Stereotaxis, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
Stereotaxis designs, manufactures 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, accessories and royalties. The unaudited report covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The installed base was 127 Niobe ES systems at September 30, 2017.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $8.1 million, versus $8.3 million | $23.6 million, versus $24.9 million |
| Systems revenue | $1.6 million, versus $2.0 million | $3.6 million, versus $5.0 million |
| Disposables, service and accessories revenue | $6.5 million, versus $6.4 million | $19.9 million, versus $19.9 million |
| Gross margin | 76%, versus 73% | 77%, versus 78% |
| Operating income (loss) | $0.2 million, versus $(1.2) million | $(2.2) million, versus $(4.3) million |
| Net loss | $(4.3) million, versus $(6.2) million | $(3.3) million, versus $(10.8) million |
| Net loss attributable to common stockholders | $(4.7) million, versus $(12.4) million | $(4.4) million, versus $(17.0) million |
| Loss per share | $(0.21), versus $(0.56) | $(0.20), versus $(0.78) |
- Cash and cash equivalents were $4.5 million at September 30, 2017, down from $8.5 million at December 31, 2016.
- Net cash used in operating activities was $3.9 million for the first nine months of 2017, compared with $6.4 million in 2016. Investing cash use was $72,000.
- Financing activities used $70,000, compared with $10.1 million of financing cash provided in the prior-year period, which included the 2016 preferred stock financing.
- Total assets were $15.1 million and total liabilities were $33.3 million. Stockholders’ deficit was $24.2 million.
- Working capital deficit was $18.0 million at September 30, 2017, compared with $16.2 million at December 31, 2016.
- The company had no outstanding balance on its Silicon Valley Bank revolving line of credit, $3.0 million of borrowing capacity based on collateral, and reported total liquidity of $7.5 million, including cash.
- The balance sheet included a $20.8 million current warrant liability, measured at Level 3 fair value, compared with $19.8 million at year-end 2016.
Material changes versus the prior comparable period
- Quarterly revenue declined 2%, primarily because systems revenue fell approximately 18%; recurring disposables, service and accessories revenue increased approximately 3%.
- Nine-month revenue declined approximately 5%, driven by a 27% reduction in systems revenue. Recurring revenue was essentially unchanged.
- Quarterly gross margin improved to 76% from 73%, primarily due to improved systems margins. Nine-month gross margin decreased to 77% from 78%, reflecting lower margins on disposables and service contracts.
- Research and development, sales and marketing, and general and administrative expenses declined in both comparison periods, reflecting lower headcount, travel, project, professional-fee and rent expenses.
- Operating loss improved substantially year over year. Interest expense also declined because the Healthcare Royalty Partners debt was extinguished in September 2016.
- The 2016 comparison included a $5.6 million gain on debt extinguishment and a $6.1 million noncash deemed dividend on convertible preferred stock; these items did not recur in 2017.
Guidance, outlook, risks and unusual items
- Management expects 2017 expenses to exceed 2017 gross margin and expects continuing operating losses and negative cash flows until revenue improves or expenses are reduced.
- Management believes available cash and expected borrowing capacity will fund ordinary-course obligations for at least 12 months after issuance of the financial statements, assuming renewal and continued availability of the revolving credit facility.
- The revolving facility matured on March 31, 2018. Management expected renewal on similar terms but stated there was no assurance of timely renewal, sufficient availability, or acceptable terms.
- On November 7, 2017, after quarter-end, the company amended the facility, reducing maximum availability from $10.0 million to $5.0 million and lowering the interest-rate floor from 7.0% to 5.75%. Management stated the change should not affect typical borrowing capacity.
- Liquidity plans include controlling operating expenditures, potentially substituting stock for cash compensation, reducing projects or headcount, and raising additional debt or equity capital. Additional financing may be unavailable, dilutive or unavailable on acceptable terms.
- Clinical adoption within the installed base and new capital-system placements are key drivers of liquidity. Failure to obtain adequate funding could delay development or commercialization, reduce sales and support resources, or require cessation of operations.
- Commercialization depends in part on alliances with Biosense Webster, Philips and Siemens and on continued availability of compatible imaging and catheter technologies.
- The company’s convertible preferred stock carries a 6% cumulative dividend, senior liquidation rights and conversion features. Approximately 38.0 million common shares were issuable upon warrant exercise and approximately 39.0 million upon conversion of preferred stock and accumulated dividends at September 30, 2017, subject to applicable limitations.
- Management stated that pending ordinary-course legal claims were not expected to have a material effect. Disclosure controls and procedures were assessed as effective, with no material change in internal control over financial reporting.
Most important facts for an investor to verify
- Whether the company renewed and retained adequate availability under its revolving credit facility when it matured in March 2018.
- Cash burn, recurring revenue growth and the timing of new Niobe ES or other capital-system placements.
- The valuation and potential dilution associated with the $20.8 million warrant liability, approximately 38.0 million warrant shares, and preferred-stock conversion rights.
- Whether recurring service, disposable and royalty revenue can offset weakness in systems revenue and support positive operating cash flow.
- The company’s ability to obtain additional financing without materially diluting existing common stockholders.
- The status of strategic technology alliances and regulatory or commercial access to compatible imaging systems and interventional devices.