Stereotaxis, Inc. Form 10-Q Summary
Business Context and Reporting Period
Stereotaxis designs and markets the Epoch Solution, including Niobe ES robotic magnetic navigation systems, Odyssey information-management systems, Vdrive robotic navigation systems, disposables, services and accessories for hospital interventional laboratories. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012. A one-for-ten reverse stock split became effective July 10, 2012; per-share and share data are presented on a post-split basis.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $11.6 million | $8.5 million | $34.4 million | $30.4 million |
| Systems revenue | $5.0 million | $2.0 million | $14.1 million | $11.4 million |
| Disposables, service and accessories | $6.5 million | $6.5 million | $20.3 million | $19.0 million |
| Gross margin | 70% | 69% | 69% | 70% |
| Operating loss | $(0.9) million | $(9.1) million | $(9.7) million | $(27.4) million |
| Net loss | $(1.9) million | $(7.3) million | $(4.9) million | $(26.5) million |
| Net loss per share | $(0.25) | $(1.33) | $(0.74) | $(4.84) |
For the nine months, research and development expense was $6.9 million, sales and marketing expense was $16.3 million, and general and administrative expense was $10.3 million. Interest expense increased to $4.9 million from $2.4 million. Other income was $9.7 million, primarily reflecting changes in the fair value of warrants and debt conversion features, and was a significant contributor to the reduced net loss.
At September 30, 2012, cash and cash equivalents were $9.9 million, compared with $14.0 million at December 31, 2011. Total assets were $35.2 million, total debt was $30.9 million, current liabilities were $32.5 million, and stockholders’ deficit was $15.3 million. Working capital was negative by approximately $1.9 million.
For the first nine months, operating activities used $12.0 million of cash, investing activities used $0.1 million, and financing activities provided $8.1 million. Cash decreased by $4.0 million during the period.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue increased approximately 35%, driven primarily by higher systems revenue. The company recognized revenue on two Niobe ES systems, Niobe ES upgrades, Vdrive systems, and Odyssey and Odyssey Cinema systems.
- Nine-month revenue increased approximately 13%, with systems revenue up approximately 24% and disposables, service and accessories revenue up approximately 7%.
- Third-quarter operating expenses declined approximately 40% overall. Research and development declined 46%, sales and marketing declined 41%, and general and administrative expense declined 34%.
- Nine-month operating expenses declined approximately 31% overall, reflecting reduced headcount, travel, marketing, consulting and development spending.
- Systems gross margin improved to 52% in the third quarter and 51% for the nine-month period, compared with 15% and 43%, respectively, in the prior-year periods. Disposables, service and accessories margins declined because of Niobe ES upgrades, lower royalties and product mix.
- As of September 30, 2012, the company had completed 60 Niobe II-to-Niobe ES upgrade installations.
- Financing activity included approximately $9.1 million of net proceeds from stock and warrants, approximately $7.7 million from subordinated convertible debentures, and an additional $2.5 million Cowen borrowing. The company used $7.0 million of financing proceeds to repay revolving-credit borrowings.
Guidance, Outlook, Risks and Unusual Items
Management reported a $3.7 million, or 29%, reduction in operating expenses from first-quarter 2012 levels in the third quarter and anticipated a 15% to 20% reduction from first-quarter levels in the fourth quarter. The company expected negative operating cash flow through 2012 and continued losses through at least December 31, 2012. No specific revenue or earnings guidance was provided.
Management stated that existing cash, cash equivalents and borrowing facilities might not be sufficient to fund operations and capital requirements for the next 12 months. An independent financial advisor was engaged to evaluate strategic and financing alternatives, including sales of non-core assets or distribution rights and geographic partnerships. The filing states that no particular alternative was assured.
- The revolving credit facility had $8.2 million outstanding, matured March 31, 2013, and had no remaining borrowing availability at September 30, 2012. The facility and term debt are secured by substantially all company assets.
- The company was in compliance with bank covenants at quarter-end, but covenant violations could trigger repayment obligations, including potential cross-defaults.
- Cowen debt totaled approximately $16.4 million and bears 16% annual interest, with repayment tied to Biosense Webster royalties. The company borrowed an additional $2.5 million in August 2012.
- Subordinated convertible debentures had approximately $1.3 million of carrying value at quarter-end after a substantial debt discount. They bear 8% interest, mature in May 2014, and are convertible at $3.361 per share. Related warrants and conversion features create substantial potential dilution and fair-value volatility.
- The company was no longer eligible to use Form S-3 following a payment default under its primary lending facility on April 30, 2012, potentially increasing the cost and complexity of future capital raising.
- Nasdaq had restored compliance with the minimum bid-price requirement after the reverse split, but the company remained subject to a separate market-value-of-publicly-held-shares deficiency with a December 24, 2012 deadline to regain compliance.
- A securities class action and a related shareholder derivative action remained pending. Management considered the claims without merit, but stated that potential losses could not yet be estimated.
- Foreign-currency sales represented approximately 16% of nine-month revenue. The company had no currency hedges; a hypothetical 10% strengthening of the U.S. dollar would have reduced revenue by approximately $0.6 million.
Investor Verification Checklist
- Verify the company’s ability to fund operations and meet debt maturities given $9.9 million of cash, negative working capital, recurring operating cash burn and no remaining revolving-credit availability.
- Review covenant compliance, the March 2013 revolving facility maturity, the May 2014 debenture maturity and potential cross-default provisions.
- Assess dilution from approximately 6.1 million outstanding warrant shares, convertible debentures, PIPE warrants, options and other equity awards.
- Separate recurring operating improvement from the $9.7 million of nine-month other income arising largely from fair-value remeasurement of warrants and conversion features.
- Monitor the strategic and financing review, including any asset sales, partnerships or additional equity or debt financing.
- Evaluate the sustainability of Niobe ES upgrade activity, systems gross-margin improvement and recurring disposable and service revenue.
- Track Nasdaq continued-listing compliance and developments in the securities class action and derivative litigation.