Pulse Biosciences, Inc. (PLSE) Q3 2021 Earnings Call Transcript

Greetings and welcome to Pulse Biosciences' Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Philip Taylor, Investor Relations. Thank you, sir. You may begin your presentation.

Thank you, operator. Before we begin, I would like to inform you that comments and responses to your questions during today's call reflect management's views as of today, November 15, 2021, only and will include forward-looking statements and opinion statements including predictions, estimates, plans, expectations, and other information. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are more fully described in our press release issued earlier today and in our filings with the Securities and Exchange Commission. Our SEC filings can be found on our website or on the SEC's website. Investors are cautioned not to place undue reliance on forward-looking statements. We disclaim any obligation to update or revise these forward-looking statements. We will also discuss certain non-GAAP financial measures. Disclosures regarding these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures, can be found in the press release. Please note, that this conference call will be available for audio replay on our website at pulsebiosciences.com on the News and Events section of our Investor Relations' page. With that, I would now like to turn the call over to President and Chief Executive Officer, Darrin Uecker.

Hello and thank you all for joining us this afternoon. 2021 has proven to be a transformational year for Pulse Biosciences as highlighted by our first recognized revenue in the third quarter. On today's call, we'll be discussing some of our recent accomplishments and plans to drive growth as we expand CellFX System commercial efforts. I will also touch on our clinical and regulatory pipeline. Then Ed will provide details from the field on the Controlled Launch program and the planned ramp up of commercial activities. Sandy will then share details around our financial results, and then I will conclude and open up the call for Q&A. Our product, the CellFX System with CellFX CloudConnect, is a multi-application platform for the delivery of our novel and proprietary Nano-Pulse Stimulation, or NPS technology. The post-electrical energy delivered by our CellFX System directly impacts cellular structures, leading to the clearance of cells, while sparing non-cellular structures, such as collagen. The differentiated non-thermal modality has been shown to clear benign skin lesions with a more favorable healing profile and aesthetic outcome than the thermal modalities currently used in dermatology practices today. In the third quarter, 12 dermatology practices that were participating in our Controlled Launch program opted to purchase their CellFX System and order initial cycle units to begin performing CellFX procedures commercially. The unique features and benefits of the CellFX System are enabling these clinics to launch a new category in dermatology, the treatment of benign skin lesions. These industry leaders took the time to learn and experience the unique features and benefits of the CellFX System and have determined that offering this unique procedure to clear common spots, bumps, and growths in a fashion that is not only acceptable but aesthetically pleasing for patients will meaningfully enhance the offerings of their practice. Previously, dermatologists were hesitant to address these lesions with currently available thermal modalities because either they were concerned about not being able to adequately clear the lesion or about the resulting aesthetic skin appearance. The benign lesion market is readily accessible by dermatologists, as these patients are typically already visiting their practices for other treatment. But it remains largely untapped due to the lack of an adequate solution. The CellFX procedure is unlocking what we believe is a currently addressable $3 billion market, contemplating CellFX procedures on a few benign lesions, sebaceous hyperplasia, seborrheic keratosis, and non-genital warts. Based on patients' perceived value of these treatments and the time required for dermatologists to perform them, which is roughly 15 minutes, this category is positioned to be one of the strongest revenue and profit-generating service lines in their practice. To simplify the economics for the clinic and the patient, we have created an innovative utilization-based model, facilitated by the CellFX CloudConnect Infrastructure, where clinics can download purchase cycle units via our e-commerce store to power the use of the CellFX System in a treatment. Each lesion treated requires the use of cycle units, and the number of cycle units used per lesion generally depends on the size and type of the lesion being treated. By offering cycle units rather than charging a fixed price for consumable procedure-based accessories, physicians can charge patients on a per-lesion basis, which is how patients prefer to pay and also directly aligns with the clinic's costs. We believe this model will facilitate utilization and remove obstacles that can occur with traditional medical device consumable-based business models. As we begin to grow our commercial installed base through Controlled Launch participant conversions and commercial sales, cycle units will represent the key recurring revenue stream associated with each CellFX System. Q3 marked the first cycle unit purchases by clinics converting to commercial use of their CellFX System. In the long term, we expect the utilization of the CellFX System to increase along with clinician experience as they become more comfortable with the procedure and new applications are introduced. As a reminder, CellFX CloudConnect is not only the backbone of our business model, it offers clinics an array of services and practice management tools to track utilization data and other metrics. Having the software connected to our Internal Customer Relationship Management and enterprise resource planning system provides us and the clinics with crucial insights into the productivity and profitability of the CellFX System. Turning back to the commercial launch, we are now in the final phase of onboarding the remaining clinics that have been selected to participate in the Controlled Launch program. We started the program in Q1 and to date have successfully onboarded 68 clinics across the U.S., Canada, and the EU. Due to administrative delays in a couple of European countries, we believe we will onboard the remaining clinics in Q4, taking the total number of clinic participants to approximately 75. At this point, the initial Controlled Launch clinics are actively completing program requirements and converting to commercial use by opting to acquire their CellFX System. We expect many of the Controlled Launch clinics to be through the program by the end of the fourth quarter, and the remainder will complete in Q1 of 2022. While we anticipate a high percentage of the Controlled Launch participants will convert to commercial use, we have had a few clinics opt out of the program, due primarily to the resource commitment required to participate in the program. Generally speaking, those who opted out have done so early in the Controlled Launch process, while those that followed through to the end of the program have been converting. This was anticipated and we believe bodes well for future conversions. In addition to continuing Controlled Launch conversions, we also anticipate initial commercial sales of the CellFX System in Q4, marking our transition from Controlled Launch to our broad commercial launch as we enter 2022. The leading aesthetic dermatology clinics and key opinion leaders who have participated in the program and opted to purchase have provided very positive feedback, and the deep relationships we have built with these key opinion leaders will form our foundation for growth as we expand our commercial efforts. An important development coming out of the Controlled Launch program is the physicians’ understanding of the CellFX System and its underlying mechanism of action through hands-on experience with the CellFX System and observations of the treatment and healing process. Physicians are beginning to identify new applications to address additional unmet needs. We expected use of the CellFX System would naturally facilitate uncovering new opportunities to treat benign lesions, and are pleased to see this is playing out as anticipated. One example of a new lesion of interest emerging from the Controlled Launch utilization is the treatment of dermatofibroma. Dermatofibroma are small benign lesions typically found on the extremities, especially the lower legs. These persistent and sometimes painful growths are fairly common, with dermatologists reporting seeing as many as 30 patients presenting with them per week. However, the current treatment rate is low, due primarily to the lack of available treatments. The current standard of care, surgical excision, is used infrequently because it typically results in undesirable scarring. There are currently no energy-based devices regularly used to treat dermatofibromas, and for this reason, we believe this could potentially be a large market opportunity for any viable CellFX procedure performed with the currently available treatment tips. That brings us to our current clinical work. The advancement of specific indications in dermatology for our CellFX System in the US is a top priority for Pulse Biosciences. As we have stated previously, we have implemented a stepwise regulatory strategy in the US, under which we're pursuing specific indications for high-value applications. The first specific indication we are seeking regulatory clearance for is the treatment of sebaceous hyperplasia. We completed the FDA-approved IDE study for the treatment of sebaceous hyperplasia earlier in the year and recently finalized all of the necessary analysis. We are pleased to report that a 510(k) will be submitted this week to the FDA. A second specific indication we are targeting is for cutaneous non-genital warts. In the third quarter, we completed enrollment of our 150 patients in the FDA IDE-approved pivotal comparison study. After the appropriate follow-up visits are completed, which should occur in early Q1 2022, the data will be analyzed, and we are anticipating a 510(k) submission in the first half of 2022. We will continue to pursue additional benign lesion clearances to grow the CellFX System's application portfolio where it makes the most sense for dermatologists. The early data sets for syringoma and Nevi, or common moles, are promising. We will provide updates on the progress with these lesions as we approach pivotal clinical trials. Outside of our benign lesion pipeline, we have completed enrollment of all 30 patients in our FDA IDE-approved treat and resect basal cell carcinoma (BCC) feasibility study. We believe that NPS technology and the CellFX System can be used to treat smaller BCC lesions with improved outcomes in cosmetically sensitive areas such as the face, because BCC is the most frequently occurring form of cancer in the US, and the current treatment of BCC is wide margin surgical excision, which typically results in undesirable cosmetics being very attractive market opportunity. In accordance with the BCC study protocol, we expect to complete the excision of the treated BCC lesions by the end of this year, with analysis of the tissue by the study pathologist taking place in the first quarter of 2022. In addition, we plan to meet with the FDA in the first half of 2022 to discuss the details of a potential pivotal study for specific indications to treat BCC lesions with the CellFX System. At this time, it's difficult to estimate what the FDA may require for a pivotal study, and therefore, the timeline for an FDA submission is also difficult to estimate. However, we remain encouraged by the potential of this opportunity for the CellFX System. Our pipeline philosophy is to target the most prevalent and compelling conditions to realize the true potential of the CellFX platform and maximize the value of NPS technology. Though there is clinical and regulatory work to be done before we can commercially launch additional applications, we believe it is beneficial to our physicians and patients to invest our resources where there's the greatest potential in improving their lives. On the global regulatory front, we are pleased to report that we have recently received approval to market and sell the CellFX System in Australia. This represents another validation of the safety of the CellFX system from regulators. This is the first country in the Asia Pacific region that we have received approval to ship, marking the beginning of our Asia Pacific commercialization. At this time, we expect our first shipment to Australia in early 2022, as we begin working with the top KOLs in that country. This is the first step to entering this territory, and although we do not anticipate significant shipments to this region in 2022, it will set a foundation for expansion in 2023. As we have mentioned previously, we continue to invest in investigational areas outside of dermatology. Early successful research initiatives have created tangible opportunities. For that reason, we are pleased to have Mitch Levinson join the company as Chief Strategy Officer in addition to serving on the board, which he has done for several years. Mitch has over 30 years of experience developing and launching novel medical device technologies across multiple medical disciplines, including dermatology, wound care, surgery, diagnostics, patient monitoring, and digital health. Mitch’s experience in medical devices and with Pulse Biosciences and his expertise in bringing new technologies to market make him uniquely qualified to lead our efforts to expand the applications of the CellFX System and NPS outside of dermatology. As evidence of our early research success, preclinical data was recently presented on the use of the NPS technology platform in the field of gastroenterology by Dr. Robert Duggan at the Annual Meeting of the American Foregut Society. The presentation, titled 'Nano-Pulse Stimulation Technology is a promising new energy modality for Barrett's Esophagus,' was extremely well received by this group of physicians. Dr. Duggan is a key opinion leader in this field and one of the foremost experts on the treatment of Barrett's Esophagus using ablative technologies. Barrett's Esophagus is a complication of Gastroesophageal Reflux Disease (GERD) faced by approximately 10% of people with chronic GERD symptoms, in which the tissue lining the esophagus becomes dysplastic or precancerous as a result of the damage caused by the chronic acid reflux. The dysplastic cells are associated with an increased risk of esophageal cancer, and for that reason, are typically removed or destroyed using thermal energy modalities. The porcine study presented by Dr. Duggan demonstrated that the CellFX system using our novel and proprietary esophageal applicator can remove the esophageal epithelium and submucosal glands without causing significant fibrosis or evidence of stricture, suggesting that NPS may provide unique safety and efficacy benefits for the treatment of Barrett's Esophagus over currently used thermal ablative technologies that can sometimes lead to adverse outcomes such as esophageal stricture, scarring, pain, and retreatment. Importantly, this evidence also demonstrates that the proven mechanism of action of NPS in skin can be applicable to other tissues of similar architecture, such as in the esophagus. This early preclinical work represents one new potential application area for the CellFX platform and NPS technology outside of dermatology. And while we believe there are exciting potential applications across many medical specialties for the CellFX platform, we remain committed and focused on the execution of our commercial launch in dermatology. Going forward, we will continue to be disciplined with our pipeline strategy to prioritize R&D efforts based on comprehensive consideration of factors, like the most important clinical unmet needs for patients and commercial opportunities. As plans and developments materialize, we will share our progress. Overall, we've made excellent progress across the business in 2021. In the third quarter, we continued to execute our strategic initiatives. Now I will let Ed provide a more detailed update on the CellFX system launch.

Thank you, Darrin. I will start by reviewing the success we've had with the controlled launch. As of September 30, 2021, over 1,800 procedures were completed on the CellFX systems across 67 clinics in North America and Europe. To date, progress with the controlled launch is tracking largely in line with expectations and we could not be more pleased with the overwhelmingly positive feedback from KOLs on the CellFX system and how it is enabling a new avenue of expansion for their practices. Just as importantly, KOL feedback on best clinical and commercial practices from the controlled launch experience will lay the foundation of acceptance for the next wave of early adopters in the coming quarters. The controlled launch continues to provide us with many important learnings regarding real-world utilization, business model and franchise development, technical training, and the account onboarding process. We've already begun utilizing some of these lessons to advance doctors and providers through the controlled launch process faster than the initial participants. Our sales force also had a unique opportunity to build understanding of the adoption dynamics with both physicians and consumers while developing a process of best practices to drive both utilization and future capital equipment sales. The lessons from the controlled launch will continue to reinforce the foundation for our future business, as we look to scale and expand our commercial operations. The application of these lessons will continue to support our KOLs and customers in the field, as the next phase of our broader launches rolls out. As part of the controlled launch, we are collecting vast amounts of data and feedback from both physicians and patients. We are seeing high physician satisfaction with the system functionality and treatment outcomes. We also saw exceptional patient satisfaction with the procedure experience, procedure time, and treatment results. The high level of patient satisfaction translated to a high likelihood to recommend the CellFX procedure to friends and family. From a qualitative perspective, the results from patient and provider surveys were a major success for us and hit our expectations for the program. These factors reinforce our conviction in our commercial launch process and NPS technology. We will continue to provide a high level of commercial support to our KOLs and their patients, as they've already become our biggest advocates, as we tend to target other clinics in North America and Europe. As we complete conversion of controlled launch participants to commercial users, we are simultaneously transitioning to a broader commercial launch, targeting early adopters. This requires us to build out our sales force as our base of users increases. Our current sales reps are focused on driving procedures and supporting KOLs participating in the controlled launch. In addition to these efforts and to comprehensively address this large market, we are now actively hiring and training a team of capital sales specialists focused on new system sales. Going forward, we plan to have two integrated sales teams: clinical application specialists and capital specialists. Clinical application specialists will continue working with the current customers to drive utilization and implement CellFX treatment workflow best practices across clinics and provide marketing support to help capture the large market for benign lesion clearance. Capital specialists will be responsible for accurately qualifying and engaging potential system customers to expand our installed base among these early adopter prospects. They are actively qualifying the known aesthetic technology purchasers. The sales force structure will enable us to scale and maintain the top-tier service that controlled launch participants lauded in their feedback. As of September 30, 2021, we had 11 North American commercial field personnel and six commercial field personnel in Europe. They will be pursuing the prospect funnel of top opportunities in the coming quarters to purchase CellFX systems and drive utilization revenues. Clinical application specialists will support 10 to 20 accounts initially, ramping to potentially 40 accounts at scale. These clinical application specialists will drive utilization and be incentivized to improve utilization rates as we place new systems. We anticipate scaling the commercial team as necessary to support this growth. Supplementing our commercial marketing efforts, we continue to stay engaged in the scientific community to support the CellFX System clinical evidence generation. For example, recently, Dr. Brian Biesman, a leading expert in eyelid and facial surgery based in Nashville and a member of Pulse Biosciences Scientific Advisory Board, presented feasibility study results of NPS technology for treating Syringoma at the Annual Symposium of the American Society of Ophthalmic, Plastic & Reconstructive Surgery in front of a highly specialized audience of oculofacial plastic surgeons. Syringoma is a benign overgrowth of cells from sweat glands that occur in clusters in the upper and lower eyelids, posing a difficult-to-treat cosmetic condition that has high value to patients. We are equally pleased to announce that Dr. Biesman will be on the virtual podium presenting these early clinical results on Syringoma at the annual meeting of the prestigious American Society of Dermatologic Surgery (ASDS) in the coming days. Of the high clearance rate and short healing period demonstrated in this early study are encouraging signs of NPS’s technology’s broad applicability in dermatologic conditions, even in these most delicate areas of the face. These promising early results will lead to the additional studies of efficacy and safety needed to pursue an indication for this lucrative new application for CellFX technology. The Syringoma application is another demonstration of how the cell-specific mechanism of action of the CellFX platform will apply to many common lids that have high value in the cash-paying aesthetic procedure market. Our scientific presence continues in December with Dr. George Hruza from St. Louis, a past President of the American Academy of Dermatology, who will be presenting an overview of NPS technology at a Cosmetic Surgery Forum, which is a multi-specialty educational symposium that covers the latest research, treatment, and techniques in dermatology and cosmetic surgery. We are thrilled with the early results of the first commercial use of the CellFX System and are excited to execute our strategy to drive a worldwide system installed base and increase utilization with this installed base. Thank you. And now I will turn the call over to Sandy.

Thank you, Ed. As Darrin mentioned, in the third quarter, we recorded our first revenue as a company. For the third quarter of 2021, revenue was $574,000. Revenue was driven by the conversion of 12 controlled launch participants opting to purchase their CellFX Systems following completion of the program. System sales of $490,000 were recognized on a non-cash basis, and revenue related to cycle units was $84,000 recognized as cash from the initial cycle units purchase for commercial systems. Revenue in North America was $405,000, representing 71% of total revenue. Moving down to the income statement, I'll focus my comments on our adjusted or non-GAAP results to provide insights into the underlying trends of our business. Please refer to today's press release for a detailed reconciliation of non-GAAP measures with the most comparable GAAP measures. As we have now shifted to a commercial organization recognizing revenue, all uncapitalized manufacturing operation costs are now recorded in cost of revenue. Previously, these costs were recorded in research and development expense. Non-GAAP gross loss in the third quarter of 2021 was $113,000. Gross loss is calculated as total revenues less cost of revenues. For the third quarter of 2021, non-GAAP operating expenses, representing research and development, sales and marketing, and general and administrative expenses were $12.3 million compared to $10 million for the prior year period, which is an approximate $2.3 million increase year-over-year. The year-over-year increase in operating expenses was primarily driven by the expansion of commercial and operational infrastructure, including increased headcount to support commercialization activities. Non-GAAP research and development expenses increased by approximately $0.3 million to $6 million for the three-month period ended September 30, 2021, primarily due to increases in personnel, clinical trial costs, and consulting and outside services in support of our FDA submissions and new application development. These additional costs were largely offset by uncapitalized manufacturing costs now recorded in the cost of revenue. We expect to maintain incrementally elevated research and development expenses compared to the prior year period at approximately these levels for the remainder of the year, as we continue to invest in CellFX System application expansion initiatives. Non-GAAP sales and marketing expenses increased by approximately $1.9 million to $3.3 million for the three-month period ended September 30, 2021, primarily due to increased personnel and consulting and outside services to support commercialization activities not conducted in 2020. Sales and marketing expenses in the third quarter of 2021 include approximately $600,000 of non-cash expenses related to our controlled launch program. Prior to receiving FDA clearance and CE Mark approval for the CellFX System, sales and marketing expenses were included in general and administrative operating expenses. We expect sales and marketing expenses to continue to incrementally increase as we invest in activities to support our full commercial launch of the CellFX System. Non-GAAP general administrative expenses increased by approximately $0.1 million to $3 million for the three-month period ended September 30, 2021, primarily due to increases in personnel from a year ago to support the transition to commercial operations. Non-GAAP net loss for the third quarter of 2021 was $12.4 million, compared to a net loss of $10 million for the third quarter of 2020. Cash, cash equivalents, and investments totaled $42 million as of September 30, 2021, compared to $47.4 million as of June 30, 2021. Cash used in the third quarter of 2021 was $13.8 million, excluding net proceeds received under the June 2021 private placement, of which $8.4 million was recorded as related party receivable at the end of the second quarter. We did not issue any shares under the ATM equity offering program during the third quarter. Cash usage will continue to increase incrementally, as we invest in activities to support our growing commercial operations, including building a commercial team in Europe, increasing inventory levels, and conducting additional studies to support indication expansion with the FDA. Inventories were $4.3 million as of September 30, 2021. We remain focused on our commercial launch and wrapping up the enrollment of the controlled launch program in the fourth quarter. We continue to make calculated investments to drive long-term adoption of the CellFX System and our proprietary NPS technology. Nonetheless, we continue to anticipate incremental revenue generating systems will come online throughout the remainder of the year, as participants in the controlled launch program convert their systems to commercial use following completion of the program commitments. Now I'll turn the call back to Darrin for final remarks.

Thank you, Sandy. 2021 continues to be a transformational year for Pulse Biosciences as the business recorded its first-ever revenues. As we wrap up enrollment in our controlled launch program, we're taking the lessons we learned from participating clinicians and their patients to build the foundation for our business in 2022 and beyond. Q4 is continuing to shape up into an exciting quarter as those KOLs that participated in the Controlled Launch program begin to convert to commercial use. We look forward to our first commercial sales of the CellFX System as we capitalize on the positive feedback and momentum we have received from the Controlled Launch program. Our dedication to developing new applications for the CellFX System, for the benefit of both patients and clinicians, is unwavering. We are pleased with the recent cadence of developments. We look forward to providing more details around our commercial launch and clinical trials on our next earnings call. Before we open the call to questions, we want to welcome Laureen DeBuono to our Board of Directors. She is an experienced healthcare executive who has been successful in driving strategy and operational excellence at several medical technology and aesthetics companies. We look forward to her contributions. And with that, joining me for Q&A are Ed Ebbers, Executive Vice President and General Manager Dermatology, and Sandy Gardiner, Executive Vice President and Chief Financial Officer. Operator, please open the call for questions.

Thank you. Good afternoon, Darrin and Sandy. This is RK from H.C. Wainwright. Congratulations on achieving your first quarterly sales. That's certainly exciting. I apologize for asking what might seem like a negative question. However, it's my only negative question, I promise. You mentioned that some clinics opted out. I just want to clarify what you meant by a few.

At the end of the quarter, we had two clinics that decided to opt out. We had established a detailed process for selecting clinics, setting expectations, and involving them in the program. There is significant interest in this new technology due to its unique capabilities and applications, especially among clinicians. However, despite our careful selection process, some clinics began to realize the demands on their time required by the program, which included using the technology and completing surveys from patients, physicians, and staff. A few clinics, as I mentioned earlier, opted out because they felt it was too much for them at this time and were not ready to incorporate a new technology participant. We believe they may be open to it later in the process. Our observation suggests that this situation is more about the specific dynamics of these early clinics rather than any major issue.

Okay, that's fantastic. So as opposed to those two, the 12 that converted into commercial, a couple of things come to my mind as to how long did it take for these folks after they completed their trial period to decide to go commercial? And also, do you think what these 12 clinics are experiencing, both from their side and from your side, is sort of the typical experience that the clinics that are coming on board continue to handle? Just trying to understand how that process is working.

It's a good question. Each clinic is a bit different, so it's challenging to generalize about all 12. However, regarding how long it took for clinics to opt for commercial use after completing the program, most of them were ready to move forward right after finishing. The time to complete the program varied for each clinic, with some finishing their 40 sessions in about two to three months and ready to convert, while others took longer. This variation often depends on the clinic's own dynamics and how much time they can dedicate to the process. We've previously mentioned that our controlled launches are carefully measured to provide high touch and service throughout. Generally, the faster clinics take between two to three months, while others may take four to six months. Among the 12 clinics that converted, there was a range of times taken. Some clinics quickly began using the system for commercial patients, and we're pleased with the utilization. Others, after agreeing to acquire the system, needed time to set up a launch tailored to their patient population. We're involved in that setup process, assisting with website information, social media posts, and providing necessary collateral for their clinics. Overall, while it varies from clinic to clinic, we're seeing positive progress as they complete the program and commit to taking ownership of the system and purchasing cycle units for their patients in a more traditional commercial setting.

Okay. One question to Sandy. Sandy, you stated that 70% of the 574,000 came from North America. Is 70% also the representation of the 68 clinics that you have gone out and done the initial beta launch? Is that how we should think of it, or did it just so happen that 70% of these 12 happened to be in North America?

No, I actually think that that's how you should roughly think about it when you think about the geographic regions that we're in. Roughly 70% to 75% will continue to be in North America, and the remaining 25% to 30% will be in the EU.

Okay. One last question that's for Ed and Darrin. So when you're looking at this expansion, the 510(k) filing that you're going in, and I'm assuming it's a 90-day review period. However, on the other end of it, let's – once you have a positive decision on this – how should we think about the dynamics in terms of usage? Will it be a lot different than what you're expecting without it? Just trying to understand how we should think about the dynamics of usage of cycle times?

Yeah. And it's also a very good question. Regarding the review time, I think the one expectation I would set is we really are not sure in terms of the overall timing of this review from the FDA. So, you're right on the FDA's 510(k) reviews, if 90 days is what they try to hit, and that's the period of time that they are on their review clock, there's usually time that is also taken up by whatever questions they may ask the company. The reason I bring that up is this is the first kind of FDA-approved IDE 510(k) that we are submitting to the FDA for the CellFX system. I think I would temper some expectations that it's probably going to be longer than 90 days. Many of these can go longer, perhaps up to 150 days. We are excited to start getting this data into the FDA, and get into the review process and be able to engage with them. I think we would expect they would take their 90 days and then also have questions for us. So that's just on the timing side. As it relates to what the impact will be in the market, I think we believe from the beginning that in the US, it's essential to get specific indications on lesions that we think there is a significant opportunity. Getting those specific indications is really for the purposes of allowing the clinics to promote these specific indications more directly to their patients and at large. But I think what we've said before is we don't really think that through the Controlled Launch, and even into some of the early adopters, which we're now starting to talk to. It's not as important to them; I think a lot of those clinics are very savvy in terms of how to incorporate a new technology into their clinic. They're very used to talking to patients about new technologies and new applications. So I think it's a little bit more of a downstream need as we kind of reach past the early adopters into the larger population of these aesthetic physicians and clinics. We do think it's important as we get to those clinics to have these indications and to give them the ability to market to their patients in that way. These are milestones along the path of commercialization. We already have, as you know, these indications outside the US. So both in Europe and in Canada. This is sort of a stepwise expansion in the US.

Thank you all. Thanks for taking my questions.

Yeah, thank you, RK. I appreciate it.

Our next question comes from the line of Chris Cooley with Stephens. You may proceed with your question.

Good afternoon, and let me echo those positive sentiments on generating your first revenues. That's great news. Maybe just from me a big-picture question and just make a clarification one. On the big picture side, help us think a little bit about how you're prioritizing and queuing potential new indications for use. Clearly, the CellFX system has significant potential use in a number of different indications. I'm just kind of curious how you're assigning focus and kind of letting these all fall into the funnel and then sort them out. Such that you can not only continue to advance the pipeline, not only within dermatology, but outside of dermatology but also do so in a cost-effective manner and targeting those indications with the highest probability of approval and also highest probability of commercial success? And I've got a quick follow-up.

Yeah, sure. Thanks, Chris. Thanks a lot for joining the call and good question. And congratulations to us on the revenue; we're certainly excited about it! Regarding the pipeline, it's a very good question. As you can imagine, and I think we've talked about, we get a lot of inbound from physicians on various indications they’re excited about. The more we've been out in sort of a commercial environment, in the US and in Europe, and in Canada, the more inbound we get from physicians about their interests and new lesions. So our internal strategy really tries to focus pretty much, as you just said, at the end there, which is: what are the indications where we see a significant clinical unmet need? I think in dermatology this is along the lines of things where physicians are telling us they don’t have good treatments. Our early indications, such as sebaceous hyperplasia, is one where you talk to physicians, and we know by our surveys, that 60% to 70% of these patients go untreated. Physicians are telling us that they just feel like they don't have good solutions. For another example, warts can oftentimes be treated with cryo, some form of cryo spray or liquid nitrogen. Physicians realize that that is not a very good solution; those warts often come back. Physicians will say that, they'll see patients month after month, trying to figure out how to treat their warts. I think our warts solution is one that we feel is very exciting and will give physicians a new way to approach warts and their patients. First, we look at where we can apply our unique mechanism of action on lesions that don't have good solutions. Then like you said, we have to check the probability and timeline for getting through the regulators and getting an indication for it if that's necessary. We try to balance those. We talked about that a new lesion kind of popped up in commercial use, this is dermatofibroma. When we ask how they treat dermatofibroma, they tell us they don't really have any good methods. So, that's rising to the top of our list based on that clinical unmet need and based on anecdotal data that we're hearing from physicians about its effectiveness. We're starting to line up clinical research to look more closely at dermatofibroma. On a yearly basis, we will likely have a couple of lesions that will be in larger trials that we would call pivotal trials. That's sort of how we think about it today. As our business grows, I think we can grow that structure. But as you've heard this last year, we had an SH IDE study and warts IDE study going into FDA. So we'll be bringing in more projects and I'm hopeful for some more feasibility studies. So that's sort of our pipeline approach on the dermatology side. As for outside dermatology, we're beginning to look at some of these applications. We believe there are exciting potential applications across many medical specialties for the CellFX platform, and we will continue to do that as that preclinical data gets to that level.

Super. I just have a quick clarification. Sandy, when I review the 12 systems and look back at the model from the first and second quarters, can you confirm that there are no additional systems onboarded during the first quarter that haven't been activated? Additionally, Ed has previously mentioned some learnings in these early stages that could help accelerate progress in select markets. Based on that, is it still true that as you onboard this last group, there is potential to transition them to commercial status more quickly than the initial ones? That's all from me, thank you.

Thank you for the question. Great question! I'd start with the last part of your question. Indeed the early learnings of Controlled Launch are being applied to the more recently installed sites, and we are seeing an acceleration of their adoption because they are applying the lessons of their predecessors. There’s a more rapid transition to a willingness to bill revenues for the patients during the Controlled Launch, because they have others who have preceded them and set the stage for the commercial value of a cosmetically elegant clearance of various benign lesions. So, generally speaking, we’re seeing the benefit of early pioneers on later participants, and we anticipate that going forward. Canada is a great example where we have full labeling and the ability to promote all the tools needed to help someone build a business. Moving forward, I think clinics that are seeing success for their treatments provides good motivation for others to follow suit. The overall review and experiences we gain are translating to quicker onboarding in the controlled launch.

Thank you.

Our next question comes from the line of Anthony Vendetti with Maxim Group. You may proceed with your question.

Thank you. Yeah. I think most of my questions have been answered. Just on the specific learnings from the KOL launch, was there anything specifically that you learned during this process that has caused you to tweak the protocol or the system as you move to the commercial launch? And then on the commercial launch, I understand it is starting this quarter. I know most of the commercial launch will be in 2022. But we're halfway through this quarter. So has the commercial launch actually started, or are you expecting to start it between now and the end of the year?

Yeah, hey, Anthony. Good questions. In terms of tweaking, I think, as for the system and protocols, really not much. We are always looking to improve little things here and there in terms of user interface and system interaction, but nothing significant. Fortunately, the hardware and software have consistent functionality. We continue with improvements, and importantly, we’ve learned about what clinicians are observing regarding treatment outcomes. These have given us insights into how various lesions are handled. Overall, there's been a change in physician experiences, importantly with treatment protocols and applications. The usage of NPS has facilitated our ongoing understanding of patient observations. So these small changes demonstrate great overall effectiveness. As for the commercial launch, it’s not a binary transition. We're phasing down the Controlled Launch program and clinics get converted throughout this quarter and into next. With early adopters, as those clinics emerge, we’re seeing inbound inquiries due to colleagues using the CellFX system. So our field team is engaged with those early adopters and we expect to see commercial traction by the end of the year.

Excellent. Thanks for that color. Appreciate it.

Yep.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Darrin Uecker for closing remarks.

All right, thank you, operator. Thank you, everybody for participating in the call. We really appreciate it. We're excited about where we're at, and we look forward to the next investor call where we can update you. Thank you.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.