Catheter Precision(VTAK) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The financial statements for Q3 2019 show significant declines in cash and equity, widening net loss, and negative operating cash flow Condensed Balance Sheets The balance sheet as of September 30, 2019, reflects a significant decrease in cash and equity, offset by short-term investments Condensed Balance Sheet Data (in thousands) | Account | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $14,512 | $64,315 | | Short-term investments | $25,964 | $0 | | Total current assets | $45,452 | $69,233 | | TOTAL ASSETS | $54,002 | $74,035 | | Liabilities & Equity | | | | Total current liabilities | $7,982 | $5,950 | | Total liabilities | $12,261 | $7,330 | | Accumulated deficit | $(107,414) | $(60,221) | | Total stockholders' equity | $41,741 | $66,705 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $54,002 | $74,035 | Condensed Statements of Operations The statements of operations show a significantly widened net loss for Q3 and nine months 2019, driven by surging operating expenses Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total net revenue | $1,908 | $2,064 | $5,809 | $4,269 | | Gross (loss) profit | $(517) | $784 | $(1,291) | $1,263 | | Selling, general and administrative | $15,889 | $5,366 | $42,907 | $15,621 | | Research and development | $1,182 | $224 | $3,692 | $1,532 | | Operating loss | $(17,588) | $(4,806) | $(47,890) | $(15,890) | | Net loss | $(17,418) | $(4,807) | $(47,214) | $(15,895) | | Basic and diluted net loss per share | $(1.30) | $(0.59) | $(3.63) | $(1.97) | Condensed Statements of Cash Flows Cash flow statements indicate a substantial increase in cash used in operations and investing activities for the nine months ended September 30, 2019 Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(23,601) | $(10,109) | | Net cash used in investing activities | $(25,984) | $(424) | | Net cash (used in) provided by financing activities | $(218) | $7,211 | | NET CHANGE IN CASH AND CASH EQUIVALENTS | $(49,803) | $(3,322) | | CASH AND CASH EQUIVALENTS, end of period | $14,512 | $4,915 | Notes to Condensed Financial Statements The notes detail accounting policies, significant commitments, and ongoing legal and governmental investigations, highlighting segment performance - The company believes its cash, cash equivalents, and short-term investments will be sufficient to fund operations for at least the next 12 months[26] - In September 2019, the company initiated a voluntary recall of its DABRA laser system single-use catheters to change product labeling due to performance issues[53] - The company is subject to a securities class action lawsuit filed in June 2019, alleging material misstatements in its IPO registration statement[93] - The company is under investigation by the Department of Justice (DOJ) for potential False Claims Act violations related to marketing clearance, unapproved uses, and improper payments to physicians. It is also under investigation by the SEC and the Criminal Division of the DOJ[97][99][100] Segment Net Revenue (in thousands) | Segment | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Vascular | $226 | $789 | $1,121 | $973 | | Dermatology | $1,682 | $1,275 | $4,688 | $3,296 | | Total Net Revenue | $1,908 | $2,064 | $5,809 | $4,269 | Segment Gross (Loss) Profit (in thousands) | Segment | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Vascular | $(694) | $210 | $(2,389) | $(77) | | Dermatology | $177 | $574 | $1,098 | $1,340 | | Total Gross (Loss) Profit | $(517) | $784 | $(1,291) | $1,263 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights delayed filing due to an Audit Committee investigation, ongoing government probes, product recall, and significant financial losses - The filing was delayed due to an Audit Committee investigation into a former employee's complaint, revealing frequent DABRA catheter failures, potentially confusing sales explanations, and failure to make timely Medical Device Reports (MDRs) to the FDA[113][114] - The company is facing investigations from the SEC's Enforcement Division, a DOJ Civil Investigative Demand regarding the False Claims Act, and a DOJ criminal investigation[118][119] - Due to inconsistent DABRA catheter performance, the company initiated a recall in September 2019 to relabel the product shelf life from 12 months to two months[127] - The company implemented cost-saving initiatives, including reducing its DABRA sales force from 34 employees as of June 30, 2019, to 6 employees as of November 11, 2019[128] Comparison of Results of Operations (in thousands) | Metric | Q3 2019 | Q3 2018 | Change $ | | :--- | :--- | :--- | :--- | | Total net revenue | $1,908 | $2,064 | $(156) | | Gross (loss) profit | $(517) | $784 | $(1,301) | | Selling, general and administrative | $15,889 | $5,366 | $10,523 | | Operating loss | $(17,588) | $(4,806) | $(12,782) | | Net loss | $(17,418) | $(4,807) | $(12,611) | - The increase in SG&A expenses for Q3 2019 was primarily due to a $5.2 million increase in stock-based compensation and a $3.3 million increase in legal expenses related to the Audit Committee investigation[155] - As of September 30, 2019, the company had cash, cash equivalents, and short-term investments of $40.5 million and believes this is sufficient to fund operations for at least the next 12 months[164][165] Quantitative and Qualitative Disclosures about Market Risk The company assesses its exposure to interest rate, foreign currency, and inflation risks as not material due to its investment policy and operational focus - The company does not believe it has any material exposure to changes in the fair value of its assets from interest rate changes due to the short-term nature of its cash and cash equivalents[179] - As revenue is denominated in U.S. dollars and expenses are primarily in the United States, the effect of a 10% adverse change in foreign currency exchange rates would not have been material[180] - The company does not believe that inflation has had a material effect on its business, results of operations, or financial condition[181] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting, with remediation underway - Management concluded that as of September 30, 2019, the company's disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting[183] - A material weakness was identified in the control environment, stemming from an inappropriate "tone at the top" set by certain former senior management, leading to behavior inconsistent with the Code of Ethics, failure to make timely FDA reports, and undocumented product recalls[185][191] - A material weakness was also identified in information and communication, as complaints implicating executive officers were not brought to the attention of the board or Audit Committee[187] - Remediation activities have commenced, including separation from certain former executives, hiring a new VP of Quality, implementing enhanced policies and training, and strengthening regulatory systems[188] PART II. OTHER INFORMATION Legal Proceedings The company is involved in significant legal and regulatory matters, including securities class actions, shareholder derivative suits, and multiple governmental investigations by the DOJ and SEC - A securities class action lawsuit was filed in June 2019 against the company, certain officers, and IPO underwriters, alleging material misstatements or omissions in the registration statement[193] - A shareholder derivative complaint was filed in October 2019 against certain officers and directors for breaches of fiduciary duty and other violations[194] - The company is under a DOJ Civil Investigative Demand regarding a False Claims Act investigation and is also aware of an open criminal investigation by the DOJ's Fraud Section[196][198] - The SEC notified the company on November 13, 2019, that it is conducting an investigation[198] Risk Factors The company faces high risks from unresolved product performance issues, ongoing government investigations, a history of losses, internal control weaknesses, and intense competition - The company may be unable to successfully remedy the performance and calibration issues with its DABRA catheters, which has led to a product recall and could prevent market acceptance and revenue growth[203][204] - The business is exposed to significant risk from matters arising from the Audit Committee investigation, including regulatory proceedings and government enforcement actions by the SEC and DOJ, which may adversely affect business and results[225] - The company has a history of net losses ($47.2 million for the nine months ended Sep 30, 2019) and may be unable to achieve profitability. It may require additional capital, which may not be available on acceptable terms[224][219] - Material weaknesses have been identified in internal control over financial reporting, which could prevent accurate financial reporting and cause investors to lose confidence[273] - The company faces substantial competition from larger, better-resourced companies in the medical device industry, such as Medtronic, Boston Scientific, and Abbott Laboratories[236][241] - The company is subject to numerous healthcare laws, including anti-kickback and false claims statutes, and is currently under a DOJ investigation for potential violations[259][261] - The company received a deficiency notice from the NYSE for failure to timely file its Form 10-Q and must maintain compliance with listing standards, including minimum market capitalization, to avoid delisting[397] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered equity sales and is re-prioritizing IPO proceeds to address DABRA catheter performance issues - The company raised approximately $67.3 million in net proceeds from its IPO, which closed on October 1, 2018[431] - The company is re-prioritizing the use of its IPO proceeds to focus on remedying the inconsistencies in its DABRA catheter performance, in addition to supporting clinical studies and general corporate purposes[432] Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - None[433] Mine Safety Disclosures This item is not applicable to the company - Not applicable[434] Other Information The company reports no other information for this item - None[435] Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents and certifications - Exhibits include corporate governance documents, CEO/CFO certifications (Sections 302 and 906 of Sarbanes-Oxley), and XBRL financial data[436]