Stereotaxis, Inc. Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the period ended September 30, 2016. Stereotaxis develops and sells the Epoch Solution, including Niobe ES magnetic navigation, Odyssey information management, Vdrive robotic navigation systems, disposables, services, accessories and related software. The installed base was 129 Niobe ES systems at quarter-end.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Change |
|---|
| Total revenue | $8.3 million | $9.3 million | Down 10% |
| Gross profit | $6.1 million | $6.8 million | Down 11% |
| Gross margin | 73% | 74% | Down 1 percentage point |
| Operating loss | $1.2 million | $0.9 million | Higher loss |
| Net loss | $6.2 million | $1.0 million | Higher loss |
| Net loss available to common stockholders | $12.4 million | $1.0 million | Higher loss |
| Loss per common share | $0.56 | $0.05 | Higher loss |
| Metric | Nine months 2016 | Nine months 2015 | Change |
|---|
| Total revenue | $24.9 million | $28.5 million | Down 13% |
| Gross profit | $19.3 million | $20.4 million | Down 5% |
| Gross margin | 78% | 72% | Up 6 percentage points |
| Operating loss | $4.3 million | $4.0 million | Higher loss |
| Net loss | $10.8 million | $5.7 million | Higher loss |
| Net loss per common share | $0.78 | $0.27 | Higher loss |
- Q3 systems revenue declined 15% to $2.0 million, primarily because of lower Niobe system sales. One Niobe system was recognized in Q3 2016 versus two in Q3 2015.
- Q3 disposables, service and accessories revenue declined 9% to $6.4 million, primarily due to lower one-time service billings.
- Nine-month systems revenue declined 40% to $5.0 million, while disposables, service and accessories revenue declined 2% to $19.9 million.
- Operating expenses were $7.3 million in Q3 and $23.6 million for the nine-month period, generally lower than the comparable periods except for relatively stable general and administrative spending.
- Q3 warrant revaluation expense of $9.9 million was recorded in other expense. The company also recorded a $5.6 million gain on extinguishment of debt.
- Cash and cash equivalents were $9.2 million at September 30, 2016, compared with $5.6 million at December 31, 2015. Total assets were $21.6 million.
- Nine-month operating cash use was $6.4 million, compared with $4.2 million in the prior-year period. Financing activities provided $10.1 million, primarily from the preferred stock and warrant financing.
- Working capital was a deficit of $21.7 million at September 30, 2016, compared with positive working capital of $1.0 million at December 31, 2015, principally because the new warrants were classified as current liabilities.
Material changes and financing
- In September 2016, the company issued 24,000 shares of Series A Convertible Preferred Stock and warrants to purchase 36.9 million common shares for aggregate gross proceeds of $24.0 million and net proceeds of $23.2 million.
- The company used $13.0 million of the financing proceeds to extinguish Healthcare Royalty Partners debt. The debt had a carrying amount of approximately $18.1 million, plus accrued interest, and was settled for $13.0 million. Royalties under the Biosense Webster agreement reverted to the company after repayment.
- The preferred stock carries a 6% cumulative dividend, is initially convertible at $0.65 per common share and ranks senior to common stock. A non-cash deemed dividend of $6.1 million was recorded, reducing net loss available to common stockholders.
- The September 2016 warrants have a $0.70 exercise price and expire in September 2021. They were recorded as a liability at fair value of $27.1 million at quarter-end. Total warrant liabilities were $27.5 million.
- The company had no outstanding balance on its Silicon Valley Bank revolving credit facility at quarter-end. The facility had a $10.0 million maximum, subject to collateral, and approximately $4.0 million of borrowing capacity was available.
- Nasdaq suspended and delisted the common stock effective August 4, 2016 because the company failed to meet the applicable market-value requirement. The shares began trading on OTCQX under the symbol STXS.
Outlook, risks and unusual items
- Management expects additional losses during 2016 while continuing product development, commercialization, research and development, and sales and marketing activities.
- Management stated that existing cash, cash equivalents and borrowing facilities may not be sufficient to fund operating expenses and capital requirements through the following 12 months. Additional financing may be required.
- Potential financing alternatives include equity sales, non-core asset sales, strategic collaborations, debt financing and distribution rights. Availability and terms are uncertain, and future equity financing could dilute stockholders.
- If adequate funds are unavailable, the company may need to delay product development or commercialization, reduce sales and support resources, license technologies to third parties or potentially cease operations.
- Revenue is affected by the timing and number of system placements, hospital capital spending, recurring disposable and service utilization, regulatory approvals, product adoption and customer acceptance.
- Warrant liabilities are remeasured through earnings and may create significant non-cash volatility based on the company’s share price and valuation assumptions.
- Legal claims arising in the ordinary course were not expected by management to have a material effect. No subsequent events were reported in the financial statement notes.
- Management concluded that disclosure controls and procedures were effective and identified no material changes in internal control over financial reporting during the period.
Facts investors should verify
- Whether the $9.2 million cash balance and approximately $4.0 million of borrowing capacity are sufficient given the reported $6.4 million nine-month operating cash burn.
- The timing and terms of any required additional financing and the potential dilution from the preferred stock, cumulative dividends and approximately 36.9 million new warrants.
- The impact of lower Niobe and Vdrive system placements on future revenue, gross margin and recurring disposable and service revenue.
- The future earnings volatility associated with the $27.5 million warrant liability and its dependence on the company’s share price and other valuation assumptions.
- The effect of OTCQX trading on share liquidity, access to capital markets and the company’s ability to use the remaining $13.8 million capacity under its controlled equity offering.
- The company’s ability to comply with revolving credit covenants, including the 1.50:1.00 liquidity ratio and minimum tangible net worth requirements.
