10-Q 1 form10-q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                TO

 

COMMISSION FILE NUMBER 001-36159

 

STEREOTAXIS, INC.

(Exact name of the Registrant as Specified in its Charter)

 

delaware   94-3120386

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

710 North Tucker Boulevard, Suite 110

St. Louis, MO 63101

(Address of Principal Executive Offices including Zip Code)

 

(314) 678-6100

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001 per share   STXS   NYSE American LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T “See 232.405 of this Chapter” during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated Filer ☐ Non-accelerated filer Smaller reporting company
Emerging growth company      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

The number of outstanding shares of the registrant’s common stock on October 31, 2023 was 80,884,561.

 

 

 

 
 

 

STEREOTAXIS, INC.

INDEX TO FORM 10-Q

 

    Page
     
Part I Financial Information  
   
Item 1. Financial Statements (unaudited) 3
  Balance Sheets 3
  Statements of Operations 4
  Statements of Convertible Preferred Stock and Stockholders’ Equity 5-6
  Statements of Cash Flows 7
  Notes to Financial Statements 8-18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19-24
Item 3. [Reserved] 24
Item 4. Controls and Procedures 24
     
Part II Other Information  
   
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. [Reserved] 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26

 

2
 

 

ITEM 1. FINANCIAL STATEMENTS

 

STEREOTAXIS, INC.

BALANCE SHEETS

 

(in thousands, except share amounts)  September 30, 2023   December 31, 2022 
   (Unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $22,100   $8,586 
Restricted cash - current   525    525 
Short-term investments   -    19,844 
Accounts receivable, net of allowance of $596 and $235 at 2023 and 2022, respectively   5,246    5,090 
Inventories, net   6,788    7,876 
Prepaid expenses and other current assets   855    1,325 
Total current assets   35,514    43,246 
Property and equipment, net   3,443    3,831 
Restricted cash   350    744 
Operating lease right-of-use assets   5,086    5,384 
Prepaid and other non-current assets   135    208 
Total assets  $44,528   $53,413 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Accounts payable  $3,243   $3,270 
Accrued liabilities   3,160    3,306 
Deferred revenue   6,216    7,342 
Current portion of operating lease liabilities   413    373 
Total current liabilities   13,032    14,291 
Long-term deferred revenue   1,982    1,654 
Operating lease liabilities   5,173    5,488 
Other liabilities   43    51 
Total liabilities   20,230    21,484 
           
Series A - Convertible preferred stock:          
Convertible preferred stock, Series A, par value $0.001; 22,383 shares outstanding at 2023 and 2022   5,583    5,583 
           
Stockholders’ equity:          
Convertible preferred stock, Series B, par value $0.001; 10,000,000 shares authorized, 5,610,121 shares outstanding at 2022   -    6 
Common stock, par value $0.001; 300,000,000 shares authorized, 80,873,295 and 74,874,459 shares issued at 2023 and 2022, respectively   81    75 
Additional paid in capital   551,480    543,438 
Treasury stock, 4,015 shares at 2023 and 2022   (206)   (206)
Accumulated deficit   (532,640)   (516,967)
Total stockholders’ equity   18,715    26,346 
Total liabilities and stockholders’ equity  $44,528   $53,413 

 

See accompanying notes.

 

3
 

 

STEREOTAXIS, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

 

(in thousands, except share and per share amounts)  2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
(in thousands, except share and per share amounts)  2023   2022   2023   2022 
Revenue:                    
Systems  $3,539   $2,413   $8,673   $4,649 
Disposables, service and accessories   4,260    5,244    13,533    16,197 
Total revenue   7,799    7,657    22,206    20,846 
                     
Cost of revenue:                    
Systems   2,909    2,016    7,309    3,817 
Disposables, service and accessories   831    1,074    2,775    2,868 
Total cost of revenue   3,740    3,090    10,084    6,685 
                     
Gross margin   4,059    4,567    12,122    14,161 
                     
Operating expenses:                    
Research and development   2,668    2,818    8,061    8,158 
Sales and marketing   3,097    3,111    9,585    9,337 
General and administrative   3,933    3,690    11,011    10,986 
Total operating expenses   9,698    9,619    28,657    28,481 
Operating loss   (5,639)   (5,052)   (16,535)   (14,320)
                     
Other income   -    -    27    - 
Interest income, net   270    135    835    182 
Net loss  $(5,369)  $(4,917)  $(15,673)  $(14,138)
                     
Cumulative dividend on convertible preferred stock   (338)   (339)   (1,004)   (1,005)
Net loss attributable to common stockholders  $(5,707)  $(5,256)  $(16,677)  $(15,143)
                     
Net loss per share attributable to common stockholders:                    
Basic  $(0.07)  $(0.07)  $(0.21)  $(0.20)
Diluted  $(0.07)  $(0.07)  $(0.21)  $(0.20)
                     
Weighted average number of common shares and equivalents:                    
Basic   82,468,971    76,100,007    80,028,243    75,977,920 
Diluted   82,468,971    76,100,007    80,028,243    75,977,920 

 

See accompanying notes.

 

4
 

 

STEREOTAXIS, INC.

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(Unaudited)

 

Three Months Ended September 30, 2022

 

   Shares   Amount   Shares   Amount   Shares   Amount   Amount   Amount   Amount   Amount 
(in thousands, except share amounts)  Convertible Preferred Stock Series A (Mezzanine)   Convertible Preferred Stock Series B   Common Stock   Additional Paid-In Capital   Treasury Stock   Accumulated Deficit   Total Stockholders’ Equity (Deficit) 
   Shares   Amount   Shares   Amount   Shares   Amount   Amount   Amount   Amount   Amount 
Balance at June 30, 2022   22,386   $5,584    5,610,121   $6    74,686,056   $75   $537,963   $(206)  $(507,897)  $29,941 
Stock issued for the exercise of stock options                       31,437         22              22 
Stock-based compensation                       100,027         2,695              2,695 
Components of net loss        -          -                    -     (4,917)   (4,917)
Employee stock purchase plan                       14,758         26              26 
Balance at September 30, 2022   22,386   $5,584    5,610,121   $6    74,832,278   $75   $540,706   $(206)  $(512,814)  $27,767 

 

Three Months Ended September 30, 2023

 

(in thousands, except share amounts)  Convertible Preferred Stock Series A (Mezzanine)   Convertible Preferred Stock Series B   Common Stock   Additional Paid-In Capital   Treasury Stock   Accumulated Deficit   Total Stockholders’ Equity (Deficit) 
   Shares   Amount   Shares   Amount   Shares   Amount   Amount   Amount   Amount   Amount 
                                         
Balance at June 30, 2023   22,383   $5,583    -   $-    80,682,586   $81   $548,782   $(206)  $(527,271)  $21,386 
Stock issued for the exercise of stock options                       1,000         1              1 
Stock-based compensation                       172,592         2,672              2,672 
Components of net loss        -         -                   -    (5,369)   (5,369)
Employee stock purchase plan                       17,117         25              25 
Balance at September 30, 2023   22,383   $5,583    -   $-    80,873,295   $81   $551,480   $(206)  $(532,640)  $18,715 

 

See accompanying notes.

 

5
 

 

STEREOTAXIS, INC.

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(Unaudited)

 

Nine Months Ended September 30, 2022

 

(in thousands, except share amounts)  Convertible Preferred Stock Series A (Mezzanine)   Convertible Preferred Stock Series B   Common Stock   Additional Paid-In Capital   Treasury Stock   Accumulated Deficit   Total Stockholders’ Equity (Deficit) 
   Shares   Amount   Shares   Amount   Shares   Amount   Amount   Amount   Amount   Amount 
Balance at December 31, 2021   22,387   $5,584    5,610,121   $6    74,618,240   $75   $532,641   $(206)  $(498,676)  $33,840 
Stock issued for the exercise of stock options                       71,960         67              67 
Stock-based compensation                       110,726         7,906              7,906 
Components of net loss        -          -                    -     (14,138)   (14,138)
Employee stock purchase plan                       29,327         92              92 
Preferred stock conversion   (1)                  2,025                        - 
Balance at September 30, 2022   22,386   $5,584    5,610,121   $6    74,832,278   $75   $540,706   $(206)  $(512,814)  $27,767 

 

Nine Months Ended September 30, 2023

 

(in thousands, except share amounts)   Convertible Preferred Stock Series A (Mezzanine)   Convertible Preferred Stock Series B   Common Stock   Additional Paid-In Capital   Treasury Stock   Accumulated Deficit   Total Stockholders’ Equity (Deficit) 
  Shares   Amount   Shares   Amount   Shares   Amount   Amount   Amount   Amount   Amount 
                                         
Balance at December 31, 2022   22,383   $5,583    5,610,121   $6    74,874,459   $75   $543,438   $(206)  $(516,967)  $26,346 
Stock issued for the exercise of stock options                       30,384         (18)             (18)
Stock-based compensation                       316,646         7,987              7,987 
Components of net loss        -          -                    -     (15,673)   (15,673)
Employee stock purchase plan                       41,685         73              73 
Preferred stock conversion             (5,610,121)   (6)   5,610,121    6                   - 
Balance at September 30, 2023   22,383   $5,583    -   $-    80,873,295   $81   $551,480   $(206)  $(532,640)  $18,715 

 

See accompanying notes.

 

6
 

 

STEREOTAXIS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

(in thousands)  2023   2022 
   Nine Months Ended September 30, 
(in thousands)  2023   2022 
Cash flows from operating activities          
Net loss  $(15,673)  $(14,138)
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation   457    298 
Non-cash lease expense   23    90 
Stock-based compensation   7,987    7,906 
Accretion and short-term investment discount   (287)   - 
Changes in operating assets and liabilities:          
Accounts receivable   (156)   329 
Inventories   1,088    (3,280)
Prepaid expenses and other current assets   470    1,071 
Other assets   73    45 
Accounts payable   270    687 
Accrued liabilities   (146)   (19)
Deferred revenue   (798)   1,199 
Other liabilities   (8)   (51)
Net cash used in operating activities   (6,700)   (5,863)
Cash flows from investing activities          
Purchase of property and equipment   (366)   (2,009)
Proceeds from maturity of short-term investments   20,131    - 
Net cash provided by (used in) investing activities   19,765    (2,009)
Cash flows from financing activities          
Proceeds from issuance of stock, net of issuance costs   55    159 
Net cash provided by financing activities   55    159 
Net increase (decrease) in cash, cash equivalents, and restricted cash   13,120    (7,713)
Cash, cash equivalents, and restricted cash at beginning of period   9,855    40,144 
Cash, cash equivalents, and restricted cash at end of period  $22,975   $32,431 
           
Supplemental disclosure of cash flow information:          
Purchase of property and equipment included in accounts payable  $-   $163 
           
Reconciliation of cash, cash equivalents, and restricted cash to balance sheet as of September 30th:          
Cash and cash equivalents  $22,100   $30,938 
Restricted cash - current   525    618 
Restricted cash   350    875 
Total cash, cash equivalents, and restricted cash  $22,975   $32,431 

 

See accompanying notes.

 

7
 

 

STEREOTAXIS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

Notes to Financial Statements

 

In this report, “Stereotaxis”, the “Company”, “Registrant”, “we”, “us”, and “our” refer to Stereotaxis, Inc. and its wholly owned subsidiaries. Genesis RMN®, Niobe®, Navigant®, Odyssey®, Odyssey Cinema, Vdrive®, Vdrive Duo, V-CAS, V-Loop, V-Sono, QuikCASand Cardiodrive® are trademarks of Stereotaxis, Inc. All other trademarks that appear in this report are the property of their respective owners.

 

1. Description of Business

 

Stereotaxis designs, manufactures and markets robotic systems, instruments and information systems for the interventional laboratory. Our proprietary robotic technology, Robotic Magnetic Navigation, fundamentally transforms endovascular interventions using precise computer-controlled magnetic fields to directly control the tip of flexible interventional catheters or devices. Direct control of the tip of an interventional device, in contrast to all manual hand-held devices that are controlled from their handle, can improve the precision, stability, reach and safety of these devices during procedures.

 

Our primary clinical focus has been electrophysiology, specifically cardiac ablation procedures for the treatment of arrhythmias. Cardiac ablation has become a well-accepted therapy for arrhythmias and a multi-billion-dollar medical device market with expectations for substantial long-term growth. We have shared our aspiration and a product strategy to expand the clinical focus of our technology to several additional endovascular indications including coronary, neuro, and peripheral interventions.

 

There is substantial real-world evidence and clinical literature for Robotic Magnetic Navigation in electrophysiology. Hundreds of electrophysiologists at over one hundred hospitals globally have treated over 100,000 arrhythmia patients with our robotic technology. Clinical use of our technology has been documented in over 400 clinical publications. Robotic Magnetic Navigation is designed to enable physicians to complete more complex interventional procedures with greater success and safety by providing image-guided delivery of catheters through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied computer-controlled magnetic fields that govern the motion of the working tip of the catheter, resulting in improved navigation. The more flexible atraumatic design of catheters driven using magnetic fields may reduce the risk of patient harm and other adverse events. Performing the procedure from a control cockpit enables physicians to complete procedures in a safe location protected from x-ray exposure, with greater ergonomics, and improved efficiency. We believe these benefits can be applicable in other endovascular indications where navigation through complex vasculature is often challenging or unsuccessful and generates significant x-ray exposure, and we are investing in research and development in these areas.

 

Our primary products include the Genesis RMN System, the Odyssey Solution, and other related devices. We also offer our customers the Stereotaxis Imaging Model S x-ray System and other accessory devices.

 

The Genesis RMN System is designed to enable physicians to complete more complex interventional procedures by providing image-guided delivery of catheters through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied magnetic fields that govern the motion of the working tip of the catheter, resulting in improved navigation, efficient procedures, and reduced x-ray exposure.

 

The Odyssey Solution consolidates lab information onto one large integrated display, enabling physicians to view and control all the key information in the operating room. This is designed to improve lab layout and procedure efficiency. The system also features a remote viewing and recording capability called Odyssey Cinema, which is an innovative solution that delivers synchronized content for optimized workflow, advanced care, and improved productivity. This tool includes an archiving capability that allows clinicians to store and replay entire procedures or segments of procedures. This information can be accessed from locations throughout the hospital local area network and over the global Odyssey Network providing physicians with a tool for clinical collaboration, remote consultation, and training.

 

The Stereotaxis Imaging Model S provides an integrated complete solution for a robotic interventional operating room. It is a single-plane, full-power x-ray system and includes the c-arm, powered table, motorized boom, and large high-definition monitors. Stereotaxis Imaging Model S incorporates modern fluoroscopy technology to support high quality imaging while minimizing radiation exposure for patients and physicians. The combination of RMN Systems with Stereotaxis Imaging Model S is designed to reduce the cost of acquisition, the ongoing cost of ownership, and the complexity of installation of a robotic electrophysiology practice.

 

We promote our full suite of products in a typical hospital implementation, subject to regulatory approvals or clearances. This implementation requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically includes equipment and installation charges. The recurring payments typically include disposable costs for each procedure, equipment service costs beyond the warranty period, and ongoing software updates. In hospitals where our full suite of products has not been implemented, equipment upgrade or expansion can be implemented upon purchasing of the necessary upgrade or expansion.

 

We have received regulatory clearances and registration necessary for us to market the Genesis RMN System in the U.S. and Europe, and we are in the process of obtaining necessary registrations for extending our markets in other countries. Our prior generation robotic magnetic navigation system, the Niobe System, the Odyssey Solution, Cardiodrive, and various disposable interventional devices have received regulatory clearance in the U.S., Europe, Canada, China, Japan and various other countries. We have received the regulatory clearance, licensing and/or CE Mark approvals that allow us to market the Vdrive and Vdrive Duo Systems with the V-CAS, V-Loop and V-Sono devices in the U.S., Canada and Europe. The Stereotaxis Imaging Model S x-ray System is CE marked and cleared by the FDA. We are pursuing regulatory approvals for the Stereotaxis MAGiC catheter, a robotically-navigated magnetic ablation catheter designed to perform minimally invasive cardiac ablation procedures, in various global geographies. Approval processes can be lengthy and uncertain, submissions may require revised or additional non-clinical and clinical data, and regulatory applications could be denied.

 

8
 

 

We have strategic relationships with technology leaders and innovators in the global interventional market. Through these strategic relationships we provide compatibility between our robotic magnetic navigation system, x-ray systems, and digital imaging and 3D catheter location sensing technology, as well as disposable interventional devices. The maintenance of these strategic relationships, or the establishment of equivalent alternatives, is critical to our commercialization efforts. There are no guarantees that any existing strategic relationships will continue, and efforts are ongoing to ensure the availability of integrated systems and devices and/or equivalent alternatives. We cannot provide assurance as to the timeline of the ongoing availability of such compatible systems or our ability to obtain equivalent alternatives on competitive terms or at all.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited financial statements of Stereotaxis, Inc. have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all the disclosures required by GAAP for complete financial statements. In the opinion of management, they include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. Operating results for the nine-month period ended September 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or for future operating periods.

 

These interim financial statements and the related notes should be read in conjunction with the annual financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (SEC) on March 9, 2023.

 

Risks and Uncertainties

 

Future results of operations could be materially adversely impacted by macroeconomic and geopolitical factors. The Company continues to experience difficulties with periodic worldwide supply chain disruptions, including shortages and inflationary pressures, and logistics delays which make it difficult for us to source parts and ship our products. We have generally been able to conduct normal business activities albeit in a more deliberate manner than prior to the pandemic, including taking action to increase inventory levels, but we cannot guarantee that they will not be impacted more severely in the future. Our suppliers and contract manufacturers have experienced, and may continue to experience, similar difficulties. If our manufacturing operations or supply chains are materially interrupted, it may not be possible for us to timely manufacture or service our products at required levels, or at all. Changes in economic conditions and supply chain constraints could lead to higher inflation than previously experienced or expected, which could, in turn, lead to an increase in costs. We may be unable to raise the prices of our products sufficiently to keep up with the rate of inflation. A material reduction or interruption in any of our manufacturing processes or a substantial increase in costs would have a material adverse effect on our business, operating results, and financial condition.

 

Many of our hospital customers, for whom the purchase of our system involves a significant capital purchase which may be part of a larger construction project at the customer site (typically the construction of a new building), may themselves be under economic pressures. Hospitals continue to experience challenges with staffing and cost pressures as supply chain constraints and inflation drive up operating costs. This may cause delays or cancellations of current purchase orders and other commitments and may exacerbate the long and variable sales and installation cycles for our robotic magnetic navigation systems. Our hospital customers have also experienced challenges in sourcing supplies, such as catheters, needed to perform procedures. Such shortages have, and may continue to, put pressure on procedures and our disposable revenue.

 

Any disruption to the capital markets could negatively impact our ability to raise capital. If the capital markets are disrupted for an extended period of time and we need to raise additional capital, such capital may not be available on acceptable terms, or at all. Disruptions to the capital markets and other financing sources could also negatively impact our hospital customers’ ability to raise capital or otherwise obtain financing to fund their operations and capital projects. Such could result in delayed spending on current projects, a longer sales cycle for new projects where a large capital commitment is required, and decreased demand for our disposable products as well as an increased risk of customer defaults or delays in payments for our systems installation, service contracts and disposable products.

 

In addition to the aforementioned macroeconomic factors, the COVID-19 pandemic or similar occurrences may continue to negatively affect demand for both our systems and our disposable products. In the past, we have experienced business disruptions, including travel restrictions on us and our third-party distributors, which negatively affected our complex sales, marketing, installation, distribution and service network relating to our products and services. We also experienced reductions in demand for our disposable products as our healthcare customers (physicians and hospitals) re-prioritized the treatment of patients and diverted resources away from non-coronavirus areas, leading to the performance of fewer procedures in which our disposable products are used. Significant decreases to our capital or recurring revenues could have a material adverse effect on our business, operating results, and financial condition. While we cannot reliably estimate the ultimate duration of the impact or the severity of ongoing periodic resurgences of pandemic-related issues, we continue to anticipate periodic disruptions to our manufacturing operations, supply chains, procedures volumes, service activities, and capital system orders and placements, any of which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

9
 

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents and marketable securities. Our investments may include, at any time, a diversified portfolio of cash equivalents and short-term and long-term investments in a variety of high-quality securities, including money market funds, U.S. treasury and U.S. government agency securities, corporate notes and bonds, commercial paper, non-U.S. government agency securities, and municipal notes. The Company’s exposure to any individual corporate entity is limited by policy. Deposits may exceed federally insured limits, and the Company is exposed to credit risk on deposits in the event of default by the financial institutions to the extent account balances exceed the amount insured by the Federal Deposit Insurance Corporation (FDIC). The Company is closely monitoring ongoing events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, including Silicon Valley Bank. On March 10, 2023, Silicon Valley Bank (“SVB”), where the Company maintained accounts with a cash balance of less than 6% of the Company’s total cash, cash equivalents and marketable securities, was closed by the California Department of Financial Protection and Innovation and the FDIC was appointed as receiver. On March 12, 2023, the U.S. Department of the Treasury, Federal Reserve Board, and FDIC released a joint statement announcing that the FDIC would complete its resolution of SVB in a manner that fully protected all depositors at SVB and that depositors would have access to all of their money starting March 13, 2023. On March 26, 2023, it was announced that First-Citizens Bank & Trust Company would assume all of SVB’s deposits and loans as of March 27, 2023. During the periods presented, the Company has not experienced any losses on its deposits of cash, cash equivalents or marketable securities.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, money market instruments, and other highly liquid investments with original maturities of three months or less.

 

Restricted Cash

 

Restricted cash primarily consists of cash that the Company is obligated to maintain in accordance with contractual obligations. The Company’s restricted cash was $0.9 million and $1.3 million as of September 30, 2023, and December 31, 2022, respectively.

 

Investments

 

Our investments may include, at any time, a diversified portfolio of cash equivalents and short-and long-term investments in a variety of high-quality securities, including money market funds, U.S. treasury and U.S. government agency securities, corporate notes and bonds, commercial paper, non-U.S. government agency securities, and municipal notes. As of September 30, 2023, the Company had no short-term investments.

 

Amortized cost of U.S. treasury securities and marketable debt securities are based on the Company’s purchase price adjusted for accrual of discount, or amortization of premium, and recognition of impairment charges, if any. The amortized cost of securities the Company purchases at a discount or premium will equal the face or par value at maturity or the call date, if applicable. Stated interest on investments is reported as income when earned and is adjusted for amortization or accretion of any premium or discount. Accrued interest receivable on investments, included in other current assets was less than $0.1 million as of September 30, 2023 and December 31, 2022.

 

Effective January 1, 2023, the Company reports held to maturity investments net of an allowance for expected credit losses in accordance with Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses (“ASC 326”). The adoption of ASC 326 had no material impact on the Company’s financial results for any prior periods, therefore no cumulative adjustment to beginning retained earnings was recorded. The Company segments its portfolio based on the underlying risk profiles of the securities and has a zero-loss expectation for U.S. treasury and U.S. government agency securities. The Company regularly reviews the securities using the probability of default method and analyzes the unrealized loss positions and evaluates the current expected credit loss by considering factors such as credit ratings, issuer-specific factors, current economic conditions, and reasonable and supportable forecasts. The Company did not have any material expected credit losses on investments or material expected credit losses on accrued interest related to investments during the nine months ended September 30, 2023, or year ended December 31, 2022.

 

Fair Value Measurements

 

Financial instruments consist of cash and cash equivalents, restricted cash, investments, accounts receivable, and accounts payable.

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis. General accounting principles for fair value measurement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”). The three levels of the fair value hierarchy are described below:

 

Level 1:   Values are based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
     
Level 2:   Values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or other model-based valuation techniques for which all significant assumptions are observable in the market.
     
Level 3:   Values are generated from model-based techniques that use significant assumptions not observable in the market.

 

As of September 30, 2023, financial assets classified as Level 2 consisted of money market funds. As of December 31, 2022, financial assets classified as Level 2 consisted of money market funds, U.S. treasury securities and corporate debt securities. The Company reviews trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data. This approach results in the Level 2 classification of these securities within the fair value hierarchy.

 

10
 

 

Accounts Receivable, Contract Assets, and Allowance for Credit Losses

 

Accounts receivable primarily include amounts due from hospitals and distributors for acquisition of magnetic systems, associated disposable device sales and service contracts, net of allowances for expected credit losses. Credit is granted on a limited basis, with balances due generally within 30 days of billing. Contract assets primarily represent the difference between the revenue that was earned but not billed on service contracts and revenue from system contracts that was recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Effective January 1, 2023, the Company reports accounts receivable and contract assets net of an allowance for expected credit losses in accordance with Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses (“ASC 326”). The adoption of ASC 326 had no material impact on the Company’s financial results for any prior periods, therefore no cumulative adjustment to beginning retained earnings was recorded. The provision for credit loss is based upon management’s assessment of historical and expected net collections considering business and economic conditions and other collection indicators. We assess collectability by reviewing the accounts receivable aging schedule on an aggregated basis where similar characteristics exist and on an individual basis when we identify specific customers with known disputes or collectability issues. Amounts deemed uncollectible are recorded as an allowance for expected credit losses.

 

Revenue and Costs of Revenue

 

The Company accounts for revenue in accordance with Accounting Standards Codification Topic 606 (“ASC 606”), “Revenue from Contracts with Customers”.

 

We generate revenue from the initial capital sales of systems as well as recurring revenue from the sale of our proprietary disposable devices, from royalties paid to the Company on the sale of various devices as provided by co-development and co-placement arrangements, and from other recurring revenue including ongoing software updates and service contracts.

 

We account for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. We record our revenue based on consideration specified in the contract with each customer, net of any taxes collected from customers that are remitted to government authorities.

 

For contracts containing multiple products and services, the Company accounts for individual products and services as separate performance obligations if they are distinct, which is if a product or service is separately identifiable from other items in the bundled package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company recognizes revenues as the performance obligations are satisfied by transferring control of the product or service to a customer.

 

For arrangements with multiple performance obligations, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services. If a standalone selling price is not directly observable, then the Company estimates the standalone selling price considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services and market conditions. The Company regularly reviews standalone selling prices and updates these estimates if necessary.

 

Our revenue recognition policy affects the following revenue streams in our business as follows:

 

Systems:

 

Contracts related to the sale of systems typically contain separate obligations for the delivery of system(s), installation and an implied obligation to provide software enhancements if and when available for one year following installation. Revenue is recognized when the Company transfers control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of delivery or installation, depending on the terms of the arrangement. Revenue from the implied obligation to deliver software enhancements if and when available is recognized ratably over the first year following installation of the system as the customer receives the right to software enhancements throughout the period and is included in Other Recurring Revenue. The Company’s system contracts do not provide a right of return. Systems are generally covered by a one-year assurance type warranty; warranty costs were approximately $0.1 million for the nine months ended September 30, 2023, and 2022. Revenue from system delivery and installation represented 39% and 22% of revenue for the nine months ended September 30, 2023, and 2022, respectively.

 

Disposables:

 

Revenue from sales of disposable products is recognized when control is transferred to the customers, which generally occurs at the time of shipment, but can also occur at the time of delivery depending on the customer arrangement. Disposable products are covered by an assurance type warranty that provides for the return of defective products. Warranty costs were not material for the nine months ended September 30, 2023, and 2022. Disposable revenue represented 21% and 29% of revenue for the nine months ended September 30, 2023, and 2022, respectively.

 

Royalty:

 

The Company receives royalties on the sale of various devices as provided by co-development and co-placement arrangements with various manufacturers. The Company was entitled to royalty payments from Biosense Webster, payable quarterly based on net revenues from sales of the co-developed catheters, during the term of the agreement. Royalty revenue from co-development and co-placement arrangements represented less than 1% and approximately 8% of revenue for the nine months ended September 30, 2023, and 2022, respectively.

 

11
 

 

Other Recurring Revenue:

 

Other recurring revenue includes revenue from product maintenance plans, other post warranty maintenance, and the implied obligation to provide software enhancements if and when available for a specified period, typically one year following installation of our systems. Revenue from services and software enhancements is deferred and amortized over the service or update period, which is typically one year. Revenue related to services performed on a time-and-materials basis is recognized when performed. Other recurring revenue represented 40% and 41% of revenue for the nine months ended September 30, 2023, and 2022, respectively.

 

The following table summarizes the Company’s revenue for systems, disposables, and service and accessories for the nine months ended September 30, 2023, and 2022 (in thousands):

 

   2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
Systems  $3,539   $2,413   $8,673   $4,649 
Disposables, service and accessories   4,260    5,244    13,533    16,197 
Total revenue  $7,799   $7,657   $22,206   $20,846 

 

Transaction price allocated to remaining performance obligations relates to amounts allocated to products and services for which the revenue has not yet been recognized. A significant portion of this amount relates to the Company’s systems contracts and obligations that will be recognized as revenue in future periods. These obligations are generally satisfied within two years after contract inception but may occasionally extend longer. Transaction price representing revenue to be earned on remaining performance obligations on system contracts was approximately $12.1 million as of September 30, 2023. Performance obligations arising from contracts for disposables and service are generally expected to be satisfied within one year after entering into the contract.

 

The following table summarizes the Company’s contract assets and liabilities (in thousands):

 

   September 30, 2023   December 31, 2022 
Contract Assets - unbilled receivables  $626   $539 
           
Customer deposits  $1,796   $2,339 
Product shipped, revenue deferred   1,473    1,389 
Deferred service and license fees   4,929    5,268 
Total deferred revenue  $8,198   $8,996 
Less: Long-term deferred revenue   (1,982)   (1,654)
Total current deferred revenue  $6,216   $7,342 

 

The Company invoices its customers based on the billing schedules in its sales arrangements. Contract assets primarily represent the difference between the revenue that was earned but not billed on service contracts and revenue from system contracts that was recognized based on the relative selling price of the related satisfied performance obligations and the contractual billing terms in the arrangements. Customer deposits primarily relate to future system sales but can also include deposits on disposable sales. Deferred revenue is primarily related to service contracts, for which the service fees are billed up-front, generally quarterly or annually, and for amounts billed in advance for system contracts for which some performance obligations remain outstanding. For service contracts, the associated deferred revenue is generally recognized ratably over the service period. For system contracts, the associated deferred revenue is recognized when the remaining performance obligations are satisfied. The Company did not have any credit losses on its contract assets for the periods presented therefore no allowance for credit losses was recorded as of September 30, 2023, or December 31, 2022.

 

Revenue recognized for the nine months ended September 30, 2023, and 2022, that was included in the deferred revenue balance at the beginning of each reporting period was $5.7 million and $5.6 million, respectively.

 

Assets Recognized from the Costs to Obtain a Contract with a Customer

 

The Company has determined that sales incentive programs for the Company’s sales team meet the requirements to be capitalized as the Company expects to generate future economic benefits from the related revenue generating contracts after the initial capital sales transaction. The costs capitalized as contract acquisition costs included in prepaid expenses and other assets, in the Company’s balance sheet was $0.1 million and $0.2 million as of September 30, 2023, and December 31, 2022, respectively. The Company did not incur any impairment losses during any of the periods presented.

 

Costs of systems revenue include direct product costs, installation labor and other costs, estimated warranty costs, and initial training and product maintenance costs. These costs are recognized at the time of sale. Costs of disposable revenue include direct product costs and estimated warranty costs and are recognized at the time of sale. Cost of revenue from services and license fees are recognized when incurred.

 

12
 

 

Leasing Arrangements

 

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company accounts for leases in accordance with Accounting Standards Update No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842 (“ASC 842”). The Company determines if an arrangement contains a lease at inception.

 

The Company leases its facilities under operating leases. In accordance with ASC 842, operating lease agreements are recognized on the balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability. These leases generally do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions. Many of our leases include both lease (i.e., fixed payments including rent, taxes, and insurance costs) and non-lease components (i.e., common-area or other maintenance costs) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases.

 

The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less) on the balance sheet.

 

The calculated amounts of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum lease payments. ASC 842 requires the use of the discount rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception.

 

Stock-Based Compensation

 

The Company accounts for its grants of stock options, stock appreciation rights, restricted shares, restricted stock units and for its employee stock purchase plan in accordance with the provisions of general accounting principles for share-based payments. These accounting principles require the determination of the fair value of the stock-based compensation at the grant date and the recognition of the related expense over the period in which the stock-based compensation vests.

 

For time-based awards, the Company utilizes the Black-Scholes valuation model to determine the fair value of stock options and stock appreciation rights at the date of grant. The weighted average assumptions and fair value for options granted during the nine months ended September 30, 2023, were 1) expected dividend rate of 0%; 2) expected volatility of 76% based on the Company’s historical volatility; 3) risk-free interest rate based on the Treasury yield on the date of grant; and 4) expected term of 6.25 years. The resulting compensation expense is recognized over the requisite service period, which is generally four years. Restricted shares and units granted to employees are valued at the fair market value at the date of grant. The Company amortizes the fair market value to expense over the service period. If the shares are subject to performance objectives, the resulting compensation expense is amortized over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives.

 

For market-based awards, stock-based compensation expense is recognized over the minimum service period regardless of whether or not the market target is probable of being achieved. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.

 

Shares purchased by employees under the 2022 Employee Stock Purchase Plans are considered to be non-compensatory.

 

Net Earnings (Loss) per Common Share

 

Basic earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by the weighted average number of common shares outstanding during the period. In periods where there is net income, we apply the two-class method to calculate basic and diluted net income (loss) per share of common stock, as our convertible preferred stock is a participating security. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. In periods where there is a net loss, the two-class method of computing earnings per share does not apply as our convertible preferred stock does not contractually participate in our losses. We compute diluted net income (loss) per common share using net income (loss) as the “control number” in determining whether potential common shares are dilutive, after giving consideration to all potentially dilutive common shares, including stock options, warrants, unvested restricted stock units outstanding during the period and potential issuance of stock upon the conversion of our convertible preferred stock issued and outstanding during the period, except where the effect of such securities would be antidilutive.

 

The following table sets forth the computation of basic and diluted EPS (in thousands except for share and per share amounts):

 

   2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
Net loss  $(5,369)  $(4,917)  $(15,673)  $(14,138)
Cumulative dividend on convertible preferred stock   (338)   (339)   (1,004)   (1,005)
Net loss attributable to common stockholders  $(5,707)  $(5,256)  $(16,677)  $(15,143)
                     
Weighted average number of common shares and equivalents:   82,468,971    76,100,007    80,028,243    75,977,920 
Basic EPS  $(0.07)  $(0.07)  $(0.21)  $(0.20)
Diluted EPS  $(0.07)  $(0.07)  $(0.21)  $(0.20)

 

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The Company did not include any portion of unearned restricted shares, outstanding options, stock appreciation rights, warrants or convertible preferred stock in the calculation of diluted loss per common share because all such securities are anti-dilutive for all periods presented. The application of the two-class method of computing earnings per share under general accounting principles for participating securities is not applicable during these periods because those securities do not contractually participate in its losses.

 

As of September 30, 2023, the Company had 3,769,675 shares of common stock issuable upon the exercise of outstanding options and stock appreciation rights at a weighted average exercise price of $3.93 per share, 48,909,568 shares of our common stock issuable upon conversion of our Series A Convertible Preferred Stock and 1,502,131 shares of unvested restricted share units. The Company had no unearned restricted shares outstanding as of September 30, 2023.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05. The standard modifies the measurement approach for credit losses on financial instruments, including trade receivables, from an incurred loss method to a current expected credit loss method, otherwise known as “CECL.” The standard requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions and a forecast that is supportable. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years; early adoption is permitted. The standard must be adopted by applying a cumulative adjustment to retained earnings. The Company adopted the standard in the first quarter of 2023. The impact to the Company’s financial results was immaterial.

 

3. Financial Instruments

 

The following table summarizes the Company’s cash and held to maturity securities’ amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category reported as cash and cash equivalents, restricted cash and investments as of September 30, 2023, and December 31, 2022:

 

   September 30, 2023 
   Valuation   Reported as: 
(in thousands)  Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value   Cash and Cash Equivalents   Restricted Cash- current   Short-term Investments   Restricted Cash 
Cash  $2,414   $-   $-   $2,414   $2,414   $-   $-   $- 
Level 2                                                                       
Money market funds   20,561    -    (2)   20,559    19,686    525    -    350 
Subtotal   20,561    -    (2)   20,559    19,686    525    -    350 
Total assets measured at fair value  $22,975   $-   $(2)  $22,973   $22,100   $525   $-   $350 

 

   December 31, 2022 
   Valuation   Reported as: 
(in thousands)  Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value   Cash and Cash Equivalents   Restricted Cash- current   Short-term Investments   Restricted Cash 
Cash  $3,258   $-   $-   $3,258   $3,258   $-   $-   $- 
Level 2                                                       
Money market funds   1,615    -    -    1,615    346    525    -    744 
US treasury securities   14,833    2    (2)   14,833    4,982    -    9,851    - 
Corporate debt securities   9,993    -    (6)   9,987    -    -    9,993    - 
Subtotal   26,441    2    (8)   26,435    5,328    525    19,844    744 
Total assets measured at fair value  $29,699   $2   $(8)  $29,693   $8,586   $525   $19,844   $744 

 

Interest income recorded for these investments was approximately $0.8 million and $0.5 million during the nine months ended September 30, 2023, and the year ended December 31, 2022, respectively.

 

As of September 30, 2023, and December 31, 2022, the Company did not have any financial assets classified as Level 1 or Level 3 nor did the Company have financial liabilities valued at fair value on a recurring basis.

 

4. Inventories

 

Inventories consist of the following (in thousands):

 

   September 30, 2023   December 31, 2022 
Raw materials  $6,490   $6,556 
Work in process   542    530 
Finished goods   1,633    2,697 
Reserve for excess and obsolescence   (1,877)   (1,907)
Total inventory  $6,788   $7,876 

 

The reserve for excess and obsolescence primarily includes Niobe Systems and related raw materials and spare parts.

 

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5. Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets consist of the following (in thousands):

 

   September 30, 2023   December 31, 2022 
Prepaid expenses  $281   $605 
Prepaid commissions   125    187 
Deposits   475    669 
Other assets   109    72 
Total prepaid expenses and other assets   990    1,533 
Less: Noncurrent prepaid expenses and other assets   (135)   (208)
Total current prepaid expenses and other assets  $855   $1,325 

 

6. Property and Equipment

 

Property and Equipment consist of the following (in thousands):

 

   September 30, 2023   December 31, 2022 
Equipment  $4,271   $4,393 
Leasehold improvements   2,911    2,692 
Construction in process   -    204 
 Gross property and equipment   7,182    7,289 
Less: Accumulated depreciation   (3,739)   (3,458)
Net property and equipment  $3,443   $3,831 

 

The Company had less than $0.1 million and $1.2 million of property and equipment additions during the nine months ended September 30, 2023, and the year ended December 31, 2022, respectively, associated with the buildout of the new leased space in St. Louis, Missouri.

 

7. Leases

 

On March 1, 2021, the Company entered into an office lease agreement (the “Lease”) with Globe Building Company (the “Landlord”), under which the Company leases executive office space and manufacturing facilities of approximately 43,100 square feet of rentable space located at 710 N. Tucker Boulevard, St. Louis, Missouri (the “Premises”) that serves as the Company’s principal executive and administrative offices and manufacturing facility. Lease payments commenced on January 1, 2022, and the lease has a term of ten years, with two renewal options of five years each. The minimum annual rent under the terms of the Lease ranges from approximately $0.8 million in 2022 to $1.0 million in 2031.

 

As of September 30, 2023, the weighted average discount rate for operating leases was 9% and the weighted average remaining lease term for operating lease term is 8.24 years.

 

The following table represents lease costs and other lease information (in thousands):

 

                     
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
Operating lease cost  $227   $227   $681   $678 
Short-term lease cost   4    4    13    24 
Total net lease cost  $231   $231   $694   $702 
                     
Cash paid within operating cash flows  $255   $232   $741   $886 

 

Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities and equipment which are paid based on actual costs incurred.

 

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Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2023, were as follows (in thousands):

 

   September 30, 2023 
2023  $220 
2024   898 
2025   919 
2026   935 
2027   956 
2028 and thereafter   4,030 
 Total lease payments   7,958 
 Less: Interest   (2,372)
 Present value of lease liabilities  $5,586 

 

8. Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

   September 30, 2023   December 31, 2022 
Accrued salaries, bonus, and benefits  $1,314   $1,381 
Accrued licenses and maintenance fees   484    484 
Accrued warranties   111    163 
Accrued professional services   173    129 
Deferred contract obligation   1,045    1,045 
Other   76    155 
Total accrued liabilities   3,203    3,357 
Less: Long term accrued liabilities   (43)   (51)
Total current accrued liabilities  $3,160   $3,306 

 

Certain prior year amounts have been reclassified to conform to the 2023 presentation.

 

9. Convertible Preferred Stock and Stockholders’ Equity

 

The holders of common stock are entitled to one vote for each share held and to receive dividends when and as declared by the Board of Directors out of funds legally available for dividends, subject to the prior rights or preferences applicable to any preferred stock as may then be outstanding. No dividends have been declared or paid as of September 30, 2023, and the Company does not presently intend to pay any cash dividends in the foreseeable future.

 

Series B Convertible Preferred Stock

 

On August 7, 2019, the Company entered into a Securities Purchase Agreement with certain institutional and other accredited investors, whereby it, as part of a private placement, agreed to issue and sell to the investors 5,610,121 shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”), $0.001 par value per share which are convertible into shares of the Company’s common stock, at a price of $2.05 per share. In April 2023, all of the outstanding shares of Series B Convertible Preferred Stock were converted into shares of common stock on a one-for-one basis by the holder. The Series B Preferred Stock, which was a common stock equivalent but non-voting and with a blocker on conversion if the holder exceeded a specified threshold of voting security ownership, was convertible into common stock on a one-for-one basis, subject to adjustment for events such as stock splits, combinations and the like as provided in the Purchase Agreement. The Series B Preferred Stock was reported in the stockholders’ equity section of the Company’s balance sheet.

 

Series A Convertible Preferred Stock and Warrants

 

In September 2016, the Company issued (i) 24,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), par value $0.001 per share, with a stated value of $1,000 per share, which are convertible into shares of the Company’s common stock at an initial conversion rate of $0.65 per share, subject to adjustment for events such as stock splits, combinations and the like as provided in the certificate of designations covering such Series A Preferred Stock, and (ii) (the SPA Warrants) to purchase an aggregate of 36,923,078 shares of common stock. The shares of Series A Preferred Stock are entitled to vote on an as-converted basis with the common stock, subject to specified beneficial ownership issuance limitations. The Series A Preferred Stock bear dividends at a rate of six percent (6%) per annum, which are cumulative and accrue daily from the date of issuance on the $1,000 stated value. Such dividends will not be paid in cash except in connection with any liquidation, dissolution or winding up of the Company or any redemption of the Series A Preferred Stock. Each holder of convertible preferred shares has the right to require us to redeem such holder’s shares of Series A Preferred Stock upon the occurrence of specified events, which include certain business combinations, the sale of all or substantially all of the Company’s assets, or the sale of more than 50% of the outstanding shares of the Company’s common stock. In addition, the Company has the right to redeem the Series A Preferred Stock in the event of a defined change of control. The Series A Preferred Stock ranks senior to our common stock as to distributions and payments upon the liquidation, dissolution, and winding up of the Company. Since the Series A Preferred Stock are subject to conditions for redemption that are outside the Company’s control, the Series A Preferred Stock are presently reported in the mezzanine section of the balance sheet.

 

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2021 CEO Performance Award Unit Grant

 

On February 23, 2021, the Company`s Board of Directors, upon recommendation of the Compensation Committee, approved the grant of the CEO Performance Award to the Company’s Chief Executive Officer. The CEO Performance award is a 10-year performance award of up to 13,000,000 shares, tied to the achievement of market capitalization milestones and subject to minimum service requirements.

 

As detailed in the table below, the CEO Performance Award consists of ten vesting tranches. The first market capitalization milestone is $1.0 billion, and each of the remaining nine market capitalization milestones are in additional $500 million increments, up to $5.5 billion.

 

Tranche #  No. of Shares Subject to PSU   Market Capitalization Milestones(1) 
1   1,000,000   $1,000,000,000 
2   1,500,000   $1,500,000,000 
3   1,500,000   $2,000,000,000 
4   2,000,000   $2,500,000,000 
5   1,000,000   $3,000,000,000 
6   1,000,000   $3,500,000,000 
7   1,000,000   $4,000,000,000 
8   2,000,000   $4,500,000,000 
9   1,000,000   $5,000,000,000 
10   1,000,000   $5,500,000,000 
Total:   13,000,000      

 

Each tranche represents a portion of the PSUs covering the number of shares outlined in the table above. Each tranche vests upon (i) satisfaction of the market capitalization milestones and (ii) continued employment as CEO of the Company from the grant date through December 31, 2030. Absent an earlier termination, the PSUs will expire on December 31, 2030. If our CEO ceases employment as CEO of the Company for any reason including death, disability, termination for cause or without cause (as defined in the award agreement), or if he voluntary terminates after service as CEO for at least five years, the remaining service period will be waived and he will retain any PSUs that have vested through the date of termination.

 

The Company received Shareholder approval at its annual meeting on May 20, 2021 for shares to be issued under the award.

 

The market capitalization requirement is considered a market condition under FASB Accounting Standards Codification Topic 718 “Compensation – Stock Compensation” and is estimated on the grant date using Monte Carlo simulations. Recognition of stock-based compensation expense of all the tranches commenced on February 23, 2021, the date of grant, as the probability of meeting the ten market capitalization milestones is not considered in determining the timing of expense recognition. The expense will be recognized on an accelerated basis through 2030. Key assumptions for estimating the performance-based awards fair value at the date of grant included share price on grant date, volatility of the Company’s common stock price, risk free interest rate, and grant term.

 

Total stock-based compensation recorded as operating expense for the CEO Performance Award was $5.3 million for the nine months ended September 30, 2023, and 2022. As of September 30, 2023, and 2022, the Company had approximately $38.8 million and $45.9 million, respectively, of total unrecognized stock-based compensation expense remaining under the CEO Performance Award assuming the grantee’s continued employment as CEO of the Company, or in a similar capacity, through 2030. As of September 30, 2023, none of the performance milestones established by the 2021 CEO Incentive Program have been achieved, and no awards have been earned.

 

Stock Award Plans

 

In February 2022, the Compensation Committee of the Board of Directors adopted the 2022 Stock Incentive Plan (the “Plan”) which was subsequently approved by the Company’s shareholders. This plan replaced the 2012 Stock Incentive Plan which expired on May 19, 2022. The 2022 Stock Incentive Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted shares and restricted share units to employees, directors, and third-party consultants.

 

At September 30, 2023, the Company had 2,645,914 remaining shares of the Company’s common stock to provide for current and future grants under its various equity plans.

 

At September 30, 2023, the total compensation cost related to options, stock appreciation rights, and non-vested stock granted to employees and non-employees under the Company’s stock award plans but not yet recognized was approximately $4.3 million, excluding compensation not yet recognized related to the CEO Performance Award discussed above. This cost will be amortized over a period of up to four years over the underlying estimated service periods and will be adjusted for subsequent changes in actual forfeitures and anticipated vesting periods.

 

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A summary of the option and stock appreciation rights activity for the nine-month period ended September 30, 2023, is as follows:

 

   Number of Options/SARs   Range of Exercise Price   Weighted Average Exercise Price per Share 
Outstanding, December 31, 2022   3,208,065    $0.74 - $9.87   $4.21 
Granted   718,000    $1.51- $2.57   $2.54 
Exercised   (30,188)   $0.74 - $2.03   $1.14 
Forfeited   (126,202)   $0.82 - $9.20   $3.82 
Outstanding, September 30, 2023   3,769,675    $0.74 - $9.87   $3.93 

 

A summary of the restricted stock unit activity for the nine-month period ended September 30, 2023, is as follows:

 

   Number of Restricted Stock Units   Weighted Average Grant Date Fair Value per Unit 
Outstanding, December 31, 2022   1,208,739   $4.21 
Granted   610,038   $1.97 
Vested   (316,646)  $1.17 
Outstanding, September 30, 2023   1,502,131   $3.94 

 

10. Product Warranty Provisions

 

The Company’s standard policy is to warrant all capital systems against defects in material or workmanship for one year following installation. The Company’s estimate of costs to service the warranty obligations is based on historical experience and current product performance trends. A regular review of warranty obligations is performed to determine the adequacy of the reserve and adjustments are made to the estimated warranty liability as appropriate.

 

Accrued warranty, which is included in other accrued liabilities, consists of the following (in thousands):

 

   September 30, 2023   December 31, 2022 
Warranty accrual, beginning of the fiscal period  $163   $242 
Accrual adjustment for product warranty   139    113 
Payments made   (191)   (192)
Warranty accrual, end of the fiscal period  $111   $163 

 

11. Commitments and Contingencies

 

The Company at times becomes a party to claims in the ordinary course of business. Management believes that the ultimate resolution of pending or threatened proceedings will not have a material effect on the financial position, results of operations or liquidity of the Company.

 

In April 2021, the Company entered into a letter of credit pursuant to the Lease agreement totaling approximately $1.8 million to be delivered in four equal installments of which the first was delivered in April 2021, the second was delivered in July 2021, the third was delivered in October 2021, and the fourth was delivered in January 2022. The amount available under this letter of credit automatically reduces by one fortieth at the end of each month during the lease term.

 

12. Subsequent Events

 

None.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2022. Operating results are not necessarily indicative of results that may occur in future periods.

 

This report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in “Part II - Item 1A. Risk Factors” included in this Quarterly Report on Form 10-Q and in Part I, Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the year ended December 31, 2022. Forward-looking statements discuss matters that are not historical facts. Forward-looking statements include, but are not limited to, discussions regarding our operating strategy, sales and marketing strategy, regulatory strategy, industry, economic conditions, financial condition, liquidity, capital resources, results of operations, and the impact of the recent coronavirus (“COVID-19”) pandemic and our response to it. Such statements include, but are not limited to, statements preceded by, followed by, or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “can”, “could”, “may”, “would”, or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they are made. They give our expectations regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

 

Overview

 

Our primary clinical focus has been electrophysiology, specifically cardiac ablation procedures for the treatment of arrhythmias. Cardiac ablation has become a well-accepted therapy for arrhythmias and a multi-billion-dollar medical device market with expectations for substantial long-term growth. We have shared our aspiration and a product strategy to expand the clinical focus of our technology to several additional endovascular indications including coronary, neuro, and peripheral interventions.

 

There is substantial real-world evidence and clinical literature for Robotic Magnetic Navigation in electrophysiology. Hundreds of electrophysiologists at over one hundred hospitals globally have treated over 100,000 arrhythmia patients with our robotic technology. Clinical use of our technology has been documented in over 400 clinical publications. Robotic Magnetic Navigation is designed to enable physicians to complete more complex interventional procedures with greater success and safety by providing image-guided delivery of catheters through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied computer-controlled magnetic fields that govern the motion of the working tip of the catheter, resulting in improved navigation. The more flexible atraumatic design of catheters driven using magnetic fields may reduce the risk of patient harm and other adverse events. Performing the procedure from a control cockpit enables physicians to complete procedures in a safe location protected from x-ray exposure, with greater ergonomics, and improved efficiency. We believe these benefits can be applicable in other endovascular indications where navigation through complex vasculature is often challenging or unsuccessful and generates significant x-ray exposure, and we are investing in research and development in these areas.

 

Our primary products include the Genesis RMN System, the Odyssey Solution, and other related devices. We also offer our customers the Stereotaxis Imaging Model S x-ray System and other accessory devices.

 

The Genesis RMN System is designed to enable physicians to complete more complex interventional procedures by providing image-guided delivery of catheters through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied magnetic fields that govern the motion of the working tip of the catheter, resulting in improved navigation, efficient procedures, and reduced x-ray exposure.

 

The Odyssey Solution consolidates lab information onto one large integrated display, enabling physicians to view and control all the key information in the operating room. This is designed to improve lab layout and procedure efficiency. The system also features a remote viewing and recording capability called Odyssey Cinema, which is an innovative solution that delivers synchronized content for optimized workflow, advanced care, and improved productivity. This tool includes an archiving capability that allows clinicians to store and replay entire procedures or segments of procedures. This information can be accessed from locations throughout the hospital local area network and over the global Odyssey Network providing physicians with a tool for clinical collaboration, remote consultation, and training.

 

The Stereotaxis Imaging Model S provides an integrated complete solution for a robotic interventional operating room. It is a single-plane, full-power x-ray system and includes the c-arm, powered table, motorized boom, and large high-definition monitors. Stereotaxis Imaging Model S incorporates modern fluoroscopy technology to support high quality imaging while minimizing radiation exposure for patients and physicians. The combination of RMN Systems with Stereotaxis Imaging Model S is designed to reduce the cost of acquisition, the ongoing cost of ownership, and the complexity of installation of a robotic electrophysiology practice.

 

We promote our full suite of products in a typical hospital implementation, subject to regulatory approvals or clearances. This implementation requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically includes equipment and installation charges. The recurring payments typically include disposable costs for each procedure, equipment service costs beyond the warranty period, and ongoing software updates. In hospitals where our full suite of products has not been implemented, equipment upgrade or expansion can be implemented upon purchasing of the necessary upgrade or expansion.

 

We have received regulatory clearances and registration necessary for us to market the Genesis RMN System in the U.S. and Europe, and we are in the process of obtaining necessary registrations for extending our markets in other countries. Our prior generation robotic magnetic navigation system, the Niobe System, the Odyssey Solution, Cardiodrive, and various disposable interventional devices have received regulatory clearance in the U.S., Europe, Canada, China, Japan and various other countries. We have received the regulatory clearance, licensing and/or CE Mark approvals that allow us to market the Vdrive and Vdrive Duo Systems with the V-CAS, V-Loop and V-Sono devices in the U.S., Canada and Europe. The Stereotaxis Imaging Model S x-ray System is CE marked and cleared by the FDA. We are pursuing regulatory approvals for the Stereotaxis MAGiC catheter, a robotically-navigated magnetic ablation catheter designed to perform minimally invasive cardiac ablation procedures, in various global geographies. Approval processes can be lengthy and uncertain, submissions may require revised or additional non-clinical and clinical data, and regulatory applications could be denied.

 

We have strategic relationships with technology leaders and innovators in the global interventional market. Through these strategic relationships we provide compatibility between our robotic magnetic navigation system, x-ray systems, and digital imaging and 3D catheter location sensing technology, as well as disposable interventional devices. The maintenance of these strategic relationships, or the establishment of equivalent alternatives, is critical to our commercialization efforts. There are no guarantees that any existing strategic relationships will continue, and efforts are ongoing to ensure the availability of integrated systems and devices and/or equivalent alternatives. We cannot provide assurance as to the timeline of the ongoing availability of such compatible systems or our ability to obtain equivalent alternatives on competitive terms or at all.

 

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Risks and Uncertainties

 

Future results of operations could be materially adversely impacted by macroeconomic and geopolitical factors. The Company continues to experience difficulties with periodic worldwide supply chain disruptions, including shortages and inflationary pressures, and logistics delays which make it difficult for us to source parts and ship our products. We have generally been able to conduct normal business activities albeit in a more deliberate manner than prior to the pandemic, including taking action to increase inventory levels, but we cannot guarantee that they will not be impacted more severely in the future. Our suppliers and contract manufacturers have experienced, and may continue to experience, similar difficulties. If our manufacturing operations or supply chains are materially interrupted, it may not be possible for us to timely manufacture or service our products at required levels, or at all. Changes in economic conditions and supply chain constraints could lead to higher inflation than previously experienced or expected, which could, in turn, lead to an increase in costs. We may be unable to raise the prices of our products sufficiently to keep up with the rate of inflation. A material reduction or interruption in any of our manufacturing processes or a substantial increase in costs would have a material adverse effect on our business, operating results, and financial condition.

 

Many of our hospital customers, for whom the purchase of our system involves a significant capital purchase which may be part of a larger construction project at the customer site (typically the construction of a new building), may themselves be under economic pressures. Hospitals continue to experience challenges with staffing and cost pressures as supply chain constraints and inflation drive up operating costs. This may cause delays or cancellations of current purchase orders and other commitments and may exacerbate the long and variable sales and installation cycles for our robotic magnetic navigation systems. Our hospital customers have also experienced challenges in sourcing supplies, such as catheters, needed to perform procedures. Such shortages have, and may continue to, put pressure on procedures and our disposable revenue.

 

Any disruption to the capital markets could negatively impact our ability to raise capital. If the capital markets are disrupted for an extended period of time and we need to raise additional capital, such capital may not be available on acceptable terms, or at all. Disruptions to the capital markets and other financing sources could also negatively impact our hospital customers’ ability to raise capital or otherwise obtain financing to fund their operations and capital projects. Such could result in delayed spending on current projects, a longer sales cycle for new projects where a large capital commitment is required, and decreased demand for our disposable products as well as an increased risk of customer defaults or delays in payments for our systems installation, service contracts and disposable products.

 

In addition to the aforementioned macroeconomic factors, the COVID-19 pandemic or similar occurrences may continue to negatively affect demand for both our systems and our disposable products. In the past, we have experienced business disruptions, including travel restrictions on us and our third-party distributors, which negatively affected our complex sales, marketing, installation, distribution and service network relating to our products and services. We also experienced reductions in demand for our disposable products as our healthcare customers (physicians and hospitals) re-prioritized the treatment of patients and diverted resources away from non-coronavirus areas, leading to the performance of fewer procedures in which our disposable products are used. Significant decreases to our capital or recurring revenues could have a material adverse effect on our business, operating results, and financial condition. While we cannot reliably estimate the ultimate duration of the impact or the severity of ongoing periodic resurgences of pandemic-related issues, we continue to anticipate periodic disruptions to our m