Stereotaxis, Inc. annual report, FY2015

Stereotaxis, Inc. 2015 Form 10-K Summary

Business context and reporting period

Stereotaxis designs and markets robotic navigation and information-management systems for electrophysiology and complex interventional cardiology procedures. Its Epoch Solution includes the Niobe ES remote magnetic navigation system, Odyssey information-management solution, Vdrive robotic navigation system, and related disposable devices, service contracts, licenses and royalties.

The filing covers the fiscal year ended December 31, 2015, with comparative information for 2014. The source does not provide a separate fourth-quarter income statement or cash-flow statement; “2015 Q4” is therefore treated as the annual 2015 filing period.

Installed base: 125 Niobe ES systems at December 31, 2015.
Employees: approximately 126.
Backlog: approximately $6.0 million at year-end, compared with $5.7 million at December 31, 2014; approximately 79% was expected to be recognized in 2016, subject to customer and installation contingencies.

Financial performance and liquidity

Metric	2015	2014	Change
Total revenue	$37.7 million	$35.0 million	Up approximately 8%
Systems revenue	$10.6 million	$7.8 million	Up approximately 36%
Disposables, service and accessories revenue	$27.0 million	$27.2 million	Down approximately 1%
Gross profit	$27.2 million	$26.8 million	Up approximately 2%
Gross margin	72%	77%	Down 5 percentage points
Operating loss	$5.4 million	$5.4 million	Essentially unchanged
Net loss	$7.4 million	$5.2 million	Loss increased
Basic and diluted loss per share	$0.35 loss	$0.26 loss	Loss per share increased
Cash flow used in operations	$2.5 million	$9.1 million	Improved

System revenue included recognition on seven Niobe ES systems, $2.8 million from Odyssey and Odyssey Cinema systems, and $0.8 million from Vdrive systems.
Gross margin declined primarily because revenue mix shifted toward lower-margin system sales. System gross margin fell to 43% from 46%; disposables, service and accessories gross margin fell to 84% from 85%.
Research and development expense rose to $6.3 million from $5.2 million, including a $443,931 impairment charge on Odyssey-related intellectual property.
Sales and marketing expense rose to $15.9 million from $15.2 million, while general and administrative expense declined to $10.5 million from $11.8 million.
Other income declined to $1.3 million from $3.5 million, primarily because of a smaller non-cash decrease in the fair value of warrant liabilities. Interest expense was $3.3 million in both years.
Cash and cash equivalents were $5.6 million at December 31, 2015, down from $7.3 million. Working capital was approximately $1.1 million, down from $4.8 million.
Total debt principal was approximately $18.4 million, consisting primarily of Healthcare Royalty Partners debt bearing 16% annual interest and maturing December 31, 2018. The debt is repaid through Biosense Webster royalty payments and is full recourse.
The Silicon Valley Bank revolving facility had no outstanding balance, $5.2 million of borrowing capacity, and a maturity date of March 31, 2018. The Company reported compliance with its covenants at year-end.
Stockholders’ deficit was $17.6 million, compared with $12.5 million at December 31, 2014; accumulated deficit was approximately $466.0 million.

Material changes versus the prior comparable period

Revenue growth was driven by higher system sales, including seven Niobe ES systems recognized in 2015 versus three in 2014.
Recurring revenue streams were comparatively stable: disposables, service and accessories declined slightly, while international revenue increased to $17.9 million from $13.4 million. U.S. revenue declined to $19.8 million from $21.6 million.
Profitability did not improve despite revenue growth because of lower-margin sales mix, higher cost of revenue, increased research and development spending, and lower warrant-related other income.
Operating cash burn improved substantially, primarily from favorable working-capital changes, including lower inventory and higher deferred revenue.
The Company raised approximately $1.0 million net through financing activities, including controlled equity sales and warrant exercises, versus $2.7 million in 2014.
In 2015, the Company sold 542,996 shares under its controlled equity offering for gross proceeds of approximately $1.1 million and received approximately $0.3 million from exercised subscription warrants.
International revenue represented approximately 48% of total revenue in 2015, compared with approximately 38% in 2014. Biosense Webster represented 9% of revenue, down from 13%.

Guidance, outlook, risks and unusual items

Management expected negative operating cash flow and additional losses into 2016. Operating expenses were expected to be generally consistent with 2015, with targeted additional investment.
Management stated that existing cash, cash equivalents and borrowing facilities might not fund operating expenses and capital requirements through the next 12 months, creating a potential need for additional equity or other financing.
Ernst & Young included a going-concern explanatory paragraph because of recurring operating losses and net capital deficiency. The financial statements contain no adjustments for the potential effects of an inability to continue as a going concern.
Nasdaq notified the Company in 2015 and early 2016 regarding deficiencies involving minimum market value of listed securities and minimum bid price. A hearing request temporarily stayed delisting while the Company presented a compliance plan. The filing states that the Company could be delisted if it failed to regain compliance.
Backlog conversion remains uncertain because orders may be delayed, modified or canceled and installations depend on customer construction or renovation projects.
Key operating risks include slow hospital adoption of expensive capital equipment, lengthy sales cycles, competition, regulatory and reimbursement requirements, dependence on strategic partners and contract manufacturers, single-source components, product liability, intellectual-property disputes and international exposure.
Biosense Webster royalty revenue represented 8% of total revenue in 2015 and was pledged to service the Healthcare Royalty Partners debt. Biosense Webster’s rights and related alliance terms changed after 2015, and the alliance includes change-of-control termination fees of up to $10 million plus a potential additional $10 million fee under specified circumstances.
The Company recognized a $443,931 impairment charge for Odyssey-related intellectual property because of uncertainty regarding forecasted revenue after May 2016.
The Company had approximately $92.7 million of federal net operating loss carryforwards, but maintained a full valuation allowance because realization was uncertain. Approximately $290 million of prior federal net operating loss carryforwards were determined to expire unused due to Section 382 limitations.
No material legal proceedings were reported, and management stated that ordinary-course claims were not expected to materially affect financial position, results or liquidity.

Most important facts for investors to verify

Whether additional financing was obtained or became necessary after the March 11, 2016 filing date, and on what terms.
The outcome of the Nasdaq listing hearings and whether the Company remained listed after the stated July 2016 compliance deadlines.
Available liquidity after considering the $5.6 million cash balance, $5.2 million borrowing capacity, operating cash burn and 16% royalty-backed debt.
Whether backlog converted to revenue as expected and whether customer cancellations or installation delays affected 2016 results.
The sustainability and margin profile of Niobe system sales versus recurring disposables, service, license and royalty revenue.
The status and economics of the Biosense Webster alliance, including royalty flows, distribution rights and debt repayment obligations.
Whether the going-concern uncertainty was resolved and whether the Company achieved positive operating cash flow or profitability.