Ladies and gentlemen, 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. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob Yedid of LifeSci Advisors. Please go ahead.

Thank you. And welcome to BrainsWay's third quarter 2022 earnings conference call. With us today are BrainsWay's President and Chief Executive Officer, Chris von Jako, and Chief Financial Officer, Scott Areglado. 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, BrainsWay released financial results for the three and nine months ended September 30, 2022. 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 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 results, business plans and prospects, and expectations for its products and pipeline, which are all subject to risk and uncertainties, including shifting market conditions resulting from the COVID-19 pandemic, the 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 BrainsWay's Form 20-F. With those prepared remarks, it's my pleasure to turn the call over to Chris von Jako. 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 continued 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. It 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 our previously stated objective of expanding the sales force 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 sales force size. You will also recall that Eric Hirt 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 a deep TMS platform technology. Also, as we target larger enterprise customers that are somewhat more insulated from the economic fluctuations, Eric is focused on ensuring that when the commercial team is appropriately built out, it's done with experienced professionals with the requisite experience to meet the needs of the…

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 30, 2022 compared to 717 systems or 19% growth as compared to September 30, 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% gross margin compared to $16.5 million or 78% 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 costs of travel, marketing…

[Operator Instructions]. Our first question comes from the line of Steven Lichtman from Oppenheimer & Company. Please go ahead.

I'm wondering in terms of the mix of units, beyond the units being lower sequentially, should we assume that you saw significantly higher increase in leased systems versus direct? Is that really where you saw the big drop off? And then secondly, can you talk about the sales force? I think you said you have 14 reps. Where were we again in 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.

This is Scott. The first question, I think 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 because the revenue is overall lower and the consistency of lease revenue on a quarter-to-quarter basis.

It's Chris. Your question about the sales people, 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. 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 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 can you talk to us in terms of what your preparations are to go after that side of the market?

Just to give some context there, and I'm asked this by investors from time to time and talking about like enterprise accounts, 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. So, we have been bringing in several people into the organization that a higher level can be able to talk commercially. But, as I 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 focus right now. That's something that has been key to Eric Hirt over the last number of months. We've been really focusing in that area. We believe it will be fruitful moving forward.

Just lastly, maybe, Chris, a little bit more color on 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, like, any sort of backlog of systems that may be building as there's interest, but perhaps reservation given the economic environment?

Steve, I think we mentioned on the last call, we started to see those headwinds and we made those statements on the last call. Those headwinds were obviously a little bit larger than we felt. Our pipeline is vast, but 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, as things, hopefully, in the next several quarters, begin to stabilize that we'll be able to continue to make inroads there with those smaller customers.

Our next question comes from the line of Jeffery Cohen from Ladenburg Thalmann.

Firstly, can 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?

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? Over 60 systems, yeah. And 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.

Are you seeing any payers come forth? Or have you submitted any paperwork to any payers for reimbursement on their front page for?

Yeah, we haven't at this time. For us, with our experience, with that really good experience, obviously, we'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.

I did want to follow up on – in the third quarter, 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 and any outlook there on the capital front.

From a patient perspective, 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 looks like it was fairly flat. We also look at numbers of patients that are going into psychiatric offices. 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 effect obviously that our smaller customers are seeing as well.

Lastly, some of the International placements, are they all capital sales or some are leases as well? Any color there would be helpful.

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

So we're selling to a distributor…

We're selling to a distributor.

Our next question comes from the line of Jayson Bedford from Raymond James.

Just a few for me. 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?

I think there's always that opportunity. Jayson, you may remember quite well, when I first started back in 2020 with COVID, you saw this happen with 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 to make it a little bit more flexible on customers that are looking to expand.

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

But you are implementing…

Absolutely. Look, I think the bottom line is we still want to build our install base and get systems. I think 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 we're focused on trying to get into accounts and get first position there wherever we can.

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.

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 choppy for that?

So capital deployment, in what sense? Just want to make sure I…

Either acquisition, licensing, technology, buyback, however you want to use the 40 some odd million in cash?

Again, I think we want to be measured in things we do. We're always evaluating things. And what we're continuing to do is I think what we talked about in our prepared remarks where we're focused on building 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 incredible we brought on Dr. Colleen Hanlon to the team. She's 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 an added value in working together with our commercial team as well.

Our next question comes from the line of Boobalan Pachaiyappan from H.C. Wainwright.

Firstly, you mentioned about CGS and NGS Medicare coverage update for deep TMS for depression. So do you foresee any such update for OCD in the near future? Any thoughts?

Medicare in particular?

Yeah.

We have one Medicare already that's come on with Palmetto. The other ones are continuing to look 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.

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?

From our side, our practice development consultants work directly with our customers and looking for the patient 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.

One more question. As we look into the fourth quarter, and maybe 2023, in addition to the macro headwinds that we just discussed, that impacted your 3Q 2022 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.

Nothing that comes off of the top of my mind. Right now, we've been looking at the challenges really being the macroeconomic areas, right? And that's why we're looking at also getting to the enterprise areas as well. Growth constraints, Scott.

Our next question comes from the line of Jason Wittes from Loop Capital.

On the sales force, sounds like you're reevaluating sort of which sales should we be bring in. I guess a couple questions related to that. First, where have you been getting your sales people? And is that changing where you're looking now? 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 sales force shaping up in the next 6 to 12 months?

Like I said, we're at 14 right now. Our goal is really to get to 21. And obviously, with a new leader, like Eric Hirt coming in place, and things change within the sales force a little bit, and he has different criteria. And he's been doing, I think, an amazing job of kind of bringing in the right talent that we need. So, 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.

I realize the focus is 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 install base, that you're thinking about? Or is that model pretty much set the way it is at the moment?

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. Obviously, our goal is to place these systems in customers to treat these patients. So we're continuously looking at different models. And I think that there are some opportunities that lie ahead for sure, definitely.

Just a follow-up on our housekeeping. You may have answered this, so apologize. But did you give the number of OCD helmets placed this quarter, the total install base currently?

I thought we did, but it was…

380, I think.

It was 12 OCD oils in the quarter. 380 in total.

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

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

Thank you. The conference of BrainsWay has now concluded. Thank you for your participation. You may now disconnect your lines.