Ra Medical Systems, Inc. (SPH) Q4 2020 Earnings Conference Call November 12, 2020 4:30 PM ET

Company Participants

Jody Cain - Lippert/Heilshorn & Associates
Will McGuire - CEO
Andrew Jackson - CFO

Conference Call Participants

Adam Maeder - Piper Sandler
Anthony Vendetti - Maxim Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ra Medical Systems Third Quarter 2020 Conference Call. As a reminder, this call is being recorded November 12, 2020. [Operator Instructions].

I'd now like to turn the call over to Jody Cain. Please go ahead.

Jody Cain

This is Jody Cain with LHA. Thank you for participating in today's call. Joining me from Ra Medical are Will McGuire, Chief Executive Officer; and Andrew Jackson, Chief Financial Officer. Earlier today, Ra Medical issued a news release announcing financial results for the second quarter of 2020. If you've not received this news release or you'd like to be added to the company's e-mail distribution list, please contact LHA in New York at 212-838-3777 and speak with Carolyn Curran. You can also sign up for e-mail alerts and access the news release in the Investor Relations section of the Ra Medical website at ir.ramed.com.

During this call, management will be making a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent the statements made by management are not descriptions of historical facts regarding Ra Medical, these are forward-looking statements reflecting the beliefs and expectations of management as of November 12, 2020. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the company's control and could materially affect actual results. In particular, there is significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. This means results could change at any time, and the contemplated impact of COVID-19 on Ra Medical's operations, financial results and outlook is the best estimate based on information for today's discussion.

For details about these risks, please see the earnings release that accompanies this call and the company's SEC filings, including Ra Medical's annual report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 7, 2020, and quarterly report on Form 10-Q for the period ended September 30, 2020, to be filed with the SEC. Ra Medical expressly disclaims any intent or obligation to update forward-looking statements except as required by law.

Today's conference call remarks will include both GAAP and non-GAAP financial results. Ra Medical believes the non-GAAP financial results provide investors with useful supplemental information about the financial performance of the business, enable the comparison of financial results between periods for certain items that may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating the business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliation between GAAP and non-GAAP financial measures can be found at the end of the financial results news release that was issued earlier today.

With that, I'd like to turn the call over to Will McGuire. Will?

Will McGuire

Thanks Jody good afternoon everyone and thank you for joining us. I'm pleased to have this opportunity to share our progress and provide an update on our business. Before discussing our engineering and clinical efforts I'd like to talk about our quality initiatives and improvements. In the past 12 months we've made key senior hires and added resources to the quality department and I think the results are showing with a more robust and effective quality system. As an example following an internal audit late last year our quality group initiated a quality improvement plan comprised of 116 items that needed addressing within the quality management system with a focus on standard operating procedures, preventive maintenance, equipment status and calibrations and supplier quality among others.

This was a huge project and I'm proud to say we've completed 115 of the items with the final item expected to be completed before year end. I'm also pleased to announce that we have completed all actions related to the form 483 we received from the FDA last December and we submitted our final report to the agency in September.

Turning to our vascular business we've recently noticed variations in the shelf life of our current DABRA catheter during internal testing procedures. As a result in September 2020 we voluntarily paused commercial sales of DABRA catheters and we subsequently shared this information with the FDA. The FDA requested additional data to confirm the stability of the shelf life before we resume commercial shipments which we believe should be resolved in the first quarter of 2021.

As you will recall we have reduced our commercial team to a handful of clinical specialists and have been focusing our efforts on the clinical trial sites so the financial impact of our paused commercial shipments is not material to the company. It is important to note however that this pause does not impact our ability to supply catheters for use in the atherectomy indication clinical trial.

Now moving on to our engineering initiatives we have made fantastic progress with efforts to extend the shelf life of our future catheters as well as with our development efforts related to those catheters. First let's talk about shelf life. We have furthered our understanding of the issues that can cause our catheters to calibrate, I'm sorry to not calibrate over time and thus limit their shelf life. The issues involve one, the introduction of unwanted elements into the catheter's core water and two the degradation of the catheter's inner coating.

Our efforts to mitigate both issues include material, process and sterilization changes. Recent data obtained from accelerated aging testing for our next generation DABRA catheters were very encouraging with 100% of the in specification manufactured catheters from the two most recent lots passing both two-month real-time tests and even more challenging accelerated aging tests. Although our analysis is ongoing we believe this testing indicates that shelf life approaching six months if not longer is feasible with this design. We will continue our accelerated aging tests to develop more conclusive data and remain confident that we will have a comprehensive plan in place by year end to extend the shelf life to six months or longer.

In addition to the progress on extending shelf life our engineering efforts continue to advance on schedule and our next generation with our next generation DABRA catheter. As a reminder this catheter incorporates a braided over jacket to make the catheter more deliverable and kink resistant when navigating tortuous anatomy. The design will be evaluated later this month during a one day DABRA hands-on workshop with several vascular physicians who still expect to complete the engineering work for this catheter in the first half of 2021 and will subsequently submit it to the FDA for clearance.

We also made substantial progress during the third quarter on the design of the DABRA catheter that is compatible with the standard guidewire. We outsourced the concept development to an experienced engineering firm and previously expected to have several guidewire compatible catheter prototypes available for in-vitro evaluation by early 2021. I'm pleased to report we're ahead of schedule and have the prototypes in-house now. This design will also be evaluated later this month during the DABRA hands-on workshop.

I'm really excited about this event as it will allow us to incorporate input on the usability and performance features on our next generation catheters as we move forward with finalizing designs. We still expect to complete the overall development project for a guidewire compatible catheter before the end of 2021.

Our clinical trial to obtain an FDA atherectomy indication for the DABRA platform has made significant progress since our last quarterly call as well. This study is approved for up to 10 clinical sites and 100 subjects. We enrolled the first subject in February 2020 starting in March 2020 the COVID-19 pandemic substantially impacted our ability to activate new sites and enroll additional subjects.

Many clinical sites are still operating at reduced capacity and some potential studies subjects are opting to postpone their procedures during the pandemic. However, we are pleased to report that we have seen a significant increase in activity at our clinical sites over the past three months. Since our last investor call we have enrolled an additional 12 subjects for a total of 13 subjects enrolled to-date.

Currently five sites have been cleared to enroll subjects in this study and we are actively evaluating two additional sites. The five sites that are cleared are now operating under COVID-19 protocols and are expected to screen potential studies participants moving forward due to the unpredictable impact of the COVID-19 pandemic on the study we cannot estimate when enrollment will be completed.

Our dermatology business has also been impacted by COVID-19 as many customers delay the acquisition or purchase of capital equipment such as our Pharos laser. However, with the recent increase in activity at physician offices we recorded a 20% growth in product revenue versus Q2 which is predominantly dermatology. We continue to believe there is an opportunity to further grow revenues and increase the dermatology businesses, cash contribution in the future. Any changes to our dermatology business strategy as well as the timing of those potential changes will be influenced by our ability to grow the business during the ongoing COVID-19 pandemic.

While we invest in our key strategic initiatives we have continued with our spending reduction initiatives to adjust to the reduced level of procedures being performed at physician offices as well as the overall uncertainty going forward due to the COVID-19. As an example we reduced our DABRA sales force from 34 employees last year to 5 employees as of today. Also we are continuing to cooperate with the various government investigations and I believe the company has the appropriate strategy to navigate the legal issues facing us.

Now I will turn the call over to Andrew to discuss our financial results. Andrew?

Andrew Jackson

Thank you Will. Starting with Q3 financial results net revenue for the third quarter of 2020 was $0.9 million and consisted of product sales of $0.2 million and service and other revenue of $0.7 million. This compares with net revenue of $1.9 million for the third quarter of 2019 which consisted of product sales of $1.1 million and service and other revenue of $0.8 million. Revenue from the vascular segment for the third quarter of 2020 was $0.1 million compared with $0.2 million for the prior year period.

Revenue from the dermatology segment was $0.8 million for the third quarter of 2020 and $1.7 million for the prior year period. Our gross loss decreased to 504,000 in the third quarter of 2020 from 517,000 in the third quarter of 2019. SG&A expenses for the third quarter of 2020 were $4.9 million compared with $15.9 million for the prior year period.

SG&A expenses for the third quarter of 2020 and 2019 included stock-based compensation expense of $0.8 million and $6.6 million respectively. SG&A expenses for the third quarter of 2020 included an increase of $0.2 million in accrued estimated costs related to the government investigations for an aggregate accrual of $2.7 million to-date.

R&D expenses for the third quarter of 2020 were $2.3 million compared with $1.2 million for the prior year period. R&D expenses in the third quarter of 2020 and 2019 included stock based compensation expense of $0.1 million and $0.3 million respectively. R&D expenses for the third quarter of 2020 included an increase of $1.3 million in personnel, supplies and consulting expenses compared with a third quarter of 2019 due to our efforts to remedy the inconsistencies in our DABRA catheter performance and expand on our efforts on the next generation of products. The GAAP-net loss for the third quarter of 2020 was $7.8 million or $0.13 per share this compares to the GAAP-net loss for the prior year quarter of $17.4 million or $1.30 per share.

Adjusted EBITDA for the third quarter of 2020 was negative $6.2 million compared with negative $9.9 million for the prior year period. A reconciliation of GAAP net loss to non-GAAP EBITDA is included in today's press release. We used $18.9 million in cash to fund operating activities for the first nine months of 2020 which included $2.4 million for legal expenses related to the securities litigation and government investigations. This compares with $23.6 million used to fund operating activities for the first nine months of 2019 which includes $0.9 million for legal expenses related to the securities litigation and government investigations.

Finally a few words in general about the continued COVID-19 pandemic. Our manufacturing facility located in Carlsbad, California has been operational throughout the COVID-19 pandemic. We have continued to manufacture lasers and catheters without interruption and our personnel are practicing social distancing, wearing masks and taking other safety precautions. Employee travel is limited to essential travel only and many employees are working from home when feasible. We have experienced minor delays in receiving shipments of parts which has not had a material impact on the timing of our key engineering efforts or on our ability to support our atherectomy indication clinical trial, the full extent to which COVID-19 will further impact our business will depend on future developments which are highly uncertain and cannot be predicted. This includes new information that may emerge concerning the severity of COVID-19 and the timing of the actions to contain it, prevent it or treat it amongst others.

With that I'd like to turn the call back over to Will.

Will McGuire

Thank you Andrew. So in closing I'm pleased with the progress we've made this past quarter with our engineering efforts, accelerating enrollment in the clinical study and addressing the robustness of our quality system. We are fortunate to be operating in two large and growing markets and we are committed to our mission of saving lives and limbs.

With these comments I'd like to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Adam Maeder from Piper Sandler. Go ahead.

Adam Maeder

Hi good afternoon, Will and Andrew. Thanks for taking the questions. I wanted to start on the shelf life issue with the catheter. It sounds like you feel good about the progress that you've been making there. So I mean at this point are you solely focused on remedy and those two issues that you identified in your prepared remarks or are you still looking at other potential causes of shelf life variability and then maybe just talk about what if anything is needed from a design change standpoint and regulatory standpoint to get the product back on the market. That's question one and then I had a follow-up or two. Thanks.

Will McGuire

Okay. Great. Hey Adam this is Will. Thanks for the question. Yes, I would say but all of our efforts now are kind of centered on the two items that we outlined in prepared remarks. There is various things that we also referenced that may contribute to those two items but everything right now that we see and that we are working toward would be around the fluid core and then the inner coating of the catheter. I think if there was anything else we'd come across at this point it would be a minor contributor. So we feel like we've kind of got a fence around what we need to work on and we feel like we've made great progress not only in our understanding Adam but also in the actual mitigations that we're putting in place and the results that we're seeing so far.

Adam Maeder

Okay. That's good to hear. Will thanks for that and then I guess my next question is on the next gen catheter technology where you're adding the braided over jacket and I guess you're also working on adding compatibility with guidewires. So my question is what do you need from a clinical data perspective if anything to get those products to market and then will you incorporate that incremental technology into the atherectomy IDE study and then I had one more. Thanks.

Will McGuire

Yes. Good questions. I think at this point we look at it as kind of two projects that'll come together. One, as you mentioned is where we're working on a braided over jacket really it's just going to be a catheter that doesn't work with a guidewire but will be more robust would be better able to navigate tortuous anatomy and more kink resistant. At this point we don't see that being additional clinical data needed, so it would just be another regulatory filing of 10-K filing without clinical data and then the same for the, for the next version which would be basically taking that catheter and some of the improvements that we have added to that catheter and we would then make it compatible or we are making it compatible with a guidewire pretty much an RX rapid exchange type design there and again we think we will be able to do the necessary testing on a [indiscernible] just so to show that it has the same basic mechanism of action as well as a few other things and that would allow us to again submit to the FDA without collecting additional clinical data.

Now your question about would we basically roll either one of these into the clinical study that's a good question, I think it really depends on how fast the study enrolls the remainder of this year in the first half of next year and then also look at when we actually complete these other products and have them available for use.

I would say this if we have either one of those products available for use or approved by the FDA and we're still enrolling patients we would take a very close look at it maybe have a discussion with the agency about rolling a new product into the study and collecting some additional data in that study with a new product but at this point we don't have any formal plans and we have not discussed that with the agency.

Right now we're going down the path of using the current product and we expect to be able to enroll the trial and enroll it successfully with the current product and then the atherectomy indication that we received we would think we could leverage that and have that for the future products but again all future discussions with the FDA but that's our working assumption now is that we don't necessarily have to include those in the clinical trial to get an atherectomy indication on those products. Once we get it on the first product. Hope that helps.

Adam Maeder

That's very helpful. Thanks so much for that and if I can just squeeze in one more on the atherectomy IDE study, it looks like on clinicaltrials.gov it has a January 2022 primary completion date. So is that a good bogey for the street to measure you against obviously we're seeing COVID-19 case counts tick up here that's a challenge for any clinical trial regardless of industry in terms of medical devices. So just trying to, if you can give any thoughts and I realized it's challenging but any thoughts around trial timelines there that would be much appreciated. Thanks so much.

Will McGuire

Yes. It's not something that we've given in the past but when we put a date on clinicaltrials.gov we probably assumed somewhat of a conservative enrollment rate without potentially future lockdowns due to COVID or anything like that so I think that's a probably a fair date or a conservative date to look at but again any date like that or any estimate that we were to give would have a layers of assumptions in there about COVID that we can't predict. So we're hesitant to really put out a prediction on the trial at this point.

Adam Maeder

Okay. That's totally fair. Thanks so much for taking the questions. Appreciate it.

Will McGuire

Yes. Thank you.

Operator

Our next question is from Anthony Vendetti from Maxim Group. Go ahead.

Anthony Vendetti

Sure. Just on the IDE trial just a little bit more you said you enrolled 12 patients at five sites. How many physicians were involved for those 12 patients and you said you're looking for two more sites. What's sort of the timeline for that?

Will McGuire

Yes. So I think if you look at the total enrollment to date of the five sites that we have activated I believe four sites have actually enrolled subjects to-date. The next two sites I don't remember the exact timing but they're both kind of past the initial discussions now and we're moving down the path of getting the appropriate IRB approvals and contracts and other things in place.

So we would be hopeful. I don't have the exact timing but I would be hopeful in the next 90 days that perhaps both of them would potentially be activated but these things with the IRB and with some sometimes with the contract negotiations it can take much longer than you would think but we're making good progress with both of those sites and there are other sites that I would classify as being much earlier in the funnel and not advanced. So we didn't think worth mentioning those until they get further down the road.

Anthony Vendetti

Okay. And then just switching gears to the derm side of the business most of the aesthetic companies that I follow have said that the dermatology offices here in the U.S. have mostly reopened about 90% - 95% reopened and treating patients. Can you talk about your particular derm business and then just sort of to break out U.S. versus versus o-U.S. and what you're seeing between those two.

Will McGuire

Sure. Maybe I'll make a couple of general comments and then turn it over to Andrew. We have a relatively small team out there, I think we're three individuals on our derm team now and I think I would agree the feedback we're getting is similar to what you said that we're seeing the derm offices back up and running and doing procedures based upon who you talk to whether it's the derm area or even the vascular area you're hearing numbers between 70% and 90% of the volume of what was happening pre-COVID so the volumes are returning as far as procedures and then for us since we don't have a pay-per-click model on the derm side, we're getting derm revenue based upon laser placements whether it's sales or rentals. Sometimes it takes a little more time for deals to work themselves through the funnel as the offices get back up and running but I do know we're back negotiating again. We have laser sales in the funnel but it's not like a pay-per-click model where we would see instant revenue as soon as the offices are back up and running. Andrew?

Andrew Jackson

Yes. Thank you Will. So hey Anthony thanks for the question. So our product revenue was up 20% from Q2 to Q3 predominantly dermatology. So we have seen an increase in activity there. It's predominantly U.S. we do have distributors o-U.S. but that activity has been lighter lately but we definitely have engagement there and plan to ramp that up in the future.

Anthony Vendetti

Okay. Great. And then it looks like this morning the reverse split was approved. There is a range. Can you just give a little more details about that and the expected timing of it?

Andrew Jackson

Sure. We expect the timing to be fairly shortly. While the board hasn't approved a range yet we're expecting the board to approve the range at the lower end of that and that should be happening shortly.

Anthony Vendetti

Okay. Thank you. I'll hop back in the queue.

Andrew Jackson

Thanks Anthony.

Operator

This concludes the question-and-answer session. I would now like to turn the conference back to Will McGuire for closing remarks.

Will McGuire

Thanks again to the team at Ra Medical for their continued work and dedication and thank you to all of our investors for your continued support. We look forward to speaking with you again in March. Have a great afternoon.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.