Pulse Biosciences, Inc. (PLSE) Q1 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to Pulse Biosciences First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Philip Taylor, Investor Relations. Thank you sir, you may begin.

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, May 11, 2022, 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 on 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. On today's call, I will discuss our first quarter and recent business progress, including our commercial priorities and updates on our clinical and regulatory initiatives. We will then be joined by Chief Commercial Officer, Kevin Danahy, who will outline recent commercial activity. Then Sandy will detail the financial results before I conclude and open the call for Q&A. Recently, we pivoted our commercial focus towards driving utilization of the CellFX System to ensure comprehensive integration within dermatology clinics. We made changes to the commercial team, including new leadership, and implemented organizational changes to better position the company to execute on this near-term focus. At the same time, we executed operating expense reduction initiatives reflective of our new focus and to reduce cash usage. In total, we reduced our headcount by approximately 20% and reduced overall operating expenses by approximately 20% from the first quarter 2022 run rate. Our priorities in 2022 are straightforward, drive meaningful CellFX System utilization and expand the system's indications for use in dermatology. Last year, we initiated a controlled launch program with 70 dermatology clinics that agreed to share data and observations about patients and their own experiences with treatments. In exchange for this valuable data, they earned credits towards the purchase of their system. As we shared on our last call, at the end of the first quarter, 39 clinics have converted to commercial use and 20 remained in the program after 11 clinics have opted out. With the controlled launch conversions to date in the three clinics that have purchased a CellFX System outside of the controlled launch program, we ended Q1 with 42 commercial CellFX clinics. These commercial clinics performed a total of 700 patient sessions during the quarter. A number of important learnings have come out of the controlled launch programs in terms of patient and lesion selection, treatment protocols and an understanding of the task of integrating the CellFX System into the clinic workflow across the continuum of clinic types from cosmetically focused to medically focused. Perhaps, most importantly, the controlled launch has confirmed our belief that patients are motivated to have their benign lesions cleared and that these patients are already visiting dermatology clinics on a daily basis, either seeking to receive treatment for these lesions or for other reasons, but are excited to learn about the potential benefits of the CellFX treatments. Though we view these learnings as positive indicators for the potential of the CellFX business for both clinics and Pulse Biosciences, we have also learned that the integration of the CellFX procedure into the busy dermatology clinic workflow requires a much higher touch model to generate the system utilization we expect. And while we generated increasing average commercial clinic utilization throughout Q1, as shown in the graph included in today's press release and our 10-Q, we are not satisfied with the rate that the utilization increased or the inconsistent trajectory, and this has led to our change in commercial leadership and strategy. It is now our priority to address this and to drive more consistent and accelerating commercial utilization of CellFX Systems. We are doing this by initially partnering with nine of our commercial clinics across the U.S., EU and Canada to collaborate on developing commercial best practices that will demonstrate the clinical and economic value of the CellFX System completely integrated in a dermatology practice. During the month of April, Kevin and his team visited many of our commercial clinics to discuss this program, selected the nine participants and are launching the program at the clinics throughout the month of May. In Q1, these nine clinics averaged 14 commercial sessions per month. Our goal for the program is to get them to 40 sessions per month on a consistent basis. We expect, once this initial group of clinics has achieved this level of utilization, we will have a blueprint for the necessary training, education and marketing required, and we'll be in a position to scale and apply this blueprint to clinics going forward. Coming up, Kevin will discuss our framework for this program and what this means tactically. Until we develop these commercial best practices and achieve our utilization goals, we will reduce the emphasis on CellFX System capital sales into new clinics. We will continue to develop and build our capital sales pipeline and believe that, as we reach our utilization goals, we will be well positioned to focus on capital sales. Now on to our clinical and regulatory pipeline. Our step-wise regulatory approach with the FDA to expand the CellFX Systems indications for use with specific lesions will provide the ability for us to assist clinics with marketing and promoting the CellFX for treatment of any clear specific lesions, in addition to our current capability to do so for general benign lesions. The treatment of sebaceous hyperplasia is approved under our CE Mark and Health Canada approval. We are currently seeking to achieve FDA clearance for this specific lesion. Following the submission of the 510(k) to the FDA in the fourth quarter, we received an additional information request letter, also known as an AI letter, from the FDA. In the AI letter, the FDA stated they do not believe the company had provided sufficient clinical evidence at this time to support the expanded indication for use and that the company had not met the primary endpoints of the SH IDE study. Recently, we had our initial meeting with FDA to clarify issues raised in the AI letter. Shortly following the meeting, and at FDA's request, we provided additional analysis of our SH comparative clinical data. A follow-on discussion is being scheduled with the FDA to review the additional data sets. We expect to continue our collaboration with FDA during this 510(k) review process and to formally respond to the AI letter. Again, I would like to remind you that this current 510(k) submission is meant to add a specific indication for sebaceous hyperplasia to our current general indication and has no impact on the existing 510(k) clearance for the CellFX System. In the third quarter 2021, we completed enrollment of our 150 patient FDA IDE approved pivotal comparison study for the clearance of nongenital warts. This data will support the second specific indication we are planning to submit. We are currently finalizing the 510(k) submission and remain on track to file during the second quarter. Regarding our basal cell carcinoma, or BCC feasibility study, we have completed follow-up and analysis of the data. We are pleased with the results we achieved and are excited to take the next steps to advance the regulatory process with FDA. This will include a meeting with FDA to discuss potential pivotal study for a specific indication to treat BCC lesions with the CellFX System. We expect to have this meeting by the end of the third quarter. We are also looking forward to presenting this data at an upcoming scientific meeting. Expanding the CellFX Systems application portfolio where it makes the most sense for dermatologists is the priority of our development programs. Before handing it over to Kevin, I want to highlight our extensive engagement with the scientific community. Investigators generating clinical evidence and promoting the latest discoveries with NPS technology is a crucial component of physician adoption. I had the privilege of attending the recent Annual Meeting of the American Society for Laser Medicine and Surgery and are happy to report the CellFX System was well represented in the scientific program with an oral presentation and poster. In the oral presentation, Dr. Suzanne Kilmer discussed long-term NPS data on the clearance of sebaceous hyperplasia, showing high levels of lesions maintained or improved clearance and good cosmesis 12 months after treatment. Another poster presentation by Dr. May Elgash demonstrated the first case of HPV-related dermatosis on the lips completely cleared by NPS. Both presentations drew strong engagement with clinicians who were eager to learn about the CellFX System and NPS technology. This week at the annual symposium for Cosmetic Advances & Laser Education, Dr. George Hruza, past President of the American Academy of Dermatology, will present an overview of NPS technology on the main stage. And in June, we are excited to have strong scientific and commercial presence at the World Congress of the International Master Course on Aging Science, also known as IMCAS, which will take place in Paris. Now I will turn the call over to Kevin.

Thank you, Darrin. I'm excited to share my initial experience with clinicians in their practices. I have spent the past four weeks in the field visiting clinics. This early experience, seeing firsthand the large and exciting opportunity that lies ahead, has only validated and strengthened the reasons why I joined Pulse Biosciences. Clinicians share our vision around CellFX procedures and its potential. My top takeaways are twofold. First, that benign lesion market is a priority for clinicians. They see this patient need every day. Second, both clinics and Pulse are committed to taking a deep dive to determine and implement the changes required for optimal integration of the CellFX procedures into their clinics. I am confident that, given these circumstances, the proper effort and investments, we can capitalize on clinical and commercial success. My early observations around potential obstacles to the integration of the CellFX System into the clinics can be bucketed into four categories. One, patient selection and patient security. Two, clinic process integration. Three, procedural techniques. And four, patient flow and follow-up. If a clinic is experiencing friction in any of these categories, it becomes hard for them to achieve routine utilization. At each of our partner clinics, we are analyzing each of these components through a framework that determines what is working, identifies obstacles to program momentum and identifies the tools needed to overcome the obstacles. Each clinic is slightly different. But as a company, we have the benefit of the entire data set from the clinics. We will identify what works best from each clinic and then we will help determine the necessary changes, observe their impact and refine to optimize. With a set of best practices for each category in clinic type, we can begin to suggest more customized best practices at scale. Based on the shared conviction in the CellFX System, clinical and economic value propositions, we are partnering with nine clinics to optimize integration in the clinic and drive utilization. We can now work closely with these clinics on what Pulse has always set out to do, which is develop the formula for success that can be passed on to the next wave of CellFX customers. Our focus in the near term will be to go deeper into these key accounts and clinics. While we continue to improve the quality of our capital pipeline, our focus will remain on driving utilization within the subset of clinics to reach our goals. I am confident that we can drive meaningful improvement in utilization. I will now turn the call over to Sandy for the financial results.

Thank you, Kevin. Hello, everyone. On March 31, 2022, we announced and implemented a restructuring plan to reduce our operating expenses, preserve financial resources, and focus sales and marketing efforts on increasing utilization of the CellFX System. Our Board of Directors approved changes to commercial leadership, restructuring of the commercial field organization and reductions in other personnel and expenses across the company. Reductions in force affected approximately 20% of our workforce. We have recorded a charge of approximately $750,000 related to this restructuring in our financial statements as of March 31, 2022. For the first quarter of 2022, revenue was $444,000, system revenue was $367,000 and revenue related to cycle units was $77,000. Approximately $300,000 of total revenue was recognized on a noncash basis driven by the conversion of 10 controlled launch participants opting to purchase their CellFX System following completion of the program. Revenue in North America was $312,000, representing 70% of total revenue. Moving down the income statement, I'll focus my comments on our adjusted or non-GAAP results to provide insights into the underlying trends in our business. Please refer to today's press release for a detailed reconciliation of non-GAAP measures with the most comparable GAAP measures. For the first quarter of 2022, non-GAAP costs and expenses representing cost of revenues, research and development, sales and marketing and general and administrative expenses were $14.7 million compared to $11.3 million for the prior year period. The year-over-year increase in costs and expenses was primarily driven by the expansion of commercial and operational infrastructure, including increased headcount to support commercialization activities. Non-GAAP cost of revenues was approximately $795,000 for the three-months period ended March 31, 2022. There were no cost of revenues in the prior year period. Until such time that we became a commercial organization in the third quarter of 2021, all uncapitalized manufacturing operation costs were recorded in research and development expense. Non-GAAP research and development expenses increased by approximately $270,000 from a year ago to $6.1 million for the three month period ended March 31, 2022. Research and development expenses in the first quarter of 2022 include approximately $125,000 of restructuring related charges. Non-GAAP sales and marketing expenses increased by approximately $2.1 million from a year ago to $4.5 million for the three month period ended March 31, 2022, primarily due to increased personnel and promotional activities to support commercialization. Sales and marketing expenses in the first quarter of 2022 include approximately $550,000 of restructuring related charges and $300,000 of noncash expenses related to our controlled launch program. Non-GAAP general and administrative expenses increased by approximately $164,000 to $3.2 million for the three month period ended March 31, 2022. General and administrative expenses in the first quarter of 2022 include approximately $50,000 of restructuring related charges. Non-GAAP net loss for the first quarter of 2022 was $14.2 million compared to a non-GAAP net loss of $11.4 million for the first quarter of 2021. As our restructuring plan was announced and effective on March 31, 2022, headcount and expense reductions are not yet reflected in the activity for the first quarter of 2022. Operating expense reduction programs are expected to lower expenses by approximately 20% from the first quarter run rate, resulting in full-year 2022 operating expenses similar to 2021 levels. As a result of our commercial team's near-term focus to increase utilization at our commercial clinics, we do not expect new system sales to be a significant contributor to revenue until we achieve our utilization goals. Cash, cash equivalents and investments totaled $12.7 million as of March 31, 2022, compared to $59.9 million as of March 31, 2021, and $28.6 million as of December 31, 2021. Cash used in the first quarter of 2022 totaled $15.9 million compared to $10.7 million used in the same period in the prior year and $13.4 million used in the fourth quarter of 2021. We expect reductions in cash usage to begin in the second quarter of 2022 until utilization rates increase. We remain committed to investing in research and development activities, including additional clinical studies to support indication expansion with the FDA. On April 14, 2022, we announced that our Board of Directors approved a rights offering to purchase up to $15 million of units. And on May 4, 2022, we announced the commencement of this offering. Each unit consists of one share of common stock and a warrant to purchase one share of common stock. Stockholders of record as of the close of market on April 25, 2022, have until 5:00 PM Eastern Time on May 23, 2022, to exercise their subscription rates. The subscription price per unit will be equal to the lesser of $3.72, the closing price of our common stock on April 13, 2022, or the volume weighted average price of our common stock for the five trading day period through and including the subscription expiration date of May 23, 2022. Stockholders who fully exercise their basic subscription rights will be entitled to subscribe for additional units that are not purchased by other stockholders on a pro rata basis and subject to availability. If fully subscribed, we expect net proceeds from the offering to be approximately $14.5 million. This excludes additional proceeds of up to $14.5 million from the exercise of warrants issued in the rights offering. Now I'll turn the call back to Darrin for final remarks.

Thank you, Sandy. Our commercial strategy is now focused on going deeper, with a subset of commercial accounts to establish a blueprint for building viable benign lesion franchises within their practice and then scaling to our other commercial accounts. We believe we have the right team and strategy in place for this program and look forward to updating you on our progress in the coming quarters. And with that, joining me for Q&A are Kevin Danahy, Chief Commercial Officer; and Sandy Gardiner, Executive Vice President and Chief Financial Officer. Operator, please open the call for questions.

At this time we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Chris Cooley with Stephens. You may proceed with your questions.

Good afternoon and thank you for taking my questions. I just have two. Darrin -- and maybe first for Darrin and Kevin. I realized that the 1Q was clearly transitional, and it seems like we have a good number of moving parts as we go into the second quarter as well, both operationally at the company, but also in terms of kind of the go-to-market strategy there with those existing accounts. That having been said, can you plant some goalposts for us just in terms of when we should tentatively assume that you can garner the learnings that you need from these core nine accounts, hopefully scaling them from 14 to 40, which looks like a pretty material ramp and then start to transition that more broadly is my first question? I've got a follow-up after that.

Yes, Sure. Hey Chris, thanks for the question and for joining the call. Yes, I think we are -- I think the key here is that, as we came out of the first quarter, as we mentioned in the prepared remarks, we just didn't see the acceleration of utilization that we hope to see. And so we made the decision to change commercial leadership, change our strategy, and we certainly believe strongly that focusing on a small number of accounts, really working with those accounts to get their utilization to the place that we all think it should be is the right approach and then expanding out from those accounts. In terms of timing, I think we don't have guidance on exactly when we think we'll get those clinics up to their 40 sessions per month, which is the goal that we've established with those clinics. But I will say that these are clinics that in our view, kind of hit the ground running and are really excited to be working with us really closely to establish these best practices for how to integrate the CellFX System into the clinic and really drive utilization. So I think on our last quarter's call, we said certainly by the end of the year, our goal was to have this subset of clinics at that level. But again, that's a goal and it's one that we'll be striving hard for. But in terms of guiding to exactly when those clinics will get there, I don't think we're in a position to do that. I'll let Kevin add a little bit more color to that. As he said, he's been out in the field. His team has been working closely with these clinics, and he can add some color in terms of how we selected these clinics.

Yes, thank you, Darrin. And Chris, thank you for the question. I think the most important thing is what we want to figure out is what is reproducible and teachable. And what we found from the clinics that we picked is that they were giving us the clues to success. So what we want to do is just integrate into their practice, learn from them, find out in these four quadrants that I've talked about on patient selection, in patient journey, clinic process integration, in their procedure technique and then the patient flow and follow-up, what are those clues and are they reproducible and teachable and then how do we push that out to scale. And that's what we're really doing right now. So we're just forming this unique teammate -- team philosophy with these clinics and really just capturing this information over the next several months, so that we can push it out to the masses.

Appreciate the additional color. And then maybe if I may, Sandy, just for you. Appreciate the details on the upcoming rights offering and the expectations for the reduction in the burn from approximately $16 million there in the first quarter. But I guess, just looking at the math here, if you have approximately $13 million in cash, a 20% reduction in OpEx coming forward here in the 2Q versus the 1Q levels, and what I'm assuming is going to be at least a moderation from where we were previously on the top line, do you then subsequently need to either have an additional reduction in OpEx to extend when we think about the cash balances? Or is that really reflected just in terms of maybe a more focused sales and marketing activity? I guess, candidly, I'm just struggling a little bit here as to how you push forward on both the regulatory front and in terms of commercial success with that cash balance. Just trying to get some clarity there, if I can may. Thank you.

Sure, Chris. So we don't expect an additional restructuring at this point in time. We do believe that the cash balance that we have, and I think you really hit the nail on the head, it is the focused sales and marketing effort. As we're focusing with these nine clinics, it really is a focused effort here as we go forward. And everything across the company, with the exception of the indication expansion, is really about the utilization. So as I've mentioned on previous calls, our cash balance was to basically get us through the end of the second quarter, and the rights offering will conclude at the end of May. So the subscription period ends May 23. Then we'll continue from there. And as I mentioned, we do expect net proceeds to be 14 -- approximately $14.5 million, and then that doesn't include an additional $14.5 million that could come if fully subscribed from the warrants later in the summer, early fall.

Understood, thank you for the additional color, Sandy. I'll get back in queue.

Thanks, Chris.

Our next question comes from the line of Swayampakula Ramakanth with H.C. Wainwright. You may proceed with your questions.

Thank you. This is RK. Good afternoon Sandy, and Darrin.

Hey, RK.

Can you tell us like how many units are now -- I mean, are there any units left within that initial launch period? Are all of them in the commercial aspect of the launch?

Yes. Thanks, RK. So there, as we talked about, there are 42 commercial clinics today, and there are 20 clinics that are still in the controlled launch program.

Okay. Then Kevin was saying something about how he wants to kind of progress using these four quadrants. I'm just trying to understand how much time do you really need to kind of do all those analytics and make it work, because it looks like time is the essence for you guys right now. How are you thinking through this process, so that you can try to ramp as quickly as you can to the 40 -- to the utilization getting up to the 40 clicks?

Yes. Good question, RK. What I can tell you is it's an all-hands-on-deck effort at the company. So we're highly focused on driving this program and driving that utilization. I think we realized that we were probably too wide and not deep enough. And so now, we're really focusing, as we mentioned on this subset of today nine clinics. So what I can tell you is, we'll have extremely high focus and attention on those clinics. We're working closely with them across those four quadrants that Kevin talked about. What I can't tell you is exactly when we'll be able to get them all up to the goal of 40 sessions per month. But I can assure you that we're working diligently to get that done, and we'll continue to provide updates on our progress. And Kevin and his team are in the field every day working on it. So I think without providing exact time lines on when that will happen, we'll continue to provide updates as we make progress.

So when you say there's an utilization rate of 14 at this point, is that among these nine clinics that we are talking about? Or is this across all the clinics that are did in commercially?

Yes, that's correct. No, that's -- those nine clinics, and that is sort of average monthly utilization in the first quarter. So if you average the three quarters, that's -- they were at 14 sessions per month, and our goal again is to get them to 40.

Okay. All right. Thank you. Thanks for taking my questions.

Yes, you bet. Thanks RK.

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

Hi, good afternoon. This is actually Jeremy online for Anthony. How you doing?

Hey Jeremy.

So just -- I wonder, the numbers that you provided for the number of clinics that have opted to switch to commercial and how many are remaining. Is that -- you said it's a -- on the press release as of quarter end, but is that also stay the same to date? Or there's been -- we're almost halfway through the second quarter. Have those numbers changed a little bit at all?

So we're actually only providing the information as of the end of the quarter. So we're working through this quarter, and we'll have that update in August for any additional clinics that have converted and/or purchased through the second quarter.

Okay. All right. Thank you. And then -- so just -- could you also -- and I think you've talked about -- you might have touched on the prior call. Can you remind us some of the reasons why the 11 clinics have opted not to adopt the CellFX System? And then just as a tag along, once you have your blueprint, would is this -- is there an opportunity to go back to those clinics who have not opted out and try and present it again showing them this would be the best practices?

Yes. That's a good question, Jeremy. So the 11, I think, it's a variety of reasons. I think, first and foremost, the controlled launch program was a program that required a lot of work and commitment from the clinic. And so in order to basically take in the CellFX System, a lot of learnings that were required, we asked them for a lot of data. And I think some of the clinics that we initially targeted and enrolled in the controlled launch program, as they got involved with it, just realized that the workload that was required to work with us and to integrate this new technology was just something that they weren't prepared for, whether it was timing or just their staffing requirements. And so a number of clinics opted out simply because they just were not ready to take on the task of the controlled launch program and what's required to kind of integrate a new technology like this into the clinic. And I certainly think that a number of those clinics, as we work through this process, and we really streamline what it's going to take to integrate the system into the clinic, I think many of those clinics will come back. I would say the other bucket of clinics that opted out were those that perhaps had a mix of maybe higher cosmetic patients. And what we have found, as we worked through the controlled launch program, is that the optimal clinics really fall into the bucket of having a mix, kind of a good mix of both cosmetic and medical patients. And so I think in some situations, clinics just didn't feel like, given the indications that we have today, that it was going to be a good fit for their clinic.

Okay. That information is really helpful. I'll hop back in the queue. Thanks.

Thanks Jeremy.

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.

Thank you, operator, and thank you, everybody, for joining the call today and for the great questions. We appreciate your time and attention and support, and we look forward to future updates. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.