Filing Overview
The provided filing is Ra Medical Systems, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019, not Catheter Precision, Inc.’s 2019 Q1 filing. The company develops and commercializes DABRA excimer laser systems and catheters for vascular applications and Pharos lasers for dermatological conditions. The filing was delayed because of an Audit Committee investigation and a Department of Justice investigation.
Financial Results and Position
| Metric | Three months ended Sept. 30, 2019 | Three months ended Sept. 30, 2018 | Nine months ended Sept. 30, 2019 | Nine months ended Sept. 30, 2018 |
|---|---|---|---|---|
| Net revenue | $1.9 million | $2.1 million | $5.8 million | $4.3 million |
| Gross profit (loss) | $(0.5) million | $0.8 million | $(1.3) million | $1.3 million |
| Operating loss | $(17.6) million | $(4.8) million | $(47.9) million | $(15.9) million |
| Net loss | $(17.4) million | $(4.8) million | $(47.2) million | $(15.9) million |
| Net loss per share | $(1.30) | $(0.59) | $(3.63) | $(1.97) |
| Adjusted EBITDA | $(9.9) million | $(3.1) million | $(24.4) million | $(8.8) million |
Gross margin was approximately negative 27% in the third quarter and negative 22% for the first nine months, compared with approximately 38% and 30% in the comparable 2018 periods. SG&A expense increased to $15.9 million in the quarter and $42.9 million year to date, driven primarily by stock-based compensation, legal costs, personnel, public-company expenses, and investigation-related costs. R&D expense was $1.2 million in the quarter and $3.7 million year to date.
Cash and cash equivalents were $14.5 million at September 30, 2019, supplemented by $26.0 million of short-term investments, for total immediately available funds of approximately $40.5 million. Current liabilities were $8.0 million and total liabilities were $12.3 million. Equipment financing totaled approximately $0.8 million, while operating lease liabilities totaled $3.0 million. Stockholders’ equity was $41.7 million and accumulated deficit was $107.4 million.
For the nine months, operating cash use was $23.6 million, investing cash use was $26.0 million, and financing cash use was $0.2 million. The company purchased $36.5 million of available-for-sale securities and received $10.7 million from maturities. Management stated that existing cash, cash equivalents, and short-term investments should fund operations for at least the next 12 months, but additional financing may be required if cost reductions or revenue improvements are insufficient.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 8% year over year, primarily because vascular revenue fell 71% to $0.2 million as DABRA catheter performance issues reduced catheter sales. Nine-month revenue increased 36%, primarily from higher dermatology revenue.
- Product and service costs increased substantially, producing a quarterly gross loss and a nine-month gross loss. The company recorded recall-related warranty expense of approximately $26,000 in the quarter and $0.2 million year to date.
- Operating loss widened by $12.8 million in the quarter and $32.0 million year to date. Stock-based compensation expense was $7.3 million in the quarter and $22.2 million year to date.
- Cash and cash equivalents declined from $64.3 million at December 31, 2018, although short-term investments of $26.0 million were added during 2019.
- The company reduced its DABRA sales force from 34 employees at June 30, 2019 to six employees by November 11, 2019, focusing on priority accounts and product remediation.
Outlook, Risks, and Unusual Items
- In September 2019, the company initiated a voluntary recall of DABRA single-use catheters and relabeled their shelf life from 12 months to two months after observing higher non-calibration rates in catheters more than two months from sterilization.
- The Audit Committee found frequent catheter calibration failures, occasional overheating, delayed Medical Device Reports, inadequately documented product recalls, concerns regarding approximately $300,000 of physician payments, potential off-label atherectomy promotion, and deficiencies in escalation of compliance complaints.
- Management identified material weaknesses in the control environment and information-and-communication controls. Remediation includes personnel changes, hiring a quality and regulatory executive, enhanced policies and training, stronger quality systems, and improved documentation and oversight.
- The DOJ issued a Civil Investigative Demand concerning possible False Claims Act, 510(k), off-label promotion, and Anti-Kickback Statute issues. The SEC also opened an investigation, and the company later disclosed a DOJ criminal investigation whose target status was unclear. The company stated that it could not estimate potential losses.
- The company faces a putative securities class action, a shareholder derivative action, and litigation involving Strata Skin Sciences and related parties. Potential losses from the securities and governmental matters were not estimable.
- DABRA’s FDA clearance does not cover an atherectomy indication. An IDE for an expanded indication was approved in July 2019, but enrollment was delayed until the first quarter of 2020 because of the catheter recall.
- The company expects continued losses and negative operating cash flow in the near term. It has no stated profitability guidance or quantified revenue guidance in the filing.
- The NYSE issued a deficiency notice related to untimely periodic filings. The company disclosed risks to continued listing and reported market capitalization of approximately $19.6 million as of November 20, 2019.
Investor Verification Priorities
- Confirm the issuer and reporting period: the supplied document is Ra Medical Systems’ Q3 2019 Form 10-Q, not Catheter Precision’s 2019 Q1 filing.
- Verify whether the two-month catheter shelf-life change resolved calibration and overheating issues and whether additional recalls, warranty costs, or regulatory actions followed.
- Monitor the DOJ civil and criminal investigations, the SEC investigation, securities litigation, and any related settlements, penalties, or financial contingencies.
- Assess whether the company’s $40.5 million of cash and short-term investments is sufficient given operating cash burn, legal costs, product remediation, and reduced DABRA sales.
- Evaluate remediation of the material weaknesses and whether subsequent filings were timely and reliable.
- Track NYSE listing compliance, future capital raises, potential dilution, and the company’s ability to restore revenue growth without materially increasing expenses.