Pulse Biosciences, Inc. (PLSE) Q2 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to Pulse Biosciences Second 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 the conference over to your host, Philip Taylor, Investor Relations. Please go ahead, sir.

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, August 10, 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.

Thank you, Trip. Good afternoon, everyone, and thank you all for joining us. On today's call, I will provide an overview of our progress during the second quarter, including our commercial strategy and updates on our regulatory initiatives. I'll then pass the call over to our Chief Commercial Officer, Kevin Danahy to discuss recent commercial activity in the field before Sandy provides a detailed financial update and we open the call to questions. During the second quarter, we continued executing across our refreshed strategic priorities. The support market adoption of the CellFX System within dermatology, our commercial team is now fully focused on our utilization program. Our financial results for the second quarter reflect the initial impacts of our plan to reduce overall operating expenses. Looking at the balance of the year, we will remain dedicated to advancing our objectives to successfully understand and implement CellFX System integration in clinics through the program while expanding system indications for use. As it relates to our initial controlled commercial launch, we transition four program participants to commercial use during the quarter. This brings us to a total of 43 commercial conversions with 12 clinics remaining in the program. We also completed two commercial sales in Q2, increasing the installed base of commercial CellFX Systems to 48. As we mentioned on our last call, we have reduced the emphasis on driving capital sales at new clinics, while we focus on the utilization program. The two system sales were the result of inbound leads that were vetted as ideal clinics for long-term CellFX System utilization. Kevin will provide a more in-depth updates on our utilization progress shortly. But I would like to first describe some of the observations that have informed the strategy developments. Several quarters into our controlled commercial launch, we experienced inconsistent system utilization after clinics completed their Controlled Launch requirements. Given the importance of utilization to our business model, we immediately prioritized addressing this challenge. As a result, in May, we initiated our utilization program to fully understand CellFX System clinic and patient workflow integration requirements within a subset of clinics. This program allows us to look closely at the current friction points and determine actions to help clinics overcome any challenges they are experiencing in any aspect of CellFX System utilization from the clinic or patient's perspective. With just over two full months of activity, we are beginning to analyze data collected from collaborating with each participating clinic to determine priority areas to focus our efforts. Our goal is to standardize these practices per clinic type, so we can proactively share this information across our current and future user base. We feel like we are on the right track. Our clinic partners continue to believe in NPS and the CellFX System's unique ability to clear benign lesions. The feedback continues to be positive regarding the systems ease of use and capabilities for treating lesions with the CellFX family of treatment tips and our clinic partners continue to provide input on new applications they are interested in pursuing with the technology. Our focus is on continuing to learn from the clinics and to provide the necessary training, education and marketing programs to make the integration of CellFX Systems as seamless as possible and to enable high utilization within the clinics. We also believe we are gaining a better understanding of the optimal profile for a CellFX clinic, given the current indications and requirements of integrating a new technology like this into an already busy practice. Before I turn it over to Kevin for a further discussion on the commercial side, I'll provide an update on our clinical and regulatory pipeline. We continue to advance our stepwise regulatory approach with the FDA to expand the CellFX Systems indications for use with specific lesions. This would allow us to support clinics with marketing and promoting CellFX for the treatment of any cleared specific lesions. Starting with an update on our sebaceous hyperplasia specific indication 510(k) submission. As a reminder, we submitted the 510(k) to the FDA in the fourth quarter of 2021. Following the submission, we received an additional information request letter or AI letter from the FDA. Since our last update call in May, we held a follow-up meeting with FDA in June. As a result of that meeting, FDA requested additional information, which was provided in early July. We are now awaiting the FDA's response. We anticipate submitting a formal response to the AI letter, once we complete these cycles of communication with FDA. We believe this ongoing communication and collaboration with FDA has been productive. This is the first set of clinical data we have submitted to FDA for an expanded indication following our general benign clearance. We believe the ongoing discussion will help pave the way for more efficient reviews for future indication submissions. We expect to submit a 510(k) for non-genital warts soon after resolution of the sebaceous hyperplasia submission. With regard to our basal cell carcinoma, or BCC program, we are pleased to report that the data from our treat and resect feasibility study have been accepted for presentation at the upcoming American Society for Dermatologic Surgery, or ASDS 2022 Annual Meeting to be held October 6 through the 10 in Denver, Colorado. We look forward to reporting the data in conjunction with the presentation. In parallel, we are planning to meet with FDA to discuss the regulatory path for potential BCC indication in the coming months. In other efforts dedicated to advancing our technology, increasing the capabilities of the CellFX System, we recently received FDA 510(k) clearance for the use of expanded energy settings for clearing lesions with our CellFX System. This enables the system to deliver higher energies to address various lesion types. While we view this as an incremental positive step that may expand utilization, we do not believe it has been a limiting factor of utilization in clinics to date. We are pleased to receive this clearance in a timely manner with the FDA clearing these energy levels in only 53 days of the allotted 90-day review period. We plan to pursue constant improvements for the CellFX System through continual 510(k) submissions and clearances intended to increase system capabilities and enhance ease of use. These incremental improvements may include treatment settings, new or improved treatment tips as well as software upgrades and are in addition to, and in parallel with the efforts to expand indications. We view these improvements as a natural and important evolution of the CellFX System, especially in the early years of commercial use and do not plan to announce every submission. Now I'd like to pass it over to Kevin.

Thank you, Darrin. Turning to our commercial progress, as Darrin mentioned, our sales force is refocused on establishing strong partners to help drive our clinic integration progresses. Our work at this point is centered around gathering data and analyzing observations regarding the progress of integrating the CellFX System into clinics. And true collaboration with focus clinic, we are meeting weekly to hear about their experiences and provide insight to help integration efficiency. As we analyze the data and observations, we intend to better understand the real and perceived barriers and any tools required for smoother integration. Together, we are addressing common challenges and leveraging our findings to generate education and training material. Additionally, we are offering participating clinics the opportunity to interact with each other and discuss effective practices and tools for overcoming any challenges. We are also learning what types of clinics face certain challenges. This helps us build materials in support utilization. Several new tools have been generated at the request of our key accounts and our operational in the clinics today. More specifically, we have received great feedback from clinicians on the progression of healing guide, messaging and talking points for staff and patient dialogue, waiting room videos, and other marketing materials. These components of the blueprints are intended to help the clinics integrate the system into their current workflow and enable meaningful utilization while decreasing the orientation burden to our team, leading to more scalable process. We are committed to this new approach and feel that we are on the right path to streamline and scale future CellFX clinic integration. Now I will turn the call over to Sandy for an update on financial results.

Thank you, Kevin. Our second quarter results reflect the initial benefits of the restructuring plan we announced at the end of Q1. These decisions were made to reduce our operating expenses, preserve financial resources and focus our near-term sales and marketing efforts on increasing utilization of the CellFX Systems. While there were no direct restructuring charges incurred in the quarter, approximately $200,000 of the restructuring charges recorded in the first quarter remains on our balance sheet in accrued expenses. We expect these remaining expenses to be paid over the remainder of the year. For the second quarter of 2022, revenue was $265,000, system revenue was $209,000 and revenue related to cycle units was $56,000. Approximately a $100,000 of total revenue was recognized on a non-cash basis, driven by the conversion of four Controlled Launch participants opting to purchase their CellFX System following completion of the program. Revenue in North America was $214,000, representing 81% of total revenue. Moving down the income statement, I'll focus my comments on our non-GAAP results. I encourage you to review today's earnings release for a detailed reconciliation of non-GAAP measures to the most comparable GAAP measures. For the second quarter of 2022, non-GAAP cost and expenses representing cost of revenues, research and development, sales and marketing and general, administrative expenses were $12.2 million compared to $12.1 million for the prior year period and $14.7 million for the prior quarter. With the implementation of our restructuring plan, second quarter non-GAAP operating expenses were reduced by $2.9 million or 21% compared to the prior quarter. Non-GAAP cost of revenues was approximately $1.2 million for the three-month period ended June 30, 2022. As a reminder, prior to our commercial status in the third quarter of 2021, all uncapitalized manufacturing operation costs were reported in research and development expense. Non-GAAP research and development expenses decreased by approximately $1.5 million from a year-ago to $4.9 million for the three-month period ended June 30, 2022, primarily as a result of headcount and expense reductions as part of our restructuring plan. Non-GAAP sales and marketing expenses increased by approximately $666,000 from a year-ago to $3.3 million for the three-month period ended June 30, 2022, primarily due to increased personnel and promotional activities to support global commercialization activities. Non-GAAP general, administrative expenses decreased by approximately $254,000 to $2.8 million for the three-month period ended June 30, 2022, primarily as a result of headcount and expense reductions as part of our restructuring plan. Non-GAAP net loss for the second quarter of 2022 was $11.9 million compared to a net loss of $12.6 million for the second quarter of 2021 and $14.2 million for the first quarter of 2022. Cash and cash equivalents totaled $14.8 million as of June 30, 2022 compared to $47.4 million as of June 30, 2021 and $12.7 million as of March 31, 2022. This includes $15 million in gross proceeds received from the rights offering completed in June. Additional gross proceeds of up to $15 million maybe received through the exercise of accompanying warrant. Cash used in the second quarter of 2022 totaled $12.8 million compared to $15 million used in the same period in the prior year and $15.9 million used in the first quarter of 2022. Cash used in the second quarter included the payment of approximately $500,000 of restructuring charges. As a result of the implementation of our restructuring plan, we expect full-year 2022 operating expenses to be similar to 2021 levels. Additionally, with our near-term focus on increasing 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. Now, I will turn the call back to Darrin for final remarks.

Thank you, Sandy. I am pleased with the productive second quarter, including the successful transition of our commercial strategy to a focus on the utilization program and our progress on the technology pipeline and regulatory initiatives. We believe the dedication of our team and pertinent clinics will allow us to accelerate adoption in dermatology. We look forward to continuing to execute across our objectives and keeping you updated on our progress. 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 will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.

Hi, good afternoon. This is actually Jeremy on the line for Anthony. So just a couple of questions about the utilization program. Just maybe if you could share some of the best practices you're seeing so far in the clinics, some more information around that?

Yes. This is Kevin Danahy. I'll take that question. I think one of the things that we're doing is we're continuing to look at the four buckets that we initially identified and that's just the patient journey, the clinic journey, the procedure, how they're doing it and best practices around that and what's the follow-up in referrals. So we're seeing great indicators from the – what we call our Jaguar accounts, our focused accounts. And we are seeing those accounts give us real nuggets in each one of those areas that help us to see if they are reproducible and teachable to other practices. And right now, we meet with them on a weekly basis. We gather this information, we ask a lot of questions and exchange information with them, and then we take that information back, repackage it, and then bring it back to their practices in order for them to test it within their own practice and we've seen some really good success. So we feel like we're getting strong indicators from them. Now it's just a matter of continuing to gather information and see if it's reproducible. Right now, these are our top accounts, the ones that have embraced the technology. So what we want to do is just make sure that we understand completely what they're giving us. And then if we give that to other accounts, if that transfers to the same results.

Okay. That's really helpful. Thanks. And then just also, I guess, now that you've got –you've been part of this program has been going on for about two months. Do you see it – do you have any clarity into when you think that you'll switch back over to focusing on capital sales or it's still too early to tell?

It's too early to tell. It's a work in progress right now. And I will tell you we're learning a tremendous amount from these accounts and what we just want to make sure is that we have the right answers and make sure that we can package those answers to success. So this is a journey of learning. And I would just say that the information is abundant and we're excited about what we're hearing.

Okay, great. That's good to hear. And then just one last question, switching over to the regulatory side. So I know you had the FDA meeting with – about SH, is there any information could you provide – what type of information – additional information did you have to provide to the FDA? And do you plan on using – you learn from this experience when you submit your 510(k) for your next indication?

Yes. Hey, Jeremy. Thanks for the question. This is Darrin. So yes, just referring to our 510(k) submission for sebaceous hyperplasia, it's been a back and forth as we've communicated and I think at each iteration, there's been really good dialogue with FDA. And each one of the meetings we've had, it's resulted in them asking for some further clarification of data or a different look at the data. And this is all the clinical data. So our SH submission is really building upon what we already have, which is a general benign lesion indication. And so building on that is really just the clinical data that we provided. And I think ours is a new technology, the indication for sebaceous hyperplasia is a relatively new indication for FDA. So I think we've just been working with FDA on kind of the best way for them to have the data presented to them and making sure that we can clarify any questions they have about patient outcomes in the clinical study. And so it's been again just a productive back and forth with regard to that. And as I stated earlier in the prepared remarks, we're now waiting to hear back from FDA. We're hopeful that we'll hear back soon and that that will allow us to then move forward and formally submit our response to the AI letter and move on with the review of the 510(k) submission. But we'll have to wait and see what we hear back from FDA. And as it relates to the future 510(k) submissions, there's no question that all of the discussion that we've had with FDA either on this 510(k) submission or on others, frankly, really makes it, so that future submissions can be much more efficient and effective in our mind because the more they learn from us, the more we understand what they'd like to see regarding our novel technology the easier it is for us to predict how they want to review it. So we feel good about where we're at in the process and the communication we've had and look forward to further communication with FDA.

Okay, great. Thank you very much. I'll hop back in the queue.

Thanks, Jeremy.

Our next question comes from Swayampakula Ramakanth with H.C. Wainwright. Please proceed with your question.

Thank you. Good afternoon, Darrin, Sandy and Kevin. Couple of questions from me. As far as the 510(k) that you received – and the 510(k) approval that you received on the expanded energy systems, how do you see it helping dermatologists in their practice and the use of – and also in trying to increase the utility of CellFX, does it have any bearing at all?

Yes. I'll start. RK, this is Darrin. Thanks for listening in and thanks for the questions. So yes, I think, the main point I think here is that as a company and with the novel and relatively new medical technology, I think our plan and strategy is to continually improve our system in the market. And we'll do that by iterating various parts of the system, whether it's in this case, expanding the energy settings or creating new treatment tips or new software to provide a better ease of use or whatever the case may be. And like you know with medical technologies, those will all get out of the market through the 510(k) process. And so we anticipate that as we innovate, we will submit 510(k), and those will make – those product enhancements will make their way out to the market. In this particular case, we felt like, with our continued work that we've done both commercially, but also pre-clinically in our lab that we felt it was safe and it was going to be effective to increase the energy settings for the treatment of these benign lesions. And so by offering a broader range of treatment settings, we think physicians will be able to both treat the lesions they're treating today, of course, but explore the treatment of other types of lesions in ways that they couldn't without those settings. And so it's really a way of just expanding the capabilities of the system and given our kind of general indication for benign lesion treatment, it gives physicians the opportunity to explore the treatment of lesions with those different energy settings. So that's really kind of the gist of this, and I think, again, it's an incremental improvement and we'll continue to have those kinds of incremental improvements going forward.

So thanks for that. So Kevin, as you're keeping close tabs with some of these institutions, the select institutions on utilization, how often does the set of indications available or the set of things that are available on the mission per se is either a handicap or a helpful benefit for them, how often is that being pointed out? Because that is also a piece of – trying to improve utilization, I would think?

So thank you for the question. I just want to make sure I understand your question. Are you talking after Darrin's answer is how are these indications are going to impact the group that we're working with?

Yes. Like how often do these docs and the staff come up to you and say, guess what Kevin, you've had, X and Y and Z indication specifically on these particular settings, we could see 5% better utility or 10% better utility, how often does that come up as a…

Yes. It's a great question. I think one of the things that makes these accounts have high value to us is they have genuine curiosity and they see the promise of the technology. So they always are asking about the future and expanded indications. And sometimes they're talking to us about things that we don't even have right now and possibilities. So the great thing about working with accounts like this is they have the curiosity to communicate with us on what they currently have, how are they using it, but more importantly, how they feel we should expand our product offering so that they can continue to leverage our technology. So I would say those conversations are frequent and it's really an exchange of information. And sometimes it's just an education on what the product can do today. And as Darrin had mentioned, we have the higher energy settings right now. So in some circumstances, they were just using the lower energies where now they will explore with the higher energies and maybe less cycles. So we're excited about those possibilities and that curiosity is continuous with those groups.

Okay. And then in terms of – because you've been taking some notes from these clinics, various clinics for at least a quarter or maybe a little bit less than that. What does the things that are really jumping out at you saying that, wow, I never thought this is something that is really important for these folks? Or are there things which are like, you know, simple things that somebody like yourself who is not in the clinic is unable to even think that is an issue?

Yes. I mean, it's a great question. I appreciate it. I think we've learned so much and a lot of things that jumped out at us that just bring highlights to where we should be focusing. And I think one of the things that we've seen is that some doctors will look at this and believe that CellFX is a perfect situation as an add-on and for anyone that's coming in just for routine treatments, other people will look at it as an exploration when they're looking at skin check. So what we're trying to do is just take all that information and really understand what is the most dynamic profile that could lead to success for us. And what we're understanding right now is there's probably about three or four different profiles, which is exciting, that could really emerge from this group that will show us different paths that we can pursue for potential success. So there's no one specific thing that's jumping out. I think it's just a lot of quality information in the amount of time that we're spending with these offices and the exchange in confidence that we have in each other is really high. And I think that helps with great dialogue and very concrete and meaningful specific direction that we are trying to take and understand so that we can communicate out to the rest of the accounts.

Okay. So Darrin, one of the things which actually was nice to hear for me was that you had two capital purchases during the quarter. So my question to you is, how did that capital purchase happen in the sense, at least, my understanding is you're not out there seeking capital purchases. But – so I'm just trying to understand how this thing came about and are there other people out there, like these two customers who could potentially be looking for things and you may not be knowing yet?

Yes. Thanks RK. It’s a good question. And we've been, I think very clear that we are not out, we're not trying to sell more systems and you can probably hear from Kevin that – the reason we're not doing that is we're really focused on this small number of accounts and learning everything we can about how to make accounts productive and successful, so that we can take that to the other clinics we have, and we can start to add new clinics. I think in the case of this quarter, which we mentioned, and I'll let Kevin talk about it as well. There are physicians who and clinics who become aware of our technology one way or the other, usually through word of mouth from one of their peers, get excited about it and just sort of continue to impress upon us how much they would like to get involved and how they believe a clinic that is well suited to take on a new technology like this and integrate it seamlessly into their clinic. And I think both – in this case, both of those clinics really kind of came from that sort of profile. So we decided to bring those two clinics in, and they paid full price for the system and are excited to get going. So again, we don't anticipate that happening a lot in the near-term. We're very selective. We think that that's the right way to go until we've convinced ourselves and our clinics that we currently have that we have the right blueprint to drive utilization in their clinics. So I don't know if I covered everything, Kevin, do you want to make another comment.

Yes. I just add and say that one of the things that's most important to us is that we qualify each account and make sure that we understand the key criteria for success. And we're challenging these accounts that are coming to us is to make sure that they understand the technology and the path to utilization. And we have a very detailed map of success. And we try to put them through that – those different criteria to make sure that it is a good fit and that they'll have the success that they're looking for and that we're taking the key learnings from our accounts that we're working with. And we're transcribing those back to these accounts as a criteria to filter, whether they'll be successful. And these were two accounts that were really aggressive that they felt them that this was the right fit for them for various reasons. We qualified them and they met those qualifications, and we're looking forward to continuing to take the learnings from our key accounts in transcribing back of these accounts.

Thanks for all that color. One last question for me, I know to learn and to learn some of the softer points in business, you can spend a couple of years and still you may feel like you don't have enough of it. But is there a certain metric within the management when you could call it – this is it – you have had enough information, and then now that it's time to kind of turn this thing around and use it in the commercial operations. So I know three months is too early. I know you're just getting started, but have you – folks kind of charted out those end points or the points at which you will end this process?

Yes. Thanks RK. It’s Darrin. You're right, there really isn't, I don't think there's sort of a binary decision point. I think the one thing we have said previously is our goal, which is, we view it as a stretch goal is to get these clinics up to 40 patients being treated per month. And I think that's the metric we've set for ourselves internally. And I think Kevin and his team are really pushing hard as he said to understand from the clinics, what is it going to take to get them to these levels? And I think, as we see these clinics in this small group getting to those levels and hopefully accelerating towards those levels, then we'll start to expand out to more clinics. And I think as we see those clinics do the same, that will give us confidence to begin bringing on new clinics because with new clinics, I think it's a combination of both, making sure we understand how to work with those clinics inside their clinic to get them going. But it's also the appropriate selection of those clinics. And so I think those are some of the metrics we're using. We don't have a specific date. I think we have a laundry list of things that we look at it each clinic to understand where they are in the process. And as we see the acceleration and certainly getting to the levels of utilization that I just talked about, we'll start to expand and I think that'll be the trigger for us.

Fantastic. Thank you very much. Thanks for taking all my questions.

You're welcome. Thanks, RK.

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would now like to turn the call back over to Darrin Uecker for closing remarks.

Thank you, operator, and thank you, everybody for joining our call today. We appreciate your support and attention, and we look forward to talking to you again real soon.

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