Catheter Precision, Inc. quarterly report, Q2 FY2019

Business Context and Reporting Period

Filing identity: The supplied filing is Ra Medical Systems, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019; it does not identify Catheter Precision, Inc. The report was filed November 27, 2019, after a delay attributed to an Audit Committee investigation and a Department of Justice investigation.

Ra Medical develops, manufactures and markets excimer laser systems and related products for vascular and dermatological applications. Its principal products are the DABRA vascular laser and catheter system and the Pharos dermatology laser. The company reports vascular and dermatology segments.

Financial Performance and Position

Metric	Three months ended June 30, 2019	Three months ended June 30, 2018	Six months ended June 30, 2019	Six months ended June 30, 2018
Net revenue	$2.153 million	$1.236 million	$3.901 million	$2.205 million
Gross profit (loss)	$(0.580) million	$0.246 million	$(0.774) million	$0.479 million
Operating loss	$(15.348) million	$(8.391) million	$(30.302) million	$(11.083) million
Net loss	$(15.122) million	$(8.395) million	$(29.796) million	$(11.088) million
Adjusted EBITDA	$(7.769) million	$(3.576) million	$(14.594) million	$(5.648) million

Revenue increased 74% year over year in the quarter and 77% for the six-month period. Product sales increased to $1.284 million from $0.475 million in the quarter and to $2.178 million from $0.710 million for six months.
Gross margin was approximately negative 27% in the quarter and negative 20% for six months, versus approximately 20% and 22% positive, respectively, in the comparable 2018 periods.
SG&A increased to $13.789 million for the quarter and $27.018 million for six months, largely reflecting stock-based compensation, increased personnel, public-company costs, professional fees and sales-related spending.
Research and development expense was $0.979 million for the quarter and $2.510 million for six months.
Stock-based compensation included in operating expenses was $6.640 million for the quarter and $13.869 million for six months. Six-month operating cash flow also included $14.877 million of stock-based compensation.
Interest income contributed $0.297 million in the quarter and $0.625 million for six months, primarily from IPO proceeds; interest expense was $0.066 million and $0.114 million, respectively.

Cash Flow, Liquidity and Capital Structure

At June 30, 2019, cash and cash equivalents were $11.787 million and short-term investments were $36.601 million, totaling approximately $48.4 million.
Six-month cash flow from operations was negative $15.747 million, compared with negative $5.966 million in 2018.
Investing cash flow was negative $36.657 million, primarily reflecting $36.461 million of purchases of short-term investments.
Financing cash flow was negative $0.124 million, compared with positive $7.749 million in 2018.
Total liabilities were $10.579 million, including $0.877 million of equipment financing and $3.082 million of operating lease liabilities. Current liabilities were $6.295 million.
Management stated that cash and short-term investments were expected to fund operations for at least the next 12 months, but also noted that additional financing or further cost reductions may be required if operating performance or legal and regulatory costs deteriorate.
The company had an accumulated deficit of $89.996 million and no preferred stock outstanding at June 30, 2019.

Material Changes Versus the Prior Comparable Period

Revenue grew substantially, led by higher DABRA catheter activity and increased Pharos product sales. However, cost of revenue grew faster than revenue, producing a gross loss.
Vascular revenue increased to $0.434 million from $0.094 million in the quarter and to $0.895 million from $0.184 million for six months, but the vascular segment gross loss widened to $0.989 million and $1.695 million, respectively.
Dermatology revenue increased to $1.719 million from $1.142 million in the quarter and to $3.006 million from $2.021 million for six months; dermatology remained profitable at the gross-profit level.
The accumulated deficit increased from $60.221 million at December 31, 2018 to $89.996 million at June 30, 2019. Cash and cash equivalents declined from $64.315 million to $11.787 million, partly because $36.6 million was shifted into short-term investments.
The company adopted ASC 606 and ASC 842 in 2019. ASC 606 resulted in a $21,000 reduction to opening accumulated deficit; ASC 842 added approximately $3.2 million of operating lease right-of-use assets and liabilities at adoption.

Guidance, Outlook, Risks and Unusual Items

No formal numerical revenue or earnings guidance is provided. Management expects continued net losses in the near term and expects near-term DABRA revenue and gross margin to be pressured while catheter performance issues are addressed.
DABRA catheters experienced calibration failures and occasional overheating. In September 2019, the company initiated a voluntary recall and relabeled the catheter shelf life from 12 months to two months. Recall-related costs of approximately $0.2 million were recorded in cost of revenue for the quarter and six months.
The company reduced its DABRA sales force from 34 employees at June 30, 2019 to six employees as of November 11, 2019, focusing on priority accounts and product remediation. It also implemented broader cost-saving and workforce-reduction initiatives.
The company received a July 2019 IDE approval for an atherectomy study but planned to update the IDE and enroll the first patient in the first quarter of 2020 following the catheter recall. DABRA was not FDA-cleared for an atherectomy indication at the reporting date.
The Audit Committee identified material weaknesses in the control environment and information and communication processes. Findings included delayed Medical Device Reports, undocumented product recalls, inadequate documentation of approximately $300,000 in payments to three physicians, and sales practices concerning atherectomy characterization and reimbursement coding.
The company disclosed SEC and DOJ investigations, including a DOJ Civil Investigative Demand involving possible 510(k), off-label promotion and Anti-Kickback Statute issues. A separate DOJ criminal investigation was also disclosed. The company stated that it could not estimate potential losses.
The company faces a putative securities class action, a stayed shareholder derivative action, and litigation involving Strata Skin Sciences and related parties. No loss estimate was provided for the securities or governmental matters.
The NYSE issued an August 2019 deficiency notice related to the delayed filing. The company disclosed a market capitalization of approximately $19.6 million as of November 20, 2019 and warned of potential delisting risks.
Management stated that no adjustments to prior financial statements were required and that the financial statements were fairly stated in accordance with GAAP despite the control weaknesses.

Important Facts for Investors to Verify

Confirm the company identity: the supplied filing is for Ra Medical Systems, Inc., not Catheter Precision, Inc.
Track the outcome and financial exposure of the SEC, DOJ civil and criminal, securities litigation and derivative proceedings.
Verify whether the DABRA catheter recall and two-month shelf-life relabeling improve field calibration and reduce warranty, replacement and recall costs.
Assess whether the substantially reduced DABRA sales force can preserve customer adoption and revenue while remediation continues.
Monitor cash burn, short-term investment balances, additional financing needs and compliance with NYSE listing requirements.
Evaluate remediation of the material weaknesses and whether future filings remain timely and reliable.
Confirm progress toward the atherectomy indication, including IDE updates, clinical enrollment and any additional FDA requirements.