Ra Medical Systems, Inc. (RMED) Q4 2019 Earnings Conference Call March 10, 2020 4:30 PM ET
Jody Cain – LHA Investor Relations
Andrew Jackson – Interim Chief Executive Officer and Chief Financial Officer
Conference Call Participants
Anthony Vendetti – Maxim Group
Drew Hoey – Piper Sandler
Craig Bijou – Cantor Fitzgerald
Ladies and gentlemen, thank you for standing by. Welcome to the Ra Medical Systems Fourth Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. Following the management’s prepared remarks, we will hold a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded today, March 10, 2020.
I’d now like to turn the call over to Jody Cain. Please go ahead.
This is Jody Cain with LHA. Thank you for participating in today’s call. Joining me from Ra Medical is Andrew Jackson, Chief Financial Officer and Interim Chief Executive Officer.
Earlier today, Ra Medical issued a news release announcing financial results for the 2019 fourth quarter and full year. If you have not received this news release or you would like to be added to the Company’s e-mail distribution list, please contact LHA in Los Angeles at 310-691-7100 and speak with Kasha Chen. The news release is also available on the Investor Relations section of the Ra Medical’s website.
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 that statements made by management are not descriptions of historical facts regarding Ra Medical, they are forward-looking statements reflecting the current beliefs and expectations of management as of March 10, 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. For details about these risks, please see the earnings news release that accompanied 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 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 its business, enables a comparison of financial results between periods, or 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 the informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP financial measures can be found at the end of the financial results news release that was issued earlier today.
Now, I’d like to turn the call over to Andrew Jackson. Andrew?
Thanks, Jody. Good afternoon, everyone and thank you for joining us. 2019 was the year of transformation for Ra Medical, and I’ll begin this call by recapping some of the highlights and sharing our progress. As reported, we were experiencing inconsistencies with the DABRA catheter performance and have been taking corrective measures through data collected from the field as well as from our internal performance testing, we observed that while catheters can perform satisfactory up to one year, catheters that were more than two months from sterilization had a significantly higher rate of non-calibration than those within two months from sterilization.
As a result in the third quarter, we initiated a voluntary recall of our catheters labeled with a 12-month shelf life to replacement with catheters labeled with a two-month shelf life. We estimated the warranty costs associated with the recall to be approximately $200,000. We are replacing catheters at physician sites to match the average monthly usage and expect the final costs to be within our estimates. We are encouraged by the results as we have seen a significant decrease in the rate of non-calibrations following this voluntary recall.
In addition, in the third quarter of 2019, we implemented certain operational efficiency and cost savings initiatives intended to better align our resources with our business strategy, reduce our operating expenses, and manage our cash flows. These cost efficiency initiatives include its targeted workforce reductions within our sales and marketing teams. More specifically, we reduced the size of our DABRA sales force from 34 employees as of June 30, 2019 down to five clinical specialists as of December 31, 2019.
Given these developments, we have refocused our business strategy on continuing to manufacture catheters to service our core accounts while we complete initiatives that are keys enabling us to ultimately re-launch DABRA to a broader market. Key components of our DABRA re-launch strategy include engineering activities to provide a longer shelf life for the catheter, upgraded overjacket designed to reduce kinking and a rapid exchange platform designed to allow physicians to track DABRA over guidewire. These product design changes are driven in large part by feedback from physicians, who are strong supporters of our technology and have provided inputs on improvements to help us gain widespread adoption in the market.
Another key component of our commercial strategy is obtaining FDA approval for the atherectomy indication. As you may recall, we received CE mark for atherectomy in Europe in 2016 and the FDA clearance for crossing chronic total occlusions in 2017. We have initiated a pivotal atherectomy clinical trial that will enroll between 80 patients and 100 patients at up to 10 clinical sites. Patients will be followed for six months post procedure; primary outcome measures for the trial include acute technical success and safety.
The trial’s primary efficacy endpoint is the mean reduction in percent diameter stenosis in each patient’s primary lesion as measured by angiography immediately following treatment with DABRA, before any adjunctive treatments. The trial’s primary safety endpoints if the incidence of 30-day major adverse events, secondary endpoints include the incidence of target lesion revascularization at the six-month follow-up and the incidence of achieving a residual diameter percent stenosis of less than or equal to 50% in the primary lesion on the day of treatment prior to any adjunctive therapy. In late February, we were pleased to announce the enrollments of the first subject in the trial when these initiatives progress towards completion; we intend to begin expanding our sales force in preparation for a commercial re-launch.
As an update on our dermatology business, in 2019, we increased focus on our product offering in this segment, which utilizes the same excimer laser platform as DABRA, we launched Pharos optimize, the next generation of our Pharos excimer laser system. Pharos optimize is designed to enhance physician and patient experience with faster treatments and extended peak performance.
Turning now to the previously disclosed audit committee, internal investigation related to whistle-blower complaints by former employee. Late last year, we announced the findings and remedial actions we took. These included the separation of certain former executives and employees, the hiring of qualified personnel, implementing additional and enhanced policies and training including with respect to our code of business ethics and conduct, strengthening our quality and regulatory systems, bolstering documentation requirements for third-party consulting, advisory and training agreements and adopting certain enhanced controls related to the matters investigated by the audit committee.
As a result of these remediation activities and controls in place as of December 31, 2019, our management team concluded that we have remediated the previously disclosed material weaknesses in the internal controls. We’ve voluntarily contacted the Securities and Exchange Commission Enforcement Division, and as previously announced the Department of Justice and the SEC are conducting investigations related to the company. We are cooperating with these investigations and intend to continue to do so.
We’ve also strengthened our management team with key hires. In June, 2019, Al Memmolo joined us as the Vice President of Clinical, Quality and Regulatory. Al has tremendous experience implementing FDA and ISO quality systems obtaining 510(k) clearances and running clinical studies. Al, previously served for seven years as Chief Operating Officer of Dallen Medical, which is a company focused on manufacturing sternal closure and orthopedic devices. Before that, he held several senior positions in medical device companies with responsibilities for Clinical, Quality and Regulatory Affairs. To date, Al has made significant improvements in our quality control environment and he’s overseeing our atherectomy study.
In January, 2020, we welcomed Dr. Chris Folk to Ra Medical as Vice President of Engineering, with more than 20 years of engineering experience primarily in medtech; Chris has led the design, development and engineering of novel medical devices with highly-specific design requirements leading to commercial successes. He has managed teams responsible for more than 20 device development programs at firms ranging from startups to multinationals. Notably, Chris has significant experience with catheters from his years at Covidien Neurovascular/ev3, where he led the commercial launch of three 510(k) catheters. Chris and his team are focused on improving the design and manufacturing of the DABRA catheter to improve its performance consistency and extended shelf life, as well as developing our next generation devices. In addition to these key hires, our search for a permanent CEO is progressing and our Board is working to ensure that at this critical juncture, we hire the right candidates with significant industry knowledge, commercialization experience and operational expertise.
Now, I’ll review our financial results for the fourth quarter of 2019 followed by the full-year. Net revenue for the fourth quarter of 2019 was $1.4 million, and consisted of product sales of $0.6 million and service and other revenue of $0.8 million. This compares with net revenue of $2.0 million for the fourth quarter of 2018, which consisted of product sales of $1.2 million and service and other revenue of $0.8 million.
Revenue from the vascular segment for the fourth quarter of 2019 was $0.2 million, compared with $0.6 million for the prior year period. Revenue from the dermatology segment was $1.2 million, compared with $1.4 million for the prior year period. Gross profit margin for the fourth quarter of 2019 was negative 26% compared with positive 40% for the fourth quarter of 2018.
SG&A expenses for the fourth quarter of 2019 were $8.6 million compared with $14.8 million for the prior year period. SG&A expenses for the fourth quarter of 2019 and 2018 included stock-based compensation of $1.1 million and $6.6 million respectively. SG&A expenses for the fourth quarter of 2019 included an increase of $1.3 million in legal expense compared with the fourth quarter of 2018 primarily due to the audit committee investigation and securities litigation.
R&D expenses in the fourth quarter of 2019 were $0.8 million compared with $1.2 million for the prior year period. R&D expenses in the fourth quarter of 2019 and 2018 included stock-based compensation of $0.1 million and $1.0 million respectively. R&D expenses for the fourth quarter of 2019 included an increase of $0.4 million in personnel costs, supplies and consulting expenses compared with the fourth quarter of 2018 to understand the inconsistencies in our DABRA catheter performance and efforts on the next generation of products.
The GAAP net loss attributable to common stock holders for the fourth quarter of 2019 was $9.7 million or $0.72 per share. This compares with a GAAP net loss for the prior year quarter of $14.9 million or $1.18 per share.
Adjusted EBITDA for the fourth quarter of 2019 was negative $8.0 million compared with negative $7.0 million for the prior year period. The reconciliation table of GAAP net loss to non-GAAP EBITDA is included in today’s press release.
Turning to our full-year financial results. Net revenue for 2019 was $7.2 million, a 15% increase from $6.3 million for 2018. Product sales for 2019 were $3.9 million, up 22% from $3.2 million in 2018. And service and other revenue was $3.3 million up 8% from $3.1 million for the prior year.
Revenue from the vascular segment was $1.3 million in 2019, compared to $1.6 million in 2018. revenue from the dermatology segment was $5.9 million for 2019 compared with $4.7 million in 2018. gross profit margin for 2019 was negative 23% compared with positive 33% for 2018.
SG&A expenses were $51.5 million in 2019 compared with $30.4 million in 2018. SG&A expenses in 2019 and 2018 included stock-based compensation of $20.4 million and $11.9 million respectively. SG&A expenses in 2019 included an increase of $4.8 million in legal expense compared with 2018 primarily due to the audit committee investigation and securities litigation.
R&D expenses for 2019 were $4.5 million versus $2.8 million for 2018. R&D expenses for 2019 and 2018 included stock-based compensation of $1.5 million and $2.0 million respectively. R&D expenses in 2019 included an increase of $1.6 million in personnel costs, supplies and consulting expenses compared with 2018 to understand the inconsistencies in our DABRA catheter performance and efforts on the next generation of products.
GAAP net loss attributable to common stockholders for 2019 was $57.0 million, or $4.33 per share, compared to the GAAP net loss of $30.8 million, or $3.34 per share for 2018. adjusted EBITDA for 2019 was negative $32.4 million; compared with negative $15.8 million for 2018.
We reported cash, cash equivalents and short-term investments as of December 31, 2019 of $30.6 million. We used $33.2 million in cash to fund operating activities for 2019. We expect our revenues and gross margin to be negatively impacted in the short-term by our reduced sales force and as we continue efforts to remedy the inconsistencies in our DABRA catheter performance.
In closing, we have strengthened our management team with highly qualified and experienced professionals. We are taking actions to improve the design of the DABRA catheter and re-launch to a broader customer base while we focus on servicing our core accounts and we are conducting a pivotal clinical trial to evaluate the safety and effectiveness of the DABRA excimer laser system for use as an atherectomy device for the treatment of peripheral artery disease.
For these reasons, I’m excited about the opportunity for our DABRA system and its competitive advantages for peripheral artery disease in a large and growing market. Our longer-term plans include pursuing additional indications for DABRA, including coronary artery disease and potentially other vascular-related indications. We are focused on our mission of saving lives and limbs. We believe our engineering and clinical efforts this year are key initiatives that will pave the way toward re-launching DABRA to a broader market and building long-term shareholder value.
With these comments, I’d like to open up the call for questions. Operator?
[Operator Instructions] And your first question will come from Anthony Vendetti with Maxim group. Please proceed with your question.
Thank you. Good afternoon.
Hi, Andrew. I just wanted to dive a little deeper into the catheter. So, I understand that the 12-month ones that you put out there, if they stayed out there, they had a – I guess a higher incidence of being at a calibration and then when you replaced them with the two-month ones, they were significantly better. Is there anything that needs to be done additionally on the manufacturing side to increase the calibration accuracy or does this now solve the problem between the enhancements and improvements you made on the manufacturing side plus now labeling them as two-month catheters? Does this completely solve the problem or go a long way towards doing that?
So, it doesn’t completely solve the problem, Anthony. What we found is that the time from sterilization was a major factor in the non-calibrations. So, the catheters were calibrating well up to the 60-day mark and after that, the rates of non-calibration significantly increased. So, by recalling those catheters and replacing them with catheters with a two-month shelf life, what we noticed is that as these fresh catheters were getting used, the rates of calibration were very high. Now, what our engineering team is doing is evaluating how they can increase the shelf life by getting the calibrations to be consistent for up to a year or longer as they are right now with a two-month shelf life.
Okay, that’s helpful. And then I know you’ve been conducting a permanent CEO search. Can you give an update as to where you and the board is with regards to selecting a candidate, have you narrowed it down? How many are still being evaluated at this point?
Yes. The search is progressing. The board is really vetting candidates that have a commercialization and operational background. And at this stage, I just – I just have to leave it at that. There’s not much more I can say at this stage.
Okay. And then just lastly, on the sales force obviously, significantly reduced these sales at 34, you’re now down to five clinical specialists. now that you have catheters that are highly stable and calibration that can last for two months. Is there a plan to start slowly adding some sales force or right now based on your pipeline and what these five clinical specialists, can you meet the demand out there the way you’re currently structured?
So, currently as we structured, we’re serving our core accounts and we can absolutely meet demand, our approach, we’ve got the four-pronged approach, improving the shelf life, adding the overjacket, coming up with a rapid exchange so that they can track DABRA over the wire and completing the atherectomy study. So, we get that indication for use. Once we complete those, we’ll be able to re-commercialize and expand our sales force until we get fined for that, we’re going to probably maintain, a trim down vascular sales force.
Okay. And then just lastly on the dermatology side that the Pharos Optimize, the new version of your dermatology product, so you launched it at the Annual Derm Conference, the Maui Derm conference. Is that available for sale now? Any difference in terms of the pricing? Can you tell me a little more about that?
It is available for sale. We’ve had some very positive responses with that product. It has a faster treatment times and extended peak performance and we’re not able to speak to the sales price or margins at this stage.
Okay, great. All right, I’ll hop back in the queue. Thank you.
Your next question will come from Matt O’Brien from Piper Sandler. Please proceed with your question.
Hi, good afternoon. This is drew on for Matt. Thank you for taking the questions. I just wanted to follow-up a little bit on the first question. I mean it sounds like there’s still a little bit of room for improvement as it relates to the shelf life. But I mean maybe, you could provide any – a little bit more incremental detail on some of the improvements you’ve made over the last couple of months. I mean, have you had any success in maybe, small lots extending that shelf life on the catheter that you could potentially begin to scale in the coming months? Or is it still kind of in the engineering stage at this point and then if that’s not the case, anything that gives you confidence that you will be able to do that?
It is still in the engineering stage. However, we’ve made significant progress. the root cause analysis is progressing along under Chris Folk. We’re very pleased with the efforts. There’s a number of solutions potentially that are still being worked on and we just extend – we plan to extend the shelf life from the two months to the year as we can validate some of these theories that we are working on.
Okay. Got it. And then on the atherectomy study, I believe it started last month. Maybe, you could help us frame up expectations there. Have you had success bringing additional centers on since you kicked it off? That’s one. I guess two, what should we view as a positive result in relation to your primary endpoint? And then I guess three, are you able to supply enough product to set aside the enrollment in the near term there? Thank you.
So, yes, we are able to supply enough product. We’re happy to enroll the first patient at the end of February and we have an enrollment to add 80 to 100 patients over five to 10 sites. We are on track to do that. And I hope that answers your question.
Very helpful. Thank you.
Your next question is from Craig Bijou with Cantor Fitzgerald. Please proceed with your question.
Good afternoon. Thanks for taking the question. I wanted to start maybe as a follow-up to the question on the DABRA re-launch strategy. So, Andrew, there’s a lot of different pieces that have to come into place to – for you guys to really re-launch. So, wanted to know, is there, I guess a little bit more color on the timing of each of those pieces. and then is there a way, and I know you said that the sales force will build after you have everything in place, but is it a gradual or incremental when you get one or two of the pieces in place, or are you really not going to push forward with a sales force build until everything is in place?
Yes. Good question. I wouldn’t say that we’re going to wait for everything to be in place before we build. We would build measurably as we get positive signs. These efforts may require a 510(k) approval. As we get positive signals that we progressing toward that, we may start to add measurably, but it’s very hard for us at this stage to attach a timeline to these engineering projects.
Got it. That’s helpful. And just let’s say, on the FDA trial for atherectomy, just the ultimate timing there. I mean, when should we expect you having – you getting that label or what – or I guess what is your best guess?
Yes. it’s really dependent on the speed, at which the sites can enroll patients. We have inclusion and exclusion criteria. We were enrolling 80 to 100 patients with a six-month follow-up. So, just however long it takes for that process to complete.
Last one for me on derm. The number – the revenue number came in a little bit later than what you guys had done in the previous quarters. So, just wanted to see you – what, if anything, if there were any headwinds in the quarter, if it was possibly a bit of a delay in purchasing ahead of the new launch, just any color there would be helpful.
Yes. Our derm business has traditionally been lumpy. We were excited that our revenue was $1 million up from the prior year in derm. I hope that answered the question.
Got it. Thanks. Thanks for taking questions.
At this time, there are no further questions in queue, and I would like to turn the call back over to Andrew Jackson for any closing remarks at this time.
Terrific. Well, thank you all for your questions. I trust that conveyed our excitement about the future prospects for Ra Medical and our strategy to re-launch DABRA. We look forward to providing an update on our next quarterly call in may. So once again, thank you for joining us today. We very much appreciate your support.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.