Stereotaxis, Inc. 2020 Q3 Form 10-Q Summary
Business context and reporting period
Stereotaxis designs and markets robotic magnetic navigation systems, including the Genesis RMN System, Niobe System, Odyssey Solution and related disposable devices and services for hospital interventional labs. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $8.7 million | $8.2 million | $19.8 million | $22.0 million |
| Gross margin | $4.7 million; 54% | $6.4 million; 78% | $13.7 million; 69% | $17.6 million; 80% |
| Operating loss | $(1.6) million | $(0.04) million | $(5.5) million | $(3.6) million |
| Net income (loss) | $(1.6) million | $0.04 million | $(5.5) million | $(3.5) million |
| Loss attributable to common stockholders | $(1.9) million | $(0.3) million | $(6.5) million | $(4.6) million |
| EPS attributable to common stockholders | $(0.03) | $0.00 | $(0.09) | $(0.07) |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(3.8) million | $(2.7) million |
- Q3 revenue increased 6%, driven by a 74% increase in system revenue to $3.0 million. Disposables, service and accessories revenue declined 12% to $5.5 million.
- Nine-month revenue declined 10%. System revenue increased 69% to $3.0 million, but disposables, service and accessories declined 18% to $16.1 million.
- Gross margin contracted materially because of product mix, initial installation costs, overhead allocation and production and obsolescence reserves. System gross margin was negative in both the Q3 and nine-month 2020 comparisons described by management.
- Nine-month research and development expense decreased 18% to $6.0 million, sales and marketing expense decreased 14% to $8.3 million, and general and administrative expense increased 19% to $5.0 million, primarily due to higher non-cash director compensation.
- Cash and cash equivalents were $43.6 million at September 30, 2020, up from $30.2 million at December 31, 2019. Working capital was $40.4 million versus $26.7 million at year-end 2019.
- Cash used in operations was $3.8 million and cash used in investing activities was $0.07 million for the first nine months. Financing activities provided $17.3 million.
- At September 30, 2020, debt consisted primarily of a $2.2 million Paycheck Protection Program loan, presented as $0.5 million current and $1.7 million long-term debt. The company expects the loan to be substantially forgiven; any unforgiven amount bears 1% interest and repayment would begin in August 2021, with final repayment in April 2022.
Material changes versus the prior comparable periods
- Q3 revenue improved modestly, but profitability deteriorated sharply as gross margin fell from 78% to 54% and the company moved from a small prior-year profit to a $1.6 million net loss.
- For the first nine months, revenue fell $2.2 million, while gross profit fell $3.9 million and the net loss increased $2.0 million.
- The company raised approximately $15.0 million net in a May 2020 registered offering of 3,658,537 common shares at $4.10 per share, contributing to higher cash and stockholders’ equity but also increasing share count and dilution.
- Common shares issued increased to 73.7 million at September 30, 2020 from 68.5 million at December 31, 2019. Potential dilution included 43.0 million shares issuable upon conversion of Series A preferred stock and accumulated dividends, 5.6 million shares issuable upon conversion of Series B preferred stock, options and stock appreciation rights, warrants and unvested restricted stock units.
- The prior working capital line of credit with Silicon Valley Bank matured on June 30, 2020 and was not identified as an outstanding facility at quarter-end.
- Deferred revenue increased to $6.8 million from $5.6 million at year-end 2019, including approximately $1.2 million of remaining performance obligations on system contracts.
Guidance, outlook, risks and unusual items
- Management stated that procedure volumes recovered during Q3 toward pre-pandemic levels, but renewed COVID-19 outbreaks could again cause hospitals and patients to postpone procedures. The company could not reliably estimate the effect on Q4 2020 and beyond.
- Management expects continuing periodic disruptions to procedure volumes, service activity and system placements, with possible delays in capital system orders. Hospital financial pressure may lengthen sales cycles, delay or cancel projects and reduce demand for disposables.
- Manufacturing and supply chains had been minimally interrupted as of the filing date, but future interruptions could materially affect production, deliveries, revenue and cash flows.
- Travel restrictions and customer access limitations affected sales, installations, service activity and distributor operations. The company continued to evaluate cost reductions and spending controls.
- Strategic relationships supporting imaging, catheter compatibility and other integrated technologies are important to commercialization; loss of these relationships or inability to secure alternatives could adversely affect results.
- Series A preferred stock carries cumulative dividends at 6% annually, ranks senior to common stock in specified circumstances and is subject to redemption rights upon certain change-of-control events. No dividends had been declared or paid as of September 30, 2020.
- Management reported no material pending legal proceedings, no subsequent events, effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19-related procedure deferrals, hospital capital constraints or renewed outbreaks reduce system placements and recurring disposable, service and royalty revenue.
- Whether the company can sustain operations while generating negative operating cash flow and incurring continuing operating losses.
- The final forgiveness amount and repayment requirements for the $2.2 million PPP loan.
- The sustainability of cash balances after considering operating cash burn, lease obligations, working-capital needs and any future capital raises.
- The causes and persistence of negative system gross margins and the effect of product mix, installation costs and inventory reserves on future profitability.
- The dilution and potential control implications of convertible preferred stock, warrants, options, stock appreciation rights and restricted stock units.
- The status of approximately $1.2 million in remaining system-contract performance obligations and the timing of related revenue recognition.