PAVmed Inc. Q2 FY2022 Earnings Call

Greeting. Welcome to the PAVmed Inc. Second Quarter 2022 Business Update Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I'll now turn the conference over to Adrian Miller, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator. Good afternoon, everyone. This is Adrian Miller, Vice President of Investor Relations at PAVmed. Thank you for participating in today's business update call. Joining me today on the call are Dr. Lishan Aklog, Chairman and Chief Executive Officer of PAVmed, along with Dennis McGrath, President and Chief Financial Officer of PAVmed. The press release announcing our business updates and financial results will be available shortly on PAVmed's website. Please take a moment to read the disclaimer about the forward-looking statements in the press release. The business update press release and this conference call both include forward-looking statements and these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from the statements made. Factors that could cause actual results to differ are described in the disclaimer and in our filings with the Securities and Exchange Commission. For a list of those descriptions and other risks and uncertainties that may affect the future operations, see Part 1, Item 1A entitled Risk Factors in PAVmed's most recent annual report on Form 10-K filed with the Securities and Exchange Commission and any subsequent updates filed in quarterly reports on Form 10-Q and subsequent Form 8-K filing. Except as required by law, PAVmed disclaims any intentions or obligations to publicly update or revise any forward-looking statements to reflect changes in expectations or in events, conditions, or circumstances on which those expectations may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements. With that, I'd like to turn the call over to Lishan Aklog. Dr. Aklog?

Thank you, Adrian and good afternoon, everyone. Thank you for joining our quarterly update call. Before proceeding, I would like to thank our long-term shareholders for your ongoing support and commitment. Our combined team has grown to over 150 employees and is singularly focused on growing PAVmed's enterprise while enhancing long-term shareholder value. PAVmed and its subsidiaries continue to make solid progress as we push forward on our long-term growth strategy and mission to create a leading diversified medical technology company across all three sectors: medical devices, diagnostics, and digital health. Our subsidiary, Lucid Diagnostics, has completed a transformational period during which it has completed its transition to an independent full-service medical diagnostic company with its own CLIA-certified fully operational laboratory, LucidDx Labs. Lucid is getting steady commercial traction from an expanding sales team and network of testing centers and secured critical practice guideline recommendations. Our digital health subsidiary, there, where health is also progressing well towards an exciting initial commercial launch this year. Other products in our recently streamlined portfolio are moving steadily forward along their development path. And we have completed nearly a year-long effort to strengthen our senior leadership team securing high caliber talent in critical areas such as business strategy and development, regulatory and quality, medical affairs, laboratory operations and systems integration, and customer support. Finally, during this past quarter, and in recent weeks, we have launched an ongoing company-wide initiative to confront perhaps the most challenging national and global market conditions in decades—uncharted waters with no clear path or timeframe to recovery. Our leadership team has been challenged to think critically, creatively, and systematically to maximize runway and strengthen our balance sheet to protect the long-term interests of the company while continuing to execute on strategic objectives and mission. We have sought to find the right balance between preserving our long-term growth trajectory and maintaining a cash preservation posture during a period of volatility and uncertainty. This has been a rewarding and clarifying experience for a team already resulting in streamlining and strategic reallocation of resources for this fiscal year and a significant rationalization and prioritization of our pipelines. I will start by providing an overview of our business and then we'll pass the baton over to Dennis, who will provide a financial update before we open it up to questions. Let me first take a step back and provide a brief background on our company and its mission for those of you who are new to the PAVmed story. PAVmed is a diversified commercial stage medical technology company operating in the medical device, diagnostics, and digital health sectors. Our mission is to utilize state-of-the-art technologies and the service to patients by providing innovative and disruptive products and solutions that significantly improve or save lives while enhancing healthcare quality, efficiency, and cost-effectiveness. Our vision is to build a growing and profitable diversified medical technology leader across the three major sectors. The PAVmed enterprise today consists of two majority-owned subsidiaries: Lucid Diagnostics and Veris Health, and internal business units with a portfolio of near-commercial products and research and development projects. Lucid is a NASDAQ-listed commercial stage cancer prevention medical diagnostics company that markets EsoGuard and EsoCheck, the first and only commercial tools for widespread early detection of esophageal precancer. Veris Health is a privately held digital health company developing a digital cancer care platform to improve personalized cancer care through remote patient monitoring using smart devices with biologic sensors and wireless communications, including the first intelligent implantable vascular access port. PAVmed operates as the central engine which provides a broad range of shared services through its subsidiaries and internal business units. These include general administration, finance, product design and development, regulatory affairs, quality management, clinical research, manufacturing, and medical affairs. This centralized shared services model allows each subsidiary and business unit to be laser-focused on the development, commercialization, and clinical evidence for its product or products. The model provides numerous benefits to facilitate value creation across the enterprise including economies of scale, risk mitigation through diversification, and lower cost of capital, along with much greater growth potential. During the past year or so, we have undergone a major transition focused on expanding our internal human resources systems and physical infrastructure laying the foundation for commercial success as well as optimizing and rationalizing our portfolio. Our team has grown to approximately 150 talented and committed individuals. This transition is really now complete and expanded infrastructure is in place. For the coming quarters and years, we're now entirely focused on commercial expansion, execution, reimbursement, and revenue products. Our strategy over the past quarter is to focus the bulk of our efforts and resources on Lucid, Veris, CarpX, Ultrasound, and EsoCure while remaining opportunistic with regard to our R&D pipeline and new groundbreaking technologies. I will now provide a more detailed business update and then pass the baton over to Dennis in a second. My discussion of Lucid will be a distillation of my remarks during yesterday's Lucid quarterly call and I would encourage you to read the transcript or listen to the recording of the Lucid call for additional details. Feel free to contact Adrian to help with this. In recent months, both major gastroenterology specialty societies, ACG, published the updated clinical practice guidelines that support for the first time the use of non-endoscopic tools as an acceptable alternative to endoscopy to screen at-risk patients for esophageal precancer. Both explicitly saw future check-ins as a diagnostic tool—the only such devices commercially available in the U.S. Additionally, both expand the adverse target population by treating men and women with the appropriate number of risk factors equally. This enhances the Lucid value proposition by increasing the target population from 13 million to 30 million and its addressable market opportunity from $25,000 to $60,000. Finally, the AGA, for the first time recommended topics of pre-cancer screening in patients without symptoms, further expanding the target population. Our recent commercialization efforts are going very well. We continue to see solid consistent growth in EsoGuard testing volume. Lucid processed 850 commercial tests in the second quarter of 2022. That represents an approximately 60% sequential increase from the first quarter of 2022 and an over 300% increase annually from the second quarter of 2021. We continue to see a steady increase in the proportion of tests performed at our Lucid test centers, which now represent approximately two-thirds of the overall testing volume. This is a direct result of our investment in our expanding sales team focused on primary care physicians. We are making excellent progress towards reaching our year-end target of 39 sales representatives and a total of 68 sales professionals. Our expanding network of Lucid test centers supports our primary care channel by providing a facility where patients referred for EsoGuard testing by primary care physicians can undergo the EsoCheck Cell Collection procedure. The test centers have very modest fixed costs and attractive margins operating almost entirely as a marginal variable cost business. The second stage of the Lucid—of the Lucid test center program is now underway. We recently launched them for new metropolitan areas in Orange County, the Dallas-Fort Worth, Palm Beach County, and Columbus, Ohio. During the first stage, which we completed earlier this year, we covered seven mostly medium-sized metropolitan areas in the Southwest and Pacific Northwest. We're seeking to launch five additional centers this year targeting the Southeast and Midwest. On the laboratory fronts, we now have a fully operationalized CLIA-certified, CAP-accredited laboratory with the DX Labs campfire own personnel operating with our own quality standards and processes, and most importantly capable of submitting and aggressively pursuing claims directly with payers. Last week, our new revenue cycle management providers started committing to a backlog of claims held since the last transition in February, and we should start seeing some revenue from the network and PPO or preferred provider organization receipts, along with recognized revenue in the coming quarters. On the private payer reimbursement front, we have entered into participating provider agreements with secondary PPOs, and a specialized diagnostic fiber optic network which collectively cover many millions of lives. Full engagement with traditional regional and national health plans and consummation of in-network contracts will require some additional time to generate meaningful claims history and to collect and report retrospective and prospective clinical utility data. With regard to Medicare, we, along with over a dozen diverse partners, completed the public comment period for the proposed foundational local coverage determination, or LCD, published by two Medicare contractors delivering a strong evidence base message on how to improve the draft LCD into one that can be operationalized consistent with clinical evidence, updated guidelines, and precedents. We now wait for a response. From a clinical research front, we've made some significant changes to our strategy. A key element of the company-wide initiative is to take a careful look at our allocation of resources for clinical research to align with our near, medium, and long-term goals. Our updated strategy is to focus heavily on generating critical clinical utility data to support private payer and Medicare reimbursement; multiple retrospective and prospective clinical utility studies are underway. Towards the same end, we have adjusted our ESOGUARD-BE-1 and ESOGUARD-BE-2 studies. We're pausing enrollment in our prospective screening study, and we will reboot it under the breakthrough device umbrella at a later date. We are continuing BE-2, the case control study and will likely complete enrollment at a somewhat lower sample size in early 2023. Let's now move on to PAVmed's other majority-owned subsidiary, Veris Health. Veris is developing a digital cancer care platform with symptom reporting telehealth functions and advanced data analytics designed to improve personalized cancer care through remote patient monitoring using smart devices with biologic sensors and wireless communication, including the first intelligent implantable vascular access port. The Veris Health cancer care platform will allow the cancer care team to detect early signs of common cancer-related complications, provide longitudinal trends of physiologic and clinical data, offer data-driven risk management tools for precision oncology, and incorporate additional prospects for substantial value creation through data monetization and bio-therapeutic clinical trial support. The Veris model is an attractive software-as-a-service, recurring revenue business model that leverages existing remote patient monitoring codes, which providers can utilize to bill for review and interpretation of patient data that our system provides. The model provides a healthy margin for the providers and the company without the need for new codes or other regulatory hurdles. Veris is advancing its mission on three fronts: software, device, and data. On the software front, our team and our partner, Loca, are scheduled to complete the development of the software platform independently. This includes the patient-facing smartphone application as well as the clinician-facing mobile and desktop applications. The team continues to work closely with the Microsoft digital healthcare team as a member of its global partner program, as well as teams from other vendors providing the tools for integration with electronic health records data and analytics and health security. The completed software platform will then be subjected to rigorous compliance audits and will be available for commercial launch by the end of the year. In anticipation of the upcoming commercial launch, we have filled out the various commercial team including our Chief Commercial Officer, Director of Product Management, and Director of Systems Integration and Customer Support. The initial launch will be in conjunction with a package we're dubbing the Veris box, with Veris-branded OEM, Bluetooth-enabled connected healthcare devices. The Veris box of external connected devices is the first step of a three-step device development process. The next product, which we've dubbed Mercury, is an implantable physiologic monitor designed to be implanted in conjunction with a traditional vascular access port for chemotherapy or other treatments. The various Mercury development process is progressing well; we have completed a successful FDA pre-submission meeting, during which the FDA provided us with a clear path to maintain clearance. Several animal studies have demonstrated the device's ability to continuously collect and wirelessly transmit physiological parameters, and we expect the device to proceed through design predevelopment, testing, and FDA submission and clearance next year. The third step in the device development process, the product we've dubbed Veris Dizziness, takes the device design a step further with full integration of the implantable monitor within the port. We're working with the FDA to finalize its regulatory path, i.e., whether it will be a 510K or de novo pathway. Design and development work on this version will accelerate once we've had experience with the modular, Veris Mercury device. Finally, Veris is all about the data; the system will be generating a substantial amount of clinical and physiological data, which will provide a rich substrate for monetizable data analytics using machine learning and AI. Veris has filled out its data science team with two full-time data scientists and two data engineers. Let's now move on to CarpX, our product 510K cleared minimally invasive device to treat carpal tunnel syndrome. Key opinion leaders and surgical partners have been using CarpX in a limited commercial release focused on generating user experience to drive procedural and product improvements. This experience led us to explore the possibility of incorporating intraluminal ultrasound into the device to provide real-time imaging of the ligament to be cut, along with critical anatomic structures. Initial exploratory efforts have advanced to a full-blown Product Development Project, which we've dubbed CarpX Ultrasound. In addition to integrated ultrasound imaging, the design incorporates additional features that we believe will enhance the clinical and commercial attractiveness of the product, including mounting the electronics to a handheld device and console, decreasing the per-case cost of goods and the gross margin opportunity. The design and development work, including cadaver testing, is ongoing, and we expect the device to proceed through design freeze, development, testing, FDA submission, and clearance next year. Given these projected timelines for the next-generation CarpX Ultrasound device, we've decided not to expand commercialization of the current first-generation product. We have plenty of inventory and now will continue to have our KOLs perform procedures and grow our experience and form the product development until the CarpX ultrasound version is ready for commercial launch. As for EsoCure, our EsoCure device is designed to endoscopically treat esophageal precancer and is also progressing well. The device is designed to compete with Medtronic's market-leading Barricks device by offering the advantages of direct modulation of the esophagus through the work and port of the endoscope and without the need for a $250,000 console. Development work is progressing well, and head-to-head chronic animal studies continue to show promising results. We expect the device to proceed through design freeze, development testing, FDA submission, and clearance next year. Quick reminder that Lucid has licensed the EsoCure platform for future commercialization as it is highly synergistic with EsoGuard. The remainder of the plasma pipeline consists of research and development projects whose commercial path is not yet fully established. PortIO is our implantable intraosseous vascular access device, which we believe does not require flushing and is the first Nathan three long-term vascular access device. PortIO's first-in-human study is progressing well with three new sites approved in Colombia, South America, with one site recently performing successful implantation of the device in seven patients. All of them have completed seven days of infusion after implantation and have shown successful outcomes. We are currently in the 30-day follow-up period with no complications or other issues. These patients close out the initial group of patients in the protocol that underwent seven days of implantation and now allows us to move on to the next set of patients that had a device implanted for 60 days. Recruitment of these patients is well underway with procedures expected in September. Once we have established some success with the 50-day implants, we'll reassess our regulatory pathway and decide whether to pursue the market in Europe or proceed with the U.S. FDA product. NextFlo is a platform infusion technology. The first product incorporating it is our NextFlo intravenous set, which seeks to revolutionize care by eliminating the need for complex, expensive, and error-prone electronic infusion pumps for most of the one million infusions performed in this country each day. NextFlo is on the verge of progressing to their patient validation testing and FDA submission. When the team encountered difficulty with repeatability despite good flow regulation, this required relegating NextFlo to research and development redesign project. The flow regulation features work, but we need to solve the repeatability issue. We're committed to trying to solve this design issue, but we do not have a solution at this time. Finally, as part of the company-wide initiative I mentioned earlier, over the past couple of months, we've taken a very aggressive approach to pipeline rationalization and pruning to make sure that we are allocating capital efficiently. As a result of this analysis, we have either terminated certain development projects or shelved them for the foreseeable future, including Solys, DisappEAR, FlexMO, and NextVent. Although we continue to pursue attractive business development opportunities and have some promising prospects in the pipeline, we have raised the bar with regard to the types of projects we will consider pursuing and investing resources in. Before handing the reins over to Dennis, let me quickly summarize the strategic priorities from our company-wide initiatives that I've touched on through the course of my remarks. Number one, clearly advance Lucid's commercial activities. This includes completing the expansion of the sales team and Lucid test centers this year, driving steady testing volume growth to demonstrate clinical utility and generate claims history, secure private and Medicare reimbursement, optimize our laboratory operations including claim submission and prosecution, and generate critical clinical utility data. Number two is to launch the Veris platform with the Veris-connected devices early this year. And number three is to advance our pre-commercial products, including EsoCure, to development, regulatory clearance, and commercial launch next year. With that, I will hand the reins over to Dennis to provide an update on our financials before proceeding with questions. Thank you.

Thanks, Lishan, and good afternoon, everyone. Our preliminary summary financial results for the three months ended June 30, 2022, were reported in our press release published earlier this afternoon. We filed our quarterly report for PAVmed on Form 10-Q with the SEC last night, August 15, the due date. The report is available at sec.gov and on the PAVmed website. As we outlined during Lucid's earnings call yesterday, as a rule, EsoGuard tests performed are recognized as GAAP revenue when cash is actually collected by the company. As previously mentioned, this will more than likely be true during this transition period of negotiating third-party private payer reimbursement contracts and related coverage policies. As I reported to you in previous quarters, for compliance purposes during this reimbursement transition period, we initially negotiated a short-term month-to-month fixed payment arrangement with the contract laboratory that was previously processing the EsoGuard assay and performing the insurance company billing and collections function. This commercial agreement terminated concurrently with the opening of our own laboratory on February 25. We recognized $189,000 of revenue as part of the EsoGuard commercial agreement with ResearchDX for the partial period from January 1, 2022, through the end of the agreement on February 25. Part of the transition to our company’s own commercial clinical laboratory, we contracted with a revenue cycle management company, abbreviated as RCM, to submit third-party reimbursement claims on our behalf. The RCM service provider will oversee payer claims, appeals processes, patient billing, online payment collection, and claims tracking with the appropriate licenses and certifications for billing and credentials secured. They have also recently completed the necessary back office systems claims for approximately 1000 tests performed since the establishment of our own lab; these are now being processed, including 850 tests in the three months ended June 30, 2022. Presently recognized revenue for GAAP purposes is subject to actual amounts collected during the period. Due to delays receiving certain information needed from the IRS related to establishing a required lockbox at JPMorgan, our commercial bank, the initial batch of claims were submitted by the RCM on August 1. Accordingly, since the RCM began submitting claims processed for our own lab subsequent to June 30, there are no collections during the three months ended June 30, 2022. Future revenues will be recognized based upon actual collections until such time as the coverage policies are in place with CMS and payment contracts with the private payers. This obviously can result in the disconnect between the timing of revenues recognized versus the timing they are submitted for third-party reimbursement until all these future conditions are met. The gaps in claim submission from this transition will impact near-term GAAP revenue recognized until the system catches up with claims for tests performed during the transition. It is our expectation that we will begin to recognize GAAP revenue related to our Lucid labs in the second quarter as mentioned and will be adjusted based upon actual collections received. The number of EsoGuard tests performed and submitted for payment are provided in the press release and was discussed earlier by Lishan. Obviously, we're in the early stages of our commercial launch particularly with our test centers. We'll continue to evolve our reporting metrics as various sales and marketing efforts further influence adoption, particularly with the ramp-up of our Lucid Test Centers and our EsoGuard Telemedicine Program. Presently, there are four banking analysts who have issued coverage on PAVmed and others doing their diligence. The quantity of EsoGuard tests assuming the related claims will be reimbursed at the CMS payment rate will need to be performed to meet the 2022 revenue estimates provided by the analysts. The collections and therefore the recognized revenue for each accounting period are highly dependent upon the evolving reimbursement landscape. Since there was no revenue in the second quarter, costs for the test centers and our laboratory are reclassified to operating expenses. For the second quarter, and excluding $38,000 of non-cash expenses, test center costs were approximately $460,000 and are included in marketing expenses. For the second quarter, and also excluding non-cash expenses of about $375,000, laboratory costs of approximately $745,000 are included in G&A expenses. PAVmed remains Lucid's controlling shareholder holding approximately 72.4% of the voting interest in Lucid. Lucid's operating results will continue to be consolidated into PAVmed's financial results. The statement of operations will reflect line items to show the non-controlling interest/profits or losses to non-PAVmed shareholders of its majority-owned subsidiaries. As well, there will be a corresponding offset in the equity section of the balance sheet for amounts attributable to minority interest equity. With regard to operating expenses, since there was no revenue in the quarter, cost centers were reallocated as I mentioned. During yesterday's earnings call, we discussed the three components that make up Lucid's operating expenses: namely sales and marketing, general and administrative, and research and development. Since Lucid's operating expenses represent approximately 60% of PAVmed's non-GAAP consolidated operating expense for the second quarter, I'll summarize the consolidated operating expense as a total. For the three months ended June 30, 2022, PAVmed's consolidated operating expenses were $23.4 million, compared to $13 million during the same period in 2021, reflecting a quarterly increase of 22% sequentially. There is a table in the PAVmed press release published today and the Lucid press release published yesterday that adjusts each of these three components of operating expense for the embedded non-cash stock-based compensation expense. Without including the SBC or stock-based compensation expense, the operating expenses from PAVmed was $18.5 million inclusive of $10.1 million of Lucid's operating expenses. PAVmed reported the second quarter net loss attributable to common shareholders of $25.6 million or a loss of $0.29 per common share versus a loss of $11.5 million or $0.14 per share in 2021. The press release provides a table entitled non-GAAP, which highlights these amounts along with other non-cash charges, namely depreciation, stock-based compensation, financing, and acquisition-related costs to enable better understanding of the company's performance. You'll notice from the table that after adjusting the second quarter loss by approximately $11 million for these charges, the company reported a non-GAAP adjusted loss for the second quarter of 2020 a $14.5 million or $0.17 per common share. PAVmed had consolidated cash of $65.2 million as of June 30, which compares to $77.3 million as of December 31, 2021. During the quarter, we realized approximately $24.5 million of net proceeds from the convertible debt financing announced in April. With that, operator, we can now open up the call to questions.

Thank you. Our first question is from Ross Osborn with Cantor Fitzgerald. Please proceed.

Hi, thanks for taking my questions. Congrats on the progress. So just starting off, could you please spend some time discussing the use cases with the first iteration of the Veris Health platform? And then what the scale of the launch later this year and early next year looks like?

Yes, so Ross, thanks—I appreciate the opportunity to dive a little bit deeper in this. So just to step back again, to reiterate the overall goal of the Veris platform is to provide physiological data parameters from a patient and that are communicated in real-time through a wireless and cloud-based connection to the providers to facilitate detection of early design-related complications that can result in morbidity, mortality, and cost. We're providing that, and that data can be of any form for the purposes of remote patient monitoring codes, as long as there's an FDA device, clear devices that are generating that data, the clinician can go for that. So we're going to be providing that data in three different steps. The first launch is to give us the opportunity to launch the software platform. In order to do so, we're providing a bundle of 10 Bluetooth connected external devices that will communicate with our platform and generate the five data points including heart rate, activity, oxygen saturation, weight, and blood pressure. That data, along with symptom reporting—which has a fairly robust system reporting—and other quality of life metrics will be provided to the caregivers. We are starting with a modest launch targeting a spectrum of providers of different sizes, including smaller practices and rural areas, where we think this will resonate particularly well—compared to larger cancer centers. Of course, this initial effort is to gain experience with some of the complexities of getting the platform on the IP networks of the providers, to establish connections with the electronic health record, and to turn on the telehealth functions and other factors. So we are excited; we have the team built, and we have a gentleman joining us who did customer integrations at Epic, the electronic healthcare record, and he'll be overseeing the systems integration and customer support aspects of this moving forward. Once we have the first version of the implantable part, many of the parameters will then move towards being collected and transmitted from the long-term implantable device.

Yes, that's great. Thank you. And then just one more for PortIO, I believe you mentioned there were seven patients included in the first phase with no complications. Correct me if I'm wrong please?

Yes, I think we're more than that. We had seven in the most recent group. I think we’re over ten. I’ll get back to you on that number. The first wave I believe we did four, and I think we’ve done seven—something to that regard. What's most important, as I mentioned, is that the protocol required us to have the first group have a seven-day implantation with explantation. That was to demonstrate that the infusions work, they were safe, and you could explant the device without any fracture or other complications associated with the implantation. Now that that part is complete, we really get to the important part, which is to demonstrate that seven days within a final report is not clinically that useful. What is useful is to get out to longer periods, something on the order of weeks to months. This next phase is very exciting, and will involve the device being implanted for 60 days. Our expectation is to prove, for the first time in humans, that we have an implantable vascular access that is maintenance free. In the animal studies, once we implanted them, they didn't require any flushing, any blood thinners or anything like that, and they were functional and patent at 60 days. Obviously, our goal here is to replicate that, and we have every reason to believe that we’ll be able to replicate that in humans. So that’s the current state of the first human study.

Okay, understood. And then, with the second phase, can you disclose how many implants you're targeting?

I'll get back to you about that—I forgot what the number is, but it seems a couple digits.

Okay, great. That does it for me. Congrats again on the progress. And thanks for taking my questions.

Yes, thanks.

Our next question is from Frank Takkinen with Lake Street Capital Markets. Please proceed.

Good, good thanks for taking the questions. I wanted to start with just a question on your comments around the reprioritization or rationalization initiative. It sounds like it's all longer-term opportunities that won't impact really the short or intermediate-term story here. So that's kind of one confirmation of that, except for the first part of the question. And the second part of that is just can you quantify expected cost savings by putting some of these initiatives on hold on an annualized basis?

Yes, so the answer, of course, the answer to the first question is yes, that's exactly the point. This was a very collaborative effort over a couple of months with a dozen or more members of our senior leadership team. The goal was in fact, as you said, to make sure that, given the landscape, we were investing in today, and deploying our resources today have the most near-term opportunity to be accretive and to lead to commercial traction and growth. So 100% correct with your first question. In terms of the—I'll let Dennis comment a little more granularly. But this is a process that we started a couple of months ago, and it did lead to some reallocations within the second half budget of this year, not a significant total savings, but more reallocation within the program. For example, on the Lucid side, we've shifted costs from the longer-term studies to clinical utility studies. Even unwinding the longer-term studies still requires some costs—you can't just shut this down immediately. However, we certainly expect to have some cost savings going into next year. One good example there, again, qualitatively, is looking to kind of plateau our sales team through this year, but then once we get to that sort of 60 total commercial team number and approximately 18 Lucid test centers to pause and keep our costs relatively flat, focusing on growing test volume through the team we already have. So, Dennis, would you like to add any more color to that?

Yes, sure, thanks. So Frank, in the sales and marketing, given the comments that Lishan made about, we intend to increase our sales force going through the end of the year, there will be some increases in sales and marketing costs between now and the end of the year. However, with that, and the target number of test centers, we expect 2023 to be fairly flat to that second-half cost level as the landscape for reimbursement starts to evolve. We probably won't add more resources until we get clarity there. We believe that by increasing the resources between now and the end of the year, we'll gain critical mass by the end of the year such that we can drive reimbursement, claims to get attention from payers, and facilitate adoption. Then when reimbursement comes into play, that will start contributing, and we can decide whether or not we are going to step on the accelerator again. Lishan pointed out that on the clinical research, there is a shift between longer-term more expensive studies to shorter studies focused more on reimbursement. There will be some overlap in costs between now and the end of the year. But we see through 2023, and 2024, those costs will be relatively flat. They're flat somewhat because of the shift in priorities with some of our products that would have had a higher level of development costs or clinical costs during those time periods. We think that is the wise thing to do given the overall economic climate and the longer-term priorities. As far as administrative expenses, they should be relatively flat between now and the end of the year, and we intend to keep them relatively flat through most of 2023. Lishan's comments earlier indicated that we've rounded out the infrastructure, the management team that we believe can sustain us through continued growth at the top line. We had a number of pretty healthy growth in tests during the last quarter, and that was done with only a fraction of the sales force that we expect to have by the end of the year, keeping in mind that it takes about four months for a new hire to actually start to carry their weight and contribute. The numbers are such that at the end of this quarter, with only a handful of folks calling on primary care physicians, and we are going to increase that sizably. We think that gives us that initiative to drive reimbursement. So that's how we see, you know, over the next 18 or 30 months; there'll be some increases between now and the end of the year to get to those levels of critical mass, and then it should be fairly flat until we see that inflection from reimbursement, which will then signal us to put more resources behind the commercial efforts.

That's great color. Then I wanted to ask one on CMS. I understand you're kind of in that wait-and-see stage. But any estimation you guys are comfortable putting out there when you could potentially hear back from either Palmetto or Noridian on next steps?

I'm a little bit wary because, you know, Frank, when we submitted the first technical file in May of 2018, we certainly thought it was coming soon. However, 18 months later, we were still waiting. So let me just - let me just first sort of couch it in a little bit of a qualitative way. Honestly, if we got - if we go back and we had a cleaned up and nice operational foundational LCD tomorrow, we wouldn't be in a position to convert that into EsoGuard coverage. We need more clinical utility data to check that final box, as articulated towards the end of the draft LCD. My hope and gut feel is that the time it will take us to complete a large retrospective clinical utility study with our NYU experience will ideally be by the end of this year, and we should start seeing the sample sizes for the other prospective studies to start to kick in in the first half of next year. My ideal situation is that once we've reached threshold numbers and substantial, you know, solid critical mass of clinical utility data in the first half of next year, it will coincide with the publication of a final LCD. That gives us the opportunity to file a technical file for technical assessments and convert that foundational LCD into coverage for use in real-time. So that's kind of roughly the ideal timeline, but you never know.

Okay, that's helpful. Thanks for taking the questions. Congrats on the progress. I'll stop there.

Thanks so much; I appreciate it.

Our next question is from Ed Woo with Ascending Capital. Please proceed.

Yes, thank you for taking my question. My question is on CarpX ultrasound. What is the thinking in terms of why you are excited to focus on this new product? Will there be significant investment required, and any regulatory approval requirements?

Great, thanks for giving the opportunity to discuss this a little bit. We’re really excited about CarpX ultrasound because we’ve gained valuable experience now, obviously in hundreds of cadavers and dozens of patients with the current device and the function of the balloon dilation. All the key principles—the bipolar RF cutting and all of that work quite well. However, the one element that has, you know, kept us with this first-generation device and this limited commercial release is procedural challenges that we felt, based on feedback, would clearly benefit from the ability of the surgeon to see what they’re doing. Right now, they can obviously see what they’re doing when they insert the device, but after the balloon is inflated, it is blind at that point. To be clear, with other techniques, a lot of the cutting is also blind, even with endoscopic techniques, but we challenge ourselves to improve what functionally works well but to improve from the procedural point of view from the physician's perspective by incorporating ultrasound. I want to be clear that this is not like an external ultrasound probe that the surgeon has to learn to use with the device; we’re talking about intraluminal ultrasound. So the ultrasound probe actually goes right down the shaft of the CarpX device, similar to intravascular ultrasound, where you can put a catheter in a blood vessel and visualize the circumferential cuts of the vessels. That’s the kind of image that can be—surgeons can be taught to interpret quite easily. They can become confident that everything is in good position, and that the critical structures are out of the way before cutting the ligaments. This was the impetus for it. We spent some time with exploratory work and development and faced initial challenges with getting some ultrasonic images. We were fortunate enough to partner with a firm that has an ultrasound-guided device for anesthesia. They’ve done some of the foundational circuitry work for us and have experience with this type of imaging. So we're starting to get decent images. We have a good feeling about the direction we’re headed; we think it’s a high priority along with others, and we allocated sufficient capital in our budget to get this product to market. We believe we can capitalize on the commercial opportunities, as we've been patiently waiting for contracts over these years. This is still a very prevalent condition, and the current options are not great. Thus, we are excited about this opportunity.

Lishan, can you comment on the regulatory path?

Yes, I'm sorry Ed. Yes—the regulatory path will involve filing this as a new 510K, and we expect that this will be straightforward. The fundamentals, the key elements for this, the mechanisms involved—this is almost identical to the current device. We're moving a lot of the electronics to a handheld non-disposable device and a console, which is quite exciting from an economic viewpoint, as it lowers the per-case cost and gives us a better margin. We expect the regulatory path to be fairly straightforward, and we will leverage the existing 510K for the current first-generation device.

Great! Well, thank you for answering my questions, and I wish you guys good luck.

Thank you, Ed.

Our next question is from Anthony Vendetti with Maxim Group. Please proceed.

Hi, Dennis. Hi Lishan, how're you doing? So just wanted to talk a little bit about the number of tests performed in the second quarter at your Lucid test center. I think you mentioned 850 just in the second quarter along. Is there anything you would attribute that significant pickup in the number of tests to, and is that a good baseline? Or was there anything extra in the second quarter that you don’t think is repeatable going forward?

Let me take a first crack at that, and I'll let Dennis provide some numbers. I think we’ve seen now two nice consecutive percentage growth quarters. Remember, we’re about a year into the initial launch of Lucid test centers in September of last year, and we only hired our first sales rep calling primary care physicians in the third quarter of last year. Today, we are at 20 and moving towards 40 by the end of the year. So, the simple answer to your question, Anthony, is that the steady growth quarter-on-quarter is directly attributable to allocating resources, building out a sales team, and expanding the number of test centers to generate referrals. It’s also a reflection that our sales leadership has done a great job of fine-tuning the sales process; we have honed our approach to ensure our reps are productive and able to generate a growing test volume. We have increasingly intense training for our sales teams, and this has been helpful. So we expect that as we grow the team, the productivity and the time from a rep starting to being productive in terms of generating test volume will improve, and we believe that overall, we are on track for continued growth. That’s why we are investing in this team. We feel that the target of 60 by the end of the year is good to pause and let those reps establish themselves in their territories and achieve growth with their existing accounts.

Yes, just a few more details. Almost all of the growth has been organic, driven by more accounts, which is a result of having more feet on the street. We entered the quarter with 21 total people in the sales organization as of April, and at the end of June, we had 29 total—16 mainly focused on primary care physicians. Currently, we have 40 total individuals, of whom 24 are dedicated to physician referrals. We steadily increased hiring, we improved processes, and thus we are actually seeing more accounts referring more patients to our test centers. Out of 850 tests in the quarter, about two-thirds were generated through our test centers predominantly driven by the increase in calling upon primary care physicians. We continue to also see increased growth in institutions and hospitals, but the most pronounced increase came from referrals to the test centers.

Okay, great. And then just last question about the overall business; was there anything that came out in terms of direct cost savings, other than policies and programs? Any cost cuts specifically?

Yes, I mean, I think the way I would summarize it is that we were very conscious of this effort. This is not an austerity program; we can't cut our way to growth. We are not going to fundamentally change our stance regarding growing this company. So the effort was driven from a general posture of cash preservation more towards rationalizing and streamlining. We focused particularly on product development; we’ve streamlined and prioritized our projects, some of which are seeing more defined opportunities. We settled on three products, and our focus is now on commercial growth rather than capital-heavy projects. Thus, we will have some cost savings as we approach next year based on this strategy; for example, we will grow our sales team steadily during 2023, but we expect to plateau in 2022 and let current team members grow sales volume throughout the next few months. The bottom line is that our leadership team is currently well-rounded and capable of driving us through continued growth.

Okay, great. That's helpful color. I appreciate it. I’ll hop back in the queue. Thanks, guys.

Great. Thanks, Anthony.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Dr. Aklog for closing comments.

Great. Thank you very much everybody for taking the time to join us today and for all the great questions from our colleagues. As always, we look forward to keeping you updated on our progress via news releases and conference calls. I encourage you to keep up with PAVmed news updates and events to sign up for our email alerts. That’s the best way to keep in touch. You can do that on our PAVmed Investor Relations website. Follow us on social media, we’re quite active on Twitter, LinkedIn, and YouTube. Also, feel free to contact Adrian at AKM@PAVmed.com for any questions. So, thanks again everyone and have a great rest of your day.

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