BrainsWay Ltd.

Greetings and welcome to the Brainsway Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob Yedid of LifeSite Advisors.

Please go ahead.

BrandsWay's third quarter 2022 earnings conference call. With us today are BrandsWay's President and Chief Executive Officer, Chris Bagnacco, and Chief Financial Officer, Scott Arreglato. The format for today's call will be a discussion of recent trends and business updates from Chris, followed by a detailed discussion of the financials from Scott. Then we will open up the call for your questions. Earlier today, BrandsWay released financial results for the three- and nine-month-ended September 30, 2022. A copy of the press release is available on the company's investor relations website. Before I turn the call over to Chris and Scott, I'd like to remind you that this conference call, including both management's prepared remarks and the question and answer session, may contain projections or other forward-looking statements regarding, among other topics, Brainsway's anticipated future operating and financial results, business plans and prospects, and expectations for its products and pipeline, which are all subject to risks and uncertainties, including shifting market conditions resulting from the COVID-19 pandemic, global supply chain constraints, as well as the use of non-GAAP financial information. Additional information regarding these and other risks are available in the company's earnings release and its other filings with the Securities and Exchange Commission, including the risk factors section contained in Bransway's Form 20F. With those prepared remarks, it's my pleasure to turn the call over to Chris Fagnacco.

Chris? Thank you, Bob. Welcome, everyone, and thank you for joining us today. To begin, as I stated on our last call, the current macroeconomic environment, including staffing shortages, higher interest rates, inflation, and recessionary fears continue to impact our customers and patients, and in turn, our third quarter results. Simply put, smaller practices which make up the large portion of our current customer base continue to take a cautious approach to purchasing decisions in this environment. Given these conditions, the company is increasingly cognizant of its spending levels and remains focused on conserving cash in order to ensure that we make the most prudent use of our shareholder capital. Additionally, while we remain committed to strengthening our sales force to penetrate the market, The economic environment and tight labor market has made it more difficult to hire the right talent, which is making our planned expansion take longer than expected. You may recall in our previously stated objective of expanding the Salesforce to 21 territories, we currently have 14 sales professionals, and we believe these challenges could lead to a longer ramp-up period before we're able to reach our desired Salesforce size. You will also recall that Eric Hurt joined us in May as our Vice President of Sales. Since that time, he is laying the groundwork toward building a truly transformational commercial infrastructure for Brainsway. He is focused on putting new pipeline tracking measures in place and improving the messaging and education related to the benefits of our deep TMS platform technology. Also, as we target larger enterprise customers, that are somewhat more insulated for the economic fluctuations, ERIC is focused on ensuring that when the commercial team is appropriately billed out, it's done with experienced professionals with the requisite experience to meet the needs of these sizable accounts. Specifically, the right professionals for us need to effectively communicate our scientific differentiation as well as the significant return on investment that can be generated using deep TMS in their clinics and practices. Dr. Colleen Hanlon, our recently appointed Vice President of Medical Affairs, will play an important role here. Dr. Hanlon, formerly a professor at Wake Forest University School of Medicine and a member of the Wake Forest Center for Addiction Research, brings nearly 20 years of experience in the field of brain imaging and brain stimulation research. One of her roles at BrainsWay will be to drive the integration of medical and scientific intelligence. She will also be instrumental in working with key opinion leaders to enhance awareness, including among the larger, more sophisticated institutional and enterprise customers that are playing an increasingly important role within the industry. We believe that this will help us to improve the sales process and commercial results. So while we're focused on being good stewards of capital, it is important to know that we have the right plan in place to continue investing in growth, including our commercial team, and leverage the substantial opportunities we see with enterprise customers when conditions warrant. As we prepare for this moment, there are several tailwinds in our business and the industry overall that I'd like to highlight. First, we are building momentum in our international business. While these international sales generate lower average selling prices and margins, our out-of-US performance bodes well for our business long term. As further context for our thriving prospects internationally, we've sold multiple systems to the largest TMS provider in Australia and even more systems in India in recent months as we penetrate those markets. We're also achieving significant progress with reimbursement. Most recently, we announced that another Blue Cross Blue Shield licensee will be extending positive coverage for deep TMS for the treatment of OCD, effective February 3, 2023. The policy will impact commercial healthcare coverage for more than 2.6 million people in the Pacific Northwest. The policy also reduces its TMS coverage criteria for depression, now requiring only three failed medication trials instead of four. In addition, final and draft local coverage determinations, respectively, were recently issued by CGS and NGS to Medicare Administrative Contractors, or MACs, reducing the number of previous medication failures required to qualify for DPTMS treatment for depression from four to two. These MACs collectively represent 14.5 million covered lives, and once implemented, The changes will result in all 60 million plus Medicare beneficiaries qualifying for deep TMS depression coverage after either one or two failed medication trials. Furthermore, NGS is now expanding its TMS coverage criteria to include psychiatric nurse practitioners, making it the first MAC to join the commercial players who have already taken the step, including Magellan, Centene, HCSC, and Select Health Intermountain Healthcare, among others. Also in the third quarter, Cigna announced positive coverage, which will apply to deep TMS for the treatment of OCD. Cigna, one of the largest major medical insurance companies in the United States, provides commercial healthcare coverage to about 17 million members, has Medicare Advantage plans in 16 states, and participates in the health insurance marketplace online exchange. Through the positive coverage decisions, we now have approximately 90 million covered lives for OCD indication. Moreover, approximately 45% of our total installed base now includes OCD treatment capability. We view this progress not only as a testament to our customers' strong belief in the benefits of deep TMS treatment for OCD, but also our growing success in securing reimbursement in this important indication. Switching gears to our key clinical and regulatory progress. Most recently, we received 510 clearance from the FDA for the use of our deep TMS H7 coil in treating adults suffering from depression, including those suffering with comorbid anxiety symptoms, commonly known as anxious depression. This was our ninth FDA clearance for the deep TMS and represents an important differentiator for our industry-leading technology. TMS treatment for depression is not a one-size-fits-all solution for all anatomical targets. The H1 targets one region of the brain, and the H7 targets a different region. And we now see that stimulating either of these regions can mitigate depressive symptoms. We believe this additional clearance supports our goal of enabling clinicians to provide more personalized medicine for their patients. Another key driver for us is generating additional market awareness. This is the intent of our recently announced collaboration with NoCD, an organization that facilitates access to online therapy for people with OCD through its innovative telehealth platform. The goal of the collaboration is to raise awareness about the life-saving treatments of both companies among patients, caregivers, and clinicians. Brainswave's collaboration with NoCD will help patients find the treatments they urgently need with access to NoCD's therapists and deep TMS providers nationwide. Staying with raising treatment awareness, we also participated in five on-site medical conferences in and outside the U.S. during the third quarter, including the World Congress of Psychiatry and the annual convention of the American Psychological Association. Another critical positive indicator for our business is the medical community's growing focus on dramatically rising mental health issues, and in some cases, the use of TMS as a potential treatment. I'd like to highlight two very compelling recent developments. First, the U.S. Preventative Services Task Force, an independent volunteer panel of national experts in prevention and evidence-based medicine issued a public proposal stating that U.S. doctors should regularly screen all adults under 65 for anxiety. The recommendations are based on a review that began before the COVID-19 pandemic, which has been shown in numerous studies and published literature to have worsened the U.S. mental health crisis. The task force said that the evidence for the benefits of regular screening include the availability of effective treatments. Of significance, this is the first time this influential group has recommended anxiety screening in primary care for adults without symptoms. Next, psychiatry news. recently published an op-ed advocating for TMS to be considered as a first-line treatment for moderate to severe depression. This is important for two reasons. First, Psychiatry News is the official print and electronic news service of the American Psychiatric Association, or APA, and is the primary and most trusted source of information for APA members, other physicians, and health professionals and the public about developments in the field of psychiatry that impact clinical care and professional practice. I'd also like to highlight that the APA promoted the op-ed on social media channels, including LinkedIn. The second reason this op-ed is important is because the author, Dr. Richard Bermudez, Chief Medical Officer of Mindful Health Solutions in California, is a longtime user of DTMS. We are grateful to Dr. Bermudez for advocating for changes to the APA's current treatment guidelines for depression and would certainly agree with his sentiment that the compelling evidence for the use of TMS has grown steadily since the initial guidelines were published in 2010. Of course, we are proud to be at the forefront of the innovation trend since that time. With the spotlight firmly remaining on mental health and TMS specifically, we believe Brainsway is well-positioned to leverage this enhanced visibility to further grow our business for the long run. With that, I would like to look ahead to the remainder of the year. As the current macroeconomic environment continues to present challenges to both our smaller customers and their patients, we intend to remain vigilant in controlling our expenses. We will focus on ensuring that our strength of our sales force is at measured pace, and we're doing so with professionals who can help us further penetrate key enterprise accounts. As I mentioned earlier, we believe that this ramp-up will take longer than previously anticipated. Until that such time, we are fortified with a strong balance sheet and continue to be buoyed by advancements in several key areas, including sustainable success internationally, further progress with reimbursement, additional clinical and regulatory milestones, increased market awareness, and favorable long-term industry trends and multiple growth catalysts. With that, I will now pass the call to Scott for his review of our third quarter 2022 financial results. Scott.

Thank you, Chris, and good morning, everyone. As Chris noted, and more than we expected, our business was impacted by inflationary and recessionary headwinds in the third quarter. Revenue for the third quarter of 2022 was $5.2 million. a 36% decrease compared to the prior year period revenue of $8.2 million. We placed 22 deep TMS systems in the third quarter and continued to experience strong international momentum, a trend we believe is sustainable. Our total installed base is now 851 systems as of September 30th, 22 compared to 717 systems or 19% growth as compared to September 30th, 2021. For the first nine months of 2022, revenues were $21.1 million flat as compared to the first nine months of 2021. Gross profit for the third quarter of 2022 was $3.8 million or a 74% gross margin compared to $6.1 million or a 76% gross margin during the prior year period. Gross profit for the first nine months of 2022 was approximately $15.7 million, or a 74 percent gross margin, compared to a $16.5 million, or a 78 percent gross margin, during the prior year period. The decrease in gross margin was largely attributable to expenses related to inventory obsolescence charges, increased shipping and inventory costs, and a higher mix of international sales. We expect margin pressure in the fourth quarter as well due to these factors. Moving on to operating expenses. For the third quarter of 2022, research and development expenses were $2.2 million compared to $1.9 million in the third quarter of 2021. The increase was driven primarily by clinical data projects to support our ongoing clinical differentiation in the marketplace. Sales and marketing expenses for the third quarter of 2022 were $4.8 million, compared to $4 million for the third quarter of 2021. These increases are due primarily to increased cost of travel, marketing events in the quarter, and increased personnel to support our customers. Moving on to G and A, expenses for the third quarter of 2022 were $1.7 million, compared to $1.5 million for the third quarter of 2021, due primarily to increased consulting costs. Looking ahead, as the macroeconomic challenges Chris outlined earlier continue to impact our operating environment, we remain focused on prudently managing expenses in the current quarter and strategically investing in our commercial and research activities to reflect current market dynamics. Operating loss for the third quarter was $4.9 million compared to an operating loss of $1.2 million for the same period in 2021. For the third quarter ended September 30, 2022, we incurred a net loss of $5 million compared to a net loss of $1.8 million in the same period of 2021. Moving on to the balance sheet, we ended the third quarter with cash, cash equivalents, and short-term deposits of $49.6 million as compared to $57.3 million at December 31st, 2021. Our strong balance sheet and ongoing prudent management of expenses has positioned us well to face the temporary headwinds presented by the current macroeconomic environment. We will continue to appropriately invest in commercial and marketing efforts to drive greater adoption of our multi-indication deep TMS system as well as in product development and clinical research to ensure our technology remains highly differentiated. We are confident that this approach will support shareholder value now and into the future. This concludes our prepared remarks. I will now ask the operator to please open up the call for questions. Operator?

Thank you. Ladies and gentlemen, At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Ladies and gentlemen, we will wait for a moment while we poll for questions.

Our first question comes from the line of Stephen Lichman from Oppenheimer and Company. Please go ahead.

Thank you. Good morning, guys. I'm wondering in terms of the mix of units, beyond the units being lower sequentially, should we assume that you saw a significantly higher increase in leased systems versus direct? I mean, is that really where you saw the big drop off? And then, secondly, can you talk about the sales force? I think you said 14 reps. Where were you again at 2Q? I thought it was a lot higher than that. Can you talk a little bit about what's going on in terms of the churn of the sales force?

Yeah. Hi, Steve. Good morning. It's Scott. So the first question, you know, I think just if you look at the math, our lease revenue has been relatively consistent over the quarters. So with revenue being down, the lease versus sale mix is just going to shift to a higher percentage of lease just in because the revenue is overall lower and the consistency of lease revenue on a quarter-to-quarter basis.

Hi, Steve. It's Chris. So your question about the salespeople, I think maybe at the end of Q2 or maybe we talked about in the period, we may have been around 16 or 17 at that time. You know, we just go through the normal course, obviously, of evaluating reps, and Eric's done a great job of doing that, and I think that's part of the normal process that we've been doing, and I think he's been doing a great job of really bringing on some new additional people, not only in the sales reps, but in the practice development team as well, which is really enhancing the entire commercial team.

Can you talk about the enterprise customer opportunity? I guess, in your mind, if you could scale it for us versus what you've been going after on the smaller customer side. And, you know, can you talk to us in terms of what your preparations are to go after that side of the market?

Yeah, no, great question. So just to give some context there, you know, and I'm asked this by investors from time to time and talking about like enterprise accounts and We've had a number of smaller customers that continue to grow and they continue to get scale. And some of these customers that we've had have been acquired by larger TMS providers. So there's definitely some consolidation that's going on in that market. And we feel that there's an opportunity for us to kind of impact some of these larger psychiatry networks, not doing TMS today, that we are trying to penetrate in there. We have been bringing several people within to the organization that at a higher level can be able to talk, you know, commercially, but as they stated in the prepared remarks, also about return on investment and the things that we can do for those centers. So we're making that a focus right now. That's something that has been key to Eric Hurt over the last number of months. We've been really focusing in that area. And we're hoping that's good. We believe it will be fruitful moving forward.

Okay, got it. And then just lastly, maybe, Chris, a little bit more color in what you're hearing from your customers, and particularly during this third quarter versus the second quarter. Obviously, we know the macro headwinds, but what furthered or changed during this quarter, and what's sort of your visibility in terms of any sort of backlog of systems that may be building as There's interest, but perhaps reservation given the economic environment.

So, Steve, I think we mentioned it on the last call. You know, we started to see those headwinds, and we made those statements on the last call. Those headwinds, you know, were obviously a little bit larger than we felt. Our pipeline is vast, but, you know, I won't use the word strong. It's vast. There are a lot of centers that are looking to acquire the technology, but the problem is they just keep pushing it off. They continue to push it off. So we're hoping now that, you know, as things hopefully in the next several quarters begin to stabilize, that we'll be able to, you know, continue to make inroads there with those smaller customers.

Okay.

Thanks, Chris. I'll jump back into you. Thanks, Steve.

Thank you. Our next question comes from the line of Jeffrey Cohen from . Please go ahead.

Hi, Chris and Scott. How are you? Hi, Jeff. Good morning. Firstly, could you give us an update on H4 coils from Q3 or maybe an outlook for Q4 and talk a little bit about some of the addiction programs out there and placements, please?

Yeah, so the H4 coil is for our smoking addiction products. We don't actually give numbers of the number of systems that we put out there, but I think roughly, Scott, how many do we have out there at this time? Over 50, over 60 systems, yeah. So our focus continues to be there, like it had been on OCD in the beginning, is to continue to acquire clinical data there. in support of reimbursement efforts that we're looking at.

Okay. And are you seeing any payers come forth, or have you submitted any paperwork to any payers for reimbursement on that front for H-4?

Yeah, we have it at this time. You know, for us, with our experience, With that really good experience, obviously you've seen from OCD, we're getting closer and closer to about 100 million there on Covered Lives. We see it's a combination of a good clinical data followed by a combination of good post-marketing data. So we don't want to go too quickly to the payers and start talking about that until we actually have that. That's some of the things that we've learned before in the past with the OCD.

Okay, got it. And then I did want to follow up on In the third quarter, so it looked like patient starts were light. Were there any interruptions in patient care as far as early stops or delayed starts? And should we expect more of that or some of that into the fourth quarter as far as folks out there delaying starting or halting sessions kind of midway through? And then what might that look like as far as capital goes in the fourth quarter. It's traditionally been strong in any outlook there on the capital front.

So from a patient perspective, you know we can monitor how our customers are doing with patients. It looked like it was fairly flat between Q2 and Q3. Now, obviously, we added a number of systems, but it looked like it was fairly flat. We also look at numbers of patients that are going into psychiatric offices and There are some reports that we get on a weekly basis to see that. And from July on, we saw kind of a drop-off in the number of patients that were visiting psychiatric offices. So we feel that may also have some of an effect, obviously, that our smaller customers are seeing as well.

Got it. And then lastly, on some of the international placements, Are they all capital sales or some are leases as well? Any color there would be helpful. Thank you.

Yeah, no, Jeff, typically the sales outside the U.S. have all been capital placements.

So we're selling to a distributor, right?

Yeah, we're selling to a distributor.

Got it. Thanks for taking our questions.

Thanks, Jeff.

Thank you. Our next question comes from the line of Jason Bedford from Raymond James. Please go ahead.

Hi. Good morning. Just a few for me. I guess just I realize that you have an existing kind of lease versus direct sales offering, but is there an opportunity to be even more flexible in terms of price or lease terms just given the constrained environment?

Yeah, I mean, I think there's always that opportunity. Jason, you may remember quite well when I first started back in 2020 with COVID, right? We saw this happen, you know, the environment that we got with the pandemic in that first and second quarter, and we started doing certain things with leasing that really kind of got us back in the ballgame. So, There's definitely things that we can do, you know, to make it a little bit, say, more flexible on customers that are looking to expand.

Yeah, and we've done that, right? So I think, you know, we'll do things like extending out lease terms, et cetera, to lower payments, give a longer term there. But obviously those take longer to contribute to revenue when you do that, right?

Right. Okay, but you are implementing some of those?

Absolutely. Yeah, look, I think at the bottom line is, you know, we still want to build our install base and get systems. I think, you know, getting into an account and being a first mover in an account is a really important thing. As customers learn how to use your system and get trained, it gives us better opportunities for repeat business. And, you know, we're focused on trying to get into accounts and get first position there wherever we can.

Okay. And you mentioned supply chain challenges. I think it may have been tied to some margin commentary, but did any supply chain issues hold back system placements at all?

Absolutely not.

Okay. Okay. And then, Chris, you have a good balance sheet here. Is there opportunity to Strengthen the business through capital deployment? Is that something you're contemplating now, or is the environment still a little choppy for that?

So capital deployment in what sense?

I just want to make sure I – Well, either acquisition, licensing technology, buyback, however you want to use the $40-some-odd million in cash. Yeah.

Yeah. Um, again, I think we want to be measured in things we do. We're always evaluating things. Um, and you know, what we're continuing to do is, is I think that, you know, what we talked about in our prepared remarks or we're, we're focused on building, uh, the best commercial team possible and continue to strengthen our clinical and our regulatory areas and making sure we're doing the right things. Look, I think it was, uh, it was incredible. We brought on Dr. Colleen Hamlin to the team. She is a really well-known person in this space. She has a lot of expertise, not only in psychiatric conditions for TMS, but also in the addiction space. So we know she's going to be of added value in working together with our commercial team as well. Okay. Thank you. Thank you, Jason.

Have a great day. Thank you.

Thank you. Our next question comes from the line of Bubilan Achayavan from HC Wainwright. Please go ahead.

Hi, Chris and Scott. Can you hear me?

Yes.

Hi, how are you? Yeah, I'm doing great. Thanks for taking my questions. So firstly, you mentioned about CGS and NGS Medicare coverage updates for DTMS for depression. So do you foresee any such update for OCD in the near future? Any thoughts?

With Medicare in particular or, Bublan, did I hear you correctly, with Medicare in particular?

Yeah.

So we have one Medicare already that's come on with Palmetto. The other ones are continuing to look, you know, at the data. We're continuously talking with them at all points. So we have one so far. So we're really focused on the other six, too, as well.

Okay. Got it. And then one of your competitors, they use a tool called PHQ-10, Patient Health Questionnaire. And then they claim that it helps them to identify patients within the treatment practice. So I would like to hear your thoughts about PHQ-10 utilization in your practice. Do you guys consider implementing one or have you implemented one already?

So from our side, our practice development consultants work directly with our customers in looking for the patients that fit that mix. So we go through that quite extensively in the training process. And I think that has been really sufficient for us and the needs for our customers at this time.

Okay. One more question. So as we look into the fourth quarter and maybe 2023, In addition to the macro headwinds that we just discussed that impacted your 3Q22 sales, are there other growth restraints you can think of?

Other growth constraints?

Yeah. I'm not sure we heard you at the end there. Sorry. Constraints?

Yes.

You know, that's a really good question. I think

Sorry. Nothing that comes off the top of my mind. Boublon, you know, I think, you know, right now we've been looking at the challenges really being the macroeconomic areas, right? And that's why we're looking to also get into the enterprise areas as well. Growth constraints. Boublon, did you hear us?

Yeah. All right. That's it from me. Thank you so much.

Thank you. Thank you.

Thank you. Our next question comes from the line of Jason Witt from Loop Capital. Please go ahead.

Hi, thanks for taking the questions. Just on the Salesforce. Hey, hi guys. So on the Salesforce, it sounds like you're re-evaluating sort of which sales people you bring in. I guess a couple of questions related to that. First, where have you been getting your sales people and is that changing? Where are you looking now? And then secondly, I don't know if it was clear in terms of how long you think it might take to reach the previously stated goals or whether there's new goals to be set. Just want to get a sense of the outlook and how you see the Salesforce shaping up in the next six to 12 months.

Yeah, thanks for the question. So like I said, we're at 14 right now. Our goal was really to get to 21. And obviously with a new leader like Eric Kirk coming in place and, you know, things change within the Salesforce a little bit and he has different criteria and And he's been doing, I think, an amazing job of kind of bringing in the right talent that we need. So, you know, and we're trying to be measured. We're trying to make sure we have the right people in place. So I think our goal continues to get to 21, but it may be measured over time as we kind of see the macroeconomic environments changing.

Okay, that's helpful. And then in terms of things you can do. Do you guys hear me? Do you guys hear me? Yes, yes. Sorry, guys. There's a connection problem. In terms of just – I realize the focus is getting first – trying to be the first one in and locking in customers. In terms of your current customer base, do you have any leverage in terms of pricing or different pricing options or just increases that you can – especially for your current installed base that you're thinking about, or, uh, is that model pretty much set the way it is at the moment?

Listen, we're, we're always looking, we did the same thing. I think we mentioned a little bit earlier during COVID. We're always looking at getting some flexibility in our models to make sure that we can do things in the right way to obviously our goal is to place these systems in customers that, you know, to treat these patients. So we're continuously looking at different models and, uh, You know, I think that there are some opportunities that lie ahead, for sure, definitely.

Okay, and then just a follow-up on our housekeeping. You may have answered this, so I apologize, but did you give the number of OCD helmets placed this quarter or the total install base currently?

You know, I thought we did, but it was… 380, I think. No, it was 12 OCD coils in the quarter, 380 in total.

Great. Thanks for the detail. I'll jump back in queue.

Yep. Thanks.

Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the conference to Chris Warniakos, CEO, for closing comments.

Thanks. I would like to thank our valued partners and providers as well as the entire Brain's Way team for elevating their commitment to boldly advancing neuroscience to improve health and transform lives. Additionally, I'd like to thank all of the investors, analysts, and other participants for their interest in Brain's Way. With that, please enjoy the rest of your day.

Thank you. The conference of Brain's Way has now concluded. Thank you for your participation. You may now disconnect your lines.