been in the medical device space for almost three decades. Before joining Neuronetics, I spent over five years at ZELTIQ in leadership roles within the commercial organization, ending my tenure as President and Chief Commercial Officer at the time that Allergan acquired the company in 2017.

Prior to ZELTIQ, I have held leadership roles at a variety of pharmaceutical and medical device companies including; Medicis Pharmaceuticals, Reliant Technologies, Medtronic and Coherent Medical.

Before the Neuronetics opportunity arose, I had independently spent a fair amount of time examining the TMS industry as a whole, as well as Neuronetics specifically. In fact I was a consultant to the company on two occasions prior to and immediately after the commercial launch of NeuroStar.

While a professor at the Mason School of Business at William & Mary, I wrote and taught a case study on the TMS-only provider business with a focus on Greenbrook TMS, Neuronetics' largest customer. In addition, I have known Bruce Shook for years.

As you're aware Bruce recently rejoined Neuronetics as a Board member after having cofounded and led the company for a number of years as CEO. I'd like to share with you what made me excited about the opportunity and why I think the company has such a bright future.

First, we are the unquestioned market leader in a rapidly growing in-demand therapeutic sector. We have more systems installed and have treated and helped more patients than all other TMS providers combined. Second, we have a tremendous technology supported by the highest quality clinical data in the industry.

Because of this, our systems are proven, reliable and clinically robust. Third, we have a well-established commercial infrastructure that has been reorganized over the last few months and now has the potential to drive meaningful growth.

Our focus is to drive greater awareness of the benefits of NeuroStar amongst patients as well as provide meaningful support to our psychiatry providers. And lastly, we have a great team here at Neuronetics and I'm impressed with their knowledge, motivation and dedication to our mission.

Having said that, I believe that there are areas of the business that can be optimized to best take advantage of the opportunity that exists.

Only a few weeks on the job, I am currently in the process of digging into every aspect of the business as well as talking to customers and patients to make sure that I fully understand the current needs of the market.

Using those insights, we will put them into the -- place the optimal strategy to drive the highest quality therapy to the greatest number of people.

While it is too early to provide a detailed outline of our long-term strategy, what I know at this point is that with the tremendous foundation that exists today, we can take this business to the next level and drive long-term success allowing us to help more patients suffering from psychiatric disorders.

With that, I'd like to turn the call back over to Steve to provide an update for the second quarter.

Steve?.

Thanks, Keith. Total revenue for the second quarter was $9.7 million, down 41% over the prior year, primarily as a result of COVID-19 which persisted throughout the quarter, causing an impact to both our capital equipment sales and the utilization of systems in the field.

Given the challenges presented by COVID, we are pleased with the performance of the business during the period. On the capital equipment side after an April in which new system sales were effectively shut down, we saw a strong sequential uptick in May and June. Another key metric of performance is per-click treatment session volumes.

While these volumes continue to slow down in May, we have seen a reversal of that trend in June and we now believe that May will represent the low point for treatment session volumes for the year. At the end of the quarter, we estimate that approximately 80% of our customers were back up and running up from 70% that we noted on May's call.

Based on the 80% of customers who are on our cloud-based TrakStar management tool, we have seen an approximate 70% increase in average daily treatment session volume from the low point in early May through the end of June. We have seen similar trends and new patient starts as defined by patients doing a motor threshold test.

After hitting a trough in early May, new patient starts at the end of June are approaching the volumes we were seeing in January and February. Capital purchases have begun to come back, but at a slower rate than the rebound in system utilization.

For much of the second quarter, our BDMs were frozen out of the market due to travel and social distancing restrictions. Where these restrictions have started to ease, BDMs have begun to get back out into the field to prospect accounts. We do anticipate that capital sales will continue to rebound albeit at a slower rate.

I would like to provide an update on some key topics related to the business. As a result of the current environment, we are seeing an increased focus on mental health throughout the United States which recent prescription data has reinforced.

In an April Express Scripts report, data showed that the use of prescription drugs to treat mental health conditions increased by more than 20% between mid-February and mid-March with prescriptions for antidepressants increasing by 18%. Importantly, when looking at prescriptions filled during the week of March 15, 78% were new prescriptions.

This indicates a significant increase in patients suffering from depression who are seeking care.

While this is a point in time estimate during a notably stressful period in American history, we continue to believe that there will be a significant uptick in depression patients many of whom will ultimately fail pharmaceutical treatment and will be seeking an alternative therapy.

As we announced in April, we restructured our commercial organization as part of our corporate reorganization. This included a substantial reduction in headcount within our sales team.

At the end of the quarter that team consists of approximately 45 employees spread between the three key roles, business development managers or BDMs, who are focused on capital sales, NeuroStar practice consultants or NPCs, who are focused on operationalizing and driving the utilization of systems within practices; and clinical training consultants or CTCs who are focused on training psychiatrists and staff on proper usage of systems once installed.

At the end of the second quarter, we had approximately 16 BDMs, 17 NPCs and seven CTCs. While we added back a few NPCs and CTCs in July to service the improving system utilization, we may selectively increase the size of the team in the future.

We believe the size and structure of the sales force will allow us to generate top line growth by focusing on driving increased system utilization and by more effectively deploying our BDMs.

On our last call, we noted that with psychiatrist offices closed and patients being held under social distancing restrictions, we reduced spending on certain marketing initiatives to conserve cash. We did however continue to actively invest in areas that we think will benefit the company our customers and patients over the long run.

Initiatives like the call center pilot, virtual training and digital marketing. Our call center pilot connects patients who visit our website to a live call center operator who can then schedule an appointment directly with the psychiatrists in their area.

The early indications from this pilot are exceeding our expectations and we are in the process of planning for a broader launch later in 2020. In response to the COVID pandemic and a need to continue to support NeuroStar practices staying open to treat TMS patients, we offered a series of webinars in the second quarter.

Over 900 individuals registered for these webinars on topics ranging from peace of mind for patients that provided videos on how to prepare the office and treat patients with TMS during COVID to TMS coverage and reimbursement update that outlines several recent positive changes in coverage.

On the digital marketing front, we continue to leverage this cost-effective method to educate patients and psychiatrists on the benefits of NeuroStar Advanced Therapy. We have also seen notable progress in our reimbursement landscape recently.

Our FDA current indication is adult patients, who have failed to achieve satisfactory improvement from one prior antidepressant medication. However, many payers have taken a more conservative approach in terms of the number of failed drugs, before they will reimburse for NeuroStar Therapy.

As a company, we have been working with payers to change that and make NeuroStar Advanced Therapy more readily available for patients seeking to manage their depression. During the quarter, we had several notable wins including Cigna, which represents 16 million covered lives.

We were able to reduce pharmacotherapy criteria from four failed drugs to two failed drugs or intolerance to one medical trial.

Aetna, which represents 22 million covered lives we were able to extend coverage to include patients between 18 and 21 years old, where it previously had been exclusively for 21 years old and over added a provision for retreatment approval based on 50% improvement, and reduced pharmacotherapy criteria from four failed drugs to two failed drugs.

And finally, HCSC/Blue Cross/Blue Shield which represents 15 million covered lives we were able to reduce pharmacotherapy criteria from four failed drugs to two failed drugs.

We view this as a meaningful progress towards making it easier for patients to get access to NeuroStar Advanced Therapy and should lead to an increase in new patient start volumes over the longer term. We will continue to work to make this shift more broadly adopted among all payers. Shifting gears to our financial performance.

Total revenue for the second quarter of 2020 was $9.7 million, a 41% decrease compared to the second quarter 2019 revenue of $16.6 million. This was primarily a result of the COVID-19 pandemic, related governmental responses and resulting economic turmoil. U.S.

NeuroStar Advanced Therapy system revenue for the second quarter of 2020 was $2.3 million, a decrease of 49% versus second quarter 2019 revenue of $4.6 million.

The decrease was primarily driven by a lower number of NeuroStar systems sold in the quarter, lower blended NeuroStar capital system ASPs due to a higher mix of sales type leases during the quarter, as well as lower other revenue related to fewer HP Coil upgrades sold.

In the quarter, the company sold 35 systems, down from 61 systems in the second quarter of 2019 as a result of the impact of COVID-19. During the quarter, we saw our installed base increased by 13% to 1,122 systems, a net increase of 146 systems from the second quarter of 2019 and a net increase of three systems since March 31, 2020. Turning to U.S.

treatment session revenue. U.S. treatment session revenue was $6.5 million for the second quarter of 2020 a decrease of 40% over the prior year. Average revenue per system was $5850 during the second quarter of 2020 compared to $11,651 in the prior year quarter. Both of these declines were driven by COVID-19-related practice shutdowns.

Gross margin for the second quarter of 2020 was 76.2% compared to second quarter 2019 gross margin of 74.8%. The increase was primarily a result of a change in the product mix of revenues versus the prior year.

Operating expenses during the second quarter of 2020 were $14.3 million, a decrease of $4.7 million compared to $19 million in the second quarter of 2019. The year-over-year decrease was primarily due to reduced sales and marketing expenses, including trade shows and advertising, travel expense and personnel costs.

On a sequential basis, operating expenses decreased $4.7 million from $19 million during the first quarter of 2020, as a result of the implementation of our cost saving initiatives. Net loss for the second quarter of 2020 was $7.8 million or $0.41 per share as compared to second quarter 2019 net loss of $7.1 million or $0.39 per share.

EBITDA for the second quarter of 2020 was negative $6.2 million, as compared to the second quarter of 2019 EBITDA of negative $5.9 million. Moving to the balance sheet.

As noted earlier, we have put in a significant amount of effort aimed at ensuring that we have adequate capital resources and liquidity to support the business over both the near and long term. As of June 30, cash and cash equivalents were $54 million.

We remain focused on conserving capital and earlier this year instituted a number of cost reduction initiatives. We expect to realize the full impact of these cost reductions in the third and fourth quarters. The company continues to project total operating expenses for the full year 2020 to be in the range of $58 million to $60 million.

Going forward, we continue to expect quarterly operating expenses to be in the range of $12 million to $14 million. And at those levels we believe that we are likely to achieve operating income breakeven that revenues between $18 million and $20 million per quarter. Moving on to our outlook for the balance of the year.

We believe that April and May will be the worst-performing months of the year causing the second quarter to be the worst-performing quarter of the year. Looking forward, we expect to see modest sequential recovery in both the third and fourth quarters. I would now like to hand the call back over to Keith.

Keith?.

Thanks, Steve. Before opening the lines for questioning, I'd like to outline the areas of the business that we will be focused on in the near-term. First is to drive awareness of TMS, as a very safe effective therapy for depression.

We plan to conduct market research to identify the proper target audience, the messaging that resonates with them and the most efficient way to communicate with them. We currently have a significant number of NeuroStar Advanced Therapy systems in the field, and we will be focused on working with our customers to make all of these systems successful.

The second area of focus is our commercial organization. The leadership team has adjusted the field sales team to drive treatment session volume and revenue per system.

Once the market data is collected, we can create the proper tools to arm our NPCs with what they need to help our accounts with educating depression sufferers on the benefits of TMS to help convert them to patients.

This is a process that will take some time to deploy, but we are confident that we can be a valuable partner with our accounts to make them successful and help their patients.

In my prior experience in the aesthetics space, it was not too long ago we would walk into a practice where the physicians had little to no experience generating patient demand and were not actively driving new patient volume. We were able to drastically change that through coaching and demand generation.

We believe that the same can be done with the psychiatric community. With the power of social and digital marketing as a tool for both driving awareness and generating demand, we can partner with these practices to build a thriving business treating patients and supporting their growth.

When we achieve this growth, it will be a catalyst to drive additional system sales. Lastly we are accelerating our indication expansion efforts in an effective and efficient manner. We have long believed that the NeuroStar platform can and should have a much broader applicability within the treatment of psychiatric disorders.

As such, we will be evaluating our go-forward strategy to make sure that we can progress through the regulatory process more efficiently and bring new indications to the market sooner. I'm very excited about what the future holds for Neuronetics.

Throughout the pandemic we have put into place a highly proactive, strategic set of initiatives that put us in a position of strength that will set us up for success as the world continues to reopen.

Building on that foundation, we believe that by executing our marketing plan coupled with our proven technological advantages, robust clinical evidence and future additional indications, we will continue to expand our leadership position in the field of TMS and have a greater number of patients achieve relief from debilitating mental illness over the near, medium and long-term.

With that, I would like to open the line for questions..

[Operator Instructions] Our first question is from the line of Margaret Kaczor with William Blair..

Hi, good morning everyone. Thanks for taking the question. A few for me. Just to start COVID -- the COVID updates you guys gave are pretty meaningful. Sounds like maybe the new patient starts are nearly back to normal.

So, first, can we say that it's fair to call new starts between 90% and 100% of pre-COVID levels? And then second, how long does it take for those new patient starts at this rate to get treatment revenue back to that pre-COVID level?.

So thanks for the question Margaret. And yes it is safe to say that the current new patient starts are at pre-COVID levels. And so we are anticipating those favorable trends to continue throughout Q3 and Q4, assuming we don't get hit with a second stage.

Obviously once the new patient starts -- traditionally 97% of those patients will continue through the approximately 36 treatment sessions for the therapy. And so again, we are forecasting that I would say modest sequential growth to continue throughout 2020..

Okay. And that sounds a little conservative to us especially on the back of what the reimbursement decisions that you did talk about this quarter.

Can you give us any background on those? How long were you working on them? And how do you compare these relative to some of the prior reimbursement decisions that you guys have had?.

Yes. So we have an employee dedicated on working with our providers to ensure that the reimbursement does get to the levels that were indicated, which is one failed drug treatment. So these are really ongoing efforts and not something that was more definitive in terms of a time line. And I expressed this during our last call.

I mean this is critically important, really for the patients. If the payers are requiring four failed drugs for reimbursement, it could take a patient between 12 and 24 months of failed drugs which accompany multiple side effects potentially, before they're able to get to TMS therapy.

And so, we view the four failed drugs to two as being a huge step for these three payers. Again, ultimately, it would be great if we could get consistent reimbursement coverage for the indication of one failed drug, but those efforts do continue on a daily basis and we are extremely pleased with those decisions in the second quarter..

Okay. Yes. And then last one, if I could. Keith, you've been around a while. We've known you for a while at ZELTIQ.

How would you compare maybe your initial thought processes going into ZELTIQ versus Neuronetics? And as you think about where you're going to spend your time over the next 12 months, is it customer focused? Is it reimbursement decisions? And what would you define as a success a year from now?.

Well, good to hear your voice, Margaret. It's been a while. I think, that as I mentioned in my remarks, I think, there's an opportunity to build greater awareness within the patient community on TMS.

And I think that, to-date the company has done a good job, but I think we need to update the market research to find out who is our target audience today and then how to get to them. So I think we are doing the call center. We're doing digital and social marketing.

But I think over the next 12 months, we'll be able to refine that and be able to do a better job at targeting those patients and building the awareness. Secondly is, also helping the accounts themselves, be able to bring those patients in and then convert them. So it's similar to the opportunity that was at ZELTIQ.

There's always a little nuances with each business, but I think that there is a chance -- a strong chance -- that we can take some of the learnings from that and apply them here..

Got it. Thanks. Appreciate it guys..

Thank you..

Your next question is from Matt O'Brien with Piper Sandler..

Hi, guys. This is Drew on for Matt. Thank you for taking the question. I wanted to push just a little bit on the COVID trend for some of your downstream customers. Obviously, good to hear on the new patient side.

I understand that patient throughput may be a little bit more challenging, as there are a lot of numerous requirements for bringing the patient back in office.

But I guess, just stepping back a little bit, what brings the 20% of signers that you mentioned that are closed back online? I mean is that primarily related to regional outbreaks of COVID? Is there any concern that some of them could be permanent closures or something else?.

Yes. What we're seeing Drew is, it's really geographically focused at this point. So there are still significant hotspots throughout the country and a lot of those states are actually where we have a lot of NeuroStars systems.

So we don't anticipate a lot of permanent shutdowns, but some of these centers are obviously still impacted by local and governmental restrictions. So it may take them longer to restart. Again, if you look at Illinois and Chicago, that one in particular has been slower than most to restart and regain the traction.

But ultimately, as we work through the pandemic, we do believe that the majority of customers that are presently shut down will come back online..

Okay. That's helpful. And then, I just was wondering if you could kind of speak to some of your priorities to COVID here. You've made some adjustments on the expense side. It sounds like you said that the capital environment would be just a little bit more challenging for a little while here.

Are your customers receptive to the operating lease type model in this kind of environment still? And then I guess are there any plans to push a little more aggressively on the treatment session side with some of your existing customers to help offset any weakness you might see in capital? Thank you..

Sure. I mean, we don't offer operating lease financing. What we have is what we term sales type leases, which prior to 2019 could be considered operating leases. But we only offer them to a handful of customers. It's really just targeted towards the TMS-only service providers.

Again, our strategy with that subgroup of customers is to make sure they preserve their capital, so they can continue to expand as opposed to tying up hundreds of thousands of dollars in NeuroStar capital equipment sales, which could slow their expansion efforts. So, it's a very strategic partnership with our largest customers.

Secondly, regarding ASPs on treatment sessions no. We don't see discounting being necessary. The reimbursement for our treatment sessions, and again, this varies by payer and also geography, so it's certainly not the same amount of reimbursement throughout the country, but it is a very favorable economic picture for psychiatrists and other customers.

Again, even if you assume an average of $200 reimbursement per treatment sessions, the payback on our machines is about a patient in a year or seven patients a year. So it is -- they are pretty quick to pay these machines off..

Thank you..

You’re welcome..

Your next question is from the line of Cecilia Furlong with Canaccord Genuity..

Hey, good morning. Thanks for taking my questions. I guess, I just wanted to start off with what you saw in Q2 in terms of rebound, but really focusing on the TMS-only centers and just their ability to rebound on a relative basis versus some of your smaller customers..

Sure. I mean, obviously the Greenbrooks of the world and Success TMS, they're are extremely large entities and better equipped to weather the COVID-19 pandemic. Obviously, they were impacted as we all were, but the TMS-only service providers have certainly recovered quicker than some of the smaller facilities.

And that's really due to their scale and expertise and changing the way they treat patients. And for example, people don't wait -- or patients don't wait in waiting rooms anymore. It's a very continuous flow through the facilities. So you don't have people in the same room potentially spreading diseases.

And so they were able to optimize their workflow and really get ahead of the recovery efforts..

Great. Thank you. And I guess if I could also ask just on your high-level thoughts on OpEx beyond 2020. Early R&D your focus there specifically and the relative priority in the pursuit of PTSD and bipolar depression indications.

I know you commented briefly in your prepared remarks, but just any further color you could give around -- your thoughts around priority of those two objectives. Thank you..

Yes. So in April, when we saw the precipitous decline in treatment session utilization as well as new patient starts, we took the swift and decisive action to reduce our expenses. We did communicate that that was for cash preservation and we would not restart investments until we were comfortable that we were out of the COVID environment.

The recent trends certainly indicate we're heading in a favorable direction and even the July data was pretty impressive. But we really don't want to get too far ahead of ourselves in terms of 2021.

So this is something that Keith, I and the rest of the senior team are looking at again planning for a restart, but again not getting too, too far ahead of ourselves. We've had ongoing conversations with the FDA that have been very positive.

But until we get comfortable with their position and opinions on clinical trial structure and things like that we're not prepared to really launch something that lengthy and that expensive. Regarding our next-gen platform, again, that was slowed, but it's still on the radar.

And these are the decisions that we'll work through during our planning process which starts next month..

Great. Thank you. .

Your next question is from the line of Marie Thibault with BTIG..

Hi. Good morning. Thank you for taking the questions. And welcome Keith. Nice to have you here..

Thank you..

I want to ask a question on the capital sales this quarter. They were actually a bit better than we had feared. And so I wanted to get a little bit more granularity on those system sales the types of centers those were going into and if there's any additional detail you could give us along those lines..

Yes. Again, given the environment of Q2, we were pretty impressed with the ability of our BDMs to transact that many systems. You would also expect to see I think a more focus on the TMS-only centers. When we looked at the data the percentage of TMS-only versus, I would say, traditional facilities didn't vary from previous quarters.

And so it was just our traditional mix between regular psychiatrists and those TMS-only centers. We do think that there could be an increased focus on TMS-only as we get into Q3 just based on their ability to recover quicker than some of the other facilities, but we'll have to see how that plays out in the quarter..

Okay. Great. And I guess, I wanted to dig a little bit on your commentary about a lot of systems and some of those hotspot states.

Do you have kind of a general breakout of how many or what proportion of systems fit in the South and West some of those states that are being hardest hit right now?.

So we actually -- we do have the ability to monitor everything on a state-by-state basis and we actually do look at utilization trends every day. And so, yes. Naturally, our highest density states are Illinois, Chicago, Texas, California and essentially many of the states that are getting hit hard again.

But again our customers have figured out the optimal way to safely treat patients and also keep their staff safe. And so we haven't seen a significant impact even in those states. They've certainly recovered at a very impressive rate since the low point in May. And again those trends have continued into the month of July..

That’s really helpful. Thanks so much..

You’re welcome..

That concludes our question-and-answer session for today. I would now like to turn the call back over to Keith Sullivan for closing remarks..

Thank you. Thank you, operator. Thanks again for joining us today. While it's early in my tenure, I'm very impressed with the team we have and our ability to move quickly and adapt.

For the balance of the year, we will be heads down focused on executing in a dynamic environment, while at the same time looking to the future and putting a long-term strategy in place. I look forward to updating you on our progress on our next quarterly call. Thank you for joining..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect..