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Edited Transcript of BRIN.TA earnings conference call or presentation 25-Nov-19 2:00pm GMT

Q3 2019 Brainsway Ltd Earnings Call

Jan 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Brainsway Ltd earnings conference call or presentation Monday, November 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Ritchie

LifeSci Advisors, LLC - MD

* Christopher von Jako

Brainsway Ltd. - President and CEO

* David Zacut

Brainsway Ltd. - Founder, Chairman of the Board & Interim CEO

* Hadar Levy

Brainsway Ltd. - CFO & COO

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Conference Call Participants

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* Craig William Bijou

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Jayson Tyler Bedford

Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst

* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Steven Michael Lichtman

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to today's Brainsway Reports Third Quarter 2019 Financial Results and Operational Highlights Call. (Operator Instructions) I must advise 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.

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Brian Ritchie, LifeSci Advisors, LLC - MD [2]

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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 Brainsway, including, but not limited to, any statements relating to commercial plans or activities, financial projections, clinical studies, R&D plans and/or anticipated time lines.

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, a forward-looking statement. 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 F-1 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. van Jako's appointment. So participants in this call who may not have already done so can find these releases on Brainsway's website 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?

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David Zacut, Brainsway Ltd. - Founder, Chairman of the Board & Interim CEO [3]

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Good morning. Thank you, Brian. Good morning, everybody. Welcome to Brainsway's 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 van Jako as the President and CEO. He has over 25 years of experience managing businesses and leading global medical technology companies. 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.

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Christopher von Jako, Brainsway Ltd. - President and CEO [4]

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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 I'm 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 and 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. Earlier in my career, I held at other leading medical device companies, including Integra LifeSciences, Covidien, Medtronic and Radionics.

Through the various roles I have 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 radiosurgery, a noninvasive 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.

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David Zacut, Brainsway Ltd. - Founder, Chairman of the Board & Interim CEO [5]

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

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Hadar Levy, Brainsway Ltd. - CFO & COO [6]

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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 markets.

Our Deep TMS system has FDA clearance for major depressive disorder or MDD, and obsessive compulsive disorder or OCD. Our Deep TMS system has demonstrated clinical efficacy in MDD and OCD. It is well tolerated and also has 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 record 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 revenue were $3.4 million, an increase of 40% over the third quarter of 2018. These recurring revenues 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 3- to 4-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 lease customers are those that typically treat an average of 3 to 4 patients per day. Therefore, commensurate with the increase in revenue from our lease model is continued strong utilization of our system. Since September 30, 2018, Brainsway installed base has increased by 138 systems, reaching a total of 488 Deep TMS systems and reflecting a quarter-over-quarter increase of 32 systems. As of September 30, 2019, the company has shipped 132 OCD coils as add-on helmets to certain of Brainsway new and existing systems since marketing clearance was obtained in August 2018.

I should add that demands for additional OCD coils outpaced our ability to fully satisfy all the orders we received in the third quarter. We anticipate that these additional demands will fulfilled 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 are making in the future growth of our business, and that was one of the key objectives we set when we successfully completed our U.S. IPO earlier this year. We added a net of 6 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 2 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 market -- marketing activities globally. We are 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 indications for Deep TMS. First, we completed the treatment phase of our multicenter smoking cessation study. This results from the data are expected to publish soon. In PTSD, we continue to accept the availability of interim 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 this study in the first quarter of next year. In multiple sclerosis or MS, we continue working toward initiating a multicenter study to treat fatigue symptoms in MS patients with Deep TMS and anticipating beginning this study shortly. We also remain focused on developing a multichannel stimulator and closed-loop stimulator with real-time EEG reading capabilities.

With that, I'd like to provide a brief update of our effort 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 this agreement to obtain contributing our -- 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 is 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 $3.5 million, an increase of $1.5 million over the prior year. The increase was primarily 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 noncash 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, we incurred 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 3 months ended September 30, 2018.

Moving to the balance sheet. We ended the third quarter with 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 our sales and 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 toward 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 and 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 multiple upcoming key R&D-related catalysts, including final results expected soon from our smoking-cessation study. Moreover, we continue to well support it 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 continued strong market demand for our Deep TMS system.

So with that, I will now ask the operator to please open up the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Greg Bijou.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [2]

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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 of 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, the 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's anything that you would expect in Q4 or even the early part of 2020.

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David Zacut, Brainsway Ltd. - Founder, Chairman of the Board & Interim CEO [3]

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There was nothing -- no disruption because of those 2, the -- Joe and Yaacov left the company. And it's business as usual, even better.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [4]

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Okay. And the OCD coils, I guess, were down just a little compared to the prior quarter. 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?

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David Zacut, Brainsway Ltd. - Founder, Chairman of the Board & Interim CEO [5]

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Hadar?

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Hadar Levy, Brainsway Ltd. - CFO & COO [6]

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Yes. So we continue to press hard with our reimbursements effort, and we believe it is headed 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 installed base, usually -- and that was expected. That was in line with our expectation, Q3, due to the seasonality of the summertime, we did some decrease in the overall demands, but we can -- as for now as we are expecting for Q4, we're expecting a much stronger demand for the OCD coils.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [7]

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Great. And last one for me. I appreciate the -- 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?

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Hadar Levy, Brainsway Ltd. - CFO & COO [8]

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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 the 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 growth as well. So we have a great confidence about our business for the upcoming year.

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Operator [9]

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The next question comes from the line from Jayson Bedford.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [10]

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Welcome, Dr. van 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 OCD orders? I got the sense that demand exceeded supply in the quarter.

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Hadar Levy, Brainsway Ltd. - CFO & COO [11]

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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's much more related to a cut-off issue. You will see the ramp-up back again in Q4.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [12]

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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?

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Hadar Levy, Brainsway Ltd. - CFO & COO [13]

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So it's pretty similar. I would say roughly a 50%, it's 50%, 50% from new customers and existing customers. The 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 customer that renting or buying the -- our MDD coil also wants to have 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.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [14]

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Okay. Just a couple of other questions. What's the timing on reimbursement in Japan?

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Hadar Levy, Brainsway Ltd. - CFO & COO [15]

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So we are pressing very, very hard on this issue as well. It's very difficult to give a time line, but we expect to have reimbursement -- we hope to have it very soon. But I don't have a clear answer right now.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [16]

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Okay. And then just lastly for me. Gross margin was quite strong in the quarter. Can you maybe comment on where the strength stemmed from?

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Hadar Levy, Brainsway Ltd. - CFO & COO [17]

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So the strength comes from the ASP. We are -- 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, we -- the OCD coils are also -- benefits to our gross margin as well as an add-on coil with a very high gross margin.

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Operator [18]

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The next question comes from the line from Steven Lichtman.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [19]

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Congratulations, Chris. Guys, can you talk a little bit about the revenue opportunity you see in the countries you'll be launching in, in Asia? And can you also remind us what selling model you're expecting to use in those countries? Will it be lease, risk share, outright purchase or mix of those?

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Hadar Levy, Brainsway Ltd. - CFO & COO [20]

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So the Japanese market is -- it's a huge market opportunity. We have a very good distributor over there. The business model is going to be a lease model. We are not going to sell the devices over there. As you -- as we mentioned before, there is -- we are 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. 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 have the reimbursements over there.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [21]

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Okay. Great. And on smoking cessation, it sounds like the data will 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?

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David Zacut, Brainsway Ltd. - Founder, Chairman of the Board & Interim CEO [22]

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

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [23]

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

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Hadar Levy, Brainsway Ltd. - CFO & COO [24]

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Okay. So we are working according to what we forecasted when we just got out with the IPO. So currently, we have 18 sales reps in the U.S. We are 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 are not expecting to increase this level intensively. For now, I think we have enough sales reps to cover the U.S. As I said, the plan is just to add additional 2 more by the end of the year and that should be sufficient for our coverage for this year.

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Operator [25]

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And our, for the moment, last question comes from the line from Jeffrey Cohen.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [26]

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Just a few questions from our end. Firstly, could you comment a little bit on any utilization trends that you've seen over third quarter? And perhaps just going into fourth quarter, anything that we should look out for as 2020 approaches?

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Hadar Levy, Brainsway Ltd. - CFO & COO [27]

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Are you referring to the utilization in the MDD?

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [28]

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Yes. Predominantly, yes.

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Hadar Levy, Brainsway Ltd. - CFO & COO [29]

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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-lease business model, it means that at the minimum, he will probably have 3 to 4 patients per day. We are tracking this number. We see this number very closely, and we are very happy to have a very strong utilization with our customers.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [30]

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

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Hadar Levy, Brainsway Ltd. - CFO & COO [31]

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Yes. So there are always the strongest hubs in the U.S. territories, California, New York, Texas and Illinois and Florida are the main hubs that are creating a 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 growth, and we are adding all the right focus and attention to these main hubs. However, we still -- we are trying to develop some new other territories in the U.S. market.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [32]

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Okay. Got it. And lastly for 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? Would you expect more of the same or some of those trends to change?

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Hadar Levy, Brainsway Ltd. - CFO & COO [33]

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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 customer 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.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [34]

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Perfect; that does it for me. Good quarter.

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Operator [35]

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

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David Zacut, Brainsway Ltd. - Founder, Chairman of the Board & Interim CEO [36]

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Thank you all for participating on today's earnings call. I would like to take this opportunity to wish you and your families a Happy Thanksgiving, and see you in 3 months in the quarter next time. Bye-bye.

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Hadar Levy, Brainsway Ltd. - CFO & COO [37]

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Thank you.

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Operator [38]

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