Stereotaxis, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2017, filed May 10, 2017. Stereotaxis develops and markets the Epoch Solution, including Niobe ES remote magnetic navigation systems, Odyssey information-management systems, Vdrive robotic navigation systems, and related disposable devices, service contracts, licenses, and royalties. The installed base was 129 Niobe ES systems at March 31, 2017.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $7.0 million | $8.6 million | Down 19% |
| Systems revenue | $0.2 million | $2.1 million | Down approximately 89% |
| Disposables, service and accessories revenue | $6.8 million | $6.6 million | Up approximately 3% |
| Gross margin | $5.7 million; 82% | $6.5 million; 75% | Margin up 7 percentage points |
| Operating loss | $1.9 million | $1.5 million | Loss increased |
| Net income (loss) | $1.2 million | $(2.3) million | Improved |
| Earnings (loss) attributable to common stockholders | $0.3 million | $(2.3) million | Improved |
| Basic and diluted EPS | $0.01 | $(0.11) | Improved |
| Cash flow from operations | $(2.7) million | $(3.9) million | Use decreased |
The reported net income included $3.1 million of non-cash other income from the decrease in fair value of warrant liabilities. A $0.4 million cumulative preferred-stock dividend and $0.5 million allocation of earnings to convertible preferred stock reduced earnings attributable to common stockholders. Gross margin benefited from the revenue mix, particularly recurring disposables, service and accessories revenue.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $5.7 million at March 31, 2017, compared with $8.5 million at December 31, 2016.
- Total liquidity was approximately $10.0 million, consisting of cash and $4.3 million of borrowing capacity under the asset-based revolving facility.
- The revolving credit facility has a maximum availability of $10.0 million, subject to collateral, and had no outstanding balance at quarter-end. It matures March 31, 2018.
- Total liabilities were $33.1 million, including $16.7 million of current warrant liabilities and $9.8 million of total deferred revenue.
- Stockholders’ deficit was $20.1 million at March 31, 2017, compared with $21.5 million at December 31, 2016.
- The Healthcare Royalty Partners debt was extinguished in September 2016; interest expense declined to approximately $49,000 from $819,000 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower Niobe system sales; systems revenue fell from $2.1 million to $0.2 million. Recurring disposables, service and accessories revenue increased modestly.
- Cost of revenue decreased from $2.2 million to $1.3 million, and overall gross margin increased from 75% to 82%. Systems gross margin was approximately 0% in Q1 2017 versus 48% in Q1 2016 due to product mix and limited transactions.
- Research and development expense decreased 21% to $1.2 million, and sales and marketing expense decreased 7% to $3.6 million. General and administrative expense increased 10% to $2.8 million, primarily due to one-time severance payments.
- Operating performance remained loss-making despite the reported net profit, reflecting the significant non-cash warrant revaluation gain.
- Operating cash use improved by approximately $1.2 million year over year, but cash declined by $2.8 million during the quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2017 expenses to exceed 2017 gross margin and expects continued operating losses and negative cash flows until revenue growth or expense reductions support ongoing operations.
- Management believes available cash and expected borrowing capacity will fund ordinary-course obligations for at least 12 months, assuming renewal and continued availability of the revolving facility. The filing cautions that renewal is not assured on acceptable terms, in sufficient amounts, or at all.
- Liquidity depends materially on clinical adoption within the existing Niobe installed base and new capital-system placements. Potential responses include reducing or delaying expenses, reducing headcount, using stock-based payments, and raising additional debt or equity financing.
- The company may be unable to obtain additional financing on acceptable terms, and financing could be dilutive. Because its common stock was delisted from Nasdaq and began trading on OTCQX in August 2016, access to equity financing may be more difficult.
- Series A convertible preferred stock carries a 6% cumulative dividend, conversion rights at an initial $0.65 per share, senior liquidation rights, and potential redemption rights. The related warrants are liabilities subject to recurring fair-value remeasurement.
- At March 31, 2017, potential dilution included approximately 38.9 million warrant shares and 37.9 million shares issuable upon conversion of preferred stock and accrued dividends, in addition to options and restricted stock units.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. Pending ordinary-course claims were not expected to have a material effect.
Investor Verification Items
- Verify the timing and terms of renewal or replacement of the revolving credit facility before its March 31, 2018 maturity.
- Assess whether recurring revenue growth and new Niobe system placements can offset weak system-sales volume.
- Separate operating performance from the $3.1 million non-cash warrant revaluation gain when evaluating profitability.
- Monitor cash burn, borrowing capacity, covenant compliance, and the need for additional financing.
- Evaluate dilution and senior claims associated with the convertible preferred stock, accrued dividends, warrants, options, and restricted stock units.
- Review the sustainability of the 82% consolidated gross margin given the quarter’s unusually low systems revenue and favorable revenue mix.