Stereotaxis, Inc. — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2014, compared with the corresponding 2013 periods. Stereotaxis develops and sells the Epoch Solution, including Niobe robotic magnetic navigation, Odyssey information management, Vdrive robotic navigation, disposable devices, service and software licenses. The company reported an installed base of 118 Niobe ES systems.
Financial Performance
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $8.9 million | $10.8 million | $25.3 million | $29.0 million |
| Systems revenue | $2.2 million | $4.4 million | $4.7 million | $10.0 million |
| Disposables, service and accessories | $6.7 million | $6.4 million | $20.6 million | $19.0 million |
| Gross profit | $6.5 million | $7.3 million | $19.3 million | $20.8 million |
| Gross margin | 74% | 68% | 76% | 72% |
| Operating loss | $(1.2) million | $(1.1) million | $(5.7) million | $(6.4) million |
| Net income (loss) | $0.02 million | $(56.9) million | $(6.1) million | $(64.8) million |
| Net income (loss) per share | $0.00 | $(4.49) | $(0.31) | $(6.72) |
Q3 revenue declined 18%, primarily because of lower Niobe system sales and lower-priced Odyssey sales through the Biosense Webster distribution arrangement. Disposables, service and accessories revenue increased 5%, helped by higher disposable volume, service revenue and Biosense Webster royalty revenue. Nine-month revenue declined 13%, while recurring and procedure-related revenue increased 9%.
Gross margin improved because the revenue mix shifted toward higher-margin disposables, service and accessories. Systems gross margin declined to 40% in Q3 and 37% for the nine-month period, partly due to low-margin Odyssey and Odyssey Cinema sales through Biosense Webster and a Niobe I-to-Niobe ES upgrade. Disposables, service and accessories gross margin increased to 85% in Q3 and 86% for nine months.
Operating expenses decreased 8% in Q3 and 8% for the first nine months. Nine-month research and development expense decreased 7% to $4.0 million, sales and marketing expense decreased 13% to $11.4 million, and general and administrative expense decreased 2% to $9.5 million.
Cash Flow, Liquidity and Capitalization
- Cash and cash equivalents were $8.7 million at September 30, 2014, down from $13.8 million at December 31, 2013.
- Working capital was approximately $3.2 million at September 30, 2014, compared with $4.4 million at year-end 2013.
- Cash used in operating activities was $7.8 million for the first nine months of 2014, compared with $4.9 million in the prior-year period.
- Cash used in investing activities was $0.05 million, primarily for equipment purchases.
- Cash provided by financing activities was $2.8 million, primarily from stock issued under the Controlled Equity Offering.
- The company had $18.4 million of long-term Healthcare Royalty Partners debt, bearing interest at 16% and maturing December 31, 2018. Repayment is tied to royalties under the Biosense Webster agreement, and the debt is secured by certain assets and intellectual property.
- No debt was outstanding under the revolving credit facility at September 30, 2014. The facility had a stated borrowing capacity of $6.1 million based on collateralized assets and a total commitment of up to $10.0 million, subject to borrowing-base limitations and covenants.
- Stockholders’ deficit was $13.8 million at September 30, 2014, compared with $11.7 million at December 31, 2013. Accumulated deficit was approximately $459.5 million.
Material Changes Versus the Prior Comparable Period
- Systems revenue fell sharply, reflecting lower Niobe installations and reduced system sales, while recurring revenue streams grew.
- Gross margin improved from 68% to 74% in Q3 and from 72% to 76% for the nine-month period due to product mix.
- Operating losses narrowed for the nine-month period despite lower revenue, reflecting reduced operating expenses.
- Q3 2014 net income of $0.02 million compared with a $56.9 million loss in Q3 2013, and the nine-month loss narrowed from $64.8 million to $6.1 million. The prior-year losses included significant non-cash charges related to convertible debt, derivative liabilities and warrants.
- Interest expense declined to $0.8 million in Q3 and $2.5 million for nine months, primarily because convertible debentures and certain other debt were extinguished or repaid in 2013.
- Other income was $2.0 million in Q3 and $2.1 million for nine months, primarily from the decrease in the fair value of warrant liabilities. These gains are non-cash and can fluctuate with the company’s stock price and valuation assumptions.
- The company issued 161,632 shares under its controlled equity offering during Q3 for $0.5 million of net proceeds. Approximately $14.9 million remained available under the facility at September 30, 2014.
Guidance, Outlook, Risks and Unusual Items
- Management expected additional losses through the remainder of 2014 and projected operating expenses to be generally consistent with 2013.
- Management stated that existing cash, cash equivalents and borrowing facilities might not be sufficient to fund operating expenses and capital requirements through the next 12 months, creating a potential need for additional financing.
- Additional financing may include equity offerings, debt, asset sales, strategic collaborations or distribution arrangements, and could be unavailable, occur on unfavorable terms or dilute existing shareholders. Failure to obtain funding could require reductions in development, commercialization, sales, marketing or customer support, or could require the company to cease operations.
- The Healthcare Royalty Partners debt is full recourse, carries a high 16% interest rate and uses Biosense Webster royalties for repayment. If royalties are insufficient to cover interest, the shortfall increases principal.
- Revenue recognition depends on delivery, installation, customer acceptance, collection assumptions and allocation of bundled arrangement prices. Deferred revenue was $8.0 million current and $1.0 million long-term at September 30, 2014.
- The company disclosed foreign exchange exposure but had no currency hedges. A hypothetical 10% strengthening of the U.S. dollar would have reduced nine-month revenue by approximately $0.4 million and operating expenses by approximately $0.3 million.
- The company reported no material off-balance-sheet arrangements. Management stated that pending litigation and ordinary-course claims were not expected to materially affect financial position, results or liquidity. A securities class action was dismissed with prejudice in March 2014, and a related derivative action was dismissed without prejudice in July 2014.
- Management concluded that disclosure controls and procedures were effective and that there were no changes in internal control over financial reporting that materially affected, or were reasonably likely to materially affect, those controls.
Investor Verification Points
- Verify the company’s cash runway, borrowing-base availability, covenant compliance and timing or terms of any required financing.
- Assess whether recurring disposables, service, accessory and royalty revenue can offset continued weakness in system sales.
- Review the Biosense Webster distribution and royalty arrangements, including their effects on system margins and repayment of the Healthcare Royalty Partners debt.
- Reconcile reported net income improvements with the substantial non-cash warrant revaluation gains and prior-year debt-related charges.
- Monitor dilution from the controlled equity offering, outstanding warrants, options and restricted stock units.
- Evaluate inventory growth, deferred revenue, accounts receivable allowances and the company’s ability to convert its installed base into recurring procedure and service revenue.