Stereotaxis, Inc. Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2018. Stereotaxis develops 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 included 128 Niobe ES systems at quarter-end.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $7.0 million | $7.0 million | Essentially flat |
| System revenue | $0.02 million | $0.2 million | Down approximately 92% |
| Disposables, service and accessories revenue | $7.0 million | $6.8 million | Up approximately 3% |
| Gross profit | $5.7 million | $5.7 million | Essentially flat |
| Gross margin | Approximately 82% | Approximately 82% | Unchanged |
| Operating loss | $(1.1) million | $(1.9) million | Improved by $0.8 million |
| Other income | $2.6 million | $3.1 million | Lower; primarily warrant remeasurement |
| Net income | $1.4 million | $1.2 million | Up $0.3 million |
| Earnings attributable to common stockholders | $0.5 million | $0.3 million | Up $0.2 million |
| Basic/diluted EPS | $0.02/$0.01 | $0.01/$0.01 | Improved basic EPS |
| Cash flow from operations | $(2.0) million | $(2.7) million | Use reduced by $0.6 million |
Gross profit represented approximately 82% of revenue, while the operating loss represented approximately 16% of revenue. Net income was substantially affected by non-cash warrant-related other income and is not representative of recurring operating profitability.
Liquidity, Debt and Capital Structure
- Cash and cash equivalents were $11.6 million at March 31, 2018, compared with $3.7 million at December 31, 2017.
- Total liquidity was $16.1 million, including $4.5 million of borrowing capacity under the revolving credit facility.
- The company had no outstanding balance under its $5.0 million Silicon Valley Bank revolving line of credit and was in compliance with its covenants at quarter-end.
- Working capital was $8.5 million, compared with a working capital deficit of $20.3 million at December 31, 2017.
- Financing activities provided $10.0 million, principally from the exercise of 35.8 million warrants. Common shares outstanding increased substantially, and stockholders’ equity improved by approximately $27 million.
- Series A convertible preferred stock totaled $6.0 million and carries a cumulative 6% dividend. The filing reports approximately 40.1 million common shares issuable upon conversion of preferred stock and accumulated dividends, subject to applicable limitations.
Material Changes Versus the Prior Comparable Period
- Revenue was stable overall, but the mix shifted materially away from system sales toward recurring disposables, service and accessories revenue.
- Research and development expense increased 23% to $2.0 million due primarily to new projects.
- Sales and marketing expense decreased 4% to $3.6 million, reflecting lower headcount and consultant costs.
- General and administrative expense decreased 45% to $1.2 million, primarily because of lower executive severance-related costs and professional fees.
- Operating loss improved despite higher research and development spending.
- Operating cash use declined, but the company remained dependent on external financing because of continuing operating losses and negative operating cash flow.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption reduced accumulated deficit by approximately $0.3 million and resulted in approximately $0.1 million less commission expense in the first quarter. Management reported no other significant change in revenue timing for material revenue streams.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 expenses to exceed 2018 gross margin and expects continued operating losses and negative cash flows until revenue growth or expense reductions support operations.
- Management believes cash on hand will be sufficient for ordinary-course obligations for at least 12 months from issuance of the financial statements.
- Liquidity needs depend heavily on clinical adoption within the existing Niobe installed base and new capital-system placements.
- The February 2018 warrant modification eliminated cash redemption rights, moved the applicable warrants from liability to equity classification, and enabled a temporary exercise-price reduction from $0.70 to $0.28. This generated approximately $10.0 million of cash and $27 million of equity improvement but materially increased share dilution.
- On April 26, 2018, the credit facility maturity was extended from March 31, 2018 to April 25, 2019. The amended facility retains $5.0 million of maximum availability, eliminates the tangible-net-worth covenant, and modifies liquidity-ratio requirements and interest-rate terms.
- Commercial availability of currently compatible digital fluoroscopy systems may not continue for multiple years. The company may be unable to secure equivalent alternatives on acceptable terms or at all.
- Additional financing may be unavailable, costly or dilutive. If adequate funds cannot be obtained, the company may need to delay development, reduce commercialization resources, license technologies, or potentially cease operations.
- Preferred stock redemption rights, cumulative dividends, substantial potential share issuance from preferred stock, warrants, options and restricted units, and the company’s history of operating losses are material investor considerations.
- Management stated that pending ordinary-course legal claims are not expected to have a material effect. Disclosure controls and procedures were reported effective, with no material change in internal control over financial reporting.
Facts Investors Should Verify
- Whether recurring revenue growth and clinical adoption can offset the sharp decline in system revenue.
- The sustainability of operations given recurring operating losses and approximately $2.0 million of quarterly operating cash burn.
- The extent of dilution from warrant exercises, preferred-stock conversion, outstanding warrants, options and restricted stock units.
- Compliance with the amended Silicon Valley Bank facility and the availability of the stated $4.5 million borrowing capacity.
- The recurring versus non-recurring nature of the $2.6 million of warrant-related other income.
- Whether compatible digital fluoroscopy integrations remain available or suitable alternatives are secured.
- The timing and collectability of deferred revenue, accounts receivable and the approximately $1.4 million of remaining system-contract performance obligations.