Stereotaxis, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended June 30, 2017, filed August 10, 2017. Stereotaxis designs and markets the Epoch Solution, including Niobe ES remote magnetic navigation, Odyssey information management, Vdrive robotic navigation systems, and related disposable devices and services. The installed base was 128 Niobe ES systems at June 30, 2017.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $8.5 million | $7.9 million | $15.4 million | $16.5 million |
| Gross profit | $6.3 million | $6.8 million | $12.0 million | $13.2 million |
| Gross margin | 74% | 86% | 78% | 80% |
| Operating loss | $0.4 million | $1.6 million | $2.3 million | $3.1 million |
| Net income (loss) | $(0.2) million | $(2.3) million | $1.0 million | $(4.6) million |
| Net income (loss) attributable to common stockholders | $(0.5) million | $(2.3) million | $0.1 million | $(4.6) million |
Second-quarter systems revenue increased 95% to $1.8 million, while disposables, service and accessories revenue declined 4% to $6.6 million. For the first six months, systems revenue declined 32% to $2.0 million and recurring and consumables-related revenue declined approximately 1% to $13.4 million.
Operating expenses were $6.7 million in the second quarter and $14.3 million for the first six months, down from $8.4 million and $16.4 million, respectively, in the comparable periods. Reductions primarily reflected lower headcount, travel, project, consulting, administrative and rent costs.
Cash and cash equivalents were $5.0 million at June 30, 2017, compared with $8.5 million at December 31, 2016. Working capital deficit was $14.6 million, versus $16.2 million at year-end 2016. Net cash used in operating activities was $3.4 million for the first six months, compared with $4.6 million in 2016. Total liquidity was $8.9 million, consisting of cash of $5.0 million and $3.9 million of borrowing capacity.
The Silicon Valley Bank asset-based revolving facility had no outstanding balance at June 30, 2017, a maximum commitment of $10.0 million subject to collateral, and maturity on March 31, 2018. The Company was in compliance with its covenants. The Healthcare Royalty Partners debt was extinguished in September 2016; related royalties are now paid to Stereotaxis.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue rose 8%, driven by higher system sales, but first-half revenue fell 7% because of lower Niobe installation revenue and lower Odyssey sales.
- Gross margin declined materially in the second quarter, primarily because of lower Odyssey margins and higher service-contract costs. First-half gross margin declined to 78% from 80%.
- Operating losses narrowed because operating expenses were reduced, but the Company remained dependent on external liquidity.
- Interest expense fell sharply following repayment of the Healthcare Royalty Partners debt.
- Other income included a $3.4 million non-cash gain from remeasurement of warrant liabilities during the first six months. Warrant liabilities declined to $16.4 million from $19.8 million at December 31, 2016.
- Series A convertible preferred stock accrued a 6% cumulative dividend. At June 30, 2017, approximately 38.5 million common shares were issuable upon conversion of preferred stock and accrued dividends, and approximately 38.8 million shares were issuable upon exercise of warrants, subject to limitations.
Guidance, Outlook, Risks and Unusual Items
Management expects 2017 expenses to exceed 2017 gross margin and expects continuing operating losses and negative cash flow until revenue improves or expenses are reduced. Management believes existing cash and expected borrowing capacity will fund obligations for at least 12 months, assuming renewal and continued availability of the revolving credit facility. Renewal is not assured.
Management’s liquidity plans include controlling or delaying operating expenditures, potentially using stock in lieu of cash payments, reducing projects or headcount, and raising additional debt or equity capital. The Company warns that financing may be unavailable, costly or dilutive, particularly because its common stock was delisted from Nasdaq in 2016 and trades on OTCQX.
Key business risks include dependence on clinical adoption and new capital-system placements, compatibility and continuation of strategic alliances with Biosense Webster, Philips and Siemens, regulatory requirements, product acceptance, service-contract costs, and the ability to obtain compatible imaging and catheter technologies.
The Company has sustained operating losses throughout its history and reports a stockholders’ deficit of $20.1 million. Preferred stock is senior to common stock and has redemption rights upon specified events. Warrant fair values are Level 3 measurements and are sensitive to stock price and volatility assumptions. Management reported no material legal proceedings, no subsequent events, and effective disclosure controls.
Important Facts for Investors to Verify
- Whether the revolving credit facility was renewed before its March 31, 2018 maturity and on what terms.
- The Company’s ability to reduce cash burn and reach sufficient recurring revenue or obtain additional financing.
- Future Niobe placements, clinical utilization of the installed base, and trends in disposable, service and royalty revenue.
- The sustainability of gross margins, particularly Odyssey system margins and service-contract costs.
- The potential dilution and financial claims associated with preferred stock, accrued dividends, warrants and equity awards.
- The effect of warrant remeasurement volatility on reported earnings and the Company’s current liquidity and working capital deficit.