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™, QuikCAS™ and 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.
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 six-month period ended June 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.
Risks
and Uncertainties
The
novel coronavirus COVID-19 (“COVID-19”) pandemic has resulted, and is likely to continue to result, in significant 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.
As
governmental authorities around the world continue to institute 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.
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 $1.6 million and $1.4 million at June 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 $1.6 million
and $1.4 million as of June 30, 2022 and December 31, 2021, respectively. The financial assets consisting of cash equivalents invested
in money market funds are classified as Level 2 as described above and total interest income recorded for these investments was insignificant
for the six months ended June 30, 2022 and 2021. As of June 30, 2022 and 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 less than $0.1 million and
$0.1 million for the six months ended June 30, 2022 and 2021 respectively. Revenue from system delivery and installation represented
17% and 30% of revenue for the six months ended June 30, 2022 and 2021, 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 six months ended June 30, 2022
and 2021. Disposable revenue represented 31% and 25% of revenue for the six months ended June 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 six-month periods ended June 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 44% and
35% of revenue for the six months ended June 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 six months ended June 30, 2021.
The
following table summarizes the Company’s revenue for systems, disposables, service and accessories and sublease for the six months
ended June 30, 2022 and 2021 (in thousands):
Schedule
of Revenue Disaggregated by Type
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
Three Months Ended June
30 | | |
Six Months Ended June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Systems | |
$ | 602 | | |
$ | 2,686 | | |
$ | 2,236 | | |
$ | 5,289 | |
| Disposables, service and accessories | |
| 5,550 | | |
| 6,118 | | |
| 10,953 | | |
| 11,892 | |
| Sublease | |
| - | | |
| 247 | | |
| - | | |
| 493 | |
| Total revenue | |
$ | 6,152 | | |
$ | 9,051 | | |
$ | 13,189 | | |
$ | 17,674 | |
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 $14.2 million as of June 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):
Summary
of Contract Assets and Liabilities
| | |
June
30, 2022 | | |
December
31, 2021 | |
| Contract Assets - unbilled receivables | |
$ | 208 | | |
$ | 178 | |
| | |
| | | |
| | |
| Customer deposits | |
$ | 1,234 | | |
$ | 925 | |
| Product shipped, revenue deferred | |
| 1,794 | | |
| 1,794 | |
| Deferred service and license fees | |
| 5,561 | | |
| 5,796 | |
| Total deferred revenue | |
$ | 8,589 | | |
$ | 8,515 | |
| Less: Long-term deferred revenue | |
| (1,630 | ) | |
| (2,238 | ) |
| Total current deferred revenue | |
$ | 6,959 | | |
$ | 6,277 | |
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 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 six months ended June 30, 2022 and 2021, that was included in the deferred revenue balance at the beginning of each
reporting period was $4.6 million and $4.0 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 June 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):
Schedule
of Computation of Basic and Diluted Earnings Per Share
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
Three Months Ended June
30, | | |
Six Months Ended June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Net loss | |
$ | (5,134 | ) | |
$ | (1,211 | ) | |
$ | (9,220 | ) | |
$ | (2,743 | ) |
| Cumulative dividend on Series A Convertible
Preferred Stock | |
| (335 | ) | |
| (335 | ) | |
| (666 | ) | |
| (668 | ) |
| Net loss attributable to common stockholders | |
$ | (5,469 | ) | |
$ | (1,546 | ) | |
$ | (9,886 | ) | |
$ | (3,411 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Weighted average number of common shares and equivalents: | |
| 75,953,916 | | |
| 75,547,574 | | |
| 75,915,864 | | |
| 75,362,521 | |
| Basic EPS | |
$ | (0.07 | ) | |
$ | (0.02 | ) | |
$ | (0.13 | ) | |
$ | (0.05 | ) |
| Diluted EPS | |
$ | (0.07 | ) | |
$ | (0.02 | ) | |
$ | (0.13 | ) | |
$ | (0.05 | ) |
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 June 30, 2022, the Company had 3,385,126 shares of common stock issuable upon the exercise of outstanding options and stock appreciation
rights at a weighted average exercise price of $4.26 per share, 46,328,875 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 1,215,604 shares of unvested restricted share units. The Company had no unearned restricted shares outstanding as of June 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):
Schedule
of Inventories
| | |
June
30, 2022 | | |
December
31, 2021 | |
| Raw materials | |
$ | 5,554 | | |
$ | 3,642 | |
| Work in process | |
| 1,405 | | |
| 133 | |
| Finished goods | |
| 2,981 | | |
| 2,823 | |
| Reserve for excess and obsolescence | |
| (2,154 | ) | |
| (2,165 | ) |
| Total inventory | |
$ | 7,786 | | |
$ | 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):
Schedule
of Prepaid Expenses and Other Assets
| | |
June
30, 2022 | | |
December
31, 2021 | |
| Prepaid expenses | |
$ | 338 | | |
$ | 1,012 | |
| Prepaid commissions | |
| 204 | | |
| 229 | |
| Deposits | |
| 584 | | |
| 1,276 | |
| Other assets | |
| 83 | | |
| 117 | |
| Total prepaid expenses and other assets | |
| 1,209 | | |
| 2,634 | |
| Less: Noncurrent prepaid expenses
and other assets | |
| (218 | ) | |
| (278 | ) |
| Total current prepaid expenses
and other assets | |
$ | 991 | | |
$ | 2,356 | |
5.
Property and Equipment
Property
and Equipment consist of the following (in thousands):
Schedule
of Property and Equipment
| | |
June
30, 2022 | | |
December
31, 2021 | |
| Equipment | |
$ | 3,684 | | |
$ | 3,670 | |
| Leasehold improvements | |
| 2,521 | | |
| 17 | |
| Construction in process | |
| 349 | | |
| 2,156 | |
| Property,
Plant and Equipment, Gross | |
| 6,554 | | |
| 5,843 | |
| Less: Accumulated depreciation | |
| (3,294 | ) | |
| (3,211 | ) |
| Net property and equipment | |
$ | 3,260 | | |
$ | 2,632 | |
The
Company had approximately $0.8 million of property and equipment additions during the six months ended June 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 June 30, 2022, the weighted average discount rate for operating leases was 9% and the weighted average remaining lease
term for operating lease term is 9.5 years.
The
following table represents lease costs and other lease information (in thousands):
Schedule
of Lease Costs and Other Lease Information
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
Three Months Ended June
30 | | |
Six Months Ended June 30 | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Operating lease cost | |
$ | 226 | | |
$ | 583 | | |
$ | 451 | | |
$ | 1,165 | |
| Short-term lease cost | |
| 10 | | |
| 14 | | |
| 20 | | |
| 31 | |
| Sublease income | |
| - | | |
| (247 | ) | |
| - | | |
| (493 | ) |
| Total net lease cost | |
$ | 236 | | |
$ | 350 | | |
$ | 471 | | |
$ | 703 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cash paid within operating cash flows | |
$ | 220 | | |
$ | 539 | | |
$ | 654 | | |
$ | 1,170 | |
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.
Future
minimum payments for operating leases with initial or remaining terms of one year or more as of June 30, 2022 were as follows (in thousands):
Schedule
of Future Minimum Operating Lease Payments
| | |
June
30, 2022 | |
| 2022 | |
$ | 413 | |
| 2023 | |
| 871 | |
| 2024 | |
| 891 | |
| 2025 | |
| 912 | |
| 2026 | |
| 933 | |
| 2027 and thereafter | |
| 4,986 | |
| Total lease payments | |
$ | 9,006 | |
| Less: Interest | |
| (3,015 | ) |
| Present value
of lease liabilities | |
$ | 5,991 | |
7.
Accrued Liabilities
Accrued
liabilities consist of the following (in thousands):
Schedule
of Accrued Liabilities
| | |
June
30, 2022 | | |
December
31, 2021 | |
| Accrued salaries, bonus, and benefits | |
$ | 1,213 | | |
$ | 1,516 | |
| Accrued licenses and maintenance fees | |
| 484 | | |
| 484 | |
| Accrued warranties | |
| 209 | | |
| 242 | |
| Accrued taxes | |
| 165 | | |
| 177 | |
| Accrued investigational sites | |
| 102 | | |
| 123 | |
| Accrued lease deposit payable | |
| 5 | | |
| 124 | |
| Other | |
| 150 | | |
| 81 | |
| Total accrued liabilities | |
| 2,328 | | |
| 2,747 | |
| Less: Long term accrued liabilities | |
| (202 | ) | |
| (219 | ) |
| Total current accrued liabilities | |
$ | 2,126 | | |
$ | 2,528 | |
Certain
prior year amounts have been reclassified to conform to the 2022 presentation.
8.
Debt and Credit Facilities
The
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. Among
the provisions contained in the CARES Act was the creation of the Paycheck Protection Program that provides for Small Business Administration
(“SBA”) Section 7(a) loans for qualified small businesses. In general, the loan could be forgiven as long as the funds were
used for payroll related expenses as well as rent and utilities paid during the twenty-four-week period from the date of the loan and
as long as certain headcount and salary/wage levels were maintained. On April 10, 2020, the Company was informed by its lender, Midwest
BankCentre (the “Bank”), that the Bank received approval from the SBA to fund the Company’s request for a loan under
the SBA’s Paycheck Protection Program (“PPP Loan”). Per the terms of the PPP Loan, the Company received total proceeds
of approximately $2.2 million from the Bank on April 20, 2020. In accordance with the loan forgiveness requirements of the CARES Act,
the Company used the full proceeds from the PPP Loan primarily for payroll costs, rent and utilities. In March 2021, the Company applied
for loan forgiveness and in June 2021 full loan forgiveness was granted by the SBA. The Company recognized a net gain from debt extinguishment
of approximately $2.2 million.
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. The Company’s Series B Preferred is entitled to dividends equal to and in the same form as dividends actually paid
on shares of common stock when, as and if such dividends are paid on shares of common stock. Until all shares of the Company’s
Series A Preferred Stock have been converted or redeemed, no dividends may be paid on the common stock or the Series B Preferred Stock
without the express written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock. In the event
that dividends or other distributions of assets are made or paid by the Company to the holders of the common stock or the holders of
shares of the Series B Preferred, the holders of shares of the Series A Preferred Stock are entitled to participate in such dividend
or distribution on an as-converted basis. No dividends have been declared or paid as of June 30, 2022, 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, $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. The Series B Preferred Stock, which is a common stock equivalent but non-voting and with a blocker on conversion if the holder
would exceed a specified threshold of voting security ownership, is 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 Convertible
Preferred Stock is 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, par value $0.001 per share, with a stated
value of $1,000 per share (the “Series A Preferred Stock”), 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.
The
SPA Warrants were modified on February 28, 2018 to allow for a reduction in the exercise price from $0.70 per share to $0.28 per share
for a period between March 1, 2018 and March 5, 2018 and to modify certain beneficial ownership limitations and to eliminate certain
redemption rights, resulting in, among other things, the exercise of a substantial number of the SPA Warrants for cash. The remaining
unexercised 15,385 Warrants expired on September 29, 2021.
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.
Summary
of Performance Award And Market Capitalization Milestones
| 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 $3.5 million and $2.5 million for the six-month
period ended June 30, 2022 and 2021, respectively. As of June 30, 2022 and 2021, the Company had approximately $47.7 million and $54.9
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 June 30, 2022, none of the performance milestones
established by the 2021 CEO Incentive Program have been achieved, and no awards have been earned.
Stock
Award Plans
The
Company has various stock plans that permit the Company to provide incentives to employees and directors of the Company in the form of
equity compensation. 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.
At
June 30, 2022, the Company had 4,107,114 remaining shares of the Company’s common stock to provide for current and future grants
under its various equity plans.
At
June 30, 2022, 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 $6.2 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.
A
summary of the option and stock appreciation rights activity for the six-month period ended June 30, 2022 is as follows:
Summary
of Option and Stock Appreciation Rights Activity
| | |
Number
of Options/SARs | | |
Range
of Exercise Price | | |
Weighted
Average Exercise Price per Share | |
| Outstanding, December 31, 2021 | |
| 2,818,012 | | |
| $0.74
- $9.87 | | |
$ | 4.10 | |
| Granted | |
| 760,500 | | |
| $2.66
- $5.21 | | |
$ | 4.80 | |
| Exercised | |
| (40,523 | ) | |
| $0.74
- $4.52 | | |
$ | 1.11 | |
| Forfeited | |
| (152,863 | ) | |
| $0.74
- $7.70 | | |
$ | 4.89 | |
| Outstanding, June 30, 2022 | |
| 3,385,126 | | |
| $0.74
- $9.87 | | |
$ | 4.26 | |
A
summary of the restricted stock unit activity for the six-month period ended June 30, 2022 is as follows:
Summary
of Restricted Stock Unit Activity
| | |
Number
of Restricted Stock Units | | |
Weighted
Average Grant Date Fair Value per Unit | |
| Outstanding, December 31, 2021 | |
| 1,164,723 | | |
$ | 3.57 | |
| Granted | |
| 61,580 | | |
$ | 9.56 | |
| Vested | |
| (10,699 | ) | |
$ | 9.37 | |
| Outstanding, June 30, 2022 | |
| 1,215,604 | | |
$ | 3.82 | |
10.
Fair Value Measurements
The
Company measures certain financial assets and liabilities at fair value on a recurring basis, including certain cash equivalents. Generally
accepted 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 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. |
The
following table sets forth the Company’s assets measured at fair value on a recurring basis by level within the fair value hierarchy.
As required by the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification, assets and liabilities are
classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Schedule
of Assets Measured at Fair Value on a Recurring Basis by Level Within Fair Value Hierarchy
| | |
Fair
Value Measurement Using | |
| (in thousands) | |
Total | | |
Quoted
Prices in
Active Markets
for Identical
Instruments
(Level 1) | | |
Significant
Other
Observable
Inputs
(Level 2) | | |
Significant
Unobservable
Inputs
(Level 3) | |
| Assets at June 30, 2022: | |
| | | |
| | | |
| | | |
| | |
| Cash invested in money
market accounts | |
$ | 1,625 | | |
$ | — | | |
$ | 1,625 | | |
$ | — | |
| Total assets at fair value | |
$ | 1,625 | | |
$ | — | | |
$ | 1,625 | | |
$ | — | |
| Assets at December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
| Cash invested in money market accounts | |
$ | 1,406 | | |
$ | — | | |
$ | 1,406 | | |
$ | — | |
| Total assets at fair value | |
$ | 1,406 | | |
$ | — | | |
$ | 1,406 | | |
$ | — | |
The
Company did not have any financial liabilities valued at fair value on a recurring basis as of June 30, 2022 or December 31, 2021.
Level
1
The
Company does not have any financial assets or liabilities classified as Level 1.
Level
2
The
Company’s financial assets consist of restricted cash and cash equivalents invested in money market funds in the amount of $1.6
million and $1.4 million at June 30, 2022 and December 31, 2021, respectively. These assets are classified as Level 2, as described above,
and total interest income recorded for these investments was less than $0.1 million during the six months ended June 30, 2022 and year
ended December 31, 2021.
Level
3
The
Company does not have any financial assets or liabilities classified as Level 3.
11.
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):
Schedule
of Accrued Warranty
| | |
June
30, 2022 | | |
December
31, 2021 | |
| Warranty accrual, beginning of the fiscal period | |
$ | 242 | | |
$ | 158 | |
| Accrual adjustment for product warranty | |
| 92 | | |
| 199 | |
| Payments made | |
| (125 | ) | |
| (115 | ) |
| Warranty accrual, end of the fiscal
period | |
$ | 209 | | |
$ | 242 | |
12.
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 will automatically reduce
by one fortieth at the end of each month during the lease term.
13.
Subsequent Events
None.