Stereotaxis, Inc. 2017 Form 10-K Summary
Business context and reporting period
Stereotaxis designs, manufactures and markets the Epoch Solution, comprising the Niobe ES remote magnetic navigation system, Odyssey information-management solution, Vdrive robotic navigation system, and related disposable devices and services for interventional cardiology and electrophysiology procedures. The filing covers the fiscal year ended December 31, 2017; quarterly Q4 results are not separately presented, although the filing identifies significant fourth-quarter inventory and intangible-asset charges.
The Company had 128 installed Niobe ES systems, approximately 117 employees, and approximately $1.5 million of backlog at year-end. About 68% of that backlog was expected to be recognized during 2018, subject to customer, construction, regulatory and other contingencies.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $31.1 million | $32.2 million | Down 3% |
| Systems revenue | $4.3 million | $5.8 million | Down 26% |
| Disposables, service and accessories | $26.9 million | $26.4 million | Up 2% |
| Gross margin | 66% | 77% | Down 11 points |
| Operating loss | $5.9 million | $6.4 million | Improved $0.5 million |
| Net loss | $5.9 million | $5.3 million | Worsened $0.6 million |
| Net loss attributable to common stockholders | $7.3 million | $11.8 million | Improved $4.5 million |
| Operating cash flow | $(4.7) million | $(6.6) million | Improved $1.9 million |
| Cash and cash equivalents at year-end | $3.7 million | $8.5 million | Down $4.8 million |
Cost of revenue increased 43% to $10.8 million. Gross margin was reduced by a $3.8 million non-cash inventory-related charge in Q4 related primarily to low recent Niobe ES sales. Excluding that charge, 2017 gross margin would have been approximately 78%, versus 77% in 2016. Systems gross margin was negative 45% as reported, or approximately 45% excluding the inventory charge.
Research and development expense declined to $4.8 million from $5.5 million, sales and marketing expense declined to $13.0 million from $15.2 million, and general and administrative expense declined to $8.5 million from $10.3 million. Interest expense declined to $0.2 million from $2.5 million following the 2016 extinguishment of the Healthcare Royalty Partners debt. Other income was $0.2 million in 2017, compared with $2.0 million of other expense in 2016, primarily due to changes in the fair value of warrant liabilities.
Year-end working capital was negative $20.3 million, compared with negative $16.2 million in 2016. The Company had no outstanding borrowings under its Silicon Valley Bank revolving facility, $2.7 million of borrowing capacity, and total liquidity of approximately $6.4 million, including cash. The facility had a March 31, 2018 maturity date and was secured by substantially all Company assets. The Company was in compliance with its financial covenants at December 31, 2017.
Material changes versus the prior comparable period
- Revenue declined primarily because systems revenue decreased by $1.5 million; recurring disposables, service and accessory revenue increased modestly.
- The Q4 inventory reserve increased the inventory obsolescence reserve to $3.9 million and reduced reported inventory to $1.1 million from $5.4 million.
- Operating expenses declined by approximately $4.8 million, reflecting lower headcount, travel, project, rent and administrative costs.
- Operating cash burn improved, but cash declined substantially because 2016 benefited from financing proceeds while 2017 had no comparable capital raise.
- The Company’s accumulated deficit increased to $477.1 million and stockholders’ deficit increased to $26.6 million.
- U.S. revenue declined to $18.0 million from $19.4 million, while international revenue increased to $13.1 million from $12.8 million.
- Royalties and Odyssey sales to Biosense Webster represented 11% of 2017 revenue, compared with 13% in 2016; royalty revenue represented approximately 10% of total revenue.
Guidance, outlook, risks and unusual items
Management stated that 2018 expenses are expected to exceed 2018 gross margin and that operating losses and negative cash flows are expected to continue until revenue growth or expense reductions support operations. Management believed year-end cash plus $10 million received from a March 2018 warrant exercise would fund obligations for at least 12 months from issuance of the financial statements.
In February 2018, the Company temporarily reduced the exercise price of certain warrants from $0.70 to $0.28 per share. Holders exercised 35.8 million warrants, generating $10.0 million of cash. The transaction may have caused an ownership change under Section 382, potentially limiting the use of approximately $98.5 million of federal net operating loss carryforwards.
Other significant items include a $77,778 Q4 impairment charge for certain Niobe ES intellectual property rights, a $14.5 million provisional deferred-tax remeasurement related to the Tax Cuts and Jobs Act fully offset by a valuation allowance, and a $0.4 million expected cumulative-effect reduction to accumulated deficit upon adoption of the new revenue standard on January 1, 2018.
- Liquidity and going-concern risk remain significant because of recurring losses, negative operating cash flow, negative working capital and reliance on additional financing or improved operating performance.
- Capital-system sales have long and variable sales and installation cycles and depend on hospital budgets, construction schedules, physician adoption, certificate-of-need approvals and reimbursement.
- Backlog may be delayed, revised or canceled and is not necessarily indicative of future revenue.
- The business depends on strategic relationships with imaging and catheter partners, including Biosense Webster, and on continued compatibility with third-party systems and disposables.
- Medical-device regulatory, reimbursement, quality, product-liability, cybersecurity, intellectual-property, supplier and manufacturing risks could adversely affect sales and operations.
- The common stock trades on OTCQX following Nasdaq delisting in 2016, which may limit liquidity and access to capital markets. Potential dilution is substantial from preferred stock, warrants, options and restricted stock units.
Important facts for investors to verify
- Whether the March 2018 warrant exercise materially extends the Company’s liquidity runway and how the related Section 382 analysis affects tax attributes.
- Current status and renewal terms of the Silicon Valley Bank facility after its March 31, 2018 maturity date.
- Actual 2018 conversion of the $1.5 million backlog into revenue and the pace of new Niobe ES placements.
- Whether recurring disposable, royalty, service and license revenue can offset continued weakness in capital-system sales.
- The sustainability of reported gross margins excluding the Q4 inventory charge and the potential for further inventory or asset impairments.
- Outstanding warrant, preferred-stock conversion and other potential dilution following the 2018 warrant exercises.
- Progress in replacing or upgrading compatible fluoroscopy and other strategic-partner technologies.