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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, 2022

 

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, 2022 was 74,844,714.

 

 

 

 
 

 

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 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
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, 2022   December 31, 2021 
Assets   (Unaudited)      
Current assets:          
Cash and cash equivalents  $30,938   $38,739 
Restricted cash - current   618    454 
Accounts receivable, net of allowance of $227 and $180 at 2022 and 2021, respectively   5,077    5,406 
Inventories, net   8,161    4,433 
Prepaid expenses and other current assets   1,285    2,356 
Total current assets   46,079    51,388 
Property and equipment, net   3,409    2,632 
Restricted cash   875    952 
Operating lease right-of-use assets   5,479    5,735 
Prepaid and other non-current assets   233    278 
Total assets  $56,075   $60,985 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Accounts payable  $3,941   $4,189 
Accrued liabilities   3,211    2,528 
Deferred revenue   8,043    6,277 
Current portion of operating lease liabilities   359    268 
Total current liabilities   15,554    13,262 
Long-term deferred revenue   1,416    2,238 
Operating lease liabilities   5,586    5,842 
Other liabilities   168    219 
Total liabilities   22,724    21,561 
           
Series A - Convertible preferred stock:          
Convertible preferred stock, Series A, par value $0.001; 22,386 and 22,387 shares outstanding at 2022 and 2021, respectively   5,584    5,584 
        
Stockholders’ equity:          
Convertible preferred stock, Series B, par value $0.001; 10,000,000 shares authorized, 5,610,121 shares outstanding at 2022 and 2021   6    6 
          
Common stock, par value $0.001; 300,000,000 shares authorized, 74,832,278 and 74,618,240 shares issued at 2022 and 2021, respectively   75     75  
Additional paid in capital   540,706    532,641 
Treasury stock, 4,015 shares at 2022 and 2021   (206)   (206)
Accumulated deficit   (512,814)   (498,676)
Total stockholders’ equity   27,767    33,840 
Total liabilities and stockholders’ equity  $56,075   $60,985 

 

See accompanying notes.

 

 3 
 

 

STEREOTAXIS, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

 

                     
   Three Months Ended September 30,   Nine Months Ended September 30, 
(in thousands, except share and per share amounts)  2022   2021   2022   2021 
Revenue:                    
Systems  $2,413   $3,541   $4,649   $8,829 
Disposables, service and accessories   5,244    5,319    16,197    17,211 
Sublease   -    246    -    740 
Total revenue   7,657    9,106    20,846    26,780 
                     
Cost of revenue:                    
Systems   2,016    3,375    3,817    6,200 
Disposables, service and accessories   1,074    751    2,868    2,558 
Sublease   -    246    -    740 
Total cost of revenue   3,090    4,372    6,685    9,498 
                     
Gross margin   4,567    4,734    14,161    17,282 
                     
Operating expenses:                    
Research and development   2,818    2,500    8,158    7,584 
Sales and marketing   3,111    2,910    9,337    8,902 
General and administrative   3,690    3,944    10,986    10,335 
Total operating expenses   9,619    9,354    28,481    26,821 
Operating loss   (5,052)   (4,620)   (14,320)   (9,539)
                     
Interest income (expense), net   135    1    182    (5)
Gain on extinguishment of debt   -    -    -    2,183 
Net loss  $(4,917)  $(4,619)  $(14,138)  $(7,361)
                     
Cumulative dividend on convertible preferred stock   (339)   (338)   (1,005)   (1,007)
Net loss attributable to common stockholders  $(5,256)  $(4,957)  $(15,143)  $(8,368)
                     
Net loss per share attributable to common stockholders:                    
Basic  $(0.07)  $(0.07)  $(0.20)  $(0.11)
Diluted  $(0.07)  $(0.07)  $(0.20)  $(0.11)
                     
Weighted average number of common shares and equivalents:                    
Basic   76,100,007    75,700,389    75,977,920    75,476,381 
Diluted   76,100,007    75,700,389    75,977,920    75,476,381 

 

See accompanying notes.

 

 4 
 

 

STEREOTAXIS, INC

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(Unaudited)

 

Three Months Ended September 30, 2021

 

                                                   
(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, 2021   22,407   $5,578    5,610,121   $6    74,428,865   $74   $527,294   $(206)  $(490,702)  $   36,466 
Issuance of common stock                       54,146    1    107              108 
Share-based compensation                       53,454         2,597              2,597 
Components of net loss                  -                    -     (4,619)   (4,619)
Employee stock purchase plan                       2,952         27              27 
Preferred stock conversion   (20)   6              39,781         (6)             (6)
Balance at September 30, 2021   22,387   $5,584    5,610,121   $6    74,579,198   $75   $530,019   $(206)  $(495,321)  $34,573 

 

Three 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 June 30, 2022   22,386   $5,584    5,610,121   $6    74,686,056   $75   $537,963   $(206)  $(507,897)  $  29,941 
Issuance of common stock                       31,437         22              22 
Share-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 

 

See accompanying notes.

 

 5 
 

 

STEREOTAXIS, INC

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY  

(Unaudited)

 

Nine Months Ended September 30, 2021

 

(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, 2020   22,513   $5,605    5,610,121   $6    73,694,203   $74   $522,710   $(206)  $(487,960)  $     34,624 
Issuance of common stock                       298,730    1    446              447 
Share-based compensation                       325,954         6,753              6,753 
Components of net loss                  -                    -     (7,361)   (7,361)
Employee stock purchase plan                       14,159         89              89 
Preferred stock conversion   (126)   (21)             246,152         21              21 
Balance at September 30, 2021   22,387   $5,584    5,610,121   $6    74,579,198   $75   $530,019   $(206)  $(495,321)  $34,573 

 

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 
Issuance of common stock                       71,960         67              67 
Share-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 

 

See accompanying notes.

 

 6 
 

 

STEREOTAXIS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

           
   Nine Months Ended September 30, 
(in thousands)  2022   2021 
Cash flows from operating activities          
Net loss  $(14,138)  $(7,361)
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation   298    80 
Non-cash lease (expense)   90    111 
Share-based compensation   7,906    6,753 
Gain on debt extinguishment   -    (2,183)
Non-cash interest   -    24 
Changes in operating assets and liabilities:          
Accounts receivable   329    (1,558)
Inventories   (3,280)   (559)
Prepaid expenses and other current assets   1,071    (668)
Compensating cash arrangement   -    (1)
Other assets   45    55 
Accounts payable   687    1,492 
Accrued liabilities   (19)   (647)
Deferred revenue   1,199    2,650 
Other liabilities   (51)   85 
Net cash used in operating activities   (5,863)   (1,727)
Cash flows from investing activities          
Purchase of property and equipment   (2,009)   (201)
Net cash used in investing activities   (2,009)   (201)
Cash flows from financing activities          
Proceeds from issuance of stock, net of issuance costs   159    536 
Net cash provided by financing activities   159    536 
Net decrease in cash, cash equivalents, and restricted cash   (7,713)   (1,392)
Cash, cash equivalents, and restricted cash at beginning of period   40,144    43,940 
Cash, cash equivalents, and restricted cash at end of period  $32,431   $42,548 
           
Supplemental disclosure of cash flow information:          
Purchase of property and equipment included in accounts payable  $163   $830 
           
Reconciliation of cash, cash equivalents, and restricted cash to balance sheet as of September 30th:          
Cash and cash equivalents  $30,938   $40,243 
Restricted cash - current   618    1,605 
Restricted cash   875    700 
Total cash, cash equivalents, and restricted cash  $32,431   $42,548 

 

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 is a pioneer and global leader in surgical robotics for minimally invasive endovascular intervention. We design, manufacture and market 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.

 

Our primary products include the Genesis RMN System, the Odyssey Solution, and other related devices. We also offer to 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.

 

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 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.

 

 8 
 

 

We have received regulatory clearances and registration approvals 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. The Niobe System, 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. Stereotaxis Imaging Model S x-ray System is CE marked and FDA cleared.

 

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 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, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, 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, 2021, as filed with the Securities and Exchange Commission (SEC) on March 10, 2022.

 

Certain prior year amounts have been reclassified to conform to the 2022 presentation.

 

Risks and Uncertainties

 

The novel coronavirus COVID-19 (“COVID-19”) pandemic has resulted, and is likely to continue to result, in significant, periodic disruptions to the economy, as well as business and capital markets around the world. The full extent of the impact of the COVID-19 pandemic on our business, results of operations and financial condition will depend on numerous evolving factors that we may not be able to accurately predict.

 

As a result of the COVID-19 outbreak, we have experienced business disruptions, including travel restrictions on us and our third-party distributors, which have negatively affected our complex sales, marketing, installation, distribution and service network relating to our products and services. The COVID-19 pandemic may continue to negatively affect demand for both our systems and our disposable products by limiting the ability of our sales personnel to maintain their customary contacts with customers as governmental authorities institute prolonged quarantines, travel restrictions, and shelter-in-place orders, or as our customers impose limitations on contacts and in-person meetings that go beyond those imposed by governmental authorities.

 

In addition, 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. 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. We may also experience significant reductions in demand for our disposable products as our healthcare customers (physicians and hospitals) continue to re-prioritize the treatment of patients and divert resources away from non-coronavirus areas, which we anticipate will lead to the performance of fewer procedures in which our disposable products are used. In addition, patients may consider foregoing or deferring procedures utilizing our products, even if physicians and hospitals are willing to perform them, which could also reduce demand for, and sales of, our disposable products.

 

As of the date of the filing of this Quarterly Report on Form 10-Q, we believe our manufacturing operations and supply chains have been manageably impacted, but we cannot guarantee that they will not be impacted more severely in the future. If our manufacturing operations or supply chains are materially interrupted, it may not be possible for us to timely manufacture relevant 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 to 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.

 

If governmental authorities around the world reinstitute prolonged mandatory closures, social distancing protocols and shelter-in-place orders, or as private parties on whom we rely to operate our business put in place their own protocols that go beyond those instituted by relevant governmental authorities, our ability to adequately staff and maintain our operations or further our product development could be negatively impacted.

 

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. Continued 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.

 

We continue to evaluate and, where appropriate, take actions to reduce costs and spending across our organization. We will continue to actively monitor the situation and may take further actions that alter our business operations that may be required by federal, state, or local governmental authorities that may be implemented by our vendors, supplier or customers, or that we determine are in the best interests of our employees, customers, suppliers and stockholders.

 

 9 
 

 

Cash and Cash Equivalents

 

The Company considers all short-term investments purchased with original maturities of three months or less to be cash equivalents. The Company places its cash with high-credit-quality financial institutions and invests primarily in money market accounts.

 

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 $1.5 million and $1.4 million as of September 30, 2022 and December 31, 2021, respectively.

 

Financial Instruments

 

Financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and debt. The carrying value of such amounts reported at the applicable balance sheet dates approximates fair value.

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis. General accounting principles for fair value measurement established 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 Company’s financial assets consist of restricted cash and cash equivalents invested in money market funds which totaled $1.5 million and $1.4 million as of September 30, 2022 and December 31, 2021, respectively. The financial assets consisting of cash equivalents invested in money market funds are classified as Level 2 and total interest income recorded for these investments was less than $0.2 million during the nine months ended September 30, 2022 and insignificant during the year ended December 31, 2021. As of September 30, 2022 and December 31, 2021, the Company did not have any financial liabilities valued at fair value on a recurring basis.

 

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 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 by Biosense Webster of co-developed catheters, and from 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 $0.1 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively. Revenue from system delivery and installation represented 22% and 33% of revenue for the nine months ended September 30, 2022 and 2021, respectively.

 

 10 
 

 

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, 2022 and 2021. Disposable revenue represented 29% and 23% of revenue for the nine months ended September 30, 2022 and 2021, respectively.

 

Royalty:

 

The Company is entitled to royalty payments from Biosense Webster, payable quarterly based on net revenues from sales of the co-developed catheters. Royalty revenue from the co-developed catheters represented 8% and 7% of revenue for the nine months ended September 30, 2022 and 2021, respectively.

 

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 41% and 34% of revenue for the nine months ended September 30, 2022 and 2021, respectively.

 

Sublease Revenue:

 

A portion of our former principal executive office was subleased to a third party through 2021. The sublease ended December 31, 2021. In accordance with Accounting Standards Update (ASU) 2016-02, “Leases” (Topic 842), the Company recorded sublease income as revenue. Sublease revenue represented 3% of revenue for the nine months ended September 30, 2021.

 

The following table summarizes the Company’s revenue for systems, disposables, service and accessories and sublease for the nine months ended September 30, 2022 and 2021 (in thousands):

 

   2022   2021   2022   2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Systems  $2,413   $3,541   $4,649   $8,829 
Disposables, service and accessories   5,244    5,319    16,197    17,211 
Sublease   -    246    -    740 
Total revenue  $7,657   $9,106   $20,846   $26,780 

 

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 $13.9 million as of September 30, 2022. Performance obligations arising from contracts for disposables, royalty 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, 2022   December 31, 2021 
Contract Assets - unbilled receivables  $351   $178 
           
Customer deposits  $1,813   $925 
Product shipped, revenue deferred   1,644    1,794 
Deferred service and license fees   6,002    5,796 
Total deferred revenue  $9,459   $8,515 
Less: Long-term deferred revenue   (1,416)   (2,238)
Total current deferred revenue  $8,043   $6,277 

 

 11 
 

 

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 impairment losses on its contract assets for the periods presented.

 

Revenue recognized for the nine months ended September 30, 2022 and 2021, that was included in the deferred revenue balance at the beginning of each reporting period was $5.6 million and $4.8 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 $0.2 million as of September 30, 2022 and December 31, 2021. 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.

 

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 share-based compensation at the grant date and the recognition of the related expense over the period in which the share-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 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 2009 and 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):

 

   2022   2021   2022   2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Net loss  $(4,917)  $(4,619)  $(14,138)  $(7,361)
Cumulative dividend on convertible preferred stock   (339)   (338)   (1,005)   (1,007)
Net loss attributable to common stockholders  $(5,256)  $(4,957)  $(15,143)  $(8,368)
                     
Weighted average number of common shares and equivalents:   76,100,007    75,700,389    75,977,920    75,476,381 
Basic EPS  $(0.07)  $(0.07)  $(0.20)  $(0.11)
Diluted EPS  $(0.07)  $(0.07)  $(0.20)  $(0.11)

 

 12 
 

 

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, 2022, the Company had 3,239,133 shares of common stock issuable upon the exercise of outstanding options and stock appreciation rights at a weighted average exercise price of $4.29 per share, 46,849,717 shares of our common stock issuable upon conversion of our Series A Convertible Preferred Stock, 5,610,121 shares of our common stock issuable upon conversion of our Series B Convertible Preferred Stock and 1,208,739 shares of unvested restricted share units. The Company had no unearned restricted shares outstanding as of September 30, 2022.

 

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 anticipates adopting the standard in the first quarter of 2023, although it does not expect a significant impact to the Company’s financial results.

 

3. Inventories

 

Inventories consist of the following (in thousands):

 

   September 30, 2022   December 31, 2021 
Raw materials  $6,831   $3,642 
Work in process   384    133 
Finished goods   2,825    2,823 
Reserve for excess and obsolescence   (1,879)   (2,165)
Total inventory  $8,161   $4,433 

 

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

 

4. Prepaid Expenses and Other Assets

 

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

 

   September 30, 2022   December 31, 2021 
Prepaid expenses  $599   $1,012 
Prepaid commissions   213    229 
Deposits   640    1,276 
Other assets   66    117 
Total prepaid expenses and other assets   1,518    2,634 
Less: Noncurrent prepaid expenses and other assets   (233)   (278)
Total current prepaid expenses and other assets  $1,285   $2,356 

 

5. Property and Equipment

 

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

 

   September 30, 2022   December 31, 2021 
Equipment  $3,770   $3,670 
Leasehold improvements   2,507    17 
Construction in process   478    2,156 
Gross property and equipment   6,755    5,843 
Less: Accumulated depreciation   (3,346)   (3,211)
Net property and equipment  $3,409   $2,632 

 

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The Company had approximately $1.0 million of property and equipment additions during the nine months ended September 30, 2022 associated with the buildout of the new leased space in St. Louis, Missouri.

 

6. Leases

 

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 and non-lease components 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. A portion of our former principal executive office was subleased to a third party through 2021. The sublease did not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. In addition, the sublease did not contain contingent rent provisions nor were there options to extend or terminate the sublease. The sublease ended December 31, 2021.

 

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.

 

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 new 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. The Company gained access to the Premises in the third quarter 2021 to begin constructing leasehold improvements. In accordance with ASC 842, the Company recorded a ROU asset and lease liability. The initial recognition of the ROU asset and lease liability was $5.9 million. In the fourth quarter of 2021, the Company received an occupancy permit and relocated its operations to the new leased space.

 

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. As of September 30, 2022, the weighted average discount rate for operating leases was 9% and the weighted average remaining lease term for operating lease term is 9.24 years.

 

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

 

                     
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Operating lease cost  $227   $733   $678   $1,898 
Short-term lease cost   4    14    24    45 
Sublease income   -    (246)   -    (740)
Total net lease cost  $231   $501   $702   $1,203 
                     
Cash paid within operating cash flows  $232   $624   $886   $1,794 

 

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, 2022 were as follows (in thousands):

 

   September 30, 2022 
2022  $214 
2023   877 
2024   898 
2025   919 
2026   935 
2027 and thereafter   4,986 
Total lease payments  $8,829 
Less: Interest   (2,884)
Present value of lease liabilities  $5,945 

 

7. Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

   September 30, 2022   December 31, 2021 
Accrued salaries, bonus, and benefits  $1,492   $1,516 
Accrued licenses and maintenance fees   484    484 
Accrued warranties   166    242 
Accrued taxes   269    177 
Accrued investigational sites   92    123 
Accrued lease deposit payable   5    124 
Deferred contract obligation   738    - 
Other   133    81 
Total accrued liabilities   3,379    2,747 
Less: Long term accrued liabilities