Stereotaxis, Inc. 2016 Form 10-K Summary
Business Context and Reporting Period
Stereotaxis designs, manufactures and markets robotic navigation and information-management systems for cardiac electrophysiology and interventional cardiology. Its Epoch Solution includes the Niobe ES remote magnetic navigation system, Odyssey information-management solution, Vdrive robotic navigation system and related disposable devices, services and royalties. The filing covers the fiscal year ended December 31, 2016, with comparisons to 2015.
At year-end, the Company had 129 installed Niobe ES systems, approximately $4.5 million of backlog, and 120 employees. Approximately 96% of the backlog was expected to be recognized as revenue during 2017, subject to customer construction, regulatory and other contingencies.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $32.2 million | $37.7 million | Down approximately 15% |
| Systems revenue | $5.8 million | $10.6 million | Down approximately 46% |
| Disposables, service and accessories | $26.4 million | $27.0 million | Down approximately 2% |
| Gross margin | $24.6 million; 77% | $27.2 million; 72% | Margin improved from mix |
| Operating loss | $(6.4) million | $(5.4) million | Loss increased |
| Net loss | $(5.3) million | $(7.4) million | Loss narrowed |
| Net loss available to common stockholders | $(11.8) million | $(7.4) million | Worsened by preferred-stock charges |
| Basic and diluted loss per share | $(0.54) | $(0.35) | Worsened |
| Cash flow from operations | $(6.6) million | $(2.5) million | Higher cash burn |
| Cash and cash equivalents | $8.5 million | $5.6 million | Increased |
Operating expenses were $31.1 million, including $5.5 million of research and development, $15.2 million of sales and marketing, and $10.3 million of general and administrative expense. Other expense was $2.0 million, primarily from warrant revaluation; interest expense was $2.5 million. A $5.6 million gain on debt extinguishment reduced the reported net loss.
U.S. revenue was $19.4 million versus $19.8 million in 2015, while international revenue declined to $12.8 million from $17.9 million. Biosense Webster represented 13% of 2016 revenue, up from 9% in 2015.
Material Changes Versus the Prior Comparable Period
- System revenue declined materially, with two Niobe ES systems recognized in 2016 compared with seven in 2015. Odyssey revenue increased slightly, while Vdrive revenue declined.
- Recurring revenue became a larger portion of the business: disposables and royalties represented 40% of revenue and other recurring revenue represented 42%; Niobe system revenue represented 9%.
- Gross margin improved to 77% from 72%, principally because of the greater mix of high-margin disposable, service and accessory revenue.
- Operating loss increased despite lower operating expenses, reflecting the revenue decline and reduced system volume.
- In September 2016, the Company issued $24.0 million of Series A convertible preferred stock and warrants, receiving approximately $23.0 million net of offering costs. It used $13.0 million to settle Healthcare Royalty Partners debt with an $18.1 million carrying amount, generating a $5.6 million gain.
- Preferred-stock accounting produced a non-cash deemed dividend of $6.1 million and cumulative preferred dividends of $0.4 million, increasing the loss attributable to common stockholders.
- Warrants issued in the financing were recorded as a liability. Warrant liabilities totaled $19.8 million at year-end, compared with $0.8 million in 2015.
- The common stock was delisted from Nasdaq in August 2016 and began trading on OTCQX, potentially reducing liquidity and access to capital markets.
Debt, Liquidity and Capital Resources
The Company had no outstanding debt under its revolving credit facility or Healthcare Royalty Partners agreement at December 31, 2016. Its asset-based revolving facility had a maximum commitment of $10.0 million, subject to collateral, with $3.8 million of borrowing capacity available at year-end and a maturity date of March 31, 2018. The Company reported total liquidity of $12.3 million, consisting of cash and available borrowing capacity.
Working capital changed from a $1.1 million surplus in 2015 to a $16.2 million deficit in 2016, largely because the warrant liability was classified as a current liability. Total assets were $21.0 million, total liabilities were $36.5 million, and stockholders’ deficit was $21.5 million. The Company was in compliance with its financial covenants at year-end.
Outlook, Risks and Unusual Items
- Management stated that 2017 expenses are expected to exceed 2017 gross margin and that operating losses and negative cash flows are expected to continue until revenue increases or expenses are reduced.
- Management believes cash on hand and expected borrowing capacity will fund obligations for at least 12 months after issuance of the financial statements, but this assessment depends on continued access to the revolving facility and its renewal on acceptable terms.
- Liquidity depends heavily on adoption and utilization of the installed Niobe base, new capital-system placements, control of operating expenses and additional debt or equity financing.
- Backlog may not convert to revenue because orders can be delayed, modified or canceled, and system installations depend on hospital construction, renovation, certificate-of-need approvals and other factors outside the Company’s control.
- The Company has a history of operating losses, an accumulated deficit of $471.2 million and fully reserved deferred tax assets. Federal net operating loss carryforwards were approximately $95.6 million, subject to limitations and expiration.
- Key risks include slow hospital and physician adoption, lengthy sales cycles, regulatory and reimbursement requirements, dependence on Siemens, Philips and Biosense Webster, supplier and contract-manufacturing concentration, product liability, software defects, intellectual-property challenges and competition.
- The Biosense Webster relationship is financially significant. Royalties represented 9% of 2016 revenue, and the agreement includes change-of-control termination fees that could reach $10 million plus an additional $10 million under specified circumstances.
- The filing reports no material legal proceedings and no subsequent events. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016.
Important Facts for Investors to Verify
- Whether the approximately $4.5 million year-end backlog converts to revenue as anticipated during 2017.
- Whether recurring disposable, service, license and royalty revenue can offset continued weakness in capital-system placements.
- The Company’s quarterly cash burn, borrowing capacity, covenant compliance and ability to renew the revolving credit facility before its March 2018 maturity.
- The potential dilution from approximately 37.3 million shares issuable under the Series A preferred stock and approximately 39.0 million shares issuable under warrants, compared with approximately 22.1 million common shares issued at year-end.
- The valuation and remeasurement effects of the $19.8 million warrant liability and the preferred stock’s 6% cumulative dividend and senior liquidation preference.
- The effects of OTCQX trading, limited capital-market access and the Company’s ability to raise additional financing without materially diluting existing holders.
- Regulatory approvals, reimbursement status, clinical adoption and customer utilization supporting future Niobe, Vdrive and disposable-device demand.