Stereotaxis, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2014; filed May 9, 2014. Stereotaxis develops and sells the Epoch Solution, including Niobe robotic magnetic navigation, Odyssey information management, Vdrive robotic navigation, and related disposables, services and accessories. The company had an installed base of 108 Niobe ES systems and cumulative net losses of approximately $457.5 million as of March 31, 2014.
Financial Results and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $8.35 million | $8.41 million | Down 0.6% |
| Systems revenue | $1.33 million | $2.23 million | Down approximately 40% |
| Disposables, service and accessories revenue | $7.02 million | $6.18 million | Up approximately 14% |
| Gross profit | $6.74 million | $6.22 million | Up 8.4% |
| Gross margin | 81% | 74% | Up approximately 7 percentage points |
| Operating loss | $(2.23) million | $(3.59) million | Improved 37.9% |
| Net loss | $(4.14) million | $(4.92) million | Improved 15.9% |
| Net loss per share | $(0.21) | $(0.61) | Improved |
| Cash used in operating activities | $(2.38) million | $(1.15) million | Higher use of cash |
Gross margin improved primarily because revenue shifted toward higher-margin disposables, services and accessories. Approximate operating and net margins were negative 27% and negative 50%, respectively.
- Research and development expense was $1.50 million, essentially unchanged year over year.
- Sales and marketing expense declined 25% to $3.63 million, primarily from lower headcount and travel costs.
- General and administrative expense increased 12% to $3.83 million, primarily due to higher regulatory expenses.
- Interest expense declined to $0.84 million from $1.93 million, mainly following the 2013 extinguishment of convertible debentures and repayment of the revolving line and term loan.
- Other expense was $1.08 million, reflecting a non-cash increase in the fair value of warrant liabilities.
- Cash and cash equivalents were $11.30 million at March 31, 2014, compared with $13.78 million at December 31, 2013. Working capital declined to approximately $0.7 million from $4.4 million.
- Total debt was $18.49 million, consisting of Healthcare Royalty Partners debt. The debt bears interest at 16%, is secured by certain assets and intellectual property, and matures December 31, 2018.
- The revolving credit facility was amended on March 28, 2014: maturity was extended to March 31, 2015, the maximum line increased to $10 million, and borrowing capacity was $6.2 million at quarter-end. No amount was drawn.
- Stockholders’ deficit was $15.59 million at March 31, 2014, compared with $11.70 million at December 31, 2013.
Material Changes Versus the Prior Comparable Period
- Total revenue was broadly stable, but system revenue declined substantially because of lower Niobe and Odyssey system sales volumes.
- Higher disposable sales volume increased recurring revenue and improved the product mix.
- Cost of revenue fell 26%, producing the significant gross-margin improvement.
- Operating expenses declined 9%, led by lower sales and marketing costs, although general and administrative costs increased.
- Net loss improved, but operating cash usage more than doubled because of working-capital requirements, including increases in accounts receivable and inventories.
- Financing activity provided approximately $2.9 million in Q1 2013 but used approximately $0.1 million in Q1 2014, reflecting the absence of comparable borrowings.
- Deferred revenue increased to $9.26 million, including $6.89 million of deferred service and license fees, before the current and long-term classifications.
Guidance, Outlook, Risks and Unusual Items
- Management expects additional losses throughout the remainder of 2014 and expects operating expenses to be generally consistent with 2013, with targeted additional investments.
- Management states that existing cash, cash equivalents and borrowing facilities may not be sufficient to fund operating expenses and capital requirements through the next 12 months. Additional financing may be required and could be unavailable, costly or dilutive.
- If adequate financing is not obtained, the company may need to delay product development or commercialization, reduce sales and support resources, license products to third parties, or potentially cease operations.
- Healthcare Royalty Partners receives 100% of royalties under the Biosense Webster agreement until its loan is repaid. Any royalty shortfall against interest due increases the loan principal.
- Warrant liabilities of $6.72 million were recorded at fair value, with a $1.08 million non-cash revaluation charge in the quarter. These liabilities are sensitive to changes in the company’s share price and volatility assumptions.
- The company has foreign-exchange exposure and does not hedge its currency exposure. Approximately 18% of Q1 revenue and 9% of total expenses were denominated in foreign currencies.
- A securities class action was dismissed in the company’s favor on March 18, 2014; the plaintiffs did not appeal by the April 17 deadline. A related shareholder derivative action remains stayed, and its outcome cannot yet be predicted.
- The company reported no material changes affecting internal control over financial reporting, and management concluded its disclosure controls were effective.
Key Facts for Investors to Verify
- Whether recurring disposable, service and accessory revenue can offset continued weakness or volatility in system sales.
- The company’s pace of cash burn and whether the $6.2 million available borrowing capacity and $11.3 million cash balance are sufficient for the next 12 months.
- Compliance with the amended revolving-credit covenants, including the minimum tangible net worth requirement and 1.75:1 liquidity ratio.
- The repayment trajectory and effective economic cost of the 16% Healthcare Royalty Partners debt.
- The valuation and potential dilution associated with approximately $6.72 million of warrant liabilities and outstanding warrants.
- Progress in commercializing products, regulatory approvals, including the V-Loop submission, and expansion of the Niobe ES installed base.
- Potential liabilities, costs or delays associated with the pending shareholder derivative litigation and other ordinary-course claims.