BrainsWay Ltd.

Greetings, and welcome to the BrainsWay first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A 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. I would now like to turn the conference over to your host, Brian Ritchie, with LifeSci Advisors. Thank you. You may begin.

Thank you all. And welcome to BrainsWay's first quarter 2023 earnings conference call. With us today are BrainsWay's Chief Executive Officer, Hadar Levy, and Chief Financial Officer, Scott Ariglato. The format for today's call will be a discussion of recent trends and business updates from Hadar, followed by a detailed discussion of the financials from Scott. Then we will open up the call for your questions. Earlier today, BrainsWay released financial results for the three months ended March 31st, 2023. A copy of the press release is available on the company's investor relations website. Before I turn the call over to Hadar and Scott, I would 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, Rainsway's anticipated future operating and financial performance, 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, the global supply chain crisis, 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 SEC, including the risk factors section contained in BrainsWays Form 20F. I would now like to turn the call over to Hadar.

Thank you, Brian.

Welcome, everyone, and thank you for joining us today. We remain focused on implementing key initiatives aimed at growing the company's top line while simultaneously advancing toward profitability. We continue to optimize our existing commercial process, including enhancing our emphasize on larger institutional and enterprise customers that are playing an increasingly important role within the industry. As a reminder, our goal is to add deep TMS technology into this expanding large mental health group or networks. I'm pleased to report that momentum resumed in our business during the first quarter. as we said would be the case on our fourth quarter call. Moreover, we continue to see positive signs in the US marketplace of increasing demand for our deep TMS system and expect this momentum to continue throughout 2023. While I will let Scott provide you with the key details of our recent financial performance, our revenue increased 10% sequentially as compared to the fourth quarter of 2022, and we shipped a net total of 48 systems during the first quarter, which was nearly 50% more than the net total from the fourth quarter of last year. Importantly, our international business continued to thrive. From a financial perspective, we executed a number of cost optimization measures in March that we expect to begin seeing the benefit of in the second quarter, and more meaningfully, in the second half of this year. As we said we would, we have reprioritized the allocation of our R&D resources and commercial investment. In R&D, as some of our new clinical development focus areas evolve, we will share further details with you. Further to this, we recently launched an investigator-initiated study program. The program is designed to support further research on deep TMS by the clinical research community through data collaboration and recruitment loan initiatives. The program will aid the investigator interested in advancing current knowledge about deep TMS. As we are accepting applications through July 3rd, we will share further details on this program later this year. On the commercial side, as we said on our last call, we are focusing less on digital marketing than in the past, but our other more impactful sales initiatives are aggressively continuing. As a reminder, we are targeting break-even operating income in the fourth quarter of 2023 while demonstrating full-year revenue growth over 2022. Our first quarter performance was in line with our expectations, and we are on our way to achieving this objective. I'd now like to pivot to some of our recent accomplishments. On the reimbursement fund, Blue Cross Blue Shield of Mississippi issued a healthcare policy update. that allows TMS-trained healthcare professionals to order and provide TMS treatment to their patients with MDD. In addition, UnitedHealthcare has updated their Medicare Advantage Policy in states covered by National Government Services Medicare to allow non-physician practitioners, like nurse practitioners, to order and administer TMS therapy to their patients with MDD in states where they have scope of practice to do so. These policy changes increase access for patients to our deep TMS system. We also continue to build clinical evidence in support of deep TMS for use in multiple indications. Most recently, an expansive post-marketing data analysis demonstrating high response and remission rates for depression and anxious depression patients undergoing deep TMS treatment was published in psychiatry research. The data show substantial benefit of deep TMS treatment for depression with patients who had received 30 or more treatments achieving an 82% response rate and a 65% remission rate. Importantly, the average patient in this data analysis had already failed more than seven medication trials in their lifetime. Until this study, it was only anecdotally known just how effective deep TMS really is in real-world settings for depression patients that have had limited success with other treatment options. In addition, we had a significant presence earlier this month at the annual meeting of Clinical TMS Society. Multiple posters related to deep TMS technology were presented at the meeting, including one by Dr. Aaron Tendler, Brainsway Chief Medical Officer, that detailed quality of life improvement following deep TMS for treatment-resistant depression. The poster highlighted the results of a secondary analysis on data from a multi-site clinical trial for treatment-resistant depression, which showed that 20 sessions of deep TMS significantly improved quality of life, as well as the primary depressive symptoms. Also presented at this meeting was a poster focused on individual trajectories for responses to deep TMS in major depression, a step toward potentially improving capabilities to predict and personalize deep TMS outcome in patients. Later this month, we will also present multiple posters at the annual meeting of the American Psychiatric Association. Before I turn the call over to Scott, I would like to reiterate our confidence in our outlook for 2023. We continue to expect to demonstrate revenue growth over 2022 and are targeting break-even operating income in the fourth quarter of 2023. The market dynamics continue to show that TMS is a large market with strong momentum and there is ample room for Brainsway to capture meaningful market share, both in the US and internationally. Finally, as always, we would like to thank our valued partners and providers who battle the mental health crisis each and every day, as well as to the entire BrainSuite team for elevating their commitment to excellence in delivering on our mission of advancing neuroscience to improve health and transform lives. With that, I will now pass the call to Scott for his review of our first quarter 2023 financial results. Scott?

Thank you, Hadar, and good morning, everyone. Revenue for the first quarter of 2023 was $6.6 million, a 17% decrease compared to the prior year period revenue of $8 million. However, on a sequential basis, revenue in the first quarter grew nearly 10% as compared to the fourth quarter of 2022. As expected, total revenue in the first quarter was impacted by the inability to recognize approximately $0.9 million of lease revenue due to the financial condition of one of our customers. As previously discussed, we anticipate that this customer's financial condition will impact our recurring revenue throughout 2023. However, momentum detailed by Hadar in direct sales in both the U.S. and internationally was not impacted by this customer. We placed 48 deep TMS systems in the first quarter and continue to experience strong international performance, a sustainable trend for us, as well as a return to solid contributions from the U.S., Our total installed base was 932 systems as of March 31, 2023, compared to 884 systems at March 31, 2022, or 18% growth. Gross profit for the first quarter of 2023 was $4.8 million, or a 73% gross margin, compared to $6.1 million, or a 77% gross margin during the prior year period. The decrease in gross margin was largely attributable to revenue mix. Moving on to operating expenses. For the first quarter of 2023, sales and marketing expenses were $4.9 million compared to $4.1 million for the first quarter of 2022. Research and development expenses were $1.8 million compared to $1.6 million in the first quarter of 2022. General and administrative expenses for the first quarter of 2023 were $1.8 million, compared to $1.9 million for the first quarter of 2022. Included in total operating expenses in the first quarter of 2023 were approximately $0.5 million in one-time severance costs. With respect to expenses for full year 2023, as we said on our last call, we expect costs to moderately decrease as compared to 2022. As Hadar noted, we are more strategically and prudently investing in our commercial and research activities. Operating loss for the first quarter was $3.7 million compared to an operating loss of $1.5 million for the same period in 2022. So the first quarter ended March 31, 2023. We incurred a net loss of $2.4 million compared to a net loss of $2 million in the same period of 2022. Moving on to the balance sheet. We ended the first quarter with cash, cash equivalents and short-term deposits of $44.3 million as compared to 47.9 at December 31st, 2022. Based on our robust U.S. pipeline and continued momentum internationally, we are confident in our positive outlook for 2023. To reiterate what Hadar said, we anticipate annual growth over last year and to demonstrate improvements in cost containment over 2022. This concludes our prepared remarks. I will now ask the operator to please open up the call for questions. Operator?

Thank you. If you'd 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'd 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. Our first question comes from the line of Steve Lichtman with Oppenheimer. Please proceed with your question.

Thank you. Good morning, guys. I guess first question on the pickup and placements you saw sequentially here. You mentioned improving momentum. Can you talk about how international performs specifically? And in the U.S., where are you seeing some of that sequential improvement?

Good morning. I'll start with the U.S. market. I definitely see the U.S. market is slowly improving, and we are experiencing some very large commercial wins in this market, both for new customers but also on current customers. The pipeline continues to grow, and that's what keeps us very, very positive with the outcome. On the international market, it's definitely growing. I think one of our investment in working with distributors outside of the U.S., we see some good proof of concept and we see some good demand. Some of it relates to the Far East, but also in Europe. And I anticipate this international market to continue to grow.

Okay, great. I was wondering if you could update us on the smoking cessation indication. How is the limited launch progressing there, and what's your outlook?

We're still collecting the data from this soft launch. As you know, we have seen some pretty good results on the multicenter trial. We continue to see such results also on the soft launch, but it's too early for me just to share some additional information. We are actively looking for some other profile of potential customers that may use this indication.

Okay, got it.

And then just lastly for me, on the cost savings, you mentioned being more targeted in R&D. As you think about some of the savings there and the reduction in digital, obviously knowing you're operating income goals, but how are you balancing that versus maybe some reinvestment on the sales and marketing side? I mean, how should we think about that balance looking ahead?

Yeah, that's a great question. So, you know, on the R&D side, we just need to reprioritize some of our objectives and to push more investment toward the sales and marketing in order to reach our objectives. On the sales and marketing, again, it's all about optimization and the ROI for each investment that we are making on marketing. So we are measuring it very carefully, at least on the digital campaign. If we don't see some good ROI, we're probably going to reduce some of this spending. But we definitely continue to push toward more boots on the ground and more aggressively to build our pipeline. And it's improving. I just see it. The pipeline is growing, and that's why we remain very optimistic about the outlook for 2023. Okay, great.

Thanks, Hadar.

Thank you.

Thank you. Our next question comes from the line of Jeffrey Cohn with Lahnberg Thalmann. Please proceed with your question.

Hey, good morning, Hadar and Scott. How are you? Good morning, Jeff. So how are you? So I guess firstly on MDD, could you –

talk a little bit about some of the um the trends out there from the payers on the reimbursement front and the number of drug failures that are being required any any movement there over the past number of months to talk about yeah sure there are always always always positive positive uh progress with uh with the pairs uh we saw um some relief from uh you know from four failures in some of the big pairs from four failures into two failures of medications. So there is always an improvement. What we just shared some additional information with in Mississippi, we can also see some also expansion outside of psychiatry also to nurse practitioner that allowed also to provide this treatment in some specific states. So there is always an improvement for this very important treatment for patients.

Okay, got it. And for the quarter, any trends to note on leasing versus selling units?

Yeah, sure, Jeff. So as I mentioned in the prepared remarks, our leasing revenue was impacted by about $900,000. So I continue to expect to see that through the rest of the year. So that's going to just slightly change our lease to direct sales ratio here in terms of revenue, but not necessarily in terms of system placements going forward as we still continue to have strong momentum in placing systems, placing lease and direct sales on a go-forward basis.

Okay, got it. And then Lastly, for us, anything to speak of on the multi-channel development out there from Hadar, Dr. Tedler, or anyone else?

Yeah, sure. We are extremely excited about this new innovation. We are planning to launch the first multi-channel system this year and to start a beta site with it in some specific centers. More to come around this subject, but it's definitely a very important milestone for Braintrain.

Okay, perfect. And Hidar, what's the approval pathway to start testing the system?

So we will start, you know, collecting some data with a few centers and obviously based on this data of safety, we will be able to submit it to FDA to get the FDA clearance.

Okay. And will you be pursuing more than one indication for the system itself?

I believe so. When the time comes, we will share a bit more information about that.

Okay, I got it. That's super helpful. Okay, thanks for taking our questions. Appreciate it.

Thank you, Jeff.

Thank you. Our next question comes from the line of Jason Bedford with Raymond James. Please proceed with your question.

Hey, this is Glenn Schell on for Jason Bedford. I just have one quick question. And Wonky, you saw a nice jump in OCD adoption. Do you expect this momentum to continue? And are you seeing an uptake of OCD internationally?

Yeah, for sure. We believe the OCD is one of the key drivers for our growth and also for differentiation. Brainstorm was the only company that conducted the multicenter trial around the OCD, and we truly do believe in this indication, and we see some very, very good results on the OCD, and therefore we are seeing very strong adoption. I believe most of our new cells are coming with... Not only the MDD coil, but also the OCD coil, the H7 coil. I see almost the same momentum also on the international market. There is a good demand for this H7 coil that can be used, by the way, internationally, mainly for OCD, but sometimes for other indications. But definitely there is a good demand and good feedback on this coil.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Carl Burns with Northland Capital Markets. Please proceed with your question.

Thanks for the question, and congratulations on the results. I noticed that the interest expense came in at about $1.4 million, which was up – pretty significantly sequentially. Was there anything of a one-time nature on that, and should we be looking at that as a consistent number for the second, third, fourth, et cetera, going forward? Thanks.

Yeah. Hi, Kyle. Good morning. So, reminder, that was in the first quarter of 2023. That was actually finance income, not expense. And it was a one-time expense, and it has to do with the reversal of how we calculate the value of our Innovation Authority loan with Israel. And I could get into the math. It's a little complicated, but just it is a one-time expense, a one-time pickup in income. And I expect our expense to resume back to normal levels, similar to what we had in 22 after that.

Got it. Thanks for the clarification. Yep. Thank you.

Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Buvalon Pachapayapan with H3 Wainwright. Please proceed with your question.

Hi, Hadar and Scott. Thanks for taking my questions. So just one from us. I was hoping you could talk about the recent post-marketing study data and how it stacks up against the RCT data that was published previously. I see that there is superior treatment response and remission. So is this primarily due to the longer nature of the treatment or are there other factors at play?

You know, we're always expecting to see some improvement and better results on the post-marketing data than the clinical trials. But it's always a combination of also durability and a number of additional treatments. So the more treatments or maintenance treatments that you provide, the better the results. So we are not surprised that we know that the treatment is very safe and effective. And, yeah, the results are extremely good, and we're very proud of these results.

All right. Thank you. That's it from me.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Levy for any final comments.

I would like to thank all of the investors, analysts, and other participants for their interest in Brainsway. With that, please enjoy the rest of our day. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.