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Edited Transcript of COOL earnings conference call or presentation 10-May-19 12:00pm GMT

Q1 2019 Polarityte Inc Earnings Call

EDISON May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of PolarityTE Inc earnings conference call or presentation Friday, May 10, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Denver M. Lough

PolarityTE, Inc. - Chairman of the Board, CEO and Chief R&D Officer

* Matt Kemp

PolarityTE, Inc. - Chief Commercial Officer

* Nikolai Sopko

PolarityTE, Inc. - Chief Scientific Officer and VP of R&D

* Paul Elliot Mann

PolarityTE, Inc. - CFO

* Rich Haerle

PolarityTE, Inc. - VP of IR & Strategy

* Richard Hague

PolarityTE, Inc. - COO

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Conference Call Participants

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* Carl Edward Byrnes

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Elemer Piros

Cantor Fitzgerald & Co., Research Division - Analyst

* Joshua Elliott Schimmer

Evercore ISI Institutional Equities, Research Division - Senior MD & Equity Analyst

* Kevin Michael DeGeeter

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Swayampakula Ramakanth

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Tyler Martin Van Buren

Piper Jaffray Companies, Research Division - Principal & Senior Biotech Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Polarity First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rich Haerle. Please go ahead, sir.

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Rich Haerle, PolarityTE, Inc. - VP of IR & Strategy [2]

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Thank you, operator. Good morning, and welcome to the PolarityTE Financial Results and Corporate Update Conference Call for the First Calendar Quarter of 2019. I'm Rich Haerle, Vice President of Investor Relations. With me today are Denver Lough, Chairman and CEO; Paul Mann, CFO; Dr. Nikolai Sopko, Chief Scientific Officer; Richard Hague, COO; and Matt Kemp, our Chief Commercial Officer. By now, you should have seen our earnings press release. A corresponding webcast and slide deck will be made available on our website in the Investor Relations section following this call.

I'd like to remind investors that this call will include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 including, but not limited to, the types of statements identified as forward-looking in our most recent reports on Forms 10-K and 10-Q, including our transition report on Form 10-K for the 2-month period ended December 31, 2018, as well as the 10-Q for the 3-month period ended March 31, 2019, that will be filed later today, all of which will be available on our website in the Investor Relations section.

These forward-looking statements represent our views only as of the date made and involve substantial risks and uncertainties, including many that are beyond our control. Please note the actual results could vary -- differ materially from those stated in any forward-looking statement. For a further description of the risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements as well as risks relating to our business, see our periodic reports filed with the SEC.

I'd like to highlight to participants that this call is being recorded, and we are making this call available to investors and the media via webcast. The call is a property of PolarityTE. Any redistribution, retransmission or rebroadcast of this call in any form without PolarityTE's expressed written consent is strictly prohibited.

I would now like to turn the call over to Dr. Denver Lough, PolarityTE's Chairman and CEO, for highlights and results for the quarter -- first calendar quarter as well as a corporate update.

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Denver M. Lough, PolarityTE, Inc. - Chairman of the Board, CEO and Chief R&D Officer [3]

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Thank you, Rich, and thank you to all of our shareholders for your continued support and those listeners joining us today for this Q1 2019 PolarityTE corporate update call. I am pleased with what we have accomplished during this past quarter and continue to be extremely excited about what the future holds for this young and growing company. Joining me today on this call is our newly appointed Chief Operating Officer, Richard Hague; our Chief Commercial Officer, Matt Kemp; our Chief Scientific Officer, Dr. Nikolai Sopko; and our Chief Financial Officer, Paul Mann. All of these individuals will be presenting their respective sessions on this call today.

Today I will briefly provide you with a business overview and an update on some of the key items occurring at PolarityTE. I will focus on 3 major areas in this section of the call. First is a general review of the enterprise and the progress we have made across a variety of areas at the company. Second, I will review the plan, progress and process we have been executing on with the translation of SkinTE and the staged commercial efforts we have pursued in order to bring our product to health care providers we support and the patients we serve. Third, I will provide a general review of where we are currently in the process of bringing SkinTE to our progressive product market stages and provide insight of success we have had during the strategic product road map.

As many of you know, since its founding, PolarityTE has sought to change the paradigm in the design, development and the practice of regenerative and neo-generative therapies. In doing so, we have sought to change, to disrupt the concept of regenerative medicine away from simply hope and dreams and into something real, evolving and utilized. In order to begin to do this, we need to develop something pragmatic and tangible that could truly impact patients' lives and something that could enhance and replace the current clinical standard of care.

And back in late 2017 just under one year from the formation of PolarityTE, we delivered a very different technology, the first of our neo-generative core TE platform technology, SkinTE, to providers and patients. At that time, we explained that the planned commercialization for SkinTE, much like the technology and product, would also be very different, and it would encompass a sequence of overlapping staged processes that I will discuss shortly. It is through these staged processes of bringing the product to market that we will also scale end stage the PolarityTE team.

And now as we prepare for transition from a translational research and development biotechnology company into a multifunctional enterprise with novel technology platforms and uniquely designed commercial products, that we've begun to assemble even a more advanced team of field leaders, a team with experience and proven success as we've begun to establish our presence in a market and expand our reach. Some of these recent additions, which bring tremendous value to our PolarityTE family, include: Richard Hague, Polarity's new Chief Operating Officer; Matt Kemp, our new Chief Commercial Officer; Minnie Baylor-Henry, our recent addition to the PolarityTE Board of Directors; Angela Ziegler, the company's new Vice President of Marketing; David Seaburg, who joined us from the Board as our new President of Corporate Development; and Jim Lodigiani, our Vice President of Sales and Market Development.

In addition to building an extraordinary team, we've also seen considerable progress throughout PolarityTE's enterprise in early 2019, including a 50% quarter-over-quarter increase of SkinTE deployments for Q1 of 2019, 14 abstracts accepted for presentation in Q1 at national conferences, publication of our first peer-reviewed journal article for SkinTE in the International Wound Journal, and more to come. We've also seen 5 clinical trials that are either currently enrolling or have completed enrollment. We've seen exciting outcomes data from 2 chronic wound pilot evaluation trials, which were presented at national wound conferences.

We've seen the initiation of 2 SkinTE multicenter randomized controlled trials, which are currently enrolling and now listed on clinicaltrials.gov. We have a signed lease for the first PolarityTE node to help bring products like SkinTE efficiently to patients in need. We've seen successful close out of the FDA inspection of the Salt Lake City, Utah central manufacturing facility with a Voluntary Action Indicated, VAI, classification. And finally, subsequent to recent and significant incoming growth opportunities, we undertook a strategic capital raise for around $29 million to position ourselves to pursue those opportunities, which we hope to share with shareholders in the market very shortly.

With that said, I would now like to focus on the plan, the process, our progress with our first available product, SkinTE. For over a year now, many of those who follow the company have seen this slide presented at conferences, street calls and road shows. And they have asked, what exactly does it really mean? Well, there's a reason why we continue to display this slide. We at PolarityTE knew early on that developing an intrinsically different technology never seen before would always require a strategic approach, a commercial process, a product support system that is significantly unique.

And in a conservative manner, we plan to introduce these elements of the technology, product, manufacturing, reimbursement and support systems in a staged manner for staged growth. These stages as it relates to bringing the commercial product to market is outlined here as follows: limited market release or what we refer to as an LMR; followed by regional market release or RMR, which we are currently in now; followed by our national market release or NMR; and lastly but certainly not least, a full-scale market release, conveniently referred to as our FMR.

And if you now focus your attention to Slide 8, we will provide you with what each of those stages of market entry entail and a certain type of metrics you can utilize to actually track our progression. The red scale bar at the top of the slide indicates where we currently are in the staged process, now partly in our regional market release. The limited market release, which began in 2018, began us to optimize the support product system, prove the product works across a spectrum of defects ranging from acute and chronic wounds to burn to trauma and surgical reconstruction as well as aesthetic scar revision.

The regional market release, which we designed to initiate access and test our reimbursement process, is focused on gaining access to providers, practices and health care networks by getting the necessary agreements in place to eventually be able to truly sell SkinTE. In addition, with the receipt of our SkinTE product code just this year in early January, we are stress testing our reimbursement process across a variety of clinical care settings, provider networks, payer systems and defect types.

The RMR or regional market release is about tailoring and optimizing an effective system and process in order to achieve product success in the long run. The national and full-scale market release will focus on conventional market growth, with the NMR directed toward activation of those accessed accounts and further penetration of those accounts to drive robust long-term adoption. More will be said about the NMR and FMR as we approach those stages of market development for our SkinTE product.

In order to understand the importance of the RMR, we must understand some basic concepts surrounding the sales cycle process, specifically for SkinTE. The sales cycle process represents the steps required to have a user or provider or facility utilize and pay for SkinTE. Here in this diagram, you can see the SkinTE sales cycle process compromise -- comprises key stages required prior to having providers regularly pay for the SkinTE product.

First, the sales team makes contact with providers and educates them on the product process, reimbursement and types of clinical outcomes one could see with a SkinTE product. Once interest and desire to use SkinTE are established, there are typically 4 optional transitional processes, which are optimal for different providers in different types of facilities. These are what we provide as access to the system. These access options include: a direct purchase agreement, a paid evaluation, assessment by a Value Analysis Committee and/or the use of a trial evaluation agreement, which may include one or more trial evaluation products, depending on the size and need of that facility.

This transition to gain access takes time, and my colleagues, Richard Hague and Matt Kemp, will go into significantly more detail about this process. Following completion of this access stage, the provider and/or facility and Polarity enter into a purchase agreement, allowing for the sale of SkinTE product within that clinical care setting or facility. This could be considered the more formal access for the product to be deployed for revenue. It is at this point that our sales team initiates the sale of the product and drives adoption into the facility or the system.

Lastly, I'd like to share with you all that we have learned from our limited market release and now this very important stage of the initial stage of our RMR. While limited market release provided intelligence on how to optimize our product system before larger scale use, the regional market release is now providing us with intelligence on how to optimize our commercial, logistical and reimbursement strategies.

To-date, we have learned that while SkinTE is the same autologous patient-specific type of product for all intents and purposes, it is impacted by different types of providers, practices and processes and thus requires tailored approaches, teams and execution. For example, while SkinTE has been successful across the full spectrum of clinical care settings and provider types, the type of providers and practices in specific facilities and processes do impact the time required to execute and eventually receive a purchase agreement. For example, large health care systems typically have more approval processes than a small office or a clinic setting with only a few providers.

Pertaining to payment for SkinTE, we have seen successful reimbursement of the SkinTE product across all clinical care settings as well as through private and public payer systems. We do, however, always want to remain well prepared for future changes in the reimbursement landscape and, therefore, have specifically designed our clinical trial studies to provide effective, prospective clinical data, clinical utility and valuable health economic measurements for SkinTE in order to maintain an effective reimbursement system into the future.

Lastly, while we already knew some of this from the limited market release, the regional market release is providing us with greater intelligence into what specific types of providers, practices, networks, facilities and health care systems impact the SkinTE process and intermediate clinical outcomes. This is very important. And all of this is helping us to validate our plan to tailor our sales and clinical sales force toward being more trained for specific types of wounds, providers, clinical care settings and market demand.

And now, I'd like to turn the call over to our recent and strategic addition to our team, Mr. Richard Hague, PolarityTE's new Chief Operating Officer. Thank you.

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Richard Hague, PolarityTE, Inc. - COO [4]

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Thank you, Denver. Good morning, everyone. First, let me say that I have been extremely impressed by the highly talented and passionate people here at PolarityTE, and I'm very pleased to be part of the team.

At this point, I'd like to share a brief overview of my background for your reference. I have a long history in the wound care and orthopedic space. After working for J&J and Pfizer in the traditional orthopedic implant market, I moved on to Genzyme with the goal of being involved with cutting-edge technology. While with Genzyme, I helped to bring to the market the first autologous cell therapies for cartilage and burns. It was there that I first experienced the positive impact that these types of products could have on patients' lives. It was also where I first experienced the challenges and rewards of driving the adoption of products launched in a nontraditional manner.

During my 18 years at Genzyme, I progressed through the organization, ultimately heading up the global Cell Therapy and Regenerative Medicine business unit, where I oversaw all the critical functions of the business. Sanofi acquired Genzyme in 2011. And in 2014, I helped lead the divestiture of the Cell Therapy business to what eventually became Vericel. Following my time at Sanofi Genzyme, I had a brief stint at TEI Medical where I built out their wound care business prior to them being acquired by Integra. And for the last 3.5 years, I was at Anika Therapeutics in the role of Chief Commercial Officer. Anika's products portfolio was utilized in multiple areas, including orthopedics, wounds and aesthetics.

During my time at Anika, I also oversaw various functions within the organization, including clinical and R&D and worked closely with colleagues to define and execute Anika's regulatory and BD strategy. Given my background, I was naturally curious when I first heard about PolarityTE. As I did further research, I became very intrigued by what I learned. And now having spent a month immersed in the business, it is very clear to me that Denver and the team had developed a product and a technology platform that is truly transformational.

SkinTE is clearly a groundbreaking approach to wound healing. However, reflecting on my experience at Genzyme, I believe initial expectations for SkinTE were unrealistic due to the inevitable hurdles that come with launching a novel and disruptive product. It is important to recognize that while HCT/P regulated products can get to market faster, you often face the challenge of building user confidence and clinical evidence at the same time you are developing your market. Each patient and provider experience are unique and act as a building block for increased adoption.

Looking at where we are today, I'm excited by the steps the commercial team are taking to increase production -- I'm sorry, increased product adoption. As you will hear from Matt momentarily, we are making significant progress with our key leading indicators. Additionally, as Nik will share shortly, we are adding to our growing body of clinical evidence. Ultimately, it takes time to earn the trust of HCPs and their institutions, especially when introducing a game-changing product. Based on my experience, I'm confident that we are laying the appropriate and necessary foundation to ensure the broad adoption of SkinTE.

At this point, I'd like to briefly transition to highlight several strategic imperatives that I will lead in the coming months. The first is to manage the day-to-day operations of the business in a highly efficient and cost-effective manner. It is imperative that we are positioned to support the current and future growth of the business, but we must do so in a fiscally responsible way. Second is to establish a set of key business priorities with an emphasis on revenue-generating and revenue-supporting activities. The goal here is to align and focus the organization and our financial resources accordingly.

Third is to identify and drive alternative revenue streams through our potential -- through potential outlicensing and strategic partnerships. It is important for us to leverage the value of our full technology platform and our internal R&D expertise. Additionally, I will provide ongoing guidance to the commercial team to ensure our evolving strategy allows us to achieve our future revenue objectives.

I'd like to close by reiterating my enthusiasm for being part of the PolarityTE team. Everyone in this room and throughout the organization has seen the impact that SkinTE can have on patients' lives, and it is truly inspirational. I look forward to working with my colleagues to maximize the adoption of SkinTE and our exciting pipeline of products.

Thank you. And at this point, I'd like to turn the presentation over to Matt Kemp.

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Matt Kemp, PolarityTE, Inc. - Chief Commercial Officer [5]

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Thank you, Richard. In Q1, we extended our regional market release with the goal of expanding the number of sites and HCPs that deploy SkinTE in targeted areas around the country. In Q1, we saw an increase in the number of in-process sites or those where we have initiated activity leading to the utilization of SkinTE. That number moved from 335 at the end of Q4 to 433 at the end of Q1. While this number continues to grow, our focus on a go-forward basis is a more important metric, and that is the number of active users or those that have used SkinTE in the preceding 2 quarters.

To be classified as an active user, you have a SkinTE agreement in place, either a product evaluation agreement, formerly known as a trial evaluation agreement, or you have a purchase agreement. And in some cases, you actually have both. In Q1, the active users rose from 60 to 100. A total of 81 patients, both paid and unpaid, were treated through these sites, representing an increase of 50% versus Q4. Of this total, 42 were paid cases, which increased roughly by 20% versus Q4.

While our goal is to generate revenue, we realize that the path to more rapid adoption of a new technology is through trial usage or more appropriately described as product evaluation. As we move forward in our regional market release, the number of initiated product evaluations, and these are unpaid products, and subsequent cases at sites around the country have become an important indicator of potential adoption of paid SkinTE cases in the future. To that end, we initiated product evaluations at 20 sites in Q1 versus only 4 in Q4 and increased the number of patients treated to 39. This represented over 100% growth versus Q4.

The SkinTE selling process in a hospital setting moving from Value Analysis Committee submission to approval, to product evaluation agreement and approval, to purchase agreement and paid product is an average of 4 to 6 months. When you look at the total number of patients treated, not surprisingly, we've seen the strongest adoption of SkinTE in the chronic wound market as physicians are able to see the product work in these smaller wounds very quickly. And as Nik will soon discuss, we've seen impressive results so far from pilot trials both in DFUs and VLUs and expect that these data will be key to driving adoption and reimbursement of SkinTE in the future. In addition to further penetrating the chronic wound market, we'll be focusing our efforts in the coming months to increase adoption of SkinTE in the larger wound and burn segments.

Due to the complex nature of these patients, and given the point of care is often in the surgical setting, it is important that we evolve our field team to ensure that we provide the highest level of clinical and customer support to the segment of the market. To accomplish this, we'll be hiring additional clinical salespeople with experience and relationships in surgical and critical care settings and bringing on several highly talented burn account managers to partner with leading burn centers to drive increased SkinTE adoption. Overall, we've made progress in commercializing SkinTE in Q1, and we're eager to put our new plan for larger wounds into practice. We will, of course, keep you all apprised of our progress over the coming quarters.

And now, I'd like to turn over our call to our Chief Scientific Officer, Dr. Nik Sopko, to provide an update on clinical trials and recent data.

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Nikolai Sopko, PolarityTE, Inc. - Chief Scientific Officer and VP of R&D [6]

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Thank you, Matt. Today I would like to discuss the evidence we are building to support continued adoption, including abstracts presented at clinical conferences, pilot trial data and the clinical trials we have recently initiated and are currently enrolling. First, it's important to note we continue to build upon scientific evidence with 14 abstracts accepted for presentation at national and international conferences in Q1, including one that received Top Abstract Special Designation at the Diabetic Limb Salvage Conference in Washington, D.C. for the presentation of results from our diabetic foot ulcer pilot trial.

As many of you know, diabetic foot ulcers are a significant problem affecting up to 3.5 million Americans, which are difficult to treat and have a high risk of resulting in amputation. Lower extremity wound care is estimated to cost the U.S. health care system $58 billion. There's a clear need to improve upon current treatments. We seek to better understand how SkinTE can address this need and have been encouraged with the results of our 2 pilot trial evaluations we have seen so far.

Our diabetic foot ulcer pilot trial evaluated 11 patients treated with SkinTE who had a diabetic foot ulcers resistant to standard of care treatment. Importantly, 10 of the 11 patients achieved complete closure within 12 weeks with a single application of SkinTE. This is particularly encouraging, given the closure rate with standard of care dressing and offloading is often less than 40%. One patient developed an unrelated infection of previously placed foot hardware and was excluded. We anticipate presenting the final results of this pilot trial at the annual American Diabetes Association meeting in June.

We are also encouraged by the venous leg ulcer interim pilot data presented yesterday at the Society of (sic) [Symposium on] Advanced Wound Care spring conference in San Antonio, Texas. To-date all patients treated with SkinTE who had venous leg ulcers that failed standard of care treatment (technical difficulty) wound closure within 12 weeks following a single application of SkinTE. Data presented yesterday will be available on our website shortly.

These 2 pilot trials were undertaken in preparation for our 2 recently launched multicenter randomized controlled trials comparing SkinTE to the standard of care in diabetic foot ulcers and venous leg ulcers and are being led by the principal investigator, Dr. David G. Armstrong, Professor of Surgery at the University of Southern California and founder of the Southwestern Academic Limb Salvage Alliance. Each trial is in expected enrollment of 100 patients and the primary endpoint of percentage of index ulcers healed at 12 weeks.

Of note, these trials are designed to not only show SkinTE's clinical efficacy, but also cost-effectiveness in the treatment of these difficult to heal ulcers, an important consideration for reimbursement. Finally, our head-to-head trial evaluating SkinTE for the treatment of burns is actively enrolling with encouraging results, and we have not observed any adverse reactions to-date. We anticipate presenting interim results in the conference cycle in the latter half of this year.

In summary, we have a total of 5 clinical trials. And just a few comments on the pipeline as we continue to execute on our plan. Similar to SkinTE, our initial commercial activity for OsteoTE will begin with a limited market release where we are targeting foot and ankle and craniomaxillofacial defects, 2 areas where we have an existing commercial footprint with foot and ankle specialists and reconstructive surgeons.

While the applications of OsteoTE exist, for example, spine and long bone, we plan to take a stepwise approach, and we'll move into those areas only post completion of the foot and ankle and craniomaxillofacial limited market release. And finally, as it relates to CartTE, preclinical studies are currently in place, and we will provide updates as we continue to advance the product forward.

Now I'd like to invite Paul Mann, our Chief Financial Officer, to share Q1 financial results in greater detail.

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Paul Elliot Mann, PolarityTE, Inc. - CFO [7]

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Thank you, and good morning, everyone. We issued a press release earlier today that included the financial update, which I'll briefly summarize. For the first quarter of 2019, we reported approximately $1.5 million in total revenues, which includes revenues from SkinTE and our contract service organization. Revenues from SkinTE during the quarter were $300,000, and revenues from contract research services were approximately $1.2 million.

Research and development costs during the first quarter were about $5.4 million, which included approximately $1.1 million in noncash charges. Included within this expense are the majority of the costs associated with the DFU and VLU pilot studies we presented yesterday at the SAWC conference and the startup costs associated with our randomized clinical trials with the company recruiting patients in the United States.

For the first quarter 2019, cash used in operations was $16.6 million. This is in line with our expectations given the growth in our manufacturing and commercial infrastructure. There are approximately $2 million of costs that occurred during the first quarter that are unlikely to occur in other quarters during 2019. For example, our auditing and accounting expenses were elevated because we filed two 10-Ks as we transitioned from an October 31 year-end to December 31 year-end. We expect our cash used in operations to be less than $5 million per month for the remainder of the year.

We finished the first quarter with $44.7 million of cash, cash equivalents and short-term investments on our balance sheet. During April, we raised an additional $29 million through the issuance of equity in an underwritten public offering. We currently have a number of significant strategic growth opportunities available to us, and this capital will help us fund those projects. The manufacturing node, which we'll be constructing in one of the world's largest burn and wound centers, is an example of such a growth opportunity. And we look forward to announcing more of these types of projects in both the United States and abroad.

Following the capital raise as we look at our capital needs, we believe we have sufficient liquidity on our balance sheet to fund our operations beyond the next 12 months. As most of you are aware, we've transitioned from an October 31 fiscal year-end to December 31 fiscal year-end. And this slide details our expected reporting schedule for the remainder of 2019.

With that, I will hand the call back to Denver for concluding remarks.

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Denver M. Lough, PolarityTE, Inc. - Chairman of the Board, CEO and Chief R&D Officer [8]

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Thank you, Paul. In closing, I'd like to thank our shareholders for your support as we build PolarityTE for the future. The new hospital integrated node we announced just last month is both an extension of and a template for the innovation approach that we are taking in order to bring practice-changing products like SkinTE, OsteoTE and eventually CartTE officially to patients in need. We continue to explore significant inbound growth opportunities to extend our reach and are energized by what we are finding, both here in the U.S. and abroad. But we must always do what is right for the company.

In the short time since the company's formation, we have built a great team and made enormous strides. The hallmarks of a great company are its ability to innovate, learn and adapt. Our work is just beginning, and we recognize that our corporate journey is certainly an evolutionary one. We look forward to keeping you abreast of our progress over the coming months, quarters and years. And I'd like to thank everyone for joining us.

We will now turn it over to Rich Haerle for transition to our Q&A session.

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Rich Haerle, PolarityTE, Inc. - VP of IR & Strategy [9]

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Thank you, Denver. Now that we've completed the presentation section of our calendar first quarter earnings call, we'd like to turn the remainder of time over to question-and-answer session. Please be advised that some questions may be related to materials that are sensitive and/or related to nonpublic material information and, therefore, will not be discussed.

I would also like to remind everyone on the call that this question-and-answer session includes forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 including, but not limited to, the types of statements identified as forward-looking in most recent reports on Form 10-K and 10-Q, including our transition report on Form 10-K for the 2-month period ended December 31, 2018, as well as the 10-Q for the 3-month period ended March 31, 2019, that was filed this morning, all of which will be available on our website in the Investor Relations section.

I would now like to turn the call over to the operator for question-and-answer.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We can now take our first question from Josh Schimmer from Evercore.

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Joshua Elliott Schimmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Equity Analyst [2]

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First, Richard, maybe for you. Thanks so much for the concise summary and realistic outlook. What -- when you refer to data being needed to really drive adoption, what -- how should we be thinking about either the small case series that are being reported versus the whole Phase III trial results for really opening the door?

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Richard Hague, PolarityTE, Inc. - COO [3]

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Well, Josh, thank you for the question. I appreciate that. I think the way you have to look at this is that as we build experience, there are early adopters out there that are more than willing to try technology based on their case series for both for themselves and their peers. As you look for broader adoption throughout the larger market, certainly, the RCTs help drive that. So it's a phased approach, and it kind of falls in line with the regional market release moving towards the larger market release.

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Joshua Elliott Schimmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Equity Analyst [4]

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Have you seen situations in the past where the case series can drive meaningful data? Or are there precedents for this approach?

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Richard Hague, PolarityTE, Inc. - COO [5]

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Yes, certainly. In my experience back with Genzyme, when we launched products at the point -- at that point in time were not regulated. The BLA process hadn't existed at that point. So basically, I've seen the process of building local champions that believe in the product, have good outcomes, generate their own data on that and then are able to influence peers in the community based on their position in the community and the outcomes of their patients. So it's not -- it's certainly precedented that this can occur and occur favorably.

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Joshua Elliott Schimmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Equity Analyst [6]

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And do you see SkinTE being a product that can drive that kind of early adoption based on its merits and these case series?

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Richard Hague, PolarityTE, Inc. - COO [7]

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Yes, absolutely. The beauty of a SkinTE product is that it's a visual product. You're seeing the healing occur right in front of you. And when you have feedback from patients as well, it becomes a pretty compelling story. So I absolutely do see that to be the case here.

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Joshua Elliott Schimmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Equity Analyst [8]

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Maybe 2 more quick questions, Richard, still for you. On the same token, is it then too early to launch OsteoTE? What's the data case to drive that product or is this is a different setting where less data can drive...

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Richard Hague, PolarityTE, Inc. - COO [9]

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No, I think it's actually -- it's very similar. As Denver outlined earlier, this is a very, very limited market release. The goal here is to gain user experience, learn a little bit more about the product, understand how it performs and, obviously, gain the experience that we will build upon. So it's a building process, but I think right now as the -- once the product is ready to go live, we'll be in a position to gain that important experience and build from it.

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Joshua Elliott Schimmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Equity Analyst [10]

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And for Denver or Paul, I guess. Why is sales and marketing so low, but G&A so high? What are the components of each? How should we be thinking about modeling these 2 lines going forward?

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Paul Elliot Mann, PolarityTE, Inc. - CFO [11]

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Thanks for the question, Josh. It's Paul here. So G&A contains most of the costs of the organization. And so that is very high. The sales and marketing cost is largely a variable cost based on commission dollars. And so that will grow with time as we succeed in the marketplace. So view G&A as being flat to declining in the next say 12 months and sales and marketing increasing.

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Joshua Elliott Schimmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Equity Analyst [12]

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Why is your G&A so substantially higher than most other smaller earlier stage companies?

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Paul Elliot Mann, PolarityTE, Inc. - CFO [13]

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So the G&A contains a very large noncash item in terms of stock option expense. And during the quarter, that was about $10.7 million. And so if you look at the cash G&A charge, it's substantially lower. And we book most of the stock option expense for the organization through the G&A line.

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Operator [14]

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We can now take our next question from Kevin DeGeeter from Oppenheimer.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [15]

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Thanks for the really clear description of road map of the commercial plan. Could you also talk about your level of engagement with payers and managed care, particularly as it pertains to the chronic wound opportunity for SkinTE, and how we should think about measuring your progress on that metric?

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Matt Kemp, PolarityTE, Inc. - Chief Commercial Officer [16]

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Sure. This is Matt Kemp. Thanks for your question. SkinTE is being reimbursed across the country. And as you know in the inpatient setting, SkinTE costs are covered as part of that procedure, DRG. In the outpatient setting, there's a variety of harvest and deployment codes with modifiers that can be selected by health care providers to submit a claim. And as it relates to care policies, obviously, we're monitoring those across the board. And where we can and where prompted, we're having engagement with those payers. But it's an ongoing process, and it's early days in the commercialization process. But overall, I want to reiterate that SkinTE is being reimbursed across all 3 types of wounds and the chronic wound space certainly, but also in trauma and reconstruction and also burn.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [17]

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And just following up though on that. I mean in the absence of randomized controlled data, how should we think about the sort of pace of your coverage decisions? I appreciate that at relatively low volumes the product is getting reimbursed. But in terms of coverage policies, do you think randomized controlled data is really sort of what drives that process? Or do you think the organization can make significant progress prior to that type of data being generated?

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Matt Kemp, PolarityTE, Inc. - Chief Commercial Officer [18]

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Sure. So reimbursement hasn't been a rate-limiting factor so far in terms of demand, and that's not limiting demand. I think, obviously, as more patients are going to be treated, we'll start to test some of those payer policies, and we'll continue to partner with payers to support -- and providers to support request for additional information. I think it's clear that having the availability of randomized controlled data certainly helps payers gain confidence in the product and strengthens our value proposition. But right now and in the foreseeable future as we increase the number of patients that are being treated, we don't expect reimbursement to be a big challenge for us.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [19]

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Okay. Just one more for me, and then I'll go and get back in the queue. And you did call out the expectation to expand the team -- the commercial team calling on burn accounts. Can you provide a little more granularity as to how you think about appropriate sizing of expanded commercial operation for the burn market, which is pretty highly concentrated? And maybe elaborate a little bit more in terms of the experience or credentials or profile of the right kind of rep to call on that channel?

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Matt Kemp, PolarityTE, Inc. - Chief Commercial Officer [20]

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Sure, sure. So just to maybe take a step back. Right now, we have a commercial team of 19 sales representatives, around 5 clinical science managers and 10 home office support staff. And we right now plan on hiring 6 additional more sales reps to support demand in several major metropolitan areas. That demand is not exclusively in burn. It's actually in a variety of different settings. So that includes chronic wound, trauma and reconstruction. And the team right now can adequately cover and support the existing 100 active users in those care settings. But I think as we move to transition those 433 in-process sites to active users over the next 6 to 9 months, we're going to strategically expand.

And the -- on the -- and specifically as the question around what we're doing in burn. While we are currently covering and engaging the burn market, I think it's clear to us based on our experience in this limited market launch that focusing on a smaller subset, as you stay, concentrated, those burn centers that really matter and that can help guide treatment algorithms as it relates to SkinTE's placement in that requires a group of individuals that have deep relationships with these sites. They're traditionally reps that have been in burn care for a significant period of time. I think what our plans are is to start with a very small group of individuals, 3 to 5. And then they will work in partner with these leading burn centers to do what I just said. And that is, number one, to help them -- to partner with them, to integrate SkinTE in their current and existing treatment algorithms. We're also going to partner with these larger burn centers from a clinical trial perspective to gain additional experience and fine-tune our product offering in burn.

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Operator [21]

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Next question comes from Tyler Van Buren from Piper Jaffray.

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Tyler Martin Van Buren, Piper Jaffray Companies, Research Division - Principal & Senior Biotech Analyst [22]

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My first question is on the pilot studies. Clearly, near 100% wound closure rates looks great. And there's the standard of care being around 40%, and I see peer-reviewed Dermagraft data at 12 weeks that shows 30%, 100% wound closure. So can you just confirm that the criteria that you guys are using for wound closure is precisely as used in pivotal trials of other agents like Dermagraft as we think about comparing the data since it wasn't controlled?

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Nikolai Sopko, PolarityTE, Inc. - Chief Scientific Officer and VP of R&D [23]

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Yes, absolutely. Tyler, this is Nik. Thank you for the question. And to your point, the definition for closures have been pretty well defined previously by the FDA to have complete epithelialization with no drainage. And we are indeed following that same definition for our patients and also for the pilot trials and for the randomized controlled trials that we have launched. You can see them on the clinicaltrials.gov with how they're designed. And they're largely following a lot of those other trials that you mentioned. So that they will be consistent with what prior data has shown. Additionally, we've taken great strides to design a very robust trial with an independent validator panel that confirms that all the wounds are closed. And this is a panel of 3 very well respected providers, because we were seeing such great results with the pilot trials that we wanted to make sure we're being as thorough as possible.

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Tyler Martin Van Buren, Piper Jaffray Companies, Research Division - Principal & Senior Biotech Analyst [24]

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Okay. That's helpful color. And then just a couple points of clarification. In the last couple fiscal quarters, you guys mentioned -- you described them as in-process accounts, and now they're in-process sites. And you also were calling them active accounts and other active users. I guess based upon the numbers you gave, they're not terribly different. But could you just, I guess, go over the decision to change the way that you describe them and discuss those differences? And if we should be -- if we're going to be getting users and sites data moving forward.

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Matt Kemp, PolarityTE, Inc. - Chief Commercial Officer [25]

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Sure. This is Matt Kemp. Thank you for your question. You're correct. We have slightly tweaked the descriptor, but the definition essentially remain the same. So in-process sites are those defined as hospital and clinics that have initiated a Value Analysis Committee review, a trial evaluation agreement or purchase agreement. But these are sites that -- not sites that we have active access to today, but are moving to using SkinTE commercially. So we will be calling them moving forward and in subsequent quarters in-process sites.

Active users is a better descriptor. These are actually individuals who have used the product commercially, either in a trial evaluation process or actually a paid case in the last 2 preceding quarters. And these are sites where commercial demand exist. They have committed utilizing SkinTE and will continue to be a focus of ours to grow the business. To be considered an active user, you must have entered into agreement with PolarityTE either from a trial evaluation perspective or a purchase agreement to use our products. And you know what, these active users are going to be considered really core to us realizing revenue over the following quarters.

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Tyler Martin Van Buren, Piper Jaffray Companies, Research Division - Principal & Senior Biotech Analyst [26]

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Okay. That's helpful. And a final question is so paid cases are up 20% quarter-over-quarter, but monthly revenues are down. And if you do the math on the amount per paid case, it's about $7,000 a case versus $12,000 in fiscal Q4. And so that suggests that clearly the cases are being driven by these less expensive chronic wounds, which can be $1,000 a case. And you guys have 100 active users. And even if you transition all 400 of those in-process sites, I guess, the question is are chronic wounds really enough to move the needle and inflect this launch? And why only put 3 to 5 individuals on burns? Why not have all of your efforts and all 20-something salespeople in burns? Because 2 paid burn cases could have equated to the sales this quarter for SkinTE or potentially exceeded that. And with the JMS manufacturing node, when do you think that, that could start contributing?

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Matt Kemp, PolarityTE, Inc. - Chief Commercial Officer [27]

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Okay. So a lot of good questions in there. I want to make sure that I address all of them. These are early days in the commercialization process. This is a limited market release, and as part of that core component is that we're learning. And what we're learning and what the market is telling us is there's significant demand right now in the chronic wound space. And as you appropriately pointed out, these are smaller wounds. And we think about the wound size, it is highly variable right now. And one patient -- it's not a one for one equation. Meaning each patient is individual. This is an autologous therapy that's manufactured for each individual patient.

So from a modeling perspective, I know that you're very interested in trying to create some assumptions moving forward. But I'd say as that relates to wound size, right now, it's too early to give you an average of what we expect in each segment because it varies so widely. As it relates to node placement and our first effort to do that, for us, it's not a if you build it, they will come. What we're trying to do is move forward and ensure that when we place a node, that there is adequate demand. And part of placing a node is really based on improving customer service, decreasing turnaround times in the manufacturing and delivery logistics process and also decreasing COGS. So we're very excited about our first node placement. And we think it's going to increase the product offering and the value add to accounts across the country.

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Operator [28]

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We can now take our next question from Elemer Piros from Cantor.

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Elemer Piros, Cantor Fitzgerald & Co., Research Division - Analyst [29]

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Paul, I was wondering. So we can avoid being worried about 20% growth from a low base in 42 paid cases. Would you please provide a perspective about the JMS node in Augusta, Georgia? How many patients are being treated -- burn patients at this center? Do they treat some additional wound types as well? And the 6,300 square feet space that you're leasing, how many manufacturing columns can you put in there? And what would be your capacity to process samples at that facility, please?

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Paul Elliot Mann, PolarityTE, Inc. - CFO [30]

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Thanks for the question, Elemer. So I can't really comment on -- we can't really comment on individual hospitals. So you put your best to direct your question to them, if they'll answer it. In terms of the lease and the size, we're paying a market rate for that lease. And that says in the contract. I think we mentioned that in the 8-K when we 8-K'd it. In terms of the number of manufacturing units or LFGIs being fit into that space, it's a substantial number. It will be in excess of 20, but we may use the space for other things as well.

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Elemer Piros, Cantor Fitzgerald & Co., Research Division - Analyst [31]

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And so that 20 or just call it 10, how many samples can you process during the year from those? So just we need to get a sense of order of magnitude.

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Paul Elliot Mann, PolarityTE, Inc. - CFO [32]

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Yes. So right now, our processing time is a little over 2 hours. So I'll let you run the math on that.

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Elemer Piros, Cantor Fitzgerald & Co., Research Division - Analyst [33]

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Okay. Okay. Denver, I had a question -- a strategic question as well to you. What would be your selection criteria or strategy to move this product to ex U.S. markets?

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Denver M. Lough, PolarityTE, Inc. - Chairman of the Board, CEO and Chief R&D Officer [34]

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Now that's a great question. You're beginning to already see a little bit of that strategy. Utilization of a scalable manufacturing logistic system, what we call our PolarityTE nodal web, is key to the development and the deployment of our core TE technologies. Because of our short cycle time to actually create these effective products, we are able to place those types of manufacturing nodal facilities in strategic areas in the United States as well as internationally. But we would have to assure that internationally it was placed in an area where there was appropriate demand, appropriate reimbursement structures and systems as well as the ability to carry out appropriate logistics.

We had once spoken with an investor who said, your technology clearly works. Now you're a logistics company. And I agree to some extent. And so we would have to make sure that, that web appropriately worked in that region of the world. As Paul had pointed out and I did in my closing statement, our capital raise was for strategic inbound growth opportunities. And that has to do with building out a strong footprint, both nationally as well as strategic international placement of such manufacturing nodes, which we hope to share with the market in due course.

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Operator [35]

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Next question comes from Carl Byrnes from Northland Securities.

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Carl Edward Byrnes, Northland Capital Markets, Research Division - MD & Senior Research Analyst [36]

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Congratulations on your progress. Just a quick follow-up question. Can you provide any updates on the progression of any potential non-U. S. partners? And what might that timing look like, to the best of your ability?

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Denver M. Lough, PolarityTE, Inc. - Chairman of the Board, CEO and Chief R&D Officer [37]

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Thank you, Carl. Appreciate the question. I would love to be able to show -- share that type of information. However, it still remains confidential. We work closely with a variety of different groups. We're very excited about some of the potential opportunities. But like I had stated in the presentation, I want to make sure that it is absolutely the right thing to do for the company now as well as for our long-term growth strategy. And so we evaluate all of those incoming strategics on a case-by-case basis. We perform significant due diligence. And I am hoping that sometime in the future, we will be able to share some of that information with yourself and the rest of the market. But it will take a little bit of time for us to finalize any of those types of agreements to be able to share.

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Operator [38]

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Next question comes from Swayampakula Ramakanth from H.C. Wainwright.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [39]

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This is RK from H.C. Wainwright. A lot of my questions have been asked. A couple of quick ones. I'm also trying to understand some of the definitions that you folks have. What is a paid case in your definition? And does the paid case mean a onetime paid situation? Or is it an activated contract drove account?

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Matt Kemp, PolarityTE, Inc. - Chief Commercial Officer [40]

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Sure, it's Matt. Thank you for your question. So a paid case is as it's defined -- I mean it's a case that the provider has agreed to use commercially. But you can't get to a paid case until you've signed a purchase agreement with Polarity. And in that purchase agreement, we specify the pricing and the length of time of the contract it's valid. So before you can move on to a paid case, you have to reach agreement with Polarity. And so in all of those active -- in the active users, you either have had a paid case and that has been secured through a purchase agreement or you have entered into a product evaluation agreement where you can use the product in an unpaid fashion. Does that answer your question?

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [41]

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Yes. Yes. That's helpful. And then another question just on the sales cycle implied here. What's the average amount of training that any one of your salesperson would require to become effective? And you talked a little bit about the experience of the sales force, but at the same time how does that contribute to your sales cycle? And are there any ways that you are trying to reduce that sales cycles, so that you generate revenues a little bit quicker?

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Matt Kemp, PolarityTE, Inc. - Chief Commercial Officer [42]

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Sure. So as it relates to training, the first thing I'd point out is the sales team that we've put together is highly experienced in the variety of wound care settings. And so we're not just hiring someone that graduated college and is looking for their first job. But obviously, we have a training program in place, but it's not a once and done. We train you for a week or 2, and then you've been here -- send out to the field. We have an ongoing training program for our field team and for our clinical science team as well. And then as it relates to how long it could take for them to be effective, what we said in previous calls is it takes about 6 months for a new sales rep to be fully sort of certified and also directly impacting sales in a profound way.

And as it relates to the selling process or cycle time, there's numerous opportunities to decrease that. In some cases, where we have an early adopter that wants to use the product, they can move directly to purchase agreement. And we've seen that happen before in the past. But as we -- majority of our business is driven through the hospital setting, that 4- to 6-month time frame is very representative of the time it takes from sort of the site being identified as one that potentially could be useful, that has market potential to getting them all away through from a Value Analysis Committee to approval and then ultimately to agreements that lead to a paid case.

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Rich Haerle, PolarityTE, Inc. - VP of IR & Strategy [43]

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Operator, we have -- I was going to say, operator, we have time for probably one more call in the interest of time.

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Operator [44]

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We have one left in the queue from Josh Schimmer from Evercore.

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Joshua Elliott Schimmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Equity Analyst [45]

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First, we have heard from some specialists that the $1,000 approximate activation fee is a little bit onerous for smaller wounds and that maybe holding back their use. Can you maybe describe your efforts to assess and/or reevaluate that upfront payment? And then second, given the limited cash on hand and the current burn rate, is this the time to be taking on new expansion projects as opposed to focusing on kind of conserving resources and executing on a more mid scale?

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Denver M. Lough, PolarityTE, Inc. - Chairman of the Board, CEO and Chief R&D Officer [46]

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Thanks, Josh. This is Denver. We actively solicit feedback from a whole host of providers that are out there that are using the product both small and large. Market research has shown us, as you know, that the majority of sort of temporary skin substitutes alone usually range from $100 to $300 per square centimeter itself. Most of those don't come in single square centimeters, and they'll essentially come in smaller sizes of 4 or even 10 square centimeters. So it actually ends up being more costly often than our product itself. Once, because price dollar or price point per centimeter's higher, but also because it's temporary. You have to apply it multiple times.

So if you can in-depth healing a DFU in a matter of 3 to 6 weeks with a single application of SkinTE, that's significantly cheaper, both at a price point as well as utilization of a single application itself that greatly offsets that cost. And that's sort of that health economic argument that I think is so important for insurance companies, providers, facilities as well as us. Because we came from that side, and we understand the importance of approaching a market that is highly focused on capitation and limited resources. And so we want to make sure that something like that is fully addressed with each and every one of the providers. And often when it is presented fully to them and they see that health economic argument, particularly the VAC committees, we typically don't see any true issues with that.

With regards to the growth opportunities or expansion of the company with the current capital that we have in the bank right now and those that we're very sort of orienting towards strategic, we do not grow this company without performing comprehensive diligence. So while I think there may be some people that believe we raised this capital to solely use to spend on moving into other markets, that's not necessarily the case. It's to position us to have strategic growth opportunities that are inbound, that allow us to have leverage and effectively build the company in ways where partners are assisting and contributing to a lot of that sort of capital necessity. So we would never focus on utilizing that capital as a sole sort of expense simply to build out a platform or a footprint in an area where there wasn't going to be absolute significant return, if that make sense.

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Operator [47]

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That concludes the questions. I would now like to hand the call back to the moderator.

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Rich Haerle, PolarityTE, Inc. - VP of IR & Strategy [48]

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All right. Thank you, operator. This now concludes the question-and-answer session of PolarityTE's calendar first quarter earnings conference call. We thank you for your time. We hope you're pleased with the incremental level of granularity provided. And we look forward to our next corporate update and quarterly earnings call for the second quarter of 2019. Thank you very much.

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Operator [49]

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That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.