Ra Medical Systems, Inc.
Q2 2020 Earnings Call Transcript

Published: 12 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Ra Medical Systems Second Quarter 2020 Conference Call. As a reminder, this call is being recorded today, August 11, 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, there are forward-looking statements reflecting the beliefs and expectations of management as of August 11, 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 June 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 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?

[Jonathan 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. First, I'll say a few words in general about the continued COVID-19 pandemic. Our manufacturing facility located in Carlsbad, California, has been operational during the COVID-19 pandemic. We have continued to manufacture lasers and catheters without interruption, and our personnel are practicing social distancing, wearing mask and taking other safety precautions. Employee travel is limited to essential travel only, and many employees are working from home when feasible. We are not currently experiencing any shortages of supplies that would impact our ability to manufacture products, sufficient to supply our dermatology accounts or the limited number of U.S. vascular accounts. As a reminder, we are primarily supporting vascular accounts involved in or candidates to be involved in our atherectomy clinical study. 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 or treat its impact, among others. Despite the pandemic, we successfully raised additional capital during the second and third quarters through 2 public stock offerings and are grateful for investors who participated. We also received a loan through a government program, which may be forgiven if used for specified purposes. With these financings completed, we can now focus 100% of our attention on the operations of the business. Starting with the vascular business. As you will recall, we have multiple engineering efforts underway to address specific limitations in the current DABRA catheter design, which we believe will help us better penetrate the atherectomy market. Our clinical trial is also underway to obtain an FDA indication to perform atherectomy. Extending our catheter's shelf life is the #1 project for the engineering team. This is essential to all future products developed from the DABRA platform. The team has made good progress since our last update and has identified aspects of the catheter's fluid core and coating that are contributing to these shelf life limitations. We are pursuing mitigations on both fronts as we also continue additional work to identify other potential mitigations required to obtain sufficient shelf life. We remain confident that we will have a comprehensive plan in place by year-end to extend the shelf life of our innovative and differentiated catheter platform. We are also increasing the robustness of our catheter to make it more kink resistant when navigating tortuous anatomy. As discussed in the past, we expect to achieve this objective with the addition of a braided overjacket or a similar design. We currently expect to complete the necessary engineering work in the first half of 2021 and would subsequently pursue FDA clearance for this improved catheter. Another project moving forward is the development of a version of our DABRA catheter that is compatible with an interventional guidewire. Physicians are typically more comfortable performing a procedure while using a guidewire, which makes this an important component of our product portfolio. We are outsourcing the concept development to an experienced engineering firm and expect to have several guidewire-compatible catheter prototypes available for in vitro evaluation by early 2021. We anticipate completing the overall development project for this guidewire-compatible version of the DABRA catheter before the end of 2021. Lastly, we are in the feasibility stage of exploring the development of larger diameter catheters to target atherectomy procedures in larger vessels, which are more commonly found above the knee. Early results from this feasibility work are encouraging, and I look forward to providing further updates as we advance this project. Though we have reduced cost in parts of the organization, we have added substantial engineering resources this year through hiring skilled personnel and engaging experienced consultants. I am confident that we have the right team in place to achieve our engineering goals. To obtain an FDA atherectomy indication for the DABRA platform, we initiated a clinical trial in late 2019. This study is approved for up to 10 clinical sites and 100 subjects. We enrolled the first subject in February 2020. Since that time, the COVID-19 pandemic has substantially impacted our ability to activate new sites and enroll additional subjects. Many sites or potential sites are currently operating at reduced capacity, and some have even closed their operations from time to time. Many sites are also prioritizing patients with a more advanced disease state, and those patients may not fit the enrollment criteria for our trial. In addition, potential study subjects may voluntarily opt to postpone their procedures during the COVID pandemic. Currently, three sites have been cleared to enroll subjects in this study and 2 additional sites are in the final stages of being cleared to enroll. The 3 sites that are cleared are now operating under COVID-19 protocols and are expected to screen potential study participants moving forward. Due to the unpredictable impact of the COVID-19 pandemic on the study, we currently cannot estimate when enrollment will be completed. One final note relative to the vascular business. We do not anticipate significantly rebuilding our vascular sales team until most of our current engineering projects have been completed and we have a more definitive time line for obtaining FDA clearance for the atherectomy indication. As we progress our efforts, we will update you accordingly. 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. Unlike DABRA, this business does not have a disposables component, and we augment our capital equipment sales with recurring revenue derived from service and/or rental or lease agreements. As such, we are experiencing less of an impact on this business than would otherwise be expected. We continue to evaluate our overall strategy for the dermatology business and believe there is an opportunity to grow revenues and increase its cash contribution in the future, both in the U.S. and internationally. Changes to our dermatology business strategy as well as the timing of those potential changes will be influenced by the impact of the 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 COVID-19. 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. In May, we secured a $2 million loan through a commercial lender under the Paycheck Protection Program. Under the terms of the program, a portion or all the loan may be forgiven if the proceeds are used for forgivable purposes. We believe that we have used the proceeds for such purposes under the terms of the note. Also in May, we completed a public offering of common stock and warrants and received approximately $8.7 million in net proceeds. We reported cash and cash equivalents as of June 30, 2020, of $29.4 million. On August 3, 2020, we completed another public offering of common stock and warrants and received approximately $10.6 million in net proceeds. Turning now to Q2 financial results. Net revenue for the second 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 $2.2 million for the second quarter of 2019, which consisted of product sales of $1.3 million and service and other revenue of $0.9 million. Revenue from the vascular segment for the second quarter of 2020 was $0.1 million compared with $0.4 million for the prior year period. Revenue from the dermatology segment was $0.8 million for the second quarter of 2020 and $1.8 million for the prior year period. Gross profit margin for the second quarter of 2020 was negative 30% compared with a negative 27% for the second quarter of 2019. SG&A expenses for the second quarter of 2020 were $7.9 million compared with $13.8 million for the prior year period. SG&A expenses for the second quarter of 2020 and 2019 included stock-based compensation expense of $0.8 million and $6.4 million, respectively. SG&A expenses for the second quarter of 2020 included an increase of $2.0 million in accrued estimated costs related to the government investigations. R&D expenses for the second quarter of 2020 were $2.0 million compared with $1.0 million for the prior year period. R&D expenses in the second quarter of 2020 and 2019 included stock-based compensation expense of $0.1 million and $0.3 million, respectively. R&D expenses for the second quarter of 2020 included an increase of $0.7 million in personnel costs and consulting expenses compared with the second quarter of 2019 in order to better understand the inconsistencies in our DABRA catheter performance and expand our efforts on the next-generation of products. The GAAP net loss for the second quarter of 2020 was $10.1 million or $0.43 per share. This compares with a GAAP net loss for the prior year quarter of $15.1 million or $1.16 per share. Adjusted EBITDA for the second quarter of 2020 was negative $8.4 million compared with negative $7.8 million for the prior year period. A reconciliation table of GAAP net loss to non-GAAP EBITDA is included in today's press release. We used $12.8 million in cash to fund operating activities for the first half of 2020, which includes $1.4 million for legal expenses related to the securities litigation and government investigations. This compares with $15.7 million used for the first half of 2019 to fund operating activities. With that, I'd like to turn the call back over to Will.

[Jonathan McGuire:]

Thank you, Andrew. So in closing, I'm pleased with the progress we've made this quarter on our engineering efforts, and I am confident we have the right team in place to deliver quality products and product improvements in a consistent manner. We are 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?

[Operator:]

[Operator Instructions]. Your first question comes from the line of Adam Maeder with Piper Sandler.

[Andrew Stafford:]

This is actually Drew on for Adam. I appreciate the commentary on the product remediation side for the shelf life of the catheters. Maybe you could share a little bit more detail as far as the progress in the quarter. I think - if I remember correctly, last quarter you were working more on the diagnostics side. It sounds like you kind of feel like you found an issue and sort of pinned it down here. Maybe you could kind of give us an idea of what gives you confidence that you have the issue in mind of - you've been able to isolate it and replicate it and then your confidence in being able to fix it.

[Jonathan McGuire:]

Sure. Yes, thanks for the question. This is Will. I'll take that, and maybe I'll back up. What we've been looking at relative to some of the - to the shelf life issue is if you step back, we're looking at the design. We're looking at the materials. We're looking at the consistency of our manufacturing processes. And as we've done that, as we said in the prepared remarks, we've identified a few aspects

[Andrew Stafford:]

Okay. That's helpful. And then on the spending side, the spend was a little bit higher than we had bottled, especially on the SG&A side. Maybe you could kind of break out some of the components there. Is that primarily on the derm side with some of your sales efforts? I think you mentioned there's a chunk of litigation expense in there as well. And then what should we anticipate for cash burn through the rest of the year?

[Andrew Jackson:]

Yes. Good question, Drew. This is Andrew. So if you look at our cash used in operations for the first 6 months of this year that was $12.8 million, that contrasts with $15.7 million for the first 6 months of last year. So we have decreased our cash burn. If you remove the $1.4 million that was for litigation and the government investigations, it's $11.4 million for the 6 months of this year. So it's an average of about $5.7 million a quarter. So we have brought down our cash burn quite a bit. We have increased spending in the areas of quality and R&D. We've hired some very quality resources in both areas to mitigate some of these - the challenges that Will discussed, and we're not really guiding to cash spending ahead. But with the $29.4 million we had at the end of June and you add the $10.6 million from the raise that we just did, the net proceeds, that gives you - gives us $40 million. So that gives you an idea that we have a bit of cash runway ahead of us.

[Andrew Stafford:]

Okay. That's helpful. And last one for me here. As we start to kind of think about the environment post COVID, assuming you're able to get the manufacturing on the vascular side up and running, you should have a product priced at a nice discount to some of your competitors there. Have you had a chance to speak to any executives regarding their - hospital executives regarding their reception to that type of value proposition lately sort of especially as COVID has kind of led to some financial pressure at some institutions?

[Jonathan McGuire:]

This is Will. Yes, we've had a few conversations. Primarily, we are in the office-based labs, or the OBLs. And I think going forward, our primary target on the vascular side will be these OBLs, and they are - I'd say even pre-COVID, they are especially cost-conscious regarding the therapies that they use and that are used in their labs because the cost is basically coming right out of their pocket as they are either complete owners or partial owners in the business. And the feedback, I think, continues to be probably what it was over the past year or 2 is if we can deliver a product that's reliable, it's predictable and it's safe and has comparable outcomes to other atherectomy devices on the market that they will be very interested and given us a shot and giving us some of the business, especially if we can come in at an attractive price point because, again, it's a struggle every day for them to make sure that they're running an efficient and profitable business and we think we can help them with that.

[Operator:]

Your next question is from Anthony Vendetti with Maxim Group.

[Anthony Vendetti:]

I guess I just wanted to talk a little bit more about the catheters. I know it's at 2 months right now. Will, you mentioned that by the end of the year, you expect to have a better idea of how it's improving and you feel like that progress has been made. Can you talk about what you think the overjacket will add? Right now, I know it's at two months, but what would the overjacket add? And then any other mitigation efforts or any other improvements - engineering improvements that you think can get it up to potentially 12-month shelf life?

[Jonathan McGuire:]

Sure. Yes, this is Will. Anthony, thanks for the question. Yes, so on the shelf life, we've identified a couple of things related to the fluid core and to the inner coating that we are addressing. We think those will improve shelf life. There's a host of other things that we're looking at. I can't really articulate right now the impact that those will have, but we are confident that over time - probably our first goal, if you will, would be to get at least 6 months of shelf life that would allow us to start some commercialization activities at some point. And then at least domestically, our ultimate goal would be 12 months. And so far, we haven't seen anything that would prevent us from getting to 6 months and 12 months. I just don't have all of the testing in hand that would validate that right now. But so far, we feel good. We think we're on the right track. We expect to hit our shelf life goals. As far as the other catheter improvements and how they may play into this or just play into us getting a more desirable catheter, the overjacket is really a separate element or a separate effort from shelf life in that we need this overjacket - or really what we need is a more robust catheter that allows the physician to push it and torque it and to really deliver the catheter to more tortuous anatomy with a reduced risk of kinking or any other complications. And again, good progress on that. We think that project, we'd complete the engineering work in the first half of next year. And then let's assume that we understand shelf life, we've improved the robustness of the catheter. The last piece we need, Anthony, is the ability for the catheter to work over a guidewire. And as we said in our prepared remarks, we've kind of outsourced the concept development there to a very experienced engineering firm that has years of experience of developing catheters, interventional catheters that are guidewire-compatible. We expect that firm to provide us a couple of concepts that would be available for testing early in the year, and then we would make a decision to go forward with the design and we'd expect to have that design essentially complete from an engineering perspective by the end of 2021. So at the end of 2021, what we want to have is we want to have shelf life of minimum 6 months, moving towards a year. We want to have a more robust catheter that can be delivered in tortuous anatomy without a risk for kinking, and we want the catheter to be compatible over an interventional guidewire. And so that's why we've got each one of these projects moving forward in parallel.

[Anthony Vendetti:]

Okay. Great. Now that's a good update. Can you talk a little bit about the atherectomy trial? I know from numerous companies I've spoken with that are in various stages of clinical trials that one of the issues during COVID-19 is having the sites up, and then even if the site is up, being able to get enough patients enrolled to meet the goals. And some companies have ended up contracting with additional sites to speed up the enrollment. Can you talk a little bit about your approach for the atherectomy trial enrollment process?

[Jonathan McGuire:]

Yes. Yes. No, it's a good question, and I agree with your comments. As we said, unfortunately, we can't really predict the timing as far as completion of the trial right now. And as we've said a couple of times, just to reiterate, I think it's important that - the impact of COVID-19 has caused most of these sites - and again, we're primarily in the office-based labs. Most of these sites are operating or have been operating at a reduced capacity. And on top of that, with this reduced capacity, they are prioritizing cases or patients that are more severe, especially ones that are at risk of losing a limb, so some of your most advanced PAD cases. And in many cases, those may not be cases that would fall within our inclusion criteria. So we've got a lower volume. We've got more severe cases. Many of those will drop out because they're too severe for inclusion/exclusion criteria. And then also, the patients are starting to - or have been opting out. And anyone that has an elective procedure at least thinks twice before they go to a medical facility now and is there a risk of getting COVID-19. So those are kind of the restraints or constraints that we've had. On the positive side, we do have 3 sites that are now cleared to enroll, and we believe each one is now actively screening for study participants. To your point about adding sites, we have 2 additional sites that are now in the final stages of getting cleared so that they can start screening for patients. And we have - in addition to those 2 additional, then we have other sites that are earlier in the process. So we do want to continue adding sites as feasible to enroll patients. Also, I'd say on the positive side, we've heard from our sites that their volume is returning. So they're getting - they're not back to where they were pre-COVID-19, but patients are coming back. Their volume is ramping up. And I've also heard reports from other interventional companies, larger firms out there, who, again, are reporting that they're seeing procedural volumes starting to rebound. So we're hopeful that, that trend continues. Then internally, what else are we doing? One is we do have a handful of individuals out there who are clinical specialists for us on the vascular side. We have made their #1 priority now to support the clinical trial sites and to support enrollment or screening efforts at the site. We're in constant communication with each one of these sites regarding potential study participants and their screening activities. I think we mentioned in our last call that we amended the protocol and the sites can now look at Rutherford 5 patients. So one classification of more severe patients that we believe we can do safely and effectively. So now they can include those as they're screening. And then finally, we did make one, I think, significant personnel add in that we hired a new Director of Clinical Affairs, who came on board in the last 30 days. And that person along with some other members of senior staff here have been out visiting our trial sites and our potential trial sites. So we're going out in person and spending time with them and really just asking the question, "What else can we do to help you right now?" So hopefully that answers your question.

[Anthony Vendetti:]

Just quick on - Will, if you could just give - at this point, I know it's tough. But any update on what you think the time line could be to completely enroll? Or based on COVID-19, it's really tough to say at this point?

[Jonathan McGuire:]

Yes. We just can't say that right now. It might be a little bit irresponsible for me to give you a time line. What I'll say is in the last call, when we were assuming really no further impact or diminishing impact from COVID-19 by, say, June, we were expecting to complete enrollment in the first half of 2021. So I think you can push it out from there, but it's hard to say right now. Hopefully, over the next 30, 60 days as we see the 3 sites that are screening and the 2 additional sites that we hope to get up, we see what their performance is, certainly, by the next call, we could give a more definitive time line that I could support with some data. I understand the importance of it. We just can't really give you much of a time line with any confidence right now.

[Anthony Vendetti:]

Understood. And then just last question on the dermatology side. Obviously, a lot of dermatologists' offices were closed in the second quarter. Some have obviously begun to reopen. Just - can you talk a little bit about that side of the business, and as they start to reopen, the strategy to interface this?

[Jonathan McGuire:]

Yes. Well, maybe I'll make a few comments and Andrew can jump in. We have been looking at our strategy there, and I would agree with your comments that volumes were definitely down given the elective - number of elective procedures or the percentage of elective procedures you'd see on the derm business. Like everyone else, they are trying to get back to work now, and they would like to get back to work. So we know their procedures are happening again. If you just look at our business, which is driven - the new business driven by laser sales, we are seeing interest in new laser placements and other things like that. So we are hopeful that there will be a rebound. As far as our strategy, we are still working through that. We don't have anything we want to say publicly now about our strategy. But suffice to say, we still see an opportunity to grow the business, to grow the revenue and to grow the cash contribution from that business. And so we're still working through what that looks like. As far as when we would start executing a strategy and investing in the business, if that is our strategy, that would be as we're kind of on the back end of COVID-19 and we think that we've got that behind us. It probably would - we would probably not get much of a return right now given a lot of the restrictions and the lower case volumes, but we're certainly working through that. And again, hopefully, we'll have more to say about that as we get COVID-19 in the rearview mirror.

[Operator:]

And there are no further questions at this time. Mr. McGuire, I'll turn the call back over to you for closing remarks.

[Jonathan McGuire:]

Great. Thanks, again, for your questions today. I also want to thank everyone at Ra Medical for the continued hard work and dedication. I look forward to providing an update on our next quarterly call. So once again, thanks for joining us today, and we very much appreciate your support.

[Operator:]

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.