BrainsWay Ltd.

G'day and welcome to Brainswave third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the film and presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the conference over to Brian Ritchie. Please go ahead.

Thank you all, and welcome to BrainsWay's third quarter 2023 earnings conference call. With us today are BrainsWay's Chief Executive Officer, Padar Levy, and Chief Financial Officer, Ido Marom. The format for today's call will be a discussion of recent trends and business updates from Padar, followed by a detailed discussion of the financials. Then, we will open up the call for your questions. Earlier today, BrainsWay released financial results for the three and nine months ended September 30th, 2023. A copy of the press release is available on the company's investor relations website. Before I turn the call over to Hadar, 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, Brainsway'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 needs and other risks are available in the company's earnings release and in its other filings with the SEC, including the risk factors section contained in Brainsway's Form 20F. I would now like to turn the call over to Hadar. Please go ahead.

Thank you, Brian. Welcome, everyone, and thank you for joining us today. To begin, I would like to extend our gratitude to so many of you who have continued to reach out to us to express your concern regarding the health and safety of our employees given the horrible acts of violence taking place in and around Israel. While no one in Israel is unaffected by the events unfolding, we remain resilient and will emerge stronger. We have encouraged our team in Israel to prioritize their well-being, look after their physical and mental health, and spend time with loved ones. As a company, we remain committed to the consistent availability and delivery of our products and services, and the impact of our current events on our operation remains limited. We are taking steps to ensure that we have enough inventory and stock on hand to continue our supply of devices on an uninterrupted basis to meet our projections and have additional contingency plan in place should there be any need for alternative supply channel in the future. Of course, we will provide further updates if and when material events so warrant. With that, I will now discuss the strong momentum that currently exists throughout our entire business. You will recall our goal of growing the company's 2023 top line over 2022 while targeting breakeven operating income and positive adjusted EBITDA in the fourth quarter. Our plan for the achievement of these objectives remain on track and in some areas ahead of initial projections. We will discuss this further shortly, but we are very pleased to nearly reach brick-haven operating income and to record positive adjusted EBITDA in the third quarter, one quarter sooner than anticipated. 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. We remain focused on adding deep TMS technology into this expanding large mental health group or networks. As our results indicate, we are executing well on this strategy. Recent key agreements include the formation of an important partnership with a mental health clinical treatment provider with an increasingly expanding footprint in the Northeast region of the US. As a result of this partnership, and the series of successive order, a total of 10 deep TMS systems will be installed by this provider in 2023 alone, with the potential for additional systems thereafter. In addition, our longstanding partner, Katie's Way Plus, has ordered an additional 10 deep TMS systems, which will be more than double its existing offering. This agreement is especially gratifying that it will support Katie's Way Plus in its vital mission to provide focused care to U.S. service members, veterans, and their families. Moreover, our international business continues to perform very well. To this end, we expanded the availability of our deep TMS technology in Taiwan, where the most recent delivery of system increased the install base in this important Asia Pacific country to 16 systems. Importantly, the momentum we experienced in our business during the first half of the year continued in the third quarter, and our outlook for the fourth quarter is positive as well. On the top line, our third quarter revenue increased 61% year over year, and we shipped a net total of 56 systems during the third quarter. Moreover, demand for OCD treatment indication continued to grow as we shipped 48 OCD coils as a head-on helmet to certain new and existing systems. Nearly 50% of our total install base now includes OCD treatment capabilities. As we said would be the case, our third quarter bottom line included meaningful benefit of the cost optimization measures we executed on earlier this year as we generated substantial improvement in operating and adjusted EBITDA results. we expect further bottom line improvement in the fourth quarter. In addition, we continue to be supported by an extremely strong balance sheet, having ended the period with $44.2 million in cash with no debt. Moreover, we were cash flow positive in the third quarter. As our third quarter results reflect, we are confident in the upward trajectory of our overall business, and look forward to further progress in the fourth quarter. In order to achieve further growth, we continue to achieve significant progress in expanding the clinical and real-world evidence in support of deep TMS. We recently presented two deep TMS posters at the World Congress of Psychiatry. The first poster highlighted the benefit of deep TMS in the difficult to treat elderly population. The second poster focused on the positive results from a group of patients receiving an accelerated deep TMS regime. This accelerated treatment approach was also the subject of the publication of new real-world post-marketing data demonstrating the efficacy of deep TMS administered over the multiple sessions each day to allow for quicker overall treatment time for depression patients. The compelling results were published in the peer-reviewed journal Psychiatry Research and the data suggested that outcome can be achieved with accelerated deep TMS, which are comparable to those resulting from longer traditional protocols. These preliminary results could be leveraged to support effort to expand current labeling for deep TMS, and we intend to further investigate the potential efficacy of accelerated deep TMS in the treatment of depression. On the commercial front, following the reprioritized allocation of our commercial investment, we have decided to seek a distribution partner for smoking cessation indication. Importantly, the data from the initial patients utilizing deep TMS therapy for smoking continues to look favorable, and we are beginning to gain commercial traction with this offering. In addition, the recent positive recommendation issued by the Clinical TMS Society that advocates for reimbursement related to TMS for the treatment of smoking addiction is an important step toward securing insurance coverage for this indication. Moving on, before I pass the call over to Ido for his review of our financial results, I would like to reiterate our confidence in the Brainsway outlook for full year 2023 and beyond. For full year 2023, we continue to expect to demonstrate revenue growth over 2022, and are now targeting positive operating income in the fourth quarter, as well as positive adjusted EBITDA for the second consecutive quarter. Looking ahead, the market dynamic continue to show that TMS is a large market with strong momentum, and there is ample room for BrainSway to continue capturing significant market share both in the U.S. and internationally. With that, I will now turn the call over to Ido for his review of our third quarter 2023 financial results. Ido?

Thank you, Adar. Revenue for the third quarter of 2023 was $8.3 million, a 61% increase compared to the prior year period revenue of $5.2 million. On a sequential basis, revenue in the third quarter grew 6% as compared to the second quarter of 2023. We placed 56 deep TMS systems in the third quarter. Our total installed base was 1,041 systems as of September 30th, 2023, compared to 851 systems at the same point in the prior year. Gross profit for the third quarter of 2023 was $6.2 million. or 74% gross margin. This is compared to $3.8 million or 74% gross margin during the prior year period. Moving on to operating expenses. For the third quarter of 2023 sales and marketing expenses were $3.6 million compared to $4.8 million for the third quarter of 2022. Research and development expenses were $1.5 million compared to $2.2 million in the third quarter of 2022. General and administrative expenses for the third quarter of 2023 were $1.2 million compared to $1.7 million for the third quarter of 2022. Operating loss for the third quarter was $133,000 compared to an operating loss of $4.9 million for the same period in 2022. As Adaro previously mentioned, adjusted EBITDA was $337,000, representing the first time we achieved positive adjusted EBITDA compared to a loss of $4.1 million in the same period in 2022. We expect to achieve a second consecutive quarter of positive adjusted EBITDA in the fourth quarter. For the third quarter ended September 30th, 2023, we incurred a net loss of $230,000 compared to a net loss of $5 million in the same period of 2022. We ended the third quarter with cash, cash equivalents and short-term deposits of $44.2 million. as compared to $47.9 million at December 31st, 2022. However, when compared the cash balance of $43.4 million in the previous quarter, we achieved positive cash flow from operating activities in the third quarter. Based on our robust US pipeline and continued momentum internationally, we are confident in our positive outlook for the remainder of 2023 and into the next year. This concludes our prepared remarks. I will now ask the operator to please open up the calls for questions.

Operator?

Thank you very much, ladies and gentlemen. We will now begin the question and answer session.

If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and link two 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. Our first question is from Jeff Cohen of Ladenburg Bowman.

Please go ahead. Our apologies.

The next question is from Jason Bateford of Raymond James.

Please go ahead. Hi. Good morning. I sympathize with what's occurring in your country right now. But congrats on the progress. You guys are doing a nice job of turning this business around here. Can I ask you if you could compare the selling environment in the U.S. and the international right now? And just as a bit of a tag onto that question, was the international U.S. mix in the quarter much different than in past quarters?

Yeah. Hi, Jason. Thank you for the question. So there is definitely an improvement in the U.S. market. It's slowly improving. It's slowly improving. And we have experienced large commercial wins recently, both in the U.S. and internationally. We continue to see positive sign in the U.S. marketplace of increasing demand for the deep TMS therapy. And I'm expecting this momentum to continue. Outside the U.S. also, we managed to sign with... some very impressive agreement with distributors and the demand continue to grow. There is a very large market outside of the US. And just to remind you, we also have some other approved indication than the US that the demand for those indication is also continue to grow. So I'm expecting both market US and international to continue to be deliver strong momentum for us. In terms of your second question, the ratio between U.S. and international continue to stay the same. I would say like 70-30 U.S. and international. That's the current ratio. In the previous quarter, I think it's similar to this quarter as well. I'm anticipating this ratio to also go into Q4.

Okay, very helpful. And then in terms of new systems, are they largely going to existing users or are you opening up new accounts as well?

So traditionally, it goes 50-50 between new customers and current customers. Our practice development team is doing a phenomenal job with developing the current business. to be much more successful, to increase utilization, and they're ready to pull the trigger and expand their practice. The other 50 is with our capital sales team that continue to push and increase the market.

Okay, great. I'll get back into you.

Thank you. Thank you.

Thank you very much. The next question is from Jeff Cohn of Landen McFarland.

Please go ahead. Good morning, Hedor and Ido. Can you hear us okay?

Yes. Hi, Jeff. Good morning. Hi. Good morning.

Wonderful. Technical problem. So a few questions from Aaron. Could you give us a sense of the 56 placements from the quarter percent of numbers that were leased and or purchased?

Yes. Actually, the 56 system was the net amount, and after a few returns, like we always, when customers are ending their lease agreements, out of the net amount that we have shipped this quarter, 46 were for sales, for purchasing deals, and the rest were for leasing, again, net amount of leasing after a few returns.

Okay, perfect. That's very helpful. Could you talk about the accelerated deep TMS treatment approach a little bit as far as number of visits that have been studied, minutes on the system as far as durations, and then maybe hypothesize with us a little bit about the payers and the costs and the reimbursements that may be the same or not?

So this is a very preliminary results on the accelerated TMS. It's a different treatment regime that is basically we are providing few treatments a day, five treatments a day in a course of six days. We intend to collect the data and potentially also to work with the FDA on submitting a protocol for a study with the FDA in this matter. It's too early for me to share the information, but based on the data that we collected so far, the data is very favorable, very similar to the, I would say, in terms of safety and efficacy to what we've seen on the acute phase protocols.

Okay, got it. So the same energy delivery just over a six-day period. Got it. Okay, and then lastly for us, any current updates on rotational fields at all? Any studies or papers or presentations that are out there?

Yeah, we are planning to launch the first multi-channel system toward the end of the year. We intend to do some feasibility study with this new and impressive technology to investigate few areas. Some of them relates to neurology like dementia and stroke rehabilitation. Some of them relates also to psychiatry. But the current timing for launch the first system is toward the end of the year.

Perfect. But those are for us. Thanks for taking the questions.

Thank you, Jeff.

Thank you very much. The next question is from Stephen Lichtman of Oppenheimer.

Hi, everyone. Good morning. This is Amir on FirstEase. And I just wanted to quickly ask You've talked about positive developments at payers with regard to lowering hurdles for MDD coverage. Can you talk about whether this has started to change customer behavior? And as a follow-up, are you seeing overall more demand as a result? Thank you.

Yeah, thank you for the question. Absolutely. And, you know, this is not a trend that started yesterday. I would say in the last... 18 months, we see a release from a PEARS to treat with TMS. There is a release on the number of antidepressant failures before you can prescribe the TMS treatment. This is definitely something that is driving utilization. And I'm expecting that it will continue to grow that from this aspect. On the other end also, I believe that on the OCD, the continuation and the increase on the OCD coverage is also could be a good driver for the adoption of the deep TMS technology.

Great. Thank you. And just quickly also moving on to international coverage. On your international expansion efforts, where do you see the biggest near-term opportunities? And can you guys update us on your outlook for international expansion in Asia and Europe? Thank you.

Yes, I think you said it right. I would say that the main big hubs internationally are Asia Pacific. It could be Japan, China, and India. We're definitely going to grow in those markets, although we also have a great success in the Taiwan market and also in South Korea. But this is on Asia Pacific. We have a very, very good footprint, and I'm anticipating that this important market will continue to grow. The other important market is obviously Europe. Europe, there is a really strong demand I would still say it's an undeveloped area for our technology. There is ample room for us to grow in those areas. We continue to look and find the right partnership, and that's where we're going to focus in 2024. Thank you.

I'll hop back on cue. Thank you, everyone.

Thank you.

Thank you very much. The next question is from Carl Burns of Brooklyn Capital Markets.

Thanks for the question, and congratulations on the progress. Most of my questions have been answered, but I was wondering, you know, given the cash flow from operations, I think it was around $1.4 million generated in a quarter, where do you see that progressing in 2025 and 2026 if you can? And then also, can you add a little more detail with respect to the prospects of a partnership relating to smoking cessation? Thanks.

Yeah, thank you for the question. So for your first question, we're not providing guidance, but what I can say that as part of our vision is to build a healthy and growing company. Healthy means that, yes, we still continue to focus on growing the company, but also looking very carefully on the profitability and the bottom line results. And for your second question, so we're having active dialogue with potentially interested parties on a consistent basis. We are looking for the right partner for the smoking addiction. I believe that there is plenty of room for us to grow in this market and finding the right partner can really help us to push this important indication forward.

Thanks, and congratulations again. Thank you so much.

Thank you very much. The next question is from Bubalan Batayapan of H.E. Wainwright. Please go ahead.

Hi. Thanks for taking our questions, and congrats on the progress. So the third quarter numbers came out very strong. So just curious, what are your expectations in terms of growth trends for the fourth quarter and maybe for early 2024? And what could be the underlying assumption behind these expectations?

So again, we're not providing guidance for 2024. but we do have a very strong confidence, very, very strong confidence about our outlook going forward. We definitely believe that we will be able to grow year over year and continue to build a healthy and strong profitability going forward.

Okay, fair enough. Speaking of H4 coils, do you expect the sales to gain traction, particularly in light of the clinical TMS societies recently published post-coverage recommendation? Or do you think you might need additional data in order to gain traction?

So the H4 is treating today is cleared for the smoking addiction. We definitely believe that We see that the demand for this coil is growing. I believe it will grow even faster with finding the right partner. The right partner could be a partner that is mainly focused in addiction centers. It can be cancer centers. We are collecting very important data. on some other addiction symptoms with DH4, and potentially that could be used for some additional clinical trials, but it's too early for us to share this information.

Alright. You briefly spoke about entering European markets, so I'm just curious whether the European strategy would be any different from, say, the other international markets such as India or Taiwan, or will it be sort of hybrid between US and India and China, India and Taiwan market? Thank you.

So in Europe, we are going to work, we're not going to work to sell directly. We are going to find a strong distributor that is familiar with the space. We can find more than one distributor. You know, one distributor can be focused on the mental health and another one could be focused on some neurology just to remind everyone that in Europe we have cleared for 10 indications not only 3 like in the US so we are wide and open to sell for some other indication and I anticipate that the demand in these important countries will continue to grow

Thank you so much for taking our questions.

Sure. Thank you.

Thank you very much. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to the CEO, Hadar Levy, for some closing remarks.

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

Thank you very much, sir. Ladies and gentlemen, that then concludes this event.