Viveve Medical, Inc.
Q2 2018 Earnings Call Transcript

Published: 13 Aug 2018

[Operator:]

Good afternoon, and welcome to the Viveve Second Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Speaking today are Viveve's Chief Executive Officer and Director, Scott Durbin; the Company's President and Chief Business Officer, Jim Atkinson; and Jeannie Swindle, Senior Director of Corporate Communications. Management will provide an overview of the second quarter financial and operating results before opening up the call for questions. Please note, this event is being recorded. I'll now turn the call over to Jeannie Swindle.

[Jeannie Swindle:]

Thank you, operator, and welcome everyone. Before we begin, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the Company. Any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the corporation's projections, expectations, plans, beliefs and prospects. These statements are based on judgments and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties are described more fully in the Company's annual report on Form 10-K and other filings made with the SEC, which are also available on the Company's website. In addition, any forward-looking statements represent management's view only as of the date of this conference call and should not be relied upon as representing management's views as of any subsequent dates. I would now like to turn the conference over to Scott Durbin, our CEO.

[Scott Durbin:]

Thank you, Jeannie. Good afternoon, everyone, thank you for joining us today. I am pleased to report Viveve’s positive second quarter financial results and the significant achievements we've recently made on the clinical and regulatory front. We saw the benefit of our first quarter commercial realignment efforts and expanded direct sales force, which was fully deployed in North America in late March, lead to a record second-quarter and we look forward to further accelerating our commercial growth going forward in conjunction with our new U.S. capital sales partnership with Aesthetic Management Partners. In addition to continuing to accelerate the growth of our existing global commercial business, we continue to pursue regulatory approvals for our patented cryogen-cooled monopolar radiofrequency or CMRF platform for the improvement of sexual function and treatment of stress urinary incontinence. Before I go into more detail on the clinical programs, I’d like to comment on our financial results. As I mentioned, the second quarter represented a record breaking quarter for us with $5.5 million dollars in total revenue, including sales of 85 systems globally, 69 of which were sold in the North American market. This represents a quarterly revenue growth rate of 80% year-over-year compared to $3.1 million for the same period in 2017. In the second quarter, we also sold approximately 2,750 treatment tips worldwide. I’d like to take a minute here to comment on treatment tip volumes in the first and second quarters, as detailed in our first quarter conference call, we reported placing 5,400 treatment tips, which included 1,900 associated with our temporary SUI BOGO program enacted to meet the growing demand for our brand-new SUI procedure, which currently requires two treatment tips. When excluding the 1,900 treatment tips for SUI, we sold approximately 3,500 on a normalized basis. Comparatively, we reported revenue associated with second quarter tip volumes of 2,750 units which included only approximately a 125 free of charge SUI tips predominantly because of the launch of our new practice management team in the first quarter. Additionally, due to a temporary manufacture supply issue in 2Q which has now been resolved approximately 1,000 tips ordered in Q2 were backordered and not counted in the 2,750 treatments tips placed. That's on a normalized basis excluding free of charge tips and including tips ordered, but not place due to our backorder we had orders for 3,500 in Q1 and 3,625 in Q2 , representing an increase in normalized tip volumes quarter-over-quarter. As we announced during our Q1 call, the BOGO program will be eliminated by Q4, and we don't expect any future supply issues with our treatment tips. Second, gross margins for the second quarter of 2018 were 51% of revenue compared to gross margins of only 40% of revenue a year ago. Our gross margin increase in the second quarter represents the results of rising system ASPs in North America and Europe due to increase list pricing of our system and the institution of our direct distributor hybrid model in Europe. Additionally, implementation of our practice management program, which again only began in late first quarter led to a significantly higher treatment tip ASPs in North America. On the expense side, total operating expenses for the second quarter of 2018 was $13.1 million and were in line with our expectations for the quarter, as a result of certain second-quarter restructuring and realignment activities, we made substantial efforts to streamline and reduce our operating expenses going forward. And we expect operating expenses to remain relatively flat quarter over quarter for the remainder of the year, despite anticipated sales growth in an anticipated ramp in our clinical trial programs. From a balance sheet perspective, we ended the second quarter with $30.2 million in cash and equivalents, which is the result of a substantial decrease in cash used in operating activities in Q2 versus Q1. As we move forward, we expect accelerated sales growth complemented by rising gross margins and relatively flat operating expenses to have a continuing positive impact on our future cash needs. I'd now like to review our clinical programs and the extraordinary label expansion opportunities we have in front of us. As you know Viveve achieved significant milestones towards advancing these efforts in the second quarter. During the quarter, we initiated that the VIVEVE II trial to assess safety and effectiveness of the Viveve System for improvement of sexual function in women. The high level of enthusiasm from our initial clinical investigators generated rapid patient enrollment early on. As we announced previously, a staged approach for clinical enrollment was required by the FDA in its Investigational Device Exemption or IDE approval letter that we received in mid-March. In the first stage, enrollment was limited to 50 subjects in order for the FDA to perform a safety review of a minimum of 25 subjects in one month post treatment. At the end of the second quarter, we were pleased to have submitted the 30-day safety data to FDA for the initial 25 subjects completing their one month assessment. Of significance, there was no serious adverse events reported in the submission and as was announced earlier this week Viveve received approval from the FDA as a result of that submission to continue enrollment in the trial. The letter stated that the agency has determined that Viveve had provided sufficient data to support expansion of the trial, and that there are no subject protection concerns that preclude continuation of the study. The FDA did however require a second safety review or second stage to the trial limiting enrollment to 100 subjects. The second stage will now include an FDA safety review of an additional 25 patients’ one month post treatment, and of the first 50 patients at three months post treatment. While safety data are being reviewed from the second stage, enrollment will continue up to 100 subjects. We’re following the FDA safety review and the approval of an anticipated IDE supplement to expand the trial, Viveve plans to continue enrollment up to the intended to 250 subject total. In light of the FDA's recent safety communication and actions against certain companies marketing their devices for vaginal rejuvenation procedures, and additional safety review by the agency is not precipitous. First, let me be clear, Viveve was not one of the seven companies included in the vaginal rejuvenation safety statement and has not received a warning letter. It's my intent here to affirm Viveve’s historic and continued commitment to conducting sound scientific research and clinical trials to support evidence-based medicine for safe and effective treatment of women's intimate health conditions using our CMRF technology.0 We believe that we are aligned with the agency's mission to ensure devices and treatments been offered to physicians and patients are safe and effective as demonstrated by medical evidence and regulatory approval for the clinical application which they are being used. Viveve is demonstrating this alignment through our adherence FDA requirements and ongoing progress in the VIVEVE II trial for the improvement of sexual function. For new participants on this call, Viveve is the only energy-based women's intimate health company to have undertaken clinical trials of the magnitude of VIVEVE I and VIVEVE II, which if successful, may support the first indication for the improvement of sexual function in women in the United States. I’d now like to turn to stress urinary incontinence and the significant advances we've made in pursuit of label expansion for this prevalent condition, one that affects an estimated 25 million to 30 million women worldwide. We announced our entrance into the SUI market earlier this year with positive 12 month pilot study results and plans for two clinical registration studies LIBERATE International and LIBERATE U.S. In June, we reported unprecedented six month interim results and treatment durability from a second concurrent SUI feasibility study, which showed extremely positive results. 83% of patients experienced improvement at six months, as measured by the one-hour pad weight test and the average improvement across all patients with 73%. Daily incontinence episodes reported from the seven-day voiding diary documented that nearly 80% of patients experienced an overall reduction in leakage episodes at six months and on average, women experienced a 50% reduction. Further, 66% of women had 1 gram or less of urinary leakage at 6 months on the one-hour pad weight test reduced from the mean baseline average of 6.2 grams and a clinically meaningful benefit was achieved at six months across all validated SUI symptom and quality of life measures. Finally, no device-related safety issues were reported in any of the subjects. These impressive results further support the 12 months SUI pilot study data and reinforce our plan and current efforts to conduct our two large-scale LIBERATE clinical registration trials. With respect to LIBERATE international, the Investigational Trial Application or ITA was submitted to the Canadian ministry of health and we anticipate hearing back very soon. The selected Canadian study sites, the clinical investigators have been trained and we project the trial will commence probably following approval and anticipated in the very near future. Preparation continues on our IDE for the LIBERATE U.S. registration trial and is underway with an expected submission to the FDA anticipated in the third quarter, so these as always been and remains committed to conducting rigorous clinical trials across a wide range of indications. We believe our strategic commitment to providing strong clinical evidence to physicians and consumers has set the standard for minimally invasive treatments in these indications and sets Viveve apart from the growing number of companies offering energy-based devices proclaiming to address women's intimate health conditions. I’d now like to turn the call over to Jim Atkinson, who will provide some further details on the success of our commercial operations.

[James Atkinson:]

Thank you, Scott. As Scott mentioned, the second quarter was a record breaking quarter for the Company and Viveve’s commercial sales organizations, achieved $5.5 million in total revenue. I want to acknowledge the hard work and professionalism of all individual on the sales team as well as those throughout the Company who supported to contribute to our outstanding results. During the second quarter, our North American sales organization was the strongest, placing 69 of the 85 total of these systems. Considering this is our largest and most rapid growing market, this is not a surprise. Sales in other regions around the globe through our distributor partners continues to grow in systems and treatment tip sales to position customers due to expanding awareness of our gold standard CMRF technology and positive SUI clinical results. Specifically, on our U.S. commercial organization, we made a strategic decision in the first quarter to accelerate expansion of the sales team to meet increased physician demand. This effort was validated by the results achieved in the second quarter. The realigned expanded team was fully deployed along with practice development managers in the field. At the close of the second quarter in North America, sales organization was expanded to 49 total professionals from 27 representatives at the beginning of 2018, and now includes 23 capital representatives, 10 associate sales representatives, 10 practice development managers, 3 regional sales directors and 1 practice development strategic partnership director, all under the leadership of our Vice President of Sales. To further expand our U.S. commercial footprint, Viveve entered into a partnership agreement with Aesthetic Management Partners in early July. This partnership immediately augmented the U.S. direct sales force with the addition of 20 experienced capital sales representatives. Equally important, Aesthetic Management Partners a successful sales organization that distributes multiple set of technologies, provides a bundling sales opportunity with the Viveve System positioned as the core product offering. In the aesthetic marketplace, bundling the product is common practice for large companies with multiple product line offerings. This product bundling opportunity enables Viveve to increase its sales competitiveness, particularly with physicians and practices just entering the aesthetic treatments space. Viveve now has a unique hybrid U.S. sales organization, a combination of 23 direct and 20 partnered capital representatives. We are confident that this strategic partnership will accelerate of these commercial reach to the rapidly growing number of physicians, who are interested in our technology and want to provide effective clinically proven intimate health treatments to their female patients, but these practice development management team continues to support all current and future utilization and growth for U.S. installed customer base. Physician and consumer awareness of women's intimate health conditions and treatment options continues to increase dramatically. Viveve marketing, sales support and key opinion leader development efforts have helped drive worldwide awareness through innovative and dynamic branded and unbranded campaigns. The successful programs and activities have been extremely well received. I'll now turn the call back over to Scott.

[Scott Durbin:]

Thank you, Jim. I'd now like to make a few closing comments before we take your questions. The second quarter was a remarkable quarter of achievements for Viveve and a result of the passionate and dedicated team of peoples that I am privileged to lead as we move forward through the rest of this year and into 2019, our focus will continue to be on accelerating the growth of the existing global business and aggressively moving towards the data readouts from our three unparalleled clinical trials. And ultimately towards what we believe will be regulatory clearances for the improvement of sexual function and stress urinary incontinence. At this time, I'll turn the call over to the operator for a question-and-answer session.

[Operator:]

[Operator Instructions] Our first question comes from Josh Jennings of Cowen and Co. Please go ahead.

[Josh Jennings:]

I guess, Scott, just to start off on the second quarter performance. Just wanted to make sure if really checked that there wasn’t any onetime kind of benefit perhaps you've something that with residual from the first quarter where you had this off to the training efforts. Just wanted to check you on how representative the 2Q performance is relative to where the business tends now heading in or now that were in the Q3.

[Scott Durbin:]

Yes, Josh, Is your comment related to the current FDA action or…

[Josh Jennings:]

The revenue performance side, the revenue performance in 2Q

[Scott Durbin:]

No, there are no onetime revenue recognition adjustments or issues. This is solely the drivers that we discussed in our prepared remarks, which are as the result of our -- the reorganization and realignment of our sales organization, the acceleration of the team that Jim talked about, the tremendous need in the marketplace we’re seeing and demand for both the vaginal laxity, sexual function treatment as well as stress incontinence.

[Josh Jennings:]

And question on the Aesthetic Management Partners agreement. Just wanted to be clear on, how we should think about the training process? And when should those 20 capital sales reps on the Aesthetic Management side start to contribute to the sales performance and get up to speed and ramp up on productivity?

[Scott Durbin:]

Jim, do you want to take that?

[James Atkinson:]

Yes, Scott, thank you. Yes, so the training for the AMP, Aesthetic Management Partners, will be in two weeks. They started the Company on July 1st, led by Erik Dowell, who is a well-known individual within the aesthetic industry. And we have them in two weeks we got them through the full training. And then our team will be cross trained on their products about a week after that. So, we expect them to really have this quarter Q3 to get up and running and get the process going in, and then in Q4, we expect to see reasonable results from their sales efforts.

[Josh Jennings:]

And then just last question here just on the FDA safety. This is I know it’s early, but just wanted to check in and here what your expectations are, in terms of the response to the manufacturer letters and whether you see this as a commercial opportunity for Viveve and next year or perhaps even this year?

[Scott Durbin:]

So, again look, we in the wake and the amount of publicity that these particular actions take -- took, this was we will say long overdue and anticipated. We've certainly received and fielded questions both from existing and new customers regarding our position. Again, we feel these actions finally level the playing field commercially in what has been, in many instances, I'll say egregious, off label claims and Viveve on the other hand has worked historically and collaboratively with the FDA towards label expansion from the beginning and have marketed responsibly according to a fact-based marketing mantra focused on the clinical data we have generated to date and we’re the only company in the field that has international clearances for laxity and/or sexual function in over 50 countries around the world. And so, as we look to even in the near term again we think this is going to level the playing field for us commercially. We think it's an advantage. We think it's another differentiating factor around Viveve going forward.

[Operator:]

Our next question comes from Dennis Ding of Raymond James. Please go ahead.

[Dennis Ding:]

This is Dennis on for Jason. I just had a few quick questions for you. In terms of your partnership with AMP, I know they’re adding 20 sales reps. Does that change your guidance on hiring throughout the year?

[Scott Durbin:]

It does. So as we talked to some of the restructuring and realignment activities in Q2 that occurred this was part of that. And it was our intend to grow the sales organization throughout 2018 to a total of about 56 or 57 reps. This particular opportunity in partnership with Erik and Aesthetic Management Partners offered us the opportunity to not have to build out and expand our footprint at our own cost and obviously gives us major advantages that Jim talked to which are a much expanded footprint across the United States as well as a bundling opportunity to make Viveve more competitive.

[Dennis Ding:]

And then in terms of U.S. pricing dynamics, do you mind giving some color on tips and systems ASPs?

[Scott Durbin:]

Sure. ASPs on systems in North America were fairly in line with our expectations for the quarter. There is some fluctuation -- minor fluctuation in ASPs quarter-to-quarter, depending on the level of demo units and KOL placements. But generally, they were in line with Q1 in line with our expectations. As we said in the prepared remarks, I think one of the great outcomes financially in Q2 do really to our outstanding practice management team that was put in place in March was a significant rise almost 2.5 times rise in North America on treatment tip ASPs. And we see that only continuing to gain momentum.

[Dennis Ding:]

And then last one from me. You mentioned that some of your sales reps will undergo cost training with the AMP product. Should we expect any level of disruption there in terms of days or the breath of selling or anything along those lines?

[Scott Durbin:]

Sure, go ahead Jim.

[James Atkinson:]

Yes, so the cross training is just that there are sales team understands the product offerings of Aesthetic Management Partners products. If you go on their website, they have multiple products. And during a situation where physician wants a bundling opportunity, our capital sales team and associate team will invite the Aesthetic Management Partners rep in to represent their products while Viveve System. And in that situation, if the physician is -- a new physician wanting two to three products, we will bundle them with the Viveve System and both parties will obviously sale their units to that physician.

[Operator:]

Our next question comes from Jon Block of Stifel. Please go ahead.

[Jon Block:]

Solid bounce back in gross margin and for your comments, Scott, it seems like that’s a good trend you used maybe over the next couple of quarters. I’m curious, is there another step function higher with the new manufacturer for boxes that I believe consumables that was scheduled to take place I think that was either late '18 or early 19 maybe you can discuss that?

[Scott Durbin:]

Sure, there we certainly anticipate in the future gross margin expansion. We are still working on the timing of our next technology iteration although we think it's relatively near-term, but that will have a impact overtime on expanding the gross margins in a positive way. So we’re not ready to talk about you know the launch of that next technology or duration, but overtime it will have a positive impact.

[Jon Block:]

Helpful and then just to pivot to the clinical side, the stage rolling that we're seeing associated with the VIVEVE II trial. Do you believe the FDA is going to require a similar stage path with LIBERATE U.S.? And then the second part of that question just to go back to the VIVEVE II, it sounded like, Scott, if you get to a 100, you can go to 250. There is not going to be another increment that 150 or 250, but maybe you can ahead and just validate that?

[Scott Durbin:]

So, I'll answer the latter part first. So we hope that we don't end up in a third stage, you would think that with you know 50 patients at one month follow-up and 50 patients at three month follow-up. Given the extensive animal both ex-vivo and in-vivo tissue studies that we did as part of the IDE approval process would be sufficient, and we're hoping it will, With that being said, you know will be subject to the agencies requirements as they review that data, so our hope is that we will get the clearance to go from 100 to 250 once that safety review has been completed. The question around whether FDA will require a similar path from a safety perspective for LIBERATE U.S. will really depend on when we get through the IDE process. Given that were likely to have a couple of rounds of questions after we submit the IDE, we may very well be beyond the safety review into these whereby we would not have to enroll in a staged traction. And if I had to guess, and I'm guessing I would guess that that's probably the case and how will end-up.

[Jon Block:]

Jim, maybe if you can discuss previously was there a particular product where you felt the pressure, where you were losing out on the bundle? What are you most excited about from and AMP bundling perspective in terms of how that levels are playing field from commercial?

[James Atkinson:]

In previous quarters, there were probably 10% maybe 12% of deals that we were presenting to a physician and one of the other companies they had multiple products would bundle for that physicians. And in some situations where there is say a GYN that wants to get into this space is just sort of getting one at onetime deal bundle two or three so the physician get into safe phase technology maybe here technology and then the women's intimate health area. So, we had lost 10% to 12% of our deals to that bundling and that's one of the reasons in our Q1 call. We said that we're going to go out and look at expanding the U.S. footprint without incurring cost obviously by adding their 20 reps, but also as I said if you get on the website that have multiple product offerings that takes away that competitive advantage of the competitors and now levels the playing field. So we’re very excited about the opportunity under Erik's leadership to get out and compete on a level playing field in the bundling area and then also with the most recent action with the FDA. Does that answer your question?

[Operator:]

Our next question comes from Difei Yang of Mizuho. Please go ahead.

[Difei Yang:]

So I know it’s still early, have you had opportunity get feedbacks in the field, that if from the physicians perspective they’re going to treat all of the esthetic devices for women’s health application similarly or they will obviously in this case, Viveve doesn’t have a warning letter it should stand out -- should be highly differentiated. Do you get some feel for your sales force at this time?

[Scott Durbin:]

As I said I think we’ve -- look we fielded questions given a little bit of publicity around the FDA actions. I think our customers both existing and potential new customers recognize that not only does Viveve have the gold standard technology in the space given that it is a single treatment. It has been proven safe and robust and randomized clinical trials. We think that this action levels the playing field from a marketing perspective, so Viveve has been viewed as the gold standard technology with the most clinical data both from a safety and efficacy perspective. But this levels the playing field are really from a marketing perspective, and as we’ve talked about before, we’ve had to be to use Jim's vernacular very center of the fairway with respect to our approach given that it is long been our intention and belief that ultimately the most successful companies in this space will have the labels. And this again just levels the playing field from a marketing perspective, and we think that's going to advantage us over the existing competition.

[Difei Yang:]

And then turning to Q3, historically for the esthetics industry the summer months has historically been a week quarter. Should we -- is that similar patterns here?

[Scott Durbin:]

So, Q3 as we’ve talked about on other conference calls tends to be the softest quarters of the year because of the seasonality of the summer. The reality is that most of Q3 happens in September and so, across all four quarters it will be the softest quarter of the year because of the seasonality. And just to reiterate typically what we see is Q4 is by far the largest quarter typically 35% to 40% of the annual revenue followed by Q2 and we just had a record second-quarter, followed by Q1 and then Q3.

[Difei Yang:]

And then finally, it seems like you’re ready to launch a next generation Viveve System by -- before year end. And could you talk a little bit about that launch? And what should we be expecting on product features?

[Scott Durbin:]

So, we’re really limited and we wanted to stay limited about what we’re saying about our next technology integration of our product and we’re not ready to talk about timing as I say. In what I said to John's question, we have been working on it. We don't want to talk about the timing. We do expect that it will have a significant impact on gross margins because of the reduction in cost of goods sold and that's really all we want to say about it at this time.

[Operator:]

Our next question comes from Anthony Vendetti of Maxim Group. Please go ahead. Our next question comes from Joshua Goltry of Maxim Group. Please go ahead.

[Joshua Goltry:]

A lot of my questions have already been answered already, so I’ll be relatively quick. I was wondering if you had any progress updates on the LIBERATE trials. How many patients are in that as well?

[Scott Durbin:]

Sure, I’d be happy to expand on that. So as we stated in the prepared remarks, we have an ITA submission into the Canadian ministry of health for LIBERATE international. We are expecting feedback on that very soon as we have trial sites identified, trained and ready to enroll patients. That study is intended to be 100 patients with six month follow-up as the primary efficacy endpoint and change in one hour pad weight. In LIBERATE U.S. it’s our intention very soon or in some time here in the third quarter to submit our IDE to FDA. And our hope is that we get cleared through a couple of rounds of questions and we are able to start the trial by the end of the year. that's currently designed as -- intended to be designed as 240 patients with 12 month follow-up on the one hour pad weight as the primary efficacy endpoint.

[Joshua Goltry:]

And I just wanted to clarify, are you still maintaining your revenue guidance of 22 million to 24 million for 2018?

[Scott Durbin:]

Yes, we are. We had put that out in our topline prerelease and we are maintaining and feel very strongly and confident in our 22 million to $24 million guidance for the year.

[Operator:]

Our next question comes from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead.

[Jeffrey Cohen:]

Firstly, I missed it but you are talking about the treatment tips for the quarter and manufacturing in -- was that backlog I heard. Can you walk through that commentary?

[Scott Durbin:]

Yes, so in Q1, if you recall during our call we placed a remarkable number of treatment of 5,400 but 1,900 of those were associated with and necessary for the success of launching our SUI procedure. Our current procedure takes two treatment tips and that's why we launched the BOGO program. So if you normalize that value and you end up in the 3,500 treatment tips that were actually sold for Q1. And our point here was in Q2, we sold and placed 2,750 with very few free of charge BOGO tips predominantly because of the implementation of our practice management program in the field. And thousand were backordered primarily due to the high volume number of tips that we placed in Q1. We are out of that back order situation and don't foresee any constraints going forward. And when you look at on a normalized basis so 3,500 really placed in Q1 3,625 placed in Q2.

[Jeffrey Cohen:]

And then lastly, I would add why don’t you kind of follow-up on one of the previous question, so have you head or have some of the folks in the field for Viveve heard some further commentary from any physicians or acquisitions or reps as far as the FDA actions particularly from offices that have other equipment out there now?

[Scott Durbin:]

We don’t want to comment on commentary that we've heard around existing physicians who may have other competitor systems. I'll just reiterate that we view what just happened is an extremely positive event for Viveve. Again, it's another differentiating factor and it has we've certainly got calls about it but our existing customers and new customers know we have the goal standards technology. They know that our technology is safe and been proving safe and effective in robust clinical trials and that's going to continue to advantage us going forward.

[Jeffrey Cohen:]

And then lastly just to review for us on timing on Viveve II as far as expected full enrollment if you don’t need another review and can be soaring right through that the 250?

[Scott Durbin:]

We can’t -- given the incredibly rapid enrollment we saw right out of the gate, we don’t think that this is going to safety stage is going to slow us down we will manage through it. We may have a one-month -- one to two month delay because of the safety review because there is time where were capped on enrollment and FDA has 30 days to review the safety data, but it won't be significant.

[Jeffrey Cohen:]

So two more quarters best case?

[Scott Durbin:]

I would say, and our intention is certainly to fully enroll that trial by the end of the year.

[Operator:]

Our next question comes from Suraj Kalia of Northland Securities.

[Suraj Kalia:]

So let me start up VIVEVE II, Scott. Can you tell us what all safety data was reviewed by the FDA? And was that initial safety review on all comers? I believe I heard the number 25 patients or 24 patients, was it all comers?

[Scott Durbin:]

I believe it was all comers and you know with, if you presume that the randomization was even in the next 25, we will give them 25 treated 25 sham. I believe it was all comers yes.

[Suraj Kalia:]

And your liberty to talk about what specific safety data was reviewed in the first cohort?

[Scott Durbin:]

Well, there is an independent safety monitor for the trial as is typical. and all adverse events in any clinical trial under an FDA or regulatory body’s purview, every adverse event is recorded and reviewed as part of the case report form. So it's all adverse events associated with that patient during that time.

[Suraj Kalia:]

So I presume the Dear Doc letter that just went out, the DSMB or whatever might -- must have looked at relative to the Dear Doc letter and compared everything and said the first quarter stage 1 is complete. Is that the safe assessment in my part?

[Scott Durbin:]

Yes correct.

[Suraj Kalia:]

For the second cohort, Scott, I heard three months follow-up. Would patients from the first cohort be followed up to three months? Or this is a separate cohort, maybe I…

[Scott Durbin:]

Yes, it’s a little confusing and let me clarify. So the first phase or stage was 25 patients at one month. FDA wants to see another 25 patients at one month and then they want to see the first 50 patients enrolled in total at the three month follow-up.

[Suraj Kalia:]

In terms of the Dear Doc letter Scott I know everyone has asked in terms of how you all are seeing the market dynamic change? Let me phrase it a little differently and see if I can get your perspective. Based on you guys are understanding what are the hurdles if you can elucidate for the audience at large whether for the six or seven players mentioned in the Dear Doc letter, but otherwise it’s a pretty fragmented market? What are the hurdles these other players would have to overcome now whether it’s in technology market issues, whether it’s in RCTs. if you can just kind of thread a needle through this -- all of this, and give us a perspective on how much first mover advantage you have or what kind of the head start you would have if others started tinkering with their systems to catch up to you guys?

[Scott Durbin:]

Look we believe we have a tremendous head start, if in terms of the pathway towards a label in the United States for any of these indications. As you know it took 18 to 20 months negotiating with FDA around the protocol for sexual function, not only because of the OB/GYN branch of CDRH is new general new to energy based devices and their safety profile, but also because sexual function had no prior guidance and we were -- our clinical and regulatory groups were pioneering the way for that path. So, clinically, we are leaps and bounds ahead of any of the competition and intend to remain so as we rapidly move towards these through these sexual function trial VIVEVE II and through what we believe will be quick enrollment and approval processes for SUI. On the safety side, Viveve went through a whole host of FDA required ex vivo and in vivo safety studies in animals, and anybody following our path I suspect would have to go through and prove the same safety outcomes, which took us probably close to nine months to get through both the ExVivo and InVivo. The letter itself is related to off label promotion, and as we -- as I alluded to previously for 18 months or since we launched commercially, our team has been competing against generally aesthetic companies who have bolted on a vaginal rejuvenation procedure to a platform they were already selling for the space, and generally making quite egregious off label claims in the field, which created an enormous amount of confusion in the marketplace and we had to stand by sort of sort through that and be the educators for doctors about what was really going on in the industry. And so, we welcomed the off label promotion letters fill it levels for playing field and proceeds companies in a position where they can no longer make claims of having labels when they do not.

[Suraj Kalia:]

And finally Scott the partnership with Aesthetic Management, are there any specific minimums moving forward that we should factor in queue consideration?

[Scott Durbin:]

Yes, we do have, I’ll call it soft minimums associated with our partnership of AMP. Obviously given Jim's comments we are extremely excited about this partnership in a hybrid model that allows us to expand the footprint bundle products to be more competitive without having to incur the operating expenses associated with building it ourselves. Due to the contractual relationship with AMP we can't really comment on either what the minimums are or any kind of transfer pricing.

[Operator:]

Our next question comes from Matthew Hewitt of Craig-Hallum Capital Group. Please go ahead.

[Matthew Hewitt:]

Just a couple of questions on the margins from me. First up obviously a nice rebound here in the second quarter almost 51% gross margin. I’m curious what impact, if any, the backlog as of the issues that you had on the supply side in Q2 had on gross margins? And what should we be thinking about from that perspective as you look at Q3 where those issues have been resolved?

[Scott Durbin:]

They certainly had somewhat of an impact because it is thousand treatment tips that couldn’t get recognized in Q2 and as I alluded to one of the highlights for Q2 for us was a substantial increase in ASPs and less margins on our treatment tips. So there was somewhat of an impact, but I think that look there are quarter-over-quarter fluctuations for a lot of reasons, mix between direct and OUS that affect top line gross margin. I think generally speaking, we are comfortable and I think I alluded to this in the answer for another question we are comfortable with this margin level going forward for the rest of the year.

[Matthew Hewitt:]

And then as we look out to next year and I know you haven’t spoken to that directly and I’m not asking you too here, but with the blended model, sales model and the potential for possibly new system. Would you anticipate gross margin staying flat? Or would we maybe see them coming a little bit depending upon some of the mix and things you just mentioned?

[Scott Durbin:]

Our expectation for next year is continued margin improvement and I think we alluded to that in the prepared remarks just because we insight into the level of transfer pricing with our partnership in AMP and further insight into cost to goods reductions in the future for a variety of reasons. So, it's our expectation that margins will fairly significantly improve next year.

[Operator:]

This concludes our question and answer session. The conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.