Good day, and thank you for standing by and welcome to the Neuronetics' Second Quarter 2021 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, Mark Klausner. Please go ahead.

Good morning, and thank you for joining us for Neuronetics' Second Quarter 2021 Conference Call. Joining me on today's call are Neuronetics' President and Chief Executive Officer, Keith Sullivan; and Chief Financial Officer, Steve Furlong. Before we begin I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our business, strategy, financial and revenue guidance, the impact of COVID-19, and other operational issues and metrics. Actual results 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 and the 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 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 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 our second quarter performance, followed by an operational update. Steve will then review our financial results, and I will conclude with our thoughts for the balance of 2021 before turning to Q&A. Starting with the review of the second quarter. Total revenue was $14.2 million, up 46% from the second quarter of 2020, driven by strong year-over-year growth in treatment session revenue. Our U.S. treatment session revenue was up 65% over the second quarter of 2020 as a result of three things: one, the increased impact from the work of our NPCs are doing in the field to train our existing accounts; two, our patient education programs; and three, the continued growth in our installed base. As a result of these initiatives during the second quarter, the number of treatment sessions utilized has increased 62% over the quarter of 2020. As previously noted, our goal for 2021 is to have treatment session revenues approach 2019 levels by year-end. I'm happy to report that we have already exceeded this goal through the first half of the year. In the middle of May, we experienced a dip in average daily treatment sessions. As you know, we monitor this metric weekly. The start of this movement coincided with the CDC announcement removing mask and the social distancing requirements for those vaccinated. Many of our larger customers saw the same trend as people opted to travel for the first time in 18 months rather than begin treatment. We believe that this was transitory as we have seen the daily average rebound back to 3,000 treatment sessions per day level, we mentioned on our last call. Unless this new strain of COVID causes more disruption, we believe our utilization will…

Thank you, Keith. Total revenue for the second quarter was $14.2 million, an increase of 46% over second quarter 2020 revenue of $9.7 million. During the quarter, total U.S. revenue increased by 49% over the prior year quarter. The U.S. revenue growth was primarily driven by an increase in U.S. treatment session revenue. U.S. NeuroStar Advanced Therapy System revenue was $2.6 million, compared to the prior year revenue of $2.3 million, it was up 10% and compared to the first quarter of 2021, was up 47%. The increase was primarily driven by our BDM team gaining traction in the new territories, resulting in an increase in the number of NeuroStar systems sold relative to the prior year quarter. The company sold 36 systems, up from 35 in the second quarter of 2020 and up significantly from 23 systems sold in the first quarter of 2021. U.S. treatment session revenue was $10.8 million, an increase of 65% over second quarter 2020 revenue of $6.5 million, primarily driven by a significant increase in treatment session volumes relative to the prior year. On a sequential basis, U.S. treatment session revenue increased by 12% over the first quarter of 2021. Revenue per active site was approximately $12,000, compared to approximately $7,400 in the prior year quarter. As a reminder, we calculate this metric by dividing total U.S. treatment session revenue by the beginning of quarter active sites. Gross margin for the second quarter of 2021 was 80.6% compared to the second quarter 2020 gross margin of 76.2%. The primary driver of the increase was a favorable product mix of treatment sessions versus capital sales. Operating expenses during the quarter were $18 million, an increase of $3.7 million compared to the second quarter of 2020, primarily driven by higher marketing expense and stock-based compensation expenses.…

Thanks, Steve. Turning to our expectations for the remainder of 2021. We will continue to be focused on building awareness of NeuroStar among depression patients and training our customers on the best practices to educate them, who are searching for an alternative to drugs on the benefits of NeuroStar. Specifically, we will work to optimize our digital and social media campaigns, expand our concierge call center efforts, launch new customer programs and continue to put the pieces in place to execute on our clinical and regulatory strategy. As we progress through the year, we continue to be encouraged by the success of our new commercial strategy as our BDMs and NPCs spend more time with customers. And as we fully implement and refine our 5 Stars to Success and Precision Pulse Programs within a greater population of our customer base, we expect to continue to see a positive impact of these initiatives throughout the back half of 2021 and into 2022. I'd now like to open the line for questions.

[Operator Instructions] First question comes from Margaret Kaczor with William Blair.

Yes. I wanted to follow-up a little bit first on some of the early comments you talked about in terms of the dip in treatment metrics in mid-May. You did talk about maybe seeing that rebound back to 3,000 treatments per month. So I guess, did you guys hear that this was more of a delay in patient starts or is it patients delaying in showing up for that initial doctor visit? And then could you see a full list of patients as they come back later on throughout the year?

So, good to talk to you, Margaret. The initial blip that we saw was in treatment sessions, patients putting off the start of their treatment. And then we saw a rebound back a few weeks later.

So Margaret, another metric that we surveyed some of our large customers and the no-show rate actually went up significantly. And so, many of our customers continue to contact new patients to make sure they show up for that initial MT, and what they saw in May and early June was that level of people that didn't show up rose to close to 15%. We think it's just a delay relative to the revised CDC guidelines.

Okay. That's helpful. And part of the reason for the ask is we've got low single-digit to low double-digit utilization growth over the next 2 quarters sequentially. So, what we're trying to figure out is how doable is that with the top CROs kind of growing in that mid-teens or a little better? And is that what's assumed in your guidance as well?

Yes. We're a little, I would say, concerned with the Delta variant right now and the impact it could have on our customers and patients. Again, we are forecasting an increase in utilization and treatment session volumes going forward. Again, it's just -- we're still in that environment of somewhat unknown. But yes, I mean, we are forecasting a continued momentum in Q3 and Q4. Obviously, if you look at our year-to-date performance compared to 2019, it's strong from a treatment session perspective. And so again, it's a very backend loaded plan for the year, but we did reaffirm guidance, and we are pushing towards getting to where we said we would.

Okay. And just if I could squeeze one more in because you referenced Delta a little bit, but are you seeing any of that impacting your business right now? Because you didn't include it in guidance, so it seems like maybe you're not, other than just a general worry like the rest of us? Thanks.

Yes, we're not seeing anything right now.

We're not seeing anything. And our accounts are geared up to be able to handle COVID patients. So, we're not seeing any close down or any reaction like that.

Our next question comes from Matt O'Brien with Piper Sandler.

It's Adam on for Matt. I wanted to start with a question on the guidance, kind of following up on Margaret's line of questioning. So, the guide implies a nice ramp in the back half of the year, so maybe just talk about your level of confidence in that guidance range? And then as you talked about rebounding to that average 3,000 sessions per day exiting Q2, if we pull that forward or extrapolate to the back half, it implies some pretty nice upside. So, how sustainable is that run-rate? How do we reconcile that with the guide? Are you expecting seasonality of vacations in Q3? And then I have a follow-up. Thanks.

From a confidence perspective, again, the metrics that we continue to track remain extremely favorable. I do think it's important to note that our capital team is essentially 100% new and didn't get out in the field until February 1. Between February and the end of June, not only were they closing transactions, but also rebuilding their sales funnels. And that's what really gives us the confidence for the second half of the year. The sales funnels are much more robust than they were at the start of the year. And that was just a matter of, again, continuing that push on the capital side. From a treatment session perspective, again, we track utilization and purchases daily, and we can see real-time the impact of the marketing programs. The uptake in the Precision Pulse has been extremely positive, and those benefits are really incurred by system purchases and ultimately, utilizations. And so we have real good insight into how those are progressing and the level of utilization and purchases that those customers in the Precision Pulse are transacting. We learned some lessons with the 5 Star. We've made some modifications. And again, the progress to date has been extremely positive. And we believe with some of the adjustments that we made, it will be even more positive for the second half of the year. Again, looking at year-to-date treatment sessions, compared to 2020, it's not a fair comp because of COVID last year. But compared to 2019 year-to-date, we are above those levels through the end of June, which is a really positive indicator since the impact of these programs is just starting to impact us.

That's helpful color. Appreciate that. And then just on the follow-up, maybe to dig into a little bit more on the capital side of things. How would you assess the current status of the capital environment? The capital came in a little bit light of our forecast, but it does sound like there's good appetite from customers at the recent sales events, and you're going to continue that initiative into the back half of the year. So, is the expectation to see a meaningful build in the back half? And anything that you guys are seeing from a competitive standpoint that's impacting system placements or is it really just timing and change in priority towards treatment sessions?

Certainly. So, we were very encouraged by our NeuroStar Summit. The fact that we could get 80 physicians and office managers to give up at least a day of their practice and at least a day of their family time was impressive, especially coming on the heels of COVID. So -- that they would travel down to Austin, Texas to learn about this product was impressive to all of us. I think we were very encouraged by it. And the level of response by those attendees was high. And they -- so we sold a number of systems out of that. As we said in the remarks, we expect to sell a number more as other physicians are building out offices and preparing their staff to get into NeuroStar TMS. So, I think the capital environment is rebounding. I think there is greater awareness out there as from the TMS Society meeting, there was a lot of discussion about increasing volumes of TMS offerings within their practice. So, I see this rebounding the way normal capital equipment sales are, and I think to be successful in that, I've always been taught that if you have five systems in your pipeline that you swear are going to close, you're going to get one. And so we just need to give our team time to be able to build up that pipeline, and they're doing so. So they're getting at those levels and they're building quarter-over-quarter as we had expected they would. On the competitive side, I would say, in the first quarter we saw a significant presence from our competitors. This quarter we have not seen as much. So, we are moving through our 5 Star Program and our Precision Pulse Program as second to our great results that we offer, and our customers and potential customers are buying into all of that.

Our next question comes from Bill Plovanic with Canaccord.

I'd like to dig into the BDMs a bit more, if I could, Keith and Steve. So, could you give us some color on where you are in terms of the number of BDMs today as you actually go into Q2 and go into Q3? What type of turnover you've seen in that? And what -- you mentioned that the funnel was stronger. Any more granularity on the funnel metrics would be helpful as well. Thanks.

Good morning, Bill. So, we have 22 territories outlined and currently we have 21 of those filled. We had a, I'll call it a company-sponsored departure earlier in the second quarter. But outside of that, we haven't had any turnover in that team. And I think as far as their opportunities, we -- I think we mentioned that they had over -- approaching 400 opportunities in sales force in the first quarter. And I think we have not quite doubled that, but we have a significant number that were developed in the second quarter. So, their pipeline is quickly growing and events like the NeuroStar Summit certainly helped that.

Thank you. And then on the -- as you talked about the 5 Star Program, just like to get a feeling for how many accounts are on that, how many have reached 5 Stars? How long do you think that will take? And what type of performance once they get all 5 Stars, is that a -- just like the Precision Plus, is that a 15%, 20% improvement? Is that a 50% improvement? Just help us understand the benefits as you drive these accounts through and how many you have going through that funnel today?

So we have -- so, as I mentioned, our first star is our clinical protocol. And the second is reimbursement and other office needs. So, with those first two stars, almost all of our accounts are now listening to the -- what the clinical protocol would be, they're all welcomed our help on the reimbursement front, doing benefits investigations, and helping them identify what insurance companies they should be offering in their practices. So, I think in our remarks we said close to 100% of our accounts are involved. And I think that's -- with those two stars, that gets us to that number. So it's the -- it's star 3, 4 and 5 that we are really focusing on. And Star 3 is training the person who answers the phone and the reception desk to be able to talk to these patients. And then the second part of that is training the counselor on how to talk to patients within their practice and patients outside their practice. So, I think today we have under 20 accounts that are at Star 5 that are marketing outside of their practice on a regular basis. And I'm excluding our service providers from that number. But individual accounts that are at a Star 5 level are generating, on average, $360,000 in practice revenue a year. So, there's a lot of upside on that, even at $360,000, that's only treating about 4 patients a month.

Okay. And then last -- thank you. That's very helpful. Thank you. Last question for me is just how many patient starts were there in the second quarter?

Bill, we'll have to get back to you on that exact number.

[Operator Instructions] We have a question from the line of Marie Thibault with BTIG.

I want to try to dig into the utilization a little bit more. By my math, it looks like the average utilization for the quarter dipped below $3,000 per day by quite a bit. And I just wanted to try to get an understanding of just how substantial that mid-May dip was? And if you could give us the utilization rate that you exited Q2 at? That would be very helpful.

Marie, this is Steve. Yes, the dip in mid-May was about 8% to 10% from a utilization perspective. And that lasted a few weeks. Again, surveying some of our top customers, that duration did fluctuate. And so, some customers suffered from that dip a little bit longer, while others recovered in early June. It was primarily right around Memorial Day, is when I think the peak happened. But we did -- we saw it internally that we did get back to that 3,000 level in June, and we did exit the quarter at that level once again. So, we are confident we will be able to get to the rates that we do have built into our guidance. Again, as a reminder, Q3 seasonally is usually flat to Q2, just because of the vacations. I think that's going to be exacerbated this year since nobody took vacations last year. But again, that will be offset by the success of our programs and the training, education, and co-marketing efforts our practice consultants are pushing forward with.

Okay. So your Q3 guidance does contemplate pronounced summer seasonality. That's good to hear. And then I guess I just have to ask about communication because in April, we heard the 3,000 treatment sessions per day metric. And then in June, you were at a sell-side conference and discussed another encouraging treatment metric. Given that you have real-time TrakStar data, why is this the first that we're hearing about the mid-May dip?

I don't think we had an opportunity or a forum to discuss it at the point. I mean, this is really the venue to talk about what happened in the quarter after the quarter.

Okay. And then, I guess just a housekeeping one for you, Steve, where were we at for active sites at the end of Q2?

Active sites, we were about 950.

Thank you. And this concludes our Q&A session. I would like to turn the call back to Mr. Keith Sullivan for his closing remarks.

Thank you, operator, and thank you again for joining us on the call today. We look forward to updating you on the progress next quarter. Thank you.

And with that, we thank you for your participation in today's conference, and you may now disconnect.