Stereotaxis, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2013, filed November 14, 2013. Stereotaxis develops and sells the Epoch Solution, including Niobe robotic magnetic navigation systems, Odyssey information-management systems, Vdrive robotic navigation systems, and related disposable devices, service and accessories. The company reported an installed base of 92 Niobe ES systems at September 30, 2013.
Financial Highlights
| Metric | Three Months Ended Sept. 30, 2013 | Three Months Ended Sept. 30, 2012 | Nine Months Ended Sept. 30, 2013 | Nine Months Ended Sept. 30, 2012 |
|---|---|---|---|---|
| Total revenue | $10.8 million | $11.6 million | $29.0 million | $34.4 million |
| Gross margin | $7.3 million; 68% | $8.1 million; 70% | $20.8 million; 72% | $23.8 million; 69% |
| Operating loss | $(1.1) million | $(0.9) million | $(6.4) million | $(9.7) million |
| Net loss | $(56.9) million | $(1.9) million | $(64.8) million | $(4.9) million |
| Net loss per share | $(4.49) | $(0.25) | $(6.72) | $(0.74) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(4.9) million | $(12.0) million |
- System revenue was $4.4 million in the third quarter and $10.0 million for the first nine months, down approximately 12% and 29%, respectively, year over year.
- Disposables, service and accessories revenue was $6.4 million in the third quarter and $19.0 million for the first nine months, down approximately 2% and 6%, respectively.
- Operating expenses declined to $8.4 million in the quarter and $27.2 million for the first nine months, compared with $9.0 million and $33.6 million in the respective 2012 periods.
- The substantial net loss was driven primarily by $48.2 million of third-quarter and $46.7 million of year-to-date other expense from remeasurement of warrants and debt conversion features, plus interest expense of $7.6 million and $11.7 million, respectively. These items were substantially related to the August 2013 capital transactions and included significant non-cash components.
- Cash and cash equivalents were $8.4 million at September 30, 2013, compared with $7.8 million at December 31, 2012. Working capital deficit improved to approximately $2.4 million from $5.7 million.
- Total debt was $21.5 million at September 30, 2013, including $18.5 million of Healthcare Royalty Partners debt and $3.0 million drawn on the revolving credit line. The company had no remaining borrowing capacity under the revolving line at quarter-end.
- Stockholders’ deficit was $17.8 million at September 30, 2013, and accumulated deficit was approximately $449.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined 6% in the quarter and 16% year to date, primarily from lower system sales, lower Niobe ES pricing, fewer upgrades and lower disposable volume.
- Quarterly gross margin declined to 68% from 70%, while nine-month gross margin increased to 72% from 69% because of a greater mix of higher-margin disposables, service and accessories.
- Research and development expense declined 32% in the quarter and 38% year to date; sales and marketing expense was flat in the quarter and down 19% year to date; general and administrative expense was approximately flat in the quarter and down 6% year to date.
- On August 7, 2013, holders exercised approximately 2.5 million conversion warrants for approximately $8.5 million of cash proceeds. Convertible debentures were exchanged for approximately 2.7 million shares and additional warrants. Certain subsequent warrant exercises were cashless, while other exercises generated approximately $3.1 million of gross proceeds.
- The company paid its term note in full in September 2013 and amended its revolving facility in August 2013, reducing the facility from $6.0 million to $3.0 million and extending maturity to March 31, 2014. Financial covenants were revised to include EBITDA and liquidity requirements.
- The company transferred its stock listing from the NASDAQ Global Market to the NASDAQ Capital Market effective August 19, 2013.
Guidance, Outlook, Risks and Unusual Items
- Management expected additional losses and negative operating cash flow throughout the remainder of 2013.
- The filing states that existing cash, cash equivalents and borrowing facilities would not be sufficient to fund operating expenses and capital equipment requirements for the next 12 months. Additional financing was required, but availability, timing, terms and potential dilution were uncertain. Management stated that insufficient financing could require reduced activities or cessation of operations.
- Healthcare Royalty Partners debt bears interest at 16%, matures December 31, 2018, and is repaid from royalties under the Biosense Webster agreement. Royalties are unavailable to the company until the debt is repaid.
- The revolving credit facility is secured by substantially all company assets and includes EBITDA and liquidity covenants. Failure to satisfy covenants or refinance maturities could materially affect liquidity.
- A rights offering filed October 29, 2013 allowed eligible stockholders and certain warrant holders to purchase up to 6,315,953 shares at $3.00 per share, generally at a ratio of one share for every three held. The rights were scheduled to expire November 21, 2013 unless extended.
- The company was defending a securities class action and a related shareholder derivative action. Management considered the claims without merit, but stated that potential losses could not reasonably be estimated.
- Approximately 17% of nine-month revenue and 14% of expenses were denominated in foreign currencies. The company did not hedge currency exposure.
Most Important Facts to Verify
- Whether the rights offering and other financing activities provided sufficient liquidity after September 30, 2013.
- Compliance with the revolving facility’s EBITDA and greater-than-2:1 liquidity covenant requirements, and the March 31, 2014 maturity.
- The sustainability of revenue, system placements and disposable utilization given year-over-year declines.
- The composition and cash versus non-cash effects of the $48.2 million quarterly other expense and $7.6 million interest expense.
- The repayment trajectory and royalty diversion associated with the 16% Healthcare Royalty Partners debt.
- Potential dilution from approximately 3.0 million outstanding warrants, additional exchange warrants and other equity-linked instruments.
- The status and potential exposure from the pending securities and derivative litigation.