Business Context and Reporting Period
The submitted filing is Ra Medical Systems, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 14, 2019. The request metadata identifies Catheter Precision, Inc. and “2018 Q4,” which does not match the filing entity or reporting period.
Ra Medical is a commercial-stage medical device company with two segments: vascular products, principally the DABRA excimer laser and single-use catheter system, and dermatology products, principally the Pharos excimer laser. DABRA received U.S. 510(k) clearance in May 2017 and completed its initial 12-month commercial launch in June 2018. As of December 31, 2018, 53 DABRA lasers were at customer sites under signed usage agreements.
Financial Performance and Liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $6.257 million | $5.870 million | +$0.387 million |
| Gross profit | $2.051 million | $1.705 million | +$0.346 million |
| Gross margin | 32.8% | 29.0% | +3.8 percentage points |
| Operating loss | $(31.160) million | $(17.760) million | $(13.400) million |
| Net loss | $(30.832) million | $(17.765) million | $(13.067) million |
| Net loss per share | $(3.34) | $(2.35) | Worsened |
| Operating cash flow | $(18.508) million | $(5.523) million | $(12.985) million |
| Adjusted EBITDA | $(15.808) million | $(4.836) million | Worsened by $10.972 million |
Product sales increased modestly to $3.159 million from $3.067 million, while service and other revenue increased to $3.098 million from $2.803 million. Vascular revenue rose to $1.552 million from $0.259 million, primarily from increased DABRA catheter sales. Dermatology revenue declined to $4.705 million from $5.611 million as sales resources were redirected toward DABRA commercialization.
SG&A increased to $30.435 million from $14.947 million, driven by sales-force expansion, public-company costs, stock-based compensation, legal and consulting fees, travel, trade shows, marketing and training. R&D declined to $2.776 million from $4.518 million. Stock-based compensation expense was $14.728 million in 2018, including $17.2 million of remaining and incremental compensation cost associated with replacement awards recognized over their service periods.
Cash and cash equivalents were $64.315 million at year-end 2018, compared with $8.237 million at year-end 2017. The company raised $67.3 million of net proceeds in its October 2018 IPO and $7.9 million through private placements. Management stated that available cash was expected to fund operations and capital requirements for at least the next 12 months.
Total liabilities were $7.330 million, including $0.850 million of equipment financing and $2.490 million of deferred revenue. Contractual obligations included $4.337 million of operating lease payments and $0.850 million of equipment financing maturities. Accumulated deficit was $60.221 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.6%, but the company remained substantially unprofitable.
- Vascular revenue increased approximately sixfold as DABRA entered commercial deployment, although the vascular segment generated only $31,000 of gross profit.
- Dermatology revenue fell approximately 16%, reflecting the shift of sales resources toward DABRA.
- Gross margin improved to approximately 32.8%, partly because higher total laser production generated manufacturing efficiencies.
- Operating expenses increased approximately 71%, substantially exceeding the revenue increase.
- Operating cash burn increased more than threefold, to $18.5 million.
- The IPO materially strengthened liquidity and increased common shares outstanding to 12.689 million at December 31, 2018 from 7.888 million at December 31, 2017.
- The company replaced previously communicated liability-classified option awards with equity-classified options and restricted stock units, eliminating a $15.376 million stock-based compensation liability recorded at December 31, 2017.
Guidance, Outlook, Risks and Unusual Items
Management expects continued net losses in the near term while expanding DABRA sales and marketing, manufacturing capacity, research and development, clinical studies and regulatory activities. The company expects long-term gross-margin improvement from higher production volumes and manufacturing efficiencies, but provided no specific revenue or earnings guidance.
- Fourth-quarter 2018 revenue was adversely affected by sales-force hiring and training issues and production limitations while scaling catheter manufacturing. Management stated that changes had been made to production flow and that process validation was in its final stages; a new sales training program was implemented in the first quarter of 2019.
- DABRA is not FDA-cleared specifically for atherectomy, although the company markets it as a tool in vascular procedures and is pursuing an expanded atherectomy indication and an indication for in-stent restenosis. A new study was expected to begin in the second quarter of 2019, with final results expected in the first quarter of 2020.
- The company announced the RESULTS two-year registry to assess DABRA’s long-term safety and revascularization outcomes.
- After a May 2018 FDA inspection, the company received a Form 483 concerning evaluation of potentially reportable complaints involving DABRA and Pharos. The company modified complaint procedures and reported that its retrospective review found no complaints requiring FDA submission.
- The company reported one FDA submission in the fourth quarter for a clinically non-significant vessel perforation associated with DABRA post-market surveillance.
- Manufacturing is concentrated in one Carlsbad, California facility, and the company depends on limited-source suppliers for certain components. Catheter production constraints and quality or supply problems could limit revenue.
- Reimbursement is dependent on existing CPT codes and third-party payor coverage. Reimbursement is not guaranteed, and DABRA’s use for atherectomy may face coding, coverage and regulatory uncertainty.
- The company faces competition from substantially larger medical device companies and disclosed competitor assertions concerning reimbursement and alleged off-label promotion. It also disclosed intellectual-property correspondence involving a former competitor employee.
- Strata Skin Sciences and an individual director filed a Pennsylvania declaratory-judgment action seeking no monetary damages. Management believes the action lacks merit; the company stated that no current legal proceeding was expected to have a material adverse effect.
- The company stated that a previously disclosed material weakness related to capital-stock transactions had been remediated as of December 31, 2018. The filing did not include management’s annual assessment or auditor attestation of internal control over financial reporting because of applicable new-public-company and emerging-growth-company exemptions.
Most Important Facts for Investors to Verify
- Confirm the filing entity: the source is Ra Medical Systems, Inc., not Catheter Precision, Inc.
- Verify DABRA’s actual regulatory labeling and distinguish FDA-cleared uses from atherectomy and other proposed indications.
- Track DABRA laser utilization, recurring catheter sales, customer retention and the number of active sites, not merely placed lasers.
- Assess whether catheter manufacturing validation resolved the fourth-quarter and first-quarter production constraints.
- Monitor cash burn relative to the $64.3 million year-end cash balance and the timing of any additional capital raise.
- Evaluate whether revenue growth can offset the substantially larger sales, marketing, public-company and stock-compensation expenses.
- Review FDA follow-up to the Form 483 observations and any future complaint, recall, product-liability or regulatory actions.
- Assess reimbursement and coverage for procedures using DABRA, particularly where the procedure involves atherectomy coding or off-label use.
- Review dilution from outstanding options, restricted stock units and equity-plan evergreen provisions.
- Verify the subsequent adoption effects of the new revenue-recognition and lease-accounting standards disclosed in the filing.