Catheter Precision(VTAK) - 2019 Q4 - Annual Report

Part I Business Ra Medical Systems develops excimer laser treatments for vascular and dermatological diseases, currently resolving DABRA catheter issues for a future relaunch Overview The company develops excimer laser platforms, with DABRA facing performance issues leading to recall, sales force reduction, and a strategic relaunch focus - The company's DABRA laser system is cleared by the FDA for crossing chronic total occlusions (CTOs) in patients with symptomatic infrainguinal lower extremity vascular disease[15] - In 2019, the company experienced inconsistencies in DABRA catheter performance, finding that catheters more than two months post-sterilization had a significantly higher rate of non-calibration, leading to a voluntary recall to replace 12-month shelf-life catheters with 2-month ones[16] - As part of cost-saving initiatives in Q3 2019, the company reduced its DABRA sales force from 34 employees to five clinical specialists to align resources with its product strategy and manage cash flows[17] - The company's strategy for relaunching DABRA is focused on four key initiatives: achieving a longer shelf life, developing a braided overjacket to reduce kinking, creating a rapid exchange mechanism for easier use with guidewires, and obtaining an atherectomy indication for use[18][19] Our Products The company's product portfolio includes DABRA for vascular diseases and Pharos for dermatological conditions, both utilizing excimer laser technology - The DABRA (Destruction of Arteriosclerotic Blockages by laser Radiation Ablation) system is a minimally-invasive excimer laser and single-use catheter used to treat vascular blockages in the lower extremities by dissolving plaque without generating harmful particulates[21] - The Pharos excimer laser is FDA-cleared for treating psoriasis, vitiligo, atopic dermatitis, and leukoderma, delivering concentrated 308nm ultraviolet light to treat skin disorders, offering a targeted approach that spares healthy tissue[26][58] - The company is conducting a pivotal study to support an atherectomy indication for DABRA in the U.S., with the IDE for the study approved in January 2020 and the first patient enrolled in February 2020[15][54][55] Markets and Competition The company operates in vascular and dermatological markets, facing intense competition from established medical device and pharmaceutical companies - Peripheral Artery Disease (PAD) affects an estimated 17.6 million people in the U.S., but only 20-30% are actively treated, with the global atherectomy market estimated at $1.1 billion in 2018[32][33] - Major competitors for the DABRA vascular solution include Medtronic plc, Cardiovascular Systems Inc., Boston Scientific Corp., and Abbott Laboratories[70] - Psoriasis affects over 8 million people in the U.S., while atopic dermatitis affects over 18 million adults in the U.S.; major competitors for the Pharos dermatological solution include The Daavlin Company, STRATA Skin Sciences, and large pharmaceutical companies[63][72] Operations and Strategy The company manufactures products in California, uses a direct sales force, focuses R&D on product enhancement, and protects technology via patents - The company manufactures its products in an approximately 32,000 square foot, ISO 13485 certified facility in Carlsbad, California[68] - As of March 6, 2020, the company owns six U.S. issued patents and is pursuing protection in five different patent families, with U.S. patents expiring between 2035 and 2037[78] Research and Development Expenses | Year | R&D Expense (in millions) | | :--- | :--- | | 2019 | $4.5 | | 2018 | $2.8 | Government Regulation Products are Class II medical devices subject to extensive FDA regulation, including QSR and healthcare fraud laws, with past FDA 483 observations - Both DABRA and Pharos are classified as Class II medical devices in the U.S. and are subject to extensive FDA regulation, including Quality System Regulation (QSR) for manufacturing[82] - The company received a Form 483 from the FDA in May 2018 for failure to properly evaluate complaints for potential Medical Device Reporting (MDR), and an internal Audit Committee later found failures to identify reportable events and file timely reports[103] - In December 2019, the FDA issued another Form 483 with observations that equipment maintenance schedules were not adequately established, a device master record was not current, and document control procedures were not fully established[103] - The company is subject to various healthcare fraud and abuse laws, including the U.S. federal Anti-Kickback Statute and the False Claims Act, which regulate relationships with healthcare professionals and customers[113][114] Risk Factors The company faces significant risks including going concern doubt, DABRA catheter issues, multiple government investigations, legal actions, and intense competition - There is substantial doubt about the company's ability to continue as a going concern, as it does not generate sufficient revenue to fund operations and is dependent on external financing[140][141] - The company's success is highly dependent on its ability to remedy the performance and calibration issues with its DABRA catheters, which have led to a voluntary recall and a shift to a two-month shelf life[143][147] - The company is subject to multiple government investigations, including a DOJ Civil Investigative Demand regarding potential False Claims Act and Anti-Kickback Statute violations, a DOJ criminal investigation, and an SEC investigation following an internal Audit Committee review[167][202][208] - The company faces substantial competition from larger, more established medical device companies with greater financial and marketing resources, who may offer bundled products or have stronger customer relationships[187][190] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[396] Properties Headquarters and manufacturing are in a 32,000 sq ft Carlsbad facility, with sufficient capacity for expected demand - The company's headquarters and manufacturing are in a 32,000 sq. ft. facility in Carlsbad, CA, leased until December 2027[397] - Current manufacturing capacity is estimated at 400 lasers and 140,000 catheters per year, which is considered sufficient for the foreseeable future[398] Legal Proceedings Involved in significant legal and governmental proceedings, including securities class actions and DOJ/SEC investigations following internal findings - A securities class action lawsuit alleges violations of the Securities Act and Exchange Act due to material misstatements or omissions regarding the company's business and products between September 2018 and November 2019[399] - The company is under investigation by the SEC and the Department of Justice (DOJ), with the DOJ's civil investigation concerning potential False Claims Act violations related to marketing clearance, off-label promotion, and improper payments to physicians, and a separate DOJ criminal investigation also open[403][404][405] - The governmental investigations were preceded by an internal Audit Committee investigation which found issues including inconsistent DABRA catheter performance, failure to file timely Medical Device Reports (MDRs), undocumented product recalls, and improper marketing characterizations of DABRA as an atherectomy device[401][402] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on NYSE, no dividends paid, and IPO proceeds were allocated to sales, clinical studies, and general corporate purposes - The company has never declared or paid cash dividends and intends to retain all future earnings to fund business operations[416] - The company's October 2018 IPO raised approximately $67.3 million in net proceeds, with intended use for sales force expansion (~$21 million), clinical studies (~$14 million), and general corporate purposes[418][422] Selected Financial Data This section is not applicable as per the report - Not applicable[420] Management's Discussion and Analysis of Financial Condition and Results of Operations Net loss widened significantly in 2019 due to increased costs and operating expenses, leading to going concern doubt and need for financing Results of Operations (in thousands) | | 2019 | 2018 | | :--- | :--- | :--- | | Total net revenue | $7,199 | $6,257 | | Gross (loss) profit | $(1,651) | $2,051 | | Total operating expenses | $56,079 | $33,211 | | Operating loss | $(57,730) | $(31,160) | | Net loss | $(56,957) | $(30,832) | - The company incurred a net loss of $57.0 million in 2019, a significant increase from the $30.8 million loss in 2018, with an accumulated deficit of $117.2 million as of December 31, 2019[432] - Management has substantial doubt about the company's ability to continue as a going concern due to recurring losses, negative cash flows, and the need to raise additional capital to fund operations for the next 12 months[466][467] Net Revenue by Segment (in thousands) | Segment | 2019 | 2018 | | :--- | :--- | :--- | | Vascular | $1,275 | $1,552 | | Dermatology | $5,924 | $4,705 | | Total | $7,199 | $6,257 | Quantitative and Qualitative Disclosures About Market Risk Primary market risks are immaterial interest rate sensitivity and minimal foreign currency exchange risk, which may increase with international expansion - The company's cash, cash equivalents, and short-term investments totaled $30.6 million as of December 31, 2019, with immaterial exposure to interest rate changes due to the short-term nature of these investments[513] - Foreign currency exchange risk is currently minimal as most revenue is in U.S. dollars, but this risk could increase with international growth[514] Financial Statements and Supplementary Data Audited financial statements show decreased assets and increased net loss in 2019, with the auditor expressing substantial doubt about going concern - The independent auditor's report expresses substantial doubt about the Company's ability to continue as a going concern due to recurring losses, negative cash flows, and a significant accumulated deficit[667] Balance Sheet Highlights (in thousands) | | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $14,584 | $64,315 | | Total Assets | $44,081 | $74,035 | | Total Liabilities | $10,931 | $7,330 | | Total Stockholders' Equity | $33,150 | $66,705 | | Accumulated Deficit | $(117,157) | $(60,221) | Statement of Operations Highlights (in thousands) | | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Total net revenue | $7,199 | $6,257 | | Gross (loss) profit | $(1,651) | $2,051 | | Operating loss | $(57,730) | $(31,160) | | Net loss | $(56,957) | $(30,832) | | Basic and diluted net loss per share | $(4.33) | $(3.34) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[517] Controls and Procedures Material weaknesses in internal control were identified and remediated in 2019, stemming from former management's 'tone at the top' and regulatory failures - Material weaknesses were identified in the control environment, stemming from an inappropriate 'tone at the top' set by certain members of senior management and a lack of sufficient competent resources[522] - The control deficiencies resulted in multiple issues, including failure to timely file Medical Device Reports (MDRs), undocumented product recalls, and salespeople being instructed to characterize DABRA as performing atherectomy for reimbursement purposes[525] - Remediation actions included the separation of certain former executives, hiring a new VP of Quality, Regulatory and Clinical, implementing enhanced policies and training, and strengthening quality and regulatory systems[527] - Management concluded that as of December 31, 2019, the previously disclosed material weaknesses have been remediated and disclosure controls and procedures were effective[521][528] Other Information Discloses 2019 cash bonuses and March 2020 base salary increases for named executive officers - On February 3, 2020, the compensation committee approved 2019 cash bonuses for named executive officers: Andrew Jackson ($150,000), Jeffrey Kraws ($65,000), and Daniel Horwood ($78,000)[534] - On March 9, 2020, annual base salaries for named executive officers were increased, effective March 1, 2020[535] Part III Directors, Executive Officers and Corporate Governance Board consists of five independent directors with three committees, and executive officers include Interim CEO/CFO, Co-President, and General Counsel - The Board of Directors consists of five members, all determined to be independent under NYSE listing standards, with Martin Colombatto serving as Chairman[538][556] - The company's executive officers include Andrew Jackson as Interim CEO and CFO, Jeffrey Kraws as Co-President, and Daniel Horwood as General Counsel[547] - The board has an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee, all composed of independent directors[565] Executive Compensation Executive compensation includes salary, bonuses, and equity awards, with severance agreements, while directors receive cash retainers and equity 2019 Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Andrew Jackson | 2019 | 348,808 | 194,805 | 91,385 | 651,573 | | Jeffrey R. Kraws | 2019 | 345,425 | 65,000 | 93,832 | 517,522 | | Daniel Horwood | 2019 | 298,275 | 104,226 | 91,385 | 507,639 | | Dean S. Irwin (Former CEO) | 2019 | 311,983 | — | — | 311,983 | - The company has change in control and severance agreements providing benefits such as lump-sum salary payments and accelerated equity vesting upon a qualifying termination[604][606][607] - Non-employee directors receive an annual cash retainer of $40,000, plus additional retainers for committee and chair service, and also receive initial and annual restricted stock unit awards[616][617][621] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Directors and executive officers collectively own 6.1% of common stock, with former CEO Dean Irwin and his wife as largest beneficial owners - As of March 6, 2020, all directors and executive officers as a group beneficially owned approximately 877,444 shares, representing 6.1% of the outstanding common stock[628] - Former CEO Dean Irwin and his wife Melissa Burstein are the largest beneficial owners, each with control over 3,207,761 shares, or 22.9% of the company[628] - Former director Martin Burstein beneficially owns 1,956,203 shares, representing 14.2% of the company[628] Certain Relationships and Related Transactions, and Director Independence Details related party transactions, including compensation for former CEO's wife and legal fees to a firm connected to a director - Melissa Burstein, wife of former CEO Dean Irwin, served as Executive Vice President, and in 2019, she received a salary of $237,561 and a severance payment of $230,000[637] - In 2019, the company paid $403,827 for legal services to Cooley LLP, where the brother-in-law of director Mark Saad is a partner[639] - The company has a formal policy requiring the Audit Committee to review and approve or ratify any related person transaction exceeding $120,000[641][642] Principal Accounting Fees and Services Deloitte & Touche LLP provided audit and other services, with fees totaling $0.9 million in 2019 and $1.6 million in 2018 Fees Paid to Independent Registered Public Accounting Firm | | Fiscal Year 2019 | Fiscal Year 2018 | | :--- | :--- | :--- | | Audit Fees | $925,105 | $1,604,415 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total Fees | $925,105 | $1,604,415 | - The Audit Committee's policy is to pre-approve all audit and permissible non-audit services provided by the independent accountants[646] Part IV Exhibits, Financial Statement Schedules This section indexes all financial statements, schedules, and exhibits filed with the annual report - This section provides an index of all financial statements, schedules, and exhibits filed with the annual report, as required by Item 601 of Regulation S-K[651]