Stereotaxis, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018. The unaudited filing was submitted November 13, 2018. Stereotaxis develops and sells the Epoch Solution, including Niobe ES robotic navigation systems, Odyssey information systems, Vdrive systems, disposables, service contracts and related products. The installed base was 127 Niobe ES systems at September 30, 2018.
Financial Highlights
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $7.6 million | $8.1 million | $22.1 million | $23.6 million |
| Gross profit | $5.9 million | $6.2 million | $17.8 million | $18.2 million |
| Gross margin | 78% | 76% | 81% | 77% |
| Operating income (loss) | $(0.1) million | $0.2 million | $(1.9) million | $(2.2) million |
| Net income (loss) | $(0.1) million | $(4.3) million | $0.7 million | $(3.3) million |
| Net loss attributable to common stockholders | $(0.5) million | $(4.7) million | $(0.4) million | $(4.4) million |
| Basic and diluted EPS | $(0.01) | $(0.21) | $(0.01) | $(0.20) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(1.8) million | $(3.9) million |
- Revenue mix: Nine-month systems revenue declined 71% to $1.0 million, while disposables, service and accessories revenue increased 5% to $21.0 million. Systems represented 5% of nine-month revenue, compared with 15% in the prior year.
- Operating expenses: Nine-month research and development expense increased 20% to $6.0 million. Sales and marketing declined 5% to $9.9 million, and general and administrative expense declined 24% to $3.8 million.
- Liquidity: Cash and equivalents were $11.6 million at September 30, 2018, compared with $3.7 million at December 31, 2017. Working capital was $8.1 million, versus a $20.3 million deficit at year-end 2017. Total liquidity was $14.8 million, including $3.2 million of borrowing capacity.
- Debt and credit facility: The company had no outstanding balance on its secured Silicon Valley Bank revolving line of credit. The facility has maximum availability of $5.0 million, subject to collateral, and matures April 25, 2019.
- Capital structure: Common shares outstanding increased substantially following the exercise of 35.8 million warrants. The company received approximately $10.0 million in cash, and stockholders’ equity increased by approximately $27 million.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue decreased 7%, primarily because systems revenue declined approximately 55%; recurring disposables, service and accessories revenue increased approximately 4%.
- Nine-month revenue decreased 6%, reflecting lower Niobe system sales, partially offset by higher recurring revenue.
- Gross margin improved because of the shift toward higher-margin recurring revenue and lower service-contract costs, despite negative nine-month systems gross margin of approximately $0.2 million.
- Operating losses narrowed for the nine-month period, but the third quarter moved from operating income of $0.2 million to an operating loss of $0.1 million.
- Nine-month net income benefited materially from a $2.6 million non-cash gain related to the remeasurement and reclassification of warrants. The prior-year period included a $1.0 million warrant-related expense and the third quarter of 2017 included a $4.5 million other expense.
- Cash increased by $7.9 million during the first nine months, primarily due to $9.9 million of financing cash flow from warrant exercises. Operating activities still consumed $1.8 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 expenses to exceed 2018 gross margin and expects continued operating losses and negative cash flow until revenue growth or expense reductions support operations.
- Management believes cash on hand will fund ordinary-course obligations for at least 12 months following issuance of the financial statements, but future liquidity depends substantially on clinical adoption within the installed base and new capital-system placements.
- The company may require additional equity, debt, asset-sale or strategic financing. Management cautions that financing may be unavailable, delayed, dilutive or available only on unfavorable terms; inadequate funding could require reduced commercialization activity or cessation of operations.
- The company relies on compatible digital fluoroscopy systems integrated with its products. The filing states that the commercial availability of both currently compatible systems is unlikely to continue for multiple years, and equivalent alternatives may not be available on acceptable terms or at all.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, recording a $0.3 million reduction to accumulated deficit. The filing states that the adoption did not otherwise significantly change the timing or method of recognizing material revenue streams.
- Inventory included a $4.6 million obsolescence reserve at September 30, 2018, including non-cash charges related to committed Niobe ES inventory.
- Series A convertible preferred stock had a $6.0 million carrying amount and accrued cumulative dividends. At September 30, 2018, potential dilution included 41.2 million shares issuable upon conversion of preferred stock and accumulated dividends, 2.3 million shares from warrants, 1.2 million from options and stock appreciation rights, and 0.7 million from unvested restricted units.
- Management reported no material pending legal proceedings, no subsequent events, and effective disclosure controls and procedures.
Important Facts for Investors to Verify
- Whether recurring revenue growth and clinical adoption can offset continued weakness in capital-system placements.
- The timing and terms of any financing needed after the April 2019 maturity of the revolving credit facility.
- The potential dilution and seniority effects of the convertible preferred stock, accumulated dividends, warrants and other equity awards.
- The sustainability of reported profitability, given that nine-month net income was materially affected by non-cash warrant accounting.
- The adequacy of the Niobe ES inventory reserve and the commercial availability of compatible fluoroscopy systems.
- Whether the company can achieve positive operating cash flow before existing cash and borrowing capacity are substantially reduced.