Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter of 2020 Financial and Operating Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Mark Klausner. Thank you, sir. Please, go ahead.

Good afternoon, and thank you for joining us for Neuronetics third quarter 2020 conference call. A replay of this call will be available on our website for 30 days. 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 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 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 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 US 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 US 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 President and Chief Executive Officer, Keith Sullivan.

Good afternoon and thank you for joining us. I will provide an overview of the third quarter performance and then discuss the progress we made on our near-term focus areas. Steve will then give our third-quarter results and I will conclude with our thoughts on the balance of 2020 before turning to question and answers. Starting with review of the third quarter, total revenue was $12.4 million, up 28% sequentially over the second quarter of 2020 driven by growth in both system sales and treatment session revenue. Although there was year-over-year decline in revenue due to the ongoing impact of COVID, which continued to affect both capital equipment sales and utilization in the field. We are pleased with our performance as we have begun to see a meaningful recovery in the business. On the capital equipment side, U.S. Neurostar Advanced Therapy System revenue grew by 11% over the second quarter of 2020. With restrictions being eased in the third quarter and our virtual marketing and training efforts starting to pay off, our BDMS began to successfully get back into the field to prospect accounts. We are particularly encouraged with the mix of systems sold between TMS only providers and the traditional psychiatrists office, is similar to our historical levels, indicating an increasingly favorable capital sales environment. We anticipate that capital sales will continue to rebound albeit at a slower rate than we are experiencing with the treatment sessions. Total US treatment session revenue was up 39% sequentially over the second quarter of 2020 and was down just 11% over the third quarter of 2019. We are encouraged by this performance knowing that approximately 10% of our customers' offices are still not seeing patients in person, but the 90% that are open and starting to see utilization approach pre-COVID level. Turning…

Thank you, Keith. Total revenue for the quarter was $12.4 million, up 28% on a sequential basis over the second quarter of 2020. Compared to the prior year, third-quarter revenue was down 22% primarily as a result of COVID-19 related governmental responses and resulting economic turmoil, which persisted throughout the quarter. US Neurostar Advanced Therapy system revenue was $2.5 million, up 9% on a sequential basis over the second quarter of 2020. Compared to the prior year, third-quarter US Neurostar Advanced Therapy system revenue was down 45%, primarily driven by a lower number of Neurostar systems sold during the quarter. In the quarter, the company sold 39 systems, down from 68 in the third quarter of 2019 as a result of the impact of COVID-19. During the quarter, we saw our install base increase by 11% over the prior-year quarter to 1,143 systems, a net increase of 111 systems from the third quarter of 2019 and a net increase of 21 systems since June 30, 2020. US treatment session revenue was $9.1 million, up 39% on a sequential basis over the second quarter of 2020. Compared to the prior year, US treatment session revenue was only down 11%. The average revenue per system was approximately $8,100 during the third quarter of 2020 compared to approximately $10,500 in the prior-year quarter. Both of these declines were driven by psychiatrists temporarily shifting to telemedicine. Gross margin for the third quarter of 2020 was 78.7% compared to the third quarter 2019 gross margin of 73.8%. This significant increase was due to a higher mix of treatment session revenue, as well as a reduction in field service cost during the quarter. Operating expenses during the quarter were $12.2 million, a decrease of $5.9 million, or 33%, compared to the third quarter of 2019. The…

Thanks, Steve. Moving to our thoughts on the balance of 2020 as well as 2021. Since joining the company in July, we have made a lot of progress throughout the organization. There is still heavy lifting to be done around the development and implementation of our commercial strategy. But we have put the right people and process in place to drive the strategy forward. As mentioned on our last call, we've engaged a market research firm to identify the proper target audience, the messaging that resonates with them and the most efficient way to communicate with them. Ultimately, our goal is to arm our NPCs with the tools and business development strategies to help customers drive increased patient volume, and educate patients on the benefit of the Neurostar Advanced Therapy as a safe, effective non-drug therapy for the treatment of MDD. We will have results of the study in late Q4 and look forward to providing an update on the results on our fourth quarter call. In addition to developing the new communication strategy, we're currently in the process of optimizing our sales organization. We will be making decisions around the structure of our sales force, which relates specifically to the ratio of BDMS to NPCs, as well as decisions around the expansion of the sales force more broadly. Specifically, we are planning to redefine our BDM territories to better optimize the volume of potential customers accounts each BDM can cover. We will also align the NPC territories to allow them to have more meaningful impact in driving patient volumes into existing customers. These decisions will be completed shortly and we expect to selectively hire new BDMS and NPCs during the fourth quarter, with the goal of having those new reps onboard and trained ahead of our national sales kickoff…

[Operator Instructions] Your first question comes from the line of Matthew O'Brien with Piper Sandler.

Thanks for taking the question. Good afternoon. I guess, Keith, can we start with the realignment plans on the PDM and NPC side of things? We've seen these in the past, I'm assuming that you're getting a look under the hood now and that's the conclusion that you draw probably in collaboration with Sara. But seeing these historically, typically, isn't a six-month period to really refined to salesforce and change territories, etcetera, before you really see a meaningful improvement. It's typically more like a year or more than that. So I guess what gives you the confidence, you're going to really start to see the improvement the second half of next year? And then how do you really make sure that your larger KMS provider customers are comfortable with how things are being adjusted?

Thanks, Matt. I think the analysis that we did of the sales organization is that we have a pretty good team in place. And that when we are restructuring the sales organization, we're really redefining what the BDM territories would look like. We're balancing them so that they will each have a specific number of psychiatrists involved in them. So right now, we - because of the realignment earlier in the year, there are much - there are some territories that are very large and some that are very small, so in - on the BDM side, we balance them. On the NPC side, again, I think we have a talented group that - that's out there. And what we're trying to do is make them more effective in the field by also balancing them to have about between 30 and 35 accounts each. So, we are going to provide training throughout January and at our sales meeting on how we can best utilize the data from our market research. But we're not overhauling the sales organization. We're just trying to make them more efficient.

Okay, all right. That's really helpful. And then just to put a little bit finer point on the guidance that you're providing for Q4, it's a little bit below the street, certainly not the end of the world. But as we think about the first half of next year, should we still think about a contracting business for the first couple quarters, and then hopefully getting back to even to growth next year, assuming that we don't have another big outbreak of COVID?

Yes, Matt, this is Steve. Now, we're still budgeting and planning for a rebound in 2021. I know the expectations are to get back to either at or above 2019 levels. And that is something we're certainly not shying away from. Obviously, there's still some economic and pandemic dependencies. But now with the revamped commercial structure, along with the revised strategy, we're looking at no growth to return in 2021.

Got it. Just one more for me, and I know this is probably a little bit further out question, but, Keith, your commentary about the first-line therapy is obviously extremely interesting and compelling. I mean, what steps need to happen to get to that point? And then I know this is a difficult question to answer, but can you just frame up a potential timeframe for when something like this could - even just a few insurance providers be the first line of therapy rather than drug? Thank you.

Matt, that's a question we talk about almost daily here. I think we are digging into our TrakStar data where we have 72,000 patients. And in our registry, which is a subset of that, we have over 5,000 patients. So we are looking at that data to be able to help put the information into a formula that can be used by the societies to take to the payers. And I have no idea what the timeframe on that is. I think we should have a handle on our data in the next several months, but how long the payers take to react to it? I don't know.

Fair enough. Thank you.

Your next question comes from the line of Margaret Kaczor with William Blair. Your line is now open.

Hi, everyone, this is Brandon [ph], on for Margaret. If I could just follow up on that last question first, as we look to a rebound in the business, and you get to 2021 and creating more of a sustainable kind of growth rate, do you think you need to have some of these market access wins in order to hit your internal goals? Or can just some reconfiguring and refining of the commercial organization be enough to kind of make a more sustainable growth profile?

So what I will tell you is, in the research that we have back so far is our opportunity just in treating MDD is large, and the number of physicians that are not using Neurostar Advanced Therapy at this point is also large. So I think we have a large amount of runway to go without any other indications. But I think we have an opportunity to advance the ball on a couple of different fronts. We all know that it's going to take time with the FDA and then with the payers, but I think we're starting to move forward down those fronts.

Got it. And then as we look towards kind of on the system utilization side and the system revenue side - or sorry, rather, the treatment revenue side, Steve had mentioned a little over $10,000 practice system as the year-over-year comp as we go moving forward into 2021. Should we think about the system base or the install base able to reach kind of a $10,000 plus number and then as we kind of look at a sustainable 2021 plus, is $10,000 kind of a floor? Can we look for upside there? Or is that kind of a level where we level out?

Yes, Brandon, our expectations are to continue to increase utilization throughout the period near term. You saw about a year ago, we felt the initial utilization declines, and had plans in place to address it and then COVID hit and really limited our ability to go out and work with the customers who saw those declines. We fully expect to re-engage those customers as well as others with our NPCs and co-marketing programs and other awareness tools to drive well beyond the $10,000 average revenue per system.

Got it. And just one last one for me. I appreciate there's probably some noise going on in the Japan business given COVID, but any updates there or even just anecdotal feedback how the commercialization is going there, and the updates on a potential reimbursement update. Thank you.

Thanks, Brandon. So in Japan, we do have reimbursement today and there are a couple of things happening. Our distributor is selling systems at a controlled placement model. He is making sure that all of the training is done properly. And he is beginning to conduct our post-market study in the 20 hospitals that we have agreed to do, so there's activity in Japan. It is on a controlled pace

Your next question comes from the line of Bill Plovanic with Canaccord. Your line is now open.

Hey, great. Thanks. Good evening Just first if we could talk about the systems as you roll them out, how does COVID impact your new account strategy as it related to the chains versus the independent operators? We've heard some of the larger chains are holding back on some of the capital spend and don't know if this has adjusted your strategy as well.

Good to hear your voice, Bill. We've been in touch with our service providers and their business is growing at this point. So I think our individual psychiatrists, and our service providers have put the policies and procedures in place to be able to handle the COVID situation. And - you know, so they have their patients wait in the waiting room - in the car before they bring them in, there is no waiting in the waiting room. So, I think that's under control. So I think I had a meeting with Greenbrook senior leadership team, and they are placing systems now. So...

Okay. So - but you talked about it a little bit, just in your opening remarks regarding kind of the balance to shifting back to the individual operators versus the chain says this [ph]? And then - but should we expect that there is going to be more focus or more drive into the individual going forward; just to balance it out a little more? Or we'll move one way or another, I guess, this is what I'm trying to figure out.

Well, I think our business today is about 50-50. And we're providing the same level of help and assistance and awareness on - to individual psychiatrists, as well as the service providers. So, I don't think we're trying to shift it in one direction or the other, I think it's in our benefit and theirs to increase treatment sessions to individuals and the providers.

Okay. And then in terms of the treatment sessions, obviously, you've come back to about 8,100 per system, per quarter; I'm trying to understand if, you know, to get back to that 10,000, I think you said about 10% of them aren't treating patients. Was there any differences you went through July and September, October? Are you seeing more and more c'mon [ph], because I'm just trying to figure out the cadence to this? And when would you expect back to 100% of your customers operating?

Yes, that's a good question, Bill. And we just finished up and received October's data, which was extremely impressive, and exceeded our own internal expectations. We did see, I would say, a healthy number of sites that have embraced telemedicine, restart their TMS platforms in the month of October. And, again, we're hopeful that that momentum can continue through the end of the year, but it was a really strong month.

So it kind of sounds that some of the guidance provided might just be conservatism given the - given what's going on with the third wave of COVID. And I don't want to put words in your mouth, but it is - that's kind of the takeaway I'm getting. Is that a fair assessment?

I think that's fair, yes.

Okay. And then just last question for me is, on the operating expenses, you've really done an amazing job cutting back the costs and making the cash you have last a long time. And I think that's something that people may have been concerned about, and I can see that you've done a great job there. But as we look at Q3, any one-time charges and any of the operating lines that we should think about that might go away in Q4, or, alternatively, given COVID not as much T&E going on, maybe not as much marketing support that you have had to provide what have you; where are the lever points in that oppline from bus [ph], the plus and the minus we should think about as you drive into the end of the year and next year? And that's all my questions. Thank you.

Yes, Q3 from an expense perspective was very normal; so no significant out of the ordinary entries. Going forward; again, so we - we cut very deeply in April and May, and now our - I would say very strategically adding resources. I don't think you'll ever see us back to where we were from an operating expense perspective anytime soon. And so from a marketing side, a lot of the expenses are being reallocated to different programs; so not necessarily incremental spend. In Q4, I think we'll see some incremental spend as we roll out our programs and new campaigns in 2021. And then from a sales perspective, again, the increases to the team I would term as modest and we're not going to go back to the days of 59 BDM in 2021; there'll be a handful on both teams. So, I think what you saw in Q3; there'll be an uptick in Q4, which is reflected in the guidance and that'll continue into 2021 as we drive growth. We're certainly not going to be in a position to spend ahead of revenue; so we want to make sure that the efforts we put in place in 2020 were valued in, and we won't get ahead of ourselves.

Great. Thank you for taking my questions.

You're welcome.

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

Hi, good evening. Thank you for taking the questions. Maybe I could start with one there on the discussion of adding back modestly to the teams with some new BDM and NPC hires. What's the ideal profile for these positions? Is it different than you've typically hired in the past? And then, I guess a related question, with all these a few realignments happening; Keith, could you tell us a little bit about what morale feels like right now at Neuronetics?

Okay. So on the BDM side, we're going to be looking for people that have capital equipment experience; preferably capital equipment that also has a trailing revenue piece. On the NPC side, it's a relationship builder, that's able to go into the accounts, gain the trust, and be able to walk in and help them through their marketing efforts, train them on how to work with their front desk staff, their consultation of patients, and teach them how to do digital and social media, and get their practice up and running. So I think the morale in the organization, both inside and outside, is high. I think we have a plan, we have given it to our teams on a very high level, and I think over the next couple of months, as we roll it out, I think there will be a higher level of excitement.

That's great to hear. I want to ask a follow-up on the capital equipment side; along the lines of what Bill was asking about? It does sound like some buying has come back from the psychiatric practices. Could you characterize who was buying or who was doing well enough, I guess, at this point to think about equipment sales? And then, of the remaining 10% of customers that have stayed close; are they waiting for a vaccine or is there some other timeline that you consider for them coming back online? Thank you.

Hi Marie, this is Steve. So with respect to the 10%; and - so we did survey our NPCs who contacted the subset of customers directly, and the vaccine was one of the overarching themes. Again, they want to be very responsible for their staff and patients, and have really moved away from bringing patients in-house. And so - you know, that will continue to be a pressure as we head for Q4, until folks are comfortable with a vaccine if it does come in 2021. In terms of who's purchasing systems; again, we mentioned in the call that there is not a lot of difference between the number of systems sold to the TMS-only providers and the traditional psychiatrists. We do analyze this data and just to see if we can see any trends but the sales in Q3 were really along historical lines. And then even in the month of October, where we did a fair amount of system sales; again, those ratios were pretty consistent than what we've seen in the past couple of years. It's not easy for an individual psychiatrists to make the capital equipment purchasing decision in this environment, there is a significant amount of trust and validation that they must go through to acquire a system in this environment; so we continue to support them and the TMS-only providers as well.

Thank you.

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

Thank you, operator, and thanks again for joining us on the call today. I look forward to updating you on our progress in the next quarterly call. And I hope you're safe. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.