Catheter Precision(VTAK) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Explanatory Note The company states the filing of its Form 10-Q was delayed due to internal and external investigations - The delay in filing the Form 10-Q was caused by an internal Audit Committee investigation and an external Department of Justice investigation[9] Financial Statements The unaudited statements show a significant cash decrease, revenue growth, and a substantially increased net loss driven by higher operating expenses Condensed Balance Sheets Total assets decreased due to a significant reduction in cash, while total liabilities increased mainly from operating lease liabilities Condensed Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $11,787 | $64,315 | | Short-term investments | $36,601 | $0 | | Total current assets | $53,488 | $69,233 | | Total Assets | $62,474 | $74,035 | | Liabilities & Equity | | | | Total current liabilities | $6,295 | $5,950 | | Total liabilities | $10,579 | $7,330 | | Total stockholders' equity | $51,895 | $66,705 | Condensed Statements of Operations Net revenue increased year-over-year, but net losses widened significantly due to a substantial rise in SG&A expenses Statement of Operations Summary (in thousands) | Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | Total net revenue | $2,153 | $1,236 | $3,901 | $2,205 | | Gross (loss) profit | $(580) | $246 | $(774) | $479 | | Selling, general and administrative | $13,789 | $7,615 | $27,018 | $10,254 | | Operating loss | $(15,348) | $(8,391) | $(30,302) | $(11,083) | | Net loss | $(15,122) | $(8,395) | $(29,796) | $(11,088) | | Basic and diluted net loss per share | $(1.16) | $(1.03) | $(2.32) | $(1.38) | Condensed Statements of Cash Flows Net cash used in operations and investing activities increased significantly, leading to a $52.5 million decrease in cash Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(15,747) | $(5,966) | | Net cash used in investing activities | $(36,657) | $(251) | | Net cash (used in) provided by financing activities | $(124) | $7,749 | | Net Change in Cash and Cash Equivalents | $(52,528) | $1,532 | Notes to Condensed Financial Statements Notes detail the adoption of new accounting standards and outline significant legal challenges, including DOJ and SEC investigations - The company adopted new accounting standards for Revenue (ASC 606) and Leases (ASC 842) on January 1, 2019[37][50][62] - The company is facing multiple legal and regulatory challenges, including a securities class action lawsuit, a shareholder derivative complaint, and investigations by the SEC and DOJ concerning potential violations of the False Claims Act and Anti-Kickback Statute[89][90][93] Segment Net Revenue and Gross (Loss) Profit (in thousands) | Segment | H1 2019 Net Revenue | H1 2018 Net Revenue | H1 2019 Gross (Loss) Profit | H1 2018 Gross Profit | | :--- | :--- | :--- | :--- | :--- | | Vascular | $895 | $184 | $(1,695) | $(287) | | Dermatology | $3,006 | $2,021 | $921 | $766 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the filing delay, investigation findings, operational results showing revenue growth but a larger net loss, and cash sufficiency - An internal Audit Committee investigation found significant issues, including inconsistent DABRA catheter performance, misleading sales explanations, failure to file Medical Device Reports (MDRs), undocumented product recalls, and questionable payments to physicians[108] - The company is under investigation by the SEC and the Department of Justice (both civil and criminal divisions) regarding potential violations of the False Claims Act and Anti-Kickback Statute, among other issues[112][113] - In response to operational challenges and to conserve cash, the company initiated cost-saving measures, including reducing its DABRA sales force from 34 employees as of June 30, 2019, to 6 as of November 11, 2019[122][162] Results of Operations Comparison - Six Months Ended June 30 (in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total net revenue | $3,901 | $2,205 | | Gross (loss) profit | $(774) | $479 | | Selling, general and administrative | $27,018 | $10,254 | | Operating loss | $(30,302) | $(11,083) | | Net loss | $(29,796) | $(11,088) | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate sensitivity and foreign currency exchange, both currently considered not material - The company's primary market risks are interest rate sensitivity on its cash and investments and foreign currency exchange risk[176] - Management believes there is no material exposure to interest rate changes due to the short-term nature of its cash and investments[177] - Foreign currency risk is currently minimal as most transactions are in U.S. dollars, but this could change with international growth[178] Controls and Procedures Management concluded that disclosure controls were ineffective due to material weaknesses in the control environment and communication channels - Management concluded that disclosure controls and procedures were not effective as of June 30, 2019[181] - 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, misleading sales explanations, and failure to properly document recalls and payments[184][188] - 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[186] - Remediation efforts are underway, including the separation of certain former executives, hiring of new qualified personnel, and implementing enhanced policies and controls[187] PART II. OTHER INFORMATION Legal Proceedings The company is involved in a securities class action lawsuit and multiple governmental investigations by the DOJ and SEC - A securities class action lawsuit was filed against the company, certain officers, and IPO underwriters, alleging material misstatements in the registration statement[191] - The company is under investigation by the Department of Justice (DOJ) for potential False Claims Act violations related to marketing clearance, unapproved uses of its DABRA device, and improper payments to physicians[194] - The company has been notified of investigations by both the SEC's Division of Enforcement and the Criminal Division of the DOJ[195][196] Risk Factors The company faces significant risks related to its products, ongoing government investigations, regulatory compliance, and stock ownership Risks Related to Business and Products Success is highly dependent on fixing DABRA catheter issues, managing net losses, and navigating outcomes of investigations and litigation - A primary risk is the inability to successfully remedy performance and calibration issues with DABRA catheters, which has led to customer dissatisfaction and a voluntary recall to relabel the shelf life from 12 to two months[201][204][209] - The company has a history of net losses, incurring $29.8 million in the first six months of 2019, and may be unable to achieve profitability[219] - The company faces significant risks from its recently completed Audit Committee investigation, ongoing regulatory investigations (DOJ, SEC), and related securities litigation, which could result in penalties, fines, and business disruption[220][221][223] Risks Related to Regulatory Approval and Industry The company faces extensive FDA oversight, risks from off-label promotion allegations, and potential impacts from healthcare reform - The company's operations are subject to pervasive FDA regulatory requirements, and failure to comply can result in sanctions, recalls, or production suspension[281][283] - The company faces risks of enforcement action for off-label promotion, particularly concerning the marketing of DABRA for atherectomy, which is a subject of a DOJ investigation[247][249] - The business is subject to healthcare fraud and abuse laws, such as the Anti-Kickback Statute, and the DOJ is investigating improper remuneration to physicians[253][254] Risks Related to Intellectual Property Competitive position depends on the uncertain process of obtaining and defending patents and protecting critical trade secrets - The company's ability to compete depends on successfully obtaining and maintaining patent protection for its products, which is an uncertain and complex process[334][335] - The company may become involved in expensive and time-consuming intellectual property litigation to defend against infringement claims or to enforce its own patents[361][372] - In addition to patents, the company relies on trade secrets, which are difficult to protect and could be lost through misappropriation or independent development by competitors[356] Risks Related to Ownership of Common Stock Stock ownership risks include high price volatility, potential NYSE delisting, and significant control by principal stockholders - The company received a deficiency notice from the NYSE for failing to timely file its Form 10-Q and faces the risk of delisting if it does not maintain compliance with all listing requirements[386] - The stock price is likely to be highly volatile due to factors such as operating results, regulatory developments, and market conditions[388][389] - As of June 30, 2019, executive officers, directors, and 10% stockholders owned approximately 38% of the outstanding common stock, giving them significant influence over corporate matters[401] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales and has updated the use of its IPO proceeds to prioritize fixing DABRA catheter issues - The company's IPO in October 2018 raised approximately $67.3 million in net proceeds[420] - The intended use of IPO proceeds has been updated to prioritize remedying the inconsistencies in DABRA catheter performance, alongside clinical studies and general corporate purposes[421] Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[422] Mine Safety Disclosures This item is not applicable to the company - Not applicable[423] Other Information The company reports no other information for this item - None[424] Exhibits This section lists filed exhibits, including corporate governance documents and required Sarbanes-Oxley certifications - Key exhibits include corporate governance documents and required CEO/CFO certifications under Sarbanes-Oxley[425]