Stereotaxis, Inc. 2018 Form 10-K Summary
Business context and reporting period
Stereotaxis designs and markets robotic systems and instruments for catheter-based cardiac procedures. Its Epoch Solution includes the Niobe ES robotic magnetic navigation system, Odyssey information-management solution, Vdrive robotic navigation system, and related disposable devices. The filing covers the fiscal year ended December 31, 2018; it is an annual report rather than a standalone fourth-quarter filing.
The company had 126 installed Niobe ES systems and 119 employees at December 31, 2018. Revenue is generated from capital system sales, disposables, service and accessories, royalties from Biosense Webster, and other recurring software and maintenance revenue.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $29.3 million | $31.1 million | Down 6% |
| Systems revenue | $1.6 million | $4.3 million | Down 63% |
| Disposables, service and accessories | $27.8 million | $26.9 million | Up 3% |
| Gross margin | 81% | 65% | Up 16 percentage points |
| Operating loss | $2.5 million | $5.9 million | Improved $3.5 million |
| Net income (loss) | $0.1 million | $(5.9) million | Improved $6.0 million |
| Net loss attributable to common stockholders | $(1.3) million | $(7.3) million | Improved $6.0 million |
| Cash flow from operations | $(2.5) million | $(4.7) million | Improved $2.1 million |
| Cash and cash equivalents | $10.8 million | $3.7 million | Up $7.1 million |
Gross margin improvement primarily reflected lower inventory-related charges and higher margins on disposable products and service contracts. Systems gross margin remained negative at approximately 13% because of low sales volume and obsolescence charges.
Research and development expense increased 23% to $8.2 million. Sales and marketing expense declined 5% to $13.0 million, and general and administrative expense declined 18% to $4.9 million. Other income was $2.6 million, primarily from warrant fair-value adjustments, compared with $0.2 million in 2017; this was a significant unusual, largely non-cash item.
Cash flow from financing activities was $9.9 million, primarily from warrant exercises. The company received approximately $10.0 million from the exercise of 35.8 million warrants after temporarily reducing the exercise price to $0.28 per share. Working capital improved to approximately $7.8 million from a $20.3 million deficit.
Stereotaxis had no outstanding borrowings under its Silicon Valley Bank revolving credit facility at year-end. The facility had $3.3 million of available borrowing capacity, subject to collateral, and a $5.0 million maximum commitment. The facility matured April 25, 2019, was secured by substantially all company assets, and included liquidity and other covenants. The company reported compliance with all financial covenants.
Material changes versus 2017
- Revenue declined because system revenue fell sharply; recurring revenue streams partially offset the decline.
- Recurring revenue represented 52% of total revenue, compared with 44% in 2017.
- Gross margin increased from 65% to 81%, benefiting from lower inventory charges and improved disposable and service margins.
- Operating losses narrowed substantially, and the company reported $0.1 million of net income before the $1.4 million cumulative preferred-stock dividend.
- Operating cash use decreased, but the company remained dependent on financing activity to increase liquidity.
- Common shares issued increased substantially following warrant exercises, creating dilution. Shares issued increased from 22.8 million at year-end 2017 to 59.1 million at year-end 2018.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, recording a $0.3 million reduction to accumulated deficit. Management reported no material effect on 2018 commission expense or the timing of material revenue streams.
Backlog, outlook, risks and unusual items
Backlog was approximately $2.8 million at December 31, 2018, compared with $1.5 million at December 31, 2017. Management expected approximately 85% of the 2018 backlog to be recognized as revenue during 2019, but cautioned that orders may be delayed, modified or canceled and that installations depend on customer construction and renovation schedules.
Management stated that cash on hand was expected to cover ordinary-course obligations for at least 12 months after issuance of the financial statements. However, the company expected 2019 expenses to exceed 2019 gross margin and anticipated continued operating losses and negative cash flows until revenue growth or expense reductions provide sufficient support. Management indicated that additional debt or equity financing might be required.
- Going-concern risk remains significant because of the company’s history of operating losses, projected 2019 operating losses, negative operating cash flow, and dependence on future financing or improved adoption.
- Hospital adoption is uncertain because the systems are expensive capital equipment and sales cycles are long and dependent on budgets, construction, physician support and, in some states, certificates of need.
- Backlog is not assured revenue and may not convert on the expected timetable.
- The company depends on Biosense Webster and other strategic partners for compatible catheters, royalties, imaging integration and product development. Biosense Webster-related royalties and Odyssey sales represented $2.9 million, or 10% of 2018 revenue.
- Regulatory clearances, reimbursement, product safety, clinical outcomes, software performance and quality-system compliance could materially affect commercialization.
- The company relies on contract manufacturers and certain sole- or single-source suppliers, including suppliers of magnets and other key components.
- The common stock trades on the OTCQX rather than a national exchange, limiting liquidity and potentially restricting access to capital markets.
- Series A convertible preferred stock carried a 6% cumulative dividend and was convertible into approximately 41.7 million common shares at year-end, creating substantial potential dilution and senior liquidation rights.
- Operating lease commitments totaled approximately $7.1 million through 2021, excluding potential sublease income.
Most important facts for investors to verify
- Whether recurring disposable, service, royalty and maintenance revenue can offset weak capital-system sales.
- Whether the $2.8 million backlog converts to revenue as expected and whether new system placements increase.
- Actual 2019 operating cash burn, expense reductions, and the need for additional financing.
- Extension, refinancing or replacement of the revolving credit facility that matured April 25, 2019.
- The effect of warrant exercises, preferred-stock conversion rights, options and remaining warrants on future share dilution.
- Customer adoption, procedure volumes and utilization of the 126-system installed base.
- Continuity of Biosense Webster and imaging-system relationships, regulatory approvals, reimbursement and supply-chain availability.
- The impact of inventory obsolescence, negative systems gross margins and future capital-equipment demand on overall profitability.