BrainsWay Ltd. (BWAY) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Brainsway Reports Third Quarter 2019 Financial Results and Operational Highlights Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advice you that this conference is being recorded today, 25th of November, 2019. And without any further delay, I would now like to turn the conference over to your first presenter today, Brian Ritchie. Please go ahead, sir.

Thank you, and good morning, everyone. I would like to welcome all of you to Brainsway's third quarter 2019 conference call. With us today are Brainsway's Chairman and Interim Chief Executive Officer, David Zacut; and Chief Operating Officer and Chief Financial Officer, Hadar Levy. Also with us today is Dr. Christopher von Jako, whom the company has just appointed to be its new President and Chief Executive Officer. After David and Hadar provide an overview of the company's business activities and developments for the third quarter, we will open the call for Q&A. Before I turn the call over to David, 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 future events, or the future performance of the Brainsway, including but not limited to any statements relating to commercial plans or activities, financial projections, clinical studies, R&D plans, and/or anticipated timelines. When used in this call, the words "anticipate," "could," "enable," "estimate," "intend, "expect," "believe," "potential," "will," "should," "project," and similar expressions as they relate to Brainsway are as such forward-looking statements. These statements are only predictions and Brainsway cannot guarantee that they will in fact occur. Brainsway does not assume any obligation to update that information. Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause actual results to differ from those anticipated by Brainsway at this time. Additional risks concerning factors that could cause actual events, results, or achievements to materially differ from those contained in the forward-looking statements can be found in the company's registration statement on Form F1 and its other filings with the Securities and Exchange Commission. Today the company issued press releases announcing its financial results for Q3, as well as regarding Dr. von Jako's appointment. So, participants in this call who may not have already done so, can find these releases on Brainsway's Web site as we provide a summary of the results on this call. I would now like to turn the call over to Brainsway's Chairman, David Zacut. David?

Good morning. Thank you, Brian. Good morning, everybody. Welcome to Brainsway third quarter 2019 earnings call. Our business continued to perform well, and most importantly, demand of our Deep TMS system continues to grow. Before I turn the call over to Hadar Levy, our CFO, to discuss various highlights of our businesses, let me begin with an update on our U.S. leadership transition. Earlier today, Brainsway announced that the Board has appointed Dr. Christopher von Jako as President and CEO. He has over 25 years of experience managing businesses and leading global medical technology company. His appointment reflects the Board's commitment to a strategic transition to U.S-based leadership, and will become effective in January 2020. You will recall that I have been serving as Interim CEO since September 2019. We are extremely excited to welcome Chris to Brainsway. While Chris will not be taking part of today's Q&A session, we are pleased to have him with us on today's call to directly introduce himself to you. Thank you. Chris, please.

Thank you, David, for your warm welcome and for your faith that you and the entire Board placed in me to lead Brainsway into the next phase of growth. I'm incredibly excited to join this exceptional organization, and truly passionate about this opportunity to be a part of the difference that Brainsway and Deep TMS are making in people's lives. Just a little bit about myself, I've been fortunate to gain over 25 years of experience in managing businesses in leading global medical technology companies, including in the development and commercialization of minimally-invasive medical technologies. Most recently, I served as CEO of Dynatronics Corporation, a publicly-traded medical device company that designs, manufactures, and sells high quality restorative products. Previously, I served as President and CEO of NinePoint Medical, an advanced image guidance company, and before that as President and CEO of NeuroTherm, a minimal-invasive interventional pain management company. Early in my career, I held other leading medical device companies, including Integra LifeSciences, Covidien, Medtronic, and Radionics. Through the various roles I've held, I have designed and implemented commercialization strategies for a variety of medical devices offering solutions to patients through a range of disruptive technologies. For example, from the use of pioneering intraoperative MRI imaging system for minimal-invasive brain surgery to the advent of radio surgery, a non-invasive solution that utilizes precise radiation to target brain tumors. I now plan to use these experiences at Brainsway to create a heightened focus on commercial excellence, to leverage the strategic opportunities that exist in this dynamic space, and to continue Brainsway's impressive track record of scientific and clinical achievements, as well as its commitment to patient health. Again, I'm honored to be joining Brainsway. I look forward to working with the entire team, and also to meeting our investors and analysts in the coming months. I would like to now turn the call back over to David.

Thank you very much, Chris. I will now turn the call over to Hadar. Please go ahead, Hadar.

Thank you, David. We are very pleased with our strong performance in the third quarter of the year. As David noted, our positive results reflect the continued increase in demands of our Deep TMS system. However, before I discuss our third quarter performance, I'd like to begin with a very brief reminder of Brainsway business, our Deep TMS technology, and key targeted market. Our Deep TMS system has FDA clearance for Major Depressive Disorder or MDD, and Obsessive Compulsive Disorder, or OCD. Our Deep TMS system have demonstrated clinical efficacy in MDD and OCD, is well-tolerated, and also have the potential to address a wide variety of psychiatric, neurological, and addiction disorders. Of significance, our FDA clearance in both MDD and OCD provide us with a substantial competitive advantage in the marketplace. Our customers can treat both sets of patients with our technology, while other TMS technologies can only treat MDD patients. With that overview, let's turn to our key results of the third quarter of 2019. We generated quarterly records revenue of $5.9 million, an increase of 38% over the third quarter of 2018. This strong performance is further notable in light of the seasonality typically associated with the third quarter. Our recurring revenues are $3.4 million, an increase of 40% over the third quarter of 2018. This recurring revenue demonstrate the benefits of the Brainsway business model, in which, a significant portion of our Deep TMS customers enter into a lease arrangement that generates recurring revenue over a three to four-year period. This recurring revenue provides greater predictability for our growth, and we believe it offers investors great visibility of Brainsway results. It is also important to consider that our least customers are those that typically treat an average of three to four patients per day. Therefore, commensurate with the increase in revenue from our least model is continuous strong utilization of our system. Since September 30, 2018, Brainsway's install base has increased by 138 systems, reaching a total of 488 Deep TMS system, and reflecting a quarter-over-quarter increase of 32 systems. As of September 30, 2019, the company has shipped 132 OCD calls as add-on elements to certain of Brainsway's new and existing systems, since marketing clearance was obtained in August 2018. I should add the demand for additional OCD calls outpaced our ability to fully satisfy all the orders we received in the third quarter. We anticipate that this additional demand will fulfill in the fourth quarter. Importantly, Brainsway continues to work to obtain reimbursement in the U.S. for our OCD therapy. While I will review our financial results in greater detail shortly, you will note an increase in our operating expenses year-over-year in the third quarter. This is primarily due to the investments we're making in the future growth of our business, and that was one of the key objectives we said when we successfully completed our U.S. IPO earlier this year. We added a net of six new sales reps in Q3 when compared with Q3 2018, ending the quarter with 18 total sales reps in the U.S. We intend to add around two new sales reps in Q4. You will recall that key part of our strategy in that, we intend to accelerate our growth by increasing the size of our sales force and enhancing our marketing activities globally. We're confident that this investment will help drive long-term growth. We also continue to ramp-up our R&D activities. We have a robust clinical pipeline, including studies in other indication for Deep TMS. First, we completed the treatment phase of our multi-center smoking cessation study. These results from the data are expected to publish soon. In PTSD, we continue to accept the availability of improved results by the end of this year. In opioid abuse, we continue to work with the FDA in an effort to initiate the study following the selection of Brainsway by the agency. We expect to submit an investigational new device application, and be in a position to initiate the study in the first quarter of next year. In Multiple Sclerosis or MS, we continue walking towards initiated a multi-center study to treat fatigue symptom in MS patients with Deep TMS, and anticipating beginning the study shortly. We also remain focused on developing a multi-channel stimulator, and closed loop stimulator with real-time EEG reading capabilities. With that, I'd like to provide a brief update of our efforts to expand into additional territories, including Asia. As announced previously, we recently entered into exclusive distribution agreements in Taiwan, the Philippines, South Korea, and Thailand. We expect these agreements to obtain contributing to our results in the fourth quarter and into next year. Now, I would like to provide a detailed review of our financial performance in the third quarter of 2019. As I mentioned earlier, total revenue in the third quarter was $5.9 million, which represents a 38% increase over the prior year quarter. Of that, $3.4 million was recurring lease revenue, which represents an outstanding 40% increase in recurring revenue over the prior year quarter. Gross profit for the third quarter of 2019 was $4.8 million, an increase of 43% from $3.4 million during the third quarter of 2018. Gross margin for the third quarter of 2019 was 81%, which has increased from third quarter 2018 gross margin of 78%. Research and development expenses for the quarter were $1.9 million compared to $1.4 million in the same period in 2018, due to the continued development of our Deep TMS technology, including finalizing the smoking cessation study, and conducting clinical trial for the treatment of PTSD, and other disorders. Sales and marketing expenses for the third quarter of 2019 were at $3.5 million, an increase of $1.5 million over the period prior year. The increase was promoted driven by an expansion of sales force and enhanced marketing activities for MDD and OCD. General and administrative expenses for the quarter were $1.5 million as compared to $0.9 million for the same period in 2018. This increase was driven by the additional costs associated with our current status as a public company in the U.S., and an increase in non-cash provision for doubtful debt. Total operating expenses for the third quarter totaled $7 million, compared to $4.3 million in the third quarter of 2018. For the third quarter ended September 30, 2019, will include a net loss of $2.6 million or $0.12 per share, as compared to a loss of $1.5 million, or $0.09 per share for the three months ended September 30, 2018. Moving to the balance sheet, we ended the third quarter with a cash and cash equivalent of $23.9 million, compared to $27.6 million as of June 30, 2019. Cash usage during the quarter was in line with our expectation. We are enthusiastic about our strong balance sheet, and believe that our substantial cash position will allow us to expand ourselves in marketing efforts further to drive additional adoption of the Deep TMS system, continue to invest in R&D in order to explore new and potential indication to move towards profitability. So, to summarize our performance in the third quarter, and recent highlights; 38% growth in the year-over-year revenue driven by demand for in use of our Deep TMS system, we are growing our sales force and expanding into additional territories, we have achieved key progress in advancing our clinical pipeline, and have multiple upcoming key R&D related catalysts, including final results expected soon from our smoking cessation study. Moreover, we continue to well-supported by a strong balance sheet with the cash and cash equivalent of $23.9 million as of September 30, 2019. Looking ahead, our outlook for the fourth quarter and into 2020 remains highly positive, this confidence is driven by the continuous strong market demand for a Deep TMS system. So with that, I will now ask the Operator to please open up the call for question. Operator?

Thank you. [Operator Instructions] The first question comes from Craig Bijou. Your line is open. Please ask your question.

Thanks for taking the questions. Congrats on the strong quarter, and the CEO hire, and welcome to Christopher, and look forward to working with you. I wanted to ask maybe a couple questions on some of the leadership transitions that have been going on. So, you guys announced on the last call the Head of Sales was leaving in mid-October, and then, obviously CEO resignation in September. So, I just wanted to see if you guys could talk about how much if any sales disruption you saw as a result of any of those departures, and if there is anything that you would expect in Q4 or even the early part of 2020?

There was nothing -- no disruption, because of those two, Joe and Yaacov left the company and business as usual even better.

Okay, thanks for that. And OCD coils, I guess, were down just a little compared to the prior quarter. I just wanted to see if you could provide a little bit of color on user demand there, and how we should think about your progress towards gaining reimbursement? I know you guys mentioned it in the script, but what's the progress towards getting that reimbursement?

Hadar, so…

Yes, so we continue to press hard with our reimbursement threshold, and we believe we are heading to the right direction. However, I'm sure you can understand, we cannot predict when exactly this effort will be materialized and impact our bottom line. In terms of the number of install base, usually -- and that was expected, you know, that was in line with our expectation, Q3 due to the seasonality of this summer time, we did some a decrease in the overall demand, but we can -- as for now, we are expecting for Q4, we're expecting a much stronger demand for the OCD coils.

Great, thanks. And last one for me, and appreciate your positive outlook for Q4 and 2020, but maybe looking ahead to 2020, just how should we think about the growth expectations for each component of the business, the direct system sales, the system leases, and then OCD?

So, our main business model is to lease the devices, and this is where we are aiming to. I think the ratio between the lease and sales will remain the same for 2020. We feel very, very comfortable with our business opportunities, and even I believe that once we will get the reimbursements for the OCD, we see a great potential for a growth as well. So, we have a great confidence about our business for the upcoming year.

Great, thanks for taking the questions.

Thank you. The next question comes from the line from Jayson Bedford. Your line is open. Please ask your question.

Hi. Good morning, and I guess, good afternoon for some. So, thanks for taking the questions, and welcome Dr. Von Jako. I don't think I fully caught all of the OCD commentary. Was there a manufacturing issue that prevented you from fulfilling all the OCB orders? I got the sense that demand exceeded supply in the quarter.

No, no. Again, I said, it was mainly due to the seasonality. I think there are some orders that arrived very late in September. I think it is much more related to a [indiscernible] issue. You will see the ramp up back again into Q4.

Okay, and just in terms of gauging the pull-through here, of the OCD helmets, what percent went to new customers or existing MDD users?

So, it's pretty similar. I would say roughly a 50% from new customers and existing customers. There is still -- we can still see some very good demands from existing customers are now looking very carefully to add this add-on coil of the OCD, and obviously, we truly believe that every new customers that renting or buying the MDD coil also wants to ask the competitive advantage or the ability to also treat OCD patients. So, we anticipate this percentage to grow, but for now it's 50-50.

Okay, just a couple other questions, what's the timing on reimbursement in Japan?

So, we are pressing very, very hard on this issue as well. It's very difficult to give a timeline, but we expect to have reimbursement. We hope to do arbitrary soon, but I don't have a clear answer right now.

Okay. And then just lastly for me, gross margin was quite strong in the quarter, can you maybe comment on where the strength stem from?

So, the strength comes from the ASP. Brainsway as a premium technology is trying to keep the ASP as high as we can, and we hope to continue to keep this level of prices. This is one. Second, the OCD also add benefit to our gross margin as -- and add-on coil with a very high gross margin.

Okay, thank you.

Thank you, Jayson.

Thank you. Next question comes from the line from Steven Lichtman. Your line is open. Please ask your question.

Thank you. Hi, guys, and congratulations, Chris. Guys, can you talk a little bit about the revenue opportunity you see in the countries you'll be launching in Asia? And can you also remind us what selling model you're expecting to use it in those countries; will it be least risk scare, outright purchase, or mix of those?

So, the Japanese market is -- it's a huge market opportunity. We are a very good distributor over there. The business model going to be at least mortal, we're not going to sell the devices over there. As we mentioned before, there is -- we're still waiting for the reimbursement. We truly believe that once we're going to get the reimbursement, this can be a very huge opportunity for us. It's very difficult now to provide some guidance, and we're not providing any guidance or the impact to our financial reports for next year. However, this is a very material market after the U.S., and we expect to have a substantial growth once we're going to add the reimbursements over there.

Okay, great. Thanks. And on smoking cessation, it sounds like it'll be out soon as you mentioned, are you still expecting it by year-end, and in what form will it be released? Will it be published in a journal or company press release? How should we be looking out for that?

It should be in the next few weeks, and it will be published as a press release.

Okay, fantastic. And then just lastly, can you talk a little bit about the sales force ramp in terms of how many accounts each rep is able to handle, what you're seeing in terms of the efficiency and the build out of the of the sales force overall in the U.S.? That would be helpful. Thanks.

Okay. So, we are working according to what we focused when we just got out with the IPO. So, currently we have 18 sales reps in the U.S. We're trying now to focus on the big hubs of psychiatrists around the U.S., and for now, we see that the average per rep will be satisfied just to cover the certain numbers of clinics. We're not expecting to increase this level intensively. For now, I think we have enough sales rep to cover the U.S., as I said, the plan is just to our additional two more by the end of the year, and that should be sufficient for our coverage for this year.

Okay, great. Thanks, guys.

Thank you. For the moment, last question comes from the line from Jeffrey Cohen. Your line is open. Please ask your question.

Good morning, gentlemen, and nice to hear your voice, Chris. Just a few questions from [indiscernible], firstly, could you comment a little bit on any utilization trends that you've seen over third quarter and perhaps just beyond the fourth quarter, and anything that we should look out for as 2020 approaches?

Are you referring to the utilization and MDD?

Yes. Predominantly, yes.

So, our main business model is unlimited use. We have a system that we can monitor, some -- our utilization, and I mentioned it, we see that everyone that is signing for the fixed list business model, it means that at the minimum, you will probably have three to four patients per day. We're tracking this number. We see this number very closely, and we're very happy to have a very strong utilization with our customers.

Okay, got it. Could you speak to any particular geographical strength throughout third quarter or fourth quarter into 2020 in the U.S. that you're seeing by region, or by commercial team?

Yes, so they're always the strongest hubs in the U.S. territories, California, New York, Texas, and Illinois, and Florida, the main hubs that are creating great revenue, and they also have a great reimbursement coverage and rates in these specific territories. We anticipate these territories to continue to be the main drive for our growth, and we are adding all the right focus and attention to these main hubs. However, we are trying to develop some new other territories in the U.S. market.

Okay, got it. Lastly from me, could you talk about any trends that you're seeing in leasing versus purchasing for MDD, and how you expect that to look going forward? Will you expect more of the same or some of those trends to change?

So, we do expect more of the same. I think we are offering to our customer a very, very attractive business model with the lease model that we see more and more customers are leaning toward this business model of the lease. However, if hospitals still want to purchase these machines, and obviously out of the U.S., we are selling the machines. Japan will be an exception, but we will continue to sell this device, but the main business model in the U.S. will continue to be the lease model.

Perfect. That's it from me. Thank you very much. Good quarter.

Thank you, Jeffery.

Thank you. And as we have no further questions, I will now hand the call back to Dr. David Zacut for any final remarks.

Thank you all for participating on today's earnings call. I would like to thank this opportunity to wish you and your families a happy thanksgiving, and see you in three months in the quarter next time. Bye-bye.

That does conclude our conference for today. Thank you all for participating. You may now disconnect.