Profound Medical Corp. Q1 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the Profound Medical First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stephen Kilmer, Investor Relations. Please go ahead.

Thank you. Good afternoon everyone. Let me start by pointing out that this conference call will include forward-looking statements within the meaning of applicable securities laws of the United States and Canada. All forward-looking statements are based on Profound's current beliefs, assumptions, and expectations and relate to, among other things, expectations regarding the efficacy of the company's treatment technologies, results of future clinical trials, the ability to obtain coding and/or reimbursement from third-party payers, anticipated financial performance, business prospects, strategies, regulatory developments, market acceptance, and future commitments. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, or achievements to be materially different from those implied by such statements. No forward-looking statement can be guaranteed. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this conference call. Profound undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than as required by law. For the benefit of those who are new to the Profound story, I would also like to take a moment to summarize our business. Profound develops and markets customizable incision-free therapies for the ablation of diseased tissue. We are currently commercializing TULSA-PRO, a technology that combines real-time MRI robotically-driven transurethral ultrasound and closed-loop temperature feedback control. The technology is designed to provide customizable and predictable radiation-free ablation of a surgeon-defined prostate volume, while actively protecting the urethra and rectum to help preserve the patient's natural functional abilities. TULSA-PRO is CE marked, Health Canada approved, and 510(k) cleared by the FDA. In the US, we employ a pure recurring revenue model for TULSA-PRO, whereby we charge customers on a per-procedure basis for TULSA-PRO consumables, lease of medical devices, and services associated with extended warranties. Outside of the United States, we primarily deploy a capital and consumable sales and service models separately if the situation warrants that. We're also commercializing Sonalleve, an innovative therapeutic platform that is CE marked for the treatment of uterine fibroids and palliative pain treatment of bone metastases. Sonalleve has also been approved by the China National Medical Products Administration for the non-invasive treatment of uterine fibroids and has recently obtained FDA approval under Humanitarian Device Exemption for the treatment of osteoid osteoma. The business model for Sonalleve Systems is currently a one-time sale of capital equipment. On the call today, representing the company are Dr. Arun Menawat, Profound's Chief Executive Officer and Chairman; and Rashed Dewan, the company's Chief Financial Officer. With that said, I'll now turn the call over to Rashed.

Good afternoon everyone and welcome to our first quarter 2023 conference call. On behalf of the management team and everyone at Profound, I would like to thank you for your ongoing interest in our company. For those of you who are shareholders, we appreciate your continued interest and support. I will turn the call over to Arun in a moment for an update on our commercial activities. However, before I do, I would like to provide a brief update on our first quarter 2023 financial results. To streamline things, all of the numbers we'll refer to have been rounded, so they are approximate. For the three-month period ended March 31, 2023, the company recorded revenue of $1.9 million, representing an increase of 36% from $1.4 million in the same period of 2022. Recurring revenue increased 43% to $1.5 million, while the one-time sale of capital equipment increased 16% to $400,000. Total operating expenses in the 2023 first quarter, which consists of R&D, G&A, and selling and distribution expenses were $8.1 million, an increase of 4% compared with $7.7 million in the first quarter of 2022. Breaking that down further, expenditures for R&D were $3.8 million, an increase of 21% compared to the first quarter of 2022. G&A expenses decreased by 10% to $2.1 million and selling and distribution expenses decreased by 4% to $2.1 million. Net finance income for the 2023 first quarter was $145,000 compared with net finance costs of $892,000 in the same three-month period of 2022. Overall, the company recorded a first quarter 2023 net loss of $6.8 million or $0.32 per common share compared with a net loss of $10.5 million or $0.40 per common share for the same three-month period in 2022. As at March 31, 2023, Profound had cash of $43 million. With that, I will now turn the call over to Arun.

Thank you, Rashed. Beginning with our financial performance, our recurring revenue continued its upward trend increasing 43% to $1.5 million compared to Q1 2022. In the quarter, our focus was on getting our new sites operational and while we did not add any new sites, our pipeline remains strong. Based on this, we expect to see an increase in the number of sites as the year progresses with the achievement of 50 systems in the United States by the end of 2023 remaining very possible. We're also confident that we will continue to see an increase in recurring revenue going forward, while capital sales from OUS markets will remain lumpy. As I've indicated before, our main focus now is driving the adoption of TULSA in the United States. I would now like to turn to the very well attended AUA 2023 Annual Meeting that took place from April 28th to May 1st in Chicago. Although robotic prostatectomy and radiation are seen as the current mainstream technology, it was very clear at the meeting that urologists are starting to view our new ablative therapy, TULSA, as a potential alternative or a third major option. We performed live demonstrations to show how TULSA employs real-time MRI imaging and thermometry as well as directional ultrasound from inside the prostate, gently heating tissue to kill temperature without causing unnecessary cell charring or boiling that can result from other types of ablative therapies. Many urologists explicitly indicated that they're ready to lead the implementation of TULSA at their sites and that based on our demonstration, they clearly understand the clinical value of our gentle and fast ablation technology as well as its customization capabilities. They also indicated that they are more comfortable using MRI even without a radiologist. TULSA is of particular interest because of its ability to treat a large variety of patients, including whole gland or sub-gland or focal and can thereby become a mainstream technology. As an example of the increasing interest, Dr. Dora, the lead author of the TULSA Level 2A review article, was specifically recognized by the Journal of Endourology on April 30th for his authorship as it was the most downloaded article over the last 12 months further illustrating the medical community's interest in TULSA. TULSA was the subject of four posters at the AUA Meeting Scientific Program, one of which covered the Pivotal TACT trial's four-year follow-up data that was first shared in September. The second poster covered a real-world outcome study of 180 men with recurrent prostate cancer and a subgroup with BPH, the largest single cohort presented to date. The results demonstrated that lesion-targeted TULSA is associated with promising midterm oncological outcomes and a minimal functional side effect profile with the flexibility to treat localized prostate cancer in primary, salvage, or recurrent settings of BPH through a patient-tailored, whole gland or lesion-targeted approach. The third poster assessed one-year complication in 206 patients where 131 received treatment from focal ablation, either TULSA or another method, and 75 received treatment with Robotic-Assisted Laparoscopic Prostatectomy or RALP. This landmark study is one of the first to establish a head-to-head comparison between radical prostatectomy and minimally invasive therapies as well as the first source of level 1 evidence that includes TULSA. The study showed that TULSA had lower complications compared to RALP and no Grade 4 complications like the two seen with RALP or other methods. The final poster assessed the safety and efficacy of TULSA in men with BPH; outcomes for the 27 treated in the study demonstrated that early symptom relief at three months was durable to 24 months. At 12 months, International Prostate Symptom Quality of Life, Urinary Symptom, and uroflowmetry scores improved despite 23 of the 27 men discontinuing symptom management medication. These presentations reiterated TULSA's safety, efficacy, durability, and flexibility, which we believe will further drive TULSA towards becoming a mainstream treatment for a broad spectrum of patients with prostate disease. In that regard, if you haven't already done so, I encourage you to look at the current investor presentation on our website and slide 16 entitled TULSA-PRO Utilization Trend, commercially-treated patients, in particular. This is not just theoretical anymore. We're seeing it in the data from patients that have been treated in the commercial setting. While that slide includes all commercial patients since FDA clearance of TULSA-PRO, let me provide some metrics for just those treated so far in 2023. With respect to indication, approximately 72% were treated for prostate cancer, 23% were hybrid patients suffering from both cancer and BPH, and 5% for salvage. We're seeing a trend that TULSA is increasingly being used with patients who are on active surveillance or diagnosed with low-grade cancer, but also have symptoms of BPH. We believe that TULSA is the only minimally invasive option for such patients. For cancer-grade approximately 13% were Grade Group 1, 58% were Grade Group 2, 19% were Grade Group 3, and 10% were Grade Group 4 and 5. In terms of ablation, around 56% were whole gland, 26% were greater than 50% but less than 100% of the gland, and 18% were focal therapy, again, demonstrating the versatility of our technology. For prostate size, approximately 2% were less than 20 cc, 39% were between 20 to 40 cc, 34% were between 40 cc to 60 cc, 23% were between 62 to 100 cc, and 2% were over 100 cc. Going forward, these are some of the utilization metrics that we will be reporting on a quarterly basis. This real-world data demonstrates TULSA's unique flexibility, which we believe translates into an unrivaled Total Addressable Market for us. Turning to our reimbursement strategy. I'm pleased to share that our CPT Category 1 application for TULSA, which was sponsored by the Society of Interventional Radiology and strongly supported by the American Urological Association, as well as by several users who added positive comments to the application, was considered by the AMA's CPT Editorial Panel on May 4th. We're very satisfied with the discussion that took place and remain optimistic about the panel's decision and eagerly await the publication of the meeting minutes on or before June 2nd. The CPT application that was filed requested three codes. The first code is for a procedure performed by a specialist such as a urologist without assistance from another specialist. The other two codes are for a procedure performed by two physicians, such as a urologist and a radiologist. We believe having multiple codes gives our physician users the flexibility to either do the whole procedure or collaborate and get reimbursed for their part of the service. The next step of the CPT application process involves the Relative Values Scale Update Committee or RUC, sending questionnaires to TULSA users to determine the physician work relative value units or RVUs associated with its TULSA procedure. Both the SIR and the AUA will be very involved in this process, which along with reviewers by the Centers for Medicare and Medicaid Services, will ultimately determine the TULSA procedure payment amount. The proposed recommendations are expected to be published in the Federal Register in August 2024, finalized in October 2024, and come into effect as of January 2025. By that time, assuming our CPT application is approved and the preliminary results of this Level 1 CAPTAIN trial are positive, we anticipate a large installed base of 75 or more sites across the United States. With this major milestone now on the horizon, we're working to build a larger national sales team to close on our strong pipeline of prospects. In the meantime, we will stay focused on the CAPTAIN trial, which is the first-ever Level 1 prospective, randomized clinical trial comparing the clinical outcomes of TULSA with radical prostatectomy. Recruitment continues to progress as planned, such that we expect to report preliminary results and particularly, functional side effects such as erectile function and urinary incontinence in Q1 2025. To summarize, urologists are looking for superior technology to treat prostate disease and we believe that TULSA's ability to treat such a wide range of patients safely and effectively will solidify its position as a mainstream treatment. We are very encouraged by the discussion at the AMA's Editorial Panel Meeting that took place last week and look forward to the publication of the panel's final decision regarding our CPT Category 1 code application in the coming weeks. Assuming the permanent code is approved, we believe that this combined with initial data from our ongoing CAPTAIN clinical trial will be a significant catalyst for TULSA adoption in the United States beginning in the first quarter of 2025. At the start of that quarter, we expect to have 75 or more US TULSA sites up and running. This ends our prepared remarks for today. With that, Rashed and I are happy to take any questions you might have.

Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from the line of Rahul Sarugaser from Raymond James. Your line is now open.

Good afternoon Arun and Rashed, Steve, thanks so much for taking the questions and congrats on the strong quarter. So, my first question is that the CPT code that was considered by the AMA, assuming it is granted, would it be applicable to BPH as well and sort of specifically given the broadening utility on TULSA that you talked about Arun?

Yes. Good question, actually. So, the way our applications are written, they are for ablation of prostate tissue. So, they do not specify whether the ablation is for cancer or for BPH lesions. That is for the physician or the surgeon to decide. And so the advice that we have received so far from our legal experts who specialize in reimbursement is that these codes are very likely to apply for both types of diseases. Now, we will work with insurance companies and so on as we go, but most certainly the codes do not have to be revised.

Great. That's very helpful. And then a follow-on question from that is you previously indicated that the temporary C code found is looking to expand to ambulatory centers. Could you perhaps give us an update on that what the process is like and any sort of timelines associated with it?

Yes, Rahul, I didn't cover that in the prepared remarks, but we have separate from this CPT activity, we have applied directly with CMS to expand the use of the C code at ambulatory surgical centers. As you know, there are over 5,000 of those in the United States; many of them already have MRIs. And based upon the clinical data and the commercial data that we submitted to CMS, it clearly shows that it is a daytime procedure. And because there is no incision in this procedure, the risk of needing a hospital in an emergency is very low. The meeting did take place in March and from our perspective, it went well. The CMS will publish their proposed remarks by the end of July or early August this year and finalize them by October this year. If indeed they accept our recommendation, that will actually become applicable as of January 2024. So, the idea is that the majority of our patients today are cash patients. But I think that we could be transitioning to using the C code more effectively as of January 2024. And then by 2025, if the AMA accepted the application, then that the permanent code will become effective. So, I think that's sort of the series of events that we're looking forward to.

Great. That's very helpful. And it's good to understand that sequence of reimbursement. And if you'll indulge just one last question. Of course, there is the balance between increasing utilization as well as increasing the installed base. You talked about no new deployments this quarter. However, recurring revenue has gone up by just on my back of the envelope about 15%. So, could you give us a sense for the rate of increase quarter-over-quarter and how we should be thinking about that recurring revenue escalating, particularly given your guidance that you expect it to continue growing?

Yes. I think that if you remember from Q4 to Q1, the number of sites increased and what you're seeing is increased usage. So, definitely the number of patients being treated is increasing. And I think that going forward, the recurring revenue will increase due to two factors. One is that as the sites gain experience, they will use the device more. Just like we saw a couple of years ago when we started, the sites that are two years or longer are certainly using the device more today. So, I think you will see an increase partly because the sites will gain more experience and they will increase utilization. But we do expect that we will have additional sites coming online. We did sign at least four new contracts and we already had some existing contracts to place more systems in the Q3, Q4 timeframe and that will increase the utilization as well. So, I think the combination of the two is the reason why I remain fairly comfortable that you will continue to see an increase in usage and recurring revenue even in the 2023 year.

Great. Thank you. That's all for me today and we'll certainly be looking forward to that AMA decision on June 2nd.

Sounds good Rahul. Thank you.

Thank you. Our next question comes from the line of Michael Sarcone from Jefferies. Your line is now open.

Thanks. Good afternoon, Arun, Rashed, and Stephen, and thanks for taking my questions. So, do you think you could just give a little more color on the TULSA system funnel? And how you think installations could trend through the course of 2023? I think for Rahul, you just mentioned placing some more systems in Q3 and Q4, but would love to just get some more color on how you view the cadence through the year to get to that 50 systems that is still possible?

Yes. Michael, I mean, we have a number of contracts. As I said, even in Q1, we signed at least four additional contracts. I think we will continue to sign those contracts. I would say part of the reason we've been very comfortable with the number is that as I mentioned, the AUA this year was particularly well attended and we walked away with leads that are in the triple digits. And so I think that given that new leads is a very large number, given that we already have pretty good line of sight of where those 50 systems are going to be installed, which includes a number of existing contracts, we're just basically in the process of putting them in. That's kind of where the confidence is coming from. The main theme, I guess, is that an ablative therapy as an alternative to existing therapies is now here to stay. And our technology is the most versatile of all of those. As I mentioned in the prepared remarks, certain types of cases, such as those hybrid cases where they have low-grade cancer and are on active surveillance with BPH, those patients really have very limited choices. And so I think in this quarter we saw an increase in the usage in that category of outpatient. The trend is starting to flow in our direction, and I think more and more sites are going to need an ablative option.

Got it. That's helpful. And that makes sense. And congrats, triple-digit leads, that's pretty impressive. And I guess just one more for me. I think last quarter you mentioned one of the initiatives you have is teaching existing sites how to optimize reimbursement and coding. And I think you might have mentioned 12 or 13 teaching sites that are now appropriately using your temporary C code to get reimbursement. Do you have any updates on how things there are trending?

I think what I said last time still holds. At the AUA, there were a couple of sites that indicated their administration has given them the green light to treat particularly Medicare patients that our C code can be used. So, I would say that statement still holds. The reimbursement itself seems to be sufficient that the site administration doesn't feel that they are in any difficulty with the amount that they're receiving, and they're starting to see some of these administrations giving green light to their urologists to treat Medicare patients with the CPT code. So overall, I think, there's steady movement.

Okay. Thanks a lot, Arun.

Sounds good, Michael.

Thank you. Our next question comes from the line of Ben Haynor from Alliance Global Partners. Your line is now open.

Good afternoon gentlemen. Thanks for taking the questions. Just a couple few for me. On the CPT code applications that are applying for three codes and kind of having the mix between the urologist, I think of specialists doing it and then performing with assistance of another specialist. What's your expectation in terms of how often each of those codes they've been applied for might be used presuming that you ultimately get all of them?

Yes. Ben, that's a great question actually. One of the things that we heard repeatedly was that urologists are increasingly comfortable and really want to take charge of doing TULSA all by themselves. They don't feel they need the radiologist anymore. Particularly, those who have done maybe 20 to 30 cases are saying that they're pretty comfortable with being able to read the images and they are very clear in terms of what their role is versus what is the role of the radiologist in terms of diagnosing the patients. When you're diagnosing the patient, you're looking at the cellular structure, versus when you are treating the patient, you're looking at the boundaries of the prostate, where are the vital organs, where is the urethra, where are the nerve bundles, and how do you see those and where the cancer is compared to those. So, they're addressing an entirely different set of questions in the treatment process as compared to the diagnostician who is really looking at whether or not there is cancer or if there is cancer, what grade of cancer it is. They're less concerned about where it's located. Our expectation is that as this product goes more and more into community hospitals and suburban hospitals and so on, outside of teaching facilities, urologists will do this procedure all by themselves. In that case, they will use the code for themselves. Now, in teaching sites, what we have seen so far is that they love collaborating because their models are different. They are typically on salaries. The hospital actually likes that collaboration these days. So, we've sort of divided that up. That's the best expectation that we have; they will use both codes and collaborate and do unique cases, whereas in the community or suburban hospitals or private practices, I think urologists will do the whole thing in the future.

Okay. So it depends on the type of facility.

Yes, exactly, the type of facility. You've probably seen that. I know I've seen that in other environments when there's a new technology, they will bring a second specialty to help them with certain unique aspects. I think having these separate codes makes it easier for them to invite the second specialty to do that, and if anything, it will help during the early phase of the TULSA development.

Okay. So, I mean, it makes sense why they would do it the way that they do it. And hopefully you get all of them so there isn't anyone that feels left out. And secondly, for me, looking – obviously you had a lot of great data at the AUA that got presented. I noticed the also Clinic real-world data, at least for the side effects looks better than radical prostatectomy does in a lot of ways. Is that mainly just attributable to not doing the whole gland, or is there more to it there?

There is. There is a lot more to it. This is the constant theme, and this is why I'm beginning to feel fairly comfortable that this technology should go into the mainstream. Because when we did the PACT trial, we were governed by the FDA requirement to do whole gland therapy. Versus in the real world, we are seeing constantly that they're making the decision on what's best for the patient. In some cases, they're doing whole gland, which is over 50% of the time, and then they're doing between 50% to 100% in some cases. And then they're doing truly focal therapy, which is very small portion of the gland in a small percentage of patients. Flexibility is the reason why you're seeing actually better outcomes in commercial settings as compared to the clinical trial, because those were all whole-gland therapies. When you get to that whole gland, you end up in a higher risk situation, whereas with these partial-gland, you can save a lot of function even more carefully. If you think about radical prostatectomy, the only choice that that surgeon has is to remove the whole gland. Versus with TULSA, they have the choice to kill the whole gland or just a partial gland, whichever is best for the patient. I fully expect that over time, that theme will become stronger, and I think that's what the patients want. I think it resonates with the urologist community.

Okay. Got it. And then lastly for me, I know at a recent conference you mentioned how doctors are going to the families after a procedure and saying, look, I'm taking care of the cancer because I can see it on the imaging, so I'm real confident that I got it. Is that something that most docs are going to the families right away on, or do they have to do a handful of cases before they're comfortable in saying, yes, I'm really confident I got it, or what's the right way to see the behavior change that happens there, how quickly does it occur?

Yes. That's another very important point. They do that right away. One of the things that we have not talked about is the fact that at the end of the procedure, because they're dealing with the MRI, they know exactly what tissue they have killed because they can see it on the images and they can make a printout of that image. Any tissue that no longer has blood flowing will show up as dark tissue. It is not only that they immediately know the quality of the work they've done. The other part of this is that in case they did miss and they feel like they need to kill another layer of cells because they missed it. They can actually do that before they wake up the patient. That feature is starting to also become really important to them. It gives them confidence to say, okay, I know I've done this, or hey, I left something, and I'm going to fix it before I wake up the patient. They can then easily go to the family and say, here's the image. You can see this large prostate before the procedure, and here's the dark prostate. They can actually project the rate with which that prostate will start to shrink and how the patient will, if it's both hybrid like BPH plus cancer, and how they will start to actually gain their urinary symptoms back pretty quickly. They will do an image later to confirm the cancer, but they certainly would give the patient pretty good confidence. I think that's a driving factor for patients.

Yes, I mean, it's what Arun was talking about, TULSA-PRO actually has a very robust reporting tool that we don't talk about, but once the procedure is done, the physician can actually print out a very good report that can be given to the physician that shows what was done and what is the outcome.

Okay, great. Well, thanks for the call, you guys, and appreciate taking the questions, gentlemen.

Okay. Thank you.

One moment, please. Our next question comes from the line of Joshua Jennings from TD Cowen. Your line is now open.

Hi. Good afternoon. Thank you for taking my questions. I wanted to follow up on one of your previous answers, Arun, regarding the development of patient demand. As we approach early 2025, with the CAPTAIN data and reimbursement in place, TULSA Pro Treatments will have many advantages. However, you will be competing with major players in radiation oncology and robotic prostatectomy. Patient demand could play a crucial role in helping you capture market share. Could you share whether your centers are experiencing a notable number of direct patient inquiries from word of mouth, and what strategies your team plans to implement to build this aspect of patient demand as we move towards 2025?

Yes. Yes, Josh, you're absolutely right. We are very, very aware of the market that we are playing in. We have a strong direct marketing strategy that is playing out very well. In fact, we are hearing from many sites that at least a third of the patients that they see ask for TULSA by name already. I think as we get to the official word on the CPT and so on, we think that that request will certainly become louder because there are certainly, most patients who can pay the $30,000 plus are doing it. But I think there are a number of patients who are basically waiting for the insurance or the CMS, the Medicaid plans to kick in. Patient education is a large part of how we plan to gain adoption. We're also giving the urologist a tool that they don't have today. It is not like having one type of robot and another type of robot that they can buy. It's still a robot and it still will do whole gland removal. In our case, we're giving them a choice that if the patient does not need whole gland removal, they can actually treat the partial gland as well. In fact, they can make that decision on the fly. They typically do make that decision on the fly, of how much of the prostate and which part of the prostate should they be taking out. I think that flexibility has no competition, quite frankly. There are well over a million patients that are on active surveillance in the United States. These are patients who've been diagnosed with low-grade prostate cancer. They're not being treated because of the side effects of the current treatments, but those patients also have BPH. I think even if we just focus on that, we will be one of the three mainstream technologies. I hope that addresses your question.

Absolutely. Absolutely. And I wanted to just one follow-up. Sorry if you've spoken about this already on this call, but just thinking about the CAPTAIN data, the CAPTAIN trial data, but just overall efficacy of TULSA-PRO and how boost could improve efficacy on the margin. Is that something we should be thinking about and are clinicians thinking about that as well? Thanks a lot.

Yes, most certainly. We did not talk about it today because we had talked about it in the last quarter, but the thermal boost capability allows them to make sure that the margins are clean. That's the bottom line; the margins are clean. That itself gives them assurance. Because they’re using MRI, they can see that as they're performing the procedure. Versus if you're doing a robotic surgery, it's well-accepted that 20% margins are not clean, but the physicians don't know that when they're doing a procedure unless they take samples of the margin and send them to the lab; it takes over 45 minutes to get the result. In our case, if the margins are suspect, thermal boost is a great way to do it. In Europe, where thermal boost is available and has been for about a year already, we find that about half of the cases being done in Europe are actually utilizing the thermal boost capability of our product. We already know it is very useful. We know that it will give the urologist a lot of confidence. From the data presented at the AUA, we see that because of these capabilities, the commercial patient clinical outcomes are superior to that of TACT. We are in the FDA process. I think we will get that done by the end of this year, this thermal boost, as well as the AI capabilities that we announced in the last quarter. I think those in the 2024, 2025 timeframe will also help with adoption curves.

Excellent. Thanks, Arun.

Thank you, Josh.

Thank you. One moment, please. Our next question comes from the line of Frank Takkinen from Lake Street Capital Markets. Your line is now open.

Hey, thanks for taking the questions. Last quarter, I think you were speaking to a backlog building for some of your users of up to three to four months. Can you speak to that dynamic, and if that continues to be the case? And if there are any specific bottlenecks too, working through that backlog or if you think it's going to be kind of a rolling backlog on a go-forward basis?

Okay. Yes. I think that in some of the teaching sites that backlog continues. A couple of sites since that quarter have gone through administration and have been allotted additional MRI time because we had grown to six months in at least one of the hospitals. They have been able to add MRI time and reduce that backlog to about three months. There's another hospital that just got agreement with administration to add an extra day to eliminate that backlog. This dynamic is certainly one of the reasons why we're starting to see increased usage in the existing sites. So, yes, for sure.

Okay, that's helpful. And then just wanted to ask for kind of a broad care authorization of the broader environment. I know there's been some elements over the last couple of years macro related that have made installations challenging or at least predicting the timing of those installations challenging. Can you maybe speak to how you feel the environment is right now and how that plays into your cadence of quarterly placements through 2023?

Yes, Frank. Good question. We do have maybe three sites where they have ordered MRIs. The timing of delivery of those MRIs has been in question. At this point, we are still getting feedback that customers are getting definitive answers. I think all those three sites are likely to be operational well before the end of this year, more likely than not in Q3 this year. I do think the environment is getting better, and we are getting much better feedback in the U.S. I think the environment in all U.S. is still a little unpredictable, particularly in Asia, but certainly the U.S. is starting to get on stream.

Okay. And then maybe last one. I think last quarter you mentioned, CAPTAIN was about 25% enrolled. Can you update us on that figure?

Frank, I don't have the exact number. It could be on purpose to try to keep that inside the clinical team. But I think certainly we are recruiting at a reasonable pace, and the number of sites will actually increase by about four to five sites by the end of this year. We are getting more and more into that, and we will probably be in the neighborhood of about 14 to 15 sites in the next three to four months. The recruitment will continue to improve. I’m sorry, I don't have the exact number, but I think the recruitment will continue to improve.

Okay. Got it. I'll stop there. Thanks for taking the questions.

Thank you.

Thank you. One minute, please, for our last question. Our next question comes from the line of Brian Gagnon from Gagnon Securities. Your line is now open.

Well, that was close. Hey, Arun. I have missed the beginning and part of it. So I just want to make sure I get this correct. Your burn was $3.5 million for the quarter of cash. Do I have that right?

It was a little bit higher than that. I think the burn. Yes, go ahead, Rashed.

I'd like to say it's actually about $5.5 million but we took in $2.4 million from warranties extended, Brian.

Okay. Got it. And you said that you signed at least four new contracts in the first quarter?

Yes, always.

Okay. Okay. So it seems to me and actually last thing for before I ask a real question. The gross margin in this quarter, do I have this right that it's 65%?

Yes.

Is that a normalized number going forward or was there something special in there that made this quarter look terrific?

In the product mix, right? So, like I said, we do have capital revenue from TULSA-PRO sales in the quarter. And that one is fairly high margin, as our cost is low for that one. But on average, our recurring revenue is doing 50%. As we said before, we will continue to see that getting better as the volume increases.

Okay. All right. So my real question is you guys are a small company, and it seems like all roads are marching to 2025 to get reimbursement and possibly 2024 if you get reimbursement in the ASCs. How do you structure yourselves to be able to handle the installation bolus that I suspect you'll see if you get these reimbursements? Because docs are going to want to be trained not when you get the code approved, but ahead of time so that they're not doing the first patient and saying I've done one; they want to have four or 50 done before January of 2025. So how are you guys thinking about growing your installation team, your sales team, your clinical team to really drive towards having a big installed base and big user base by the time you get there?

Brian, 80% of my time right now is spent on that question because I think we have to be ready for this. A couple of things. One is that given that this has been a game-changing product, it took us some time to determine what is the best way to structure a sales team, how do we set our messaging? How do we present the clinical data in a comfortable way? How do we educate? Our sales team and prepare them to provide the proper information to customers and potential customers. This is something that we addressed late last year, and we have a fantastic team that educates our people, and we're very pleased with the way they have done that. The other question is not only scaling the sales team and service team, but also how do we educate the urologists to ensure they can get up and running at a good pace? We have several urologists who are robotic urologists today but have indicated they will be primarily flipping to TULSA as the reimbursement codes become effective. They are preparing training programs where they will be able to train urologists on the procedure. My expectation is that there will be at least two more likely three sites, one on the West Coast, one on the East Coast, both Southern, and then one in the Midwest or Northeast. We're quite excited about that because we think the best type of training comes from existing urologists who are doing it. We have structured our sales team with a hunter-gatherer model. So there is a team that is focused on utilization, another team focused on new sites, and we have a clinical team that will continue to perform. We're looking to scale all of it at the moment and have quite a few sales positions open.

And can you do this without significantly increasing your burn, as you've been pretty frugal with the money recently?

We think that in the long run, this is a very efficient business model because we get over $8,000 per patient. The margins are decent already. If you look at a 12-month view, I think you will see visibility. Yes, we will have some increase in the short term, but I think it will start to come back as the salespeople begin to convert their efforts into revenue.

They're going to have to go chase those triple-digit leads from AUA. Last kind of piece for me. Are you still comfortable that you can get to those 50 installs by the end of this year?

Yes, I think so. We signed four additional contracts in Q1; we have at least a few more contracts. With this lead and even without these leads, we had enough line of sight. So I think getting to 50 systems is a reasonable number for this year.

Okay, and then for a broader question, do you have any idea about what type of payment might be expected if the CPT receives full approval? Perhaps a dollar amount?

I guess the best surrogate line is the current C-Code. The payment amounts typically are cost-plus, and the C-Code payment is cost-plus as well. If you look at 2022, the C-Code was paying a national average about $12,500 and it went up about 5% to $13,050. It was only because the primary use of that C-Code is because of TULSA. The costs increase reflected the cost of the TULSA procedure. If the analysis stays the same, and CMS does it the same way they're doing it for the C-Code, that seems like a reasonable expectation.

Can the doctor earn more from this procedure compared to any other treatment for prostate cancer? I understand it's beneficial for the patient, but

Yes. I definitely think, Brian, that we will be in a competitive range. Is it going to be better or not? I think we're definitely going to be in competitive ways. It's a procedure that is much more comfortable for these surgeons to do. In some cases, surgeons I know are doing three procedures with large prostates fairly routinely today. For them, in terms of better scheduling, easier on their day, so they can actually do more procedures. If you look at that overall picture, I would estimate that we will be compelling.

Good. All right. Thank you very much. Appreciate it.

Thank you, Brian.

Thank you. At this time, I'd like to turn it back to Dr. Menawat for closing remarks.

Thank you so much, and thank you for the time you spend with us. We look forward to reporting on the second quarter. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.