Stereotaxis, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed August 7, 2014. Stereotaxis develops and sells the Epoch Solution, including Niobe robotic magnetic navigation, Odyssey information management, Vdrive robotic navigation, disposables, services and accessories. The installed base included 113 Niobe ES systems at June 30, 2014.
Financial Results and Position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $8.0 million | $9.7 million | $16.4 million | $18.1 million |
| Gross margin | 75% | 75% | 78% | 74% |
| Operating loss | $2.3 million | $1.8 million | $4.5 million | $5.3 million |
| Net loss | $1.9 million | $3.0 million | $6.1 million | $7.9 million |
| Net loss per share | $0.10 | $0.37 | $0.31 | $0.98 |
| Cash used in operations | Not separately provided | Not separately provided | $5.5 million | $3.3 million |
- Revenue mix: Q2 systems revenue declined 65% to $1.2 million, while disposables, service and accessories increased 8% to $6.9 million. For the six-month period, systems revenue declined 55% to $2.5 million, while disposables, service and accessories increased 11% to $13.9 million.
- Profitability: Q2 gross profit was $6.1 million and six-month gross profit was $12.8 million. Six-month gross margin improved primarily because of the shift toward higher-margin disposables and service revenue. Systems gross margin fell to 6% in Q2 and 34% for the six-month period, affected by low-margin Odyssey and Odyssey Cinema sales and a Niobe upgrade.
- Expenses: Q2 research and development, sales and marketing, and general and administrative expenses declined year over year. Six-month sales and marketing expense declined 15%; general and administrative expense was approximately unchanged.
- Other items: Q2 other income was $1.2 million, primarily from a non-cash decrease in the fair value of warrant liabilities. Six-month other income was $0.1 million versus $1.5 million in the prior-year period.
- Cash and liquidity: Cash and cash equivalents were $10.6 million at June 30, 2014, down from $13.8 million at December 31, 2013. Working capital declined to approximately $1.7 million from $4.4 million. Current assets were $24.7 million versus current liabilities of $23.1 million.
- Debt: Long-term debt was $18.5 million, consisting of Healthcare Royalty Partners debt. The debt bears interest at 16%, matures December 31, 2018, and is repaid from royalties under the Biosense Webster agreement. The revolving credit facility had no balance outstanding, with reported borrowing capacity of $3.8 million.
- Equity financing: The Company sold 711,959 shares through its Controlled Equity Offering during Q2 for $2.6 million of gross proceeds and $2.5 million of net proceeds. Approximately $15.4 million remained available under the facility at June 30, 2014.
Material Changes Versus Prior Comparable Period
- Revenue declined 17% in Q2 and 10% for the first six months, driven by substantially lower system sales.
- Recurring-oriented disposables, service and accessories revenue increased 8% in Q2 and 11% year to date.
- Operating loss improved for the six-month period despite lower revenue, reflecting reduced operating expenses and higher gross margin.
- Net loss improved because interest expense fell to $0.8 million in Q2 and $1.7 million year to date, following the 2013 extinguishment of convertible debentures and repayment of the term loan and revolving credit borrowings.
- Operating cash burn increased to $5.5 million from $3.3 million, primarily because of working-capital changes, including higher inventories.
- Stockholders’ deficit increased to $14.7 million from $11.7 million at December 31, 2013.
Outlook, Risks, Contingencies and Unusual Items
- Management expects additional losses through the remainder of 2014 and expects operating expenses to be generally consistent with 2013, with targeted additional investment.
- The Company states that existing cash, cash equivalents and borrowing facilities may not be sufficient to fund operating expenses and capital requirements through the next 12 months. Additional financing may be required and could be unavailable, unfavorable or dilutive; inadequate funding could force reductions in development, commercialization, sales, marketing or support activities, or cessation of operations.
- The Biosense Webster royalty stream is pledged to Healthcare Royalty Partners until the associated debt is repaid. Any royalty shortfall relative to interest due increases the loan principal.
- Remaining warrant liabilities totaled $5.5 million and are measured using Level 3 inputs. Changes in the Company’s share price and estimated volatility can materially affect reported other income or expense.
- Foreign-currency revenue represented approximately 16% of six-month revenue and foreign-currency expenses approximately 10% of total expenses. The Company does not hedge these exposures.
- Management reported effective disclosure controls and no material change in internal control over financial reporting.
- The securities class action was dismissed in the Company’s favor, with no appeal filed by the deadline. A related derivative action was dismissed without prejudice in July 2014. Management did not expect ordinary-course claims to have a material effect.
- The Company had submitted the V-Loop and V-CAS products for FDA review; the filing does not provide a subsequent regulatory determination.
- In July 2014, the Company received approximately $0.1 million from issuing 24,355 additional shares under the Controlled Equity Offering.
Investor Verification Items
- Verify the pace of system placements and upgrades, given the sharp decline in systems revenue and very low systems gross margin.
- Assess cash runway using the $5.5 million first-half operating cash burn, $10.6 million cash balance, $3.8 million reported revolver capacity and expected additional losses.
- Review the terms, covenants and repayment economics of the 16% Healthcare Royalty Partners debt and the related Biosense Webster royalty pledge.
- Monitor further equity issuance under the $18.0 million Controlled Equity Offering and the resulting dilution.
- Evaluate the sustainability of the higher recurring revenue mix and 78% year-to-date gross margin.
- Review warrant valuation sensitivity, foreign-currency exposure, regulatory submissions and the Company’s ability to finance operations through the next 12 months.