Stereotaxis(STXS) - 2021 Q2 - Quarterly Report

Part I Financial Information This section presents the unaudited interim financial statements and management's discussion and analysis Item 1. Financial Statements (Unaudited) This section presents Stereotaxis, Inc.'s unaudited interim financial statements, prepared under U.S. GAAP Balance Sheets The balance sheets show a slight increase in total assets and stockholders' equity, with stable liabilities Balance Sheet Highlights (Unaudited) | Metric | June 30, 2021 | December 31, 2020 | Change | % Change | |---|---|---|---|---| | Assets | | | | | | Cash and cash equivalents | $42,054,296 | $43,939,512 | $(1,885,216) | -4.29% | | Total current assets | $55,234,847 | $52,716,739 | $2,518,108 | 4.78% | | Total assets | $57,335,686 | $55,455,825 | $1,879,861 | 3.39% | | Liabilities | | | | | | Short-term debt | $- | $1,185,058 | $(1,185,058) | -100.00% | | Deferred revenue (current) | $8,284,600 | $5,282,770 | $3,001,830 | 56.82% | | Total current liabilities | $13,435,635 | $13,573,186 | $(137,551) | -1.01% | | Total liabilities | $15,291,023 | $15,226,584 | $64,439 | 0.42% | | Equity | | | | | | Total stockholders' equity | $36,466,482 | $34,623,918 | $1,842,564 | 5.32% | Statements of Operations Total revenue significantly increased, though gross margin percentage decreased and operating loss rose | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | YoY Change | % YoY Change | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | YoY Change | % YoY Change | |---|---|---|---|---|---|---|---|---| | Revenue: | | | | | | | | | | Systems | $2,686,180 | $12,769 | $2,673,411 | 20937.5% | $5,288,692 | $12,769 | $5,275,923 | 41319.7% | | Disposables, service and accessories | $6,118,712 | $5,086,156 | $1,032,556 | 20.3% | $11,892,228 | $10,595,867 | $1,296,361 | 12.2% | | Total revenue | $9,051,422 | $5,345,455 | $3,705,967 | 69.3% | $17,673,980 | $11,101,696 | $6,572,284 | 59.2% | | Gross margin | $6,532,015 | $4,260,474 | $2,271,541 | 53.3% | $12,547,890 | $9,065,300 | $3,482,590 | 38.4% | | Operating loss | $(3,390,722) | $(1,921,673) | $(1,469,049) | 76.4% | $(4,918,843) | $(3,974,166) | $(944,677) | 23.8% | | Net loss | $(1,210,398) | $(1,921,106) | $710,708 | -37.0% | $(2,742,795) | $(3,892,637) | $1,149,842 | -29.5% | | Basic EPS | $(0.02) | $(0.03) | $0.01 | -33.3% | $(0.05) | $(0.06) | $0.01 | -16.7% | | Diluted EPS | $(0.02) | $(0.03) | $0.01 | -33.3% | $(0.05) | $(0.06) | $0.01 | -16.7% | - Gain on extinguishment of debt: The Company recognized a gain of $2,182,891 for both the three and six months ended June 30, 2021, which significantly reduced the net loss[14] Statements of Convertible Preferred Stock and Stockholders' Equity This section details changes in convertible preferred stock and stockholders' equity, showing an overall increase Stockholders' Equity Changes (Six Months Ended June 30, 2021 vs. Dec 31, 2020) | Metric | June 30, 2021 | December 31, 2020 | Change | % Change | |---|---|---|---|---| | Series A Convertible Preferred Stock (Shares) | 22,407 | 22,513 | (106) | -0.47% | | Series A Convertible Preferred Stock (Amount) | $5,578,181 | $5,605,323 | $(27,142) | -0.48% | | Common Stock (Shares) | 74,428,865 | 73,694,203 | 734,662 | 1.00% | | Common Stock (Amount) | $74,429 | $73,694 | $735 | 1.00% | | Additional Paid-In Capital | $527,294,470 | $522,709,846 | $4,584,624 | 0.88% | | Accumulated Deficit | $(490,702,028) | $(487,959,233) | $(2,742,795) | 0.56% | | Total Stockholders' Equity | $36,466,482 | $34,623,918 | $1,842,564 | 5.32% | - Issuance of common stock: For the six months ended June 30, 2021, 244,584 shares of common stock were issued, contributing $339,686 to equity[21] - Share-based compensation: For the six months ended June 30, 2021, share-based compensation added $4,156,274 to additional paid-in capital[21] Statements of Cash Flows Cash flows show a significant reduction in cash used in operating activities and a substantial decrease in financing activities Cash Flow Summary (Unaudited) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | YoY Change | % YoY Change | |---|---|---|---|---| | Net cash used in operating activities | $(270,607) | $(3,336,760) | $3,066,153 | -91.9% | | Net cash used in investing activities | $(149,721) | $(70,896) | $(78,825) | 111.2% | | Net cash provided by financing activities | $401,943 | $17,231,703 | $(16,829,760) | -97.7% | | Net (decrease) increase in cash and cash equivalents | $(18,385) | $13,824,047 | $(13,842,432) | -100.1% | | Cash and cash equivalents at end of period | $43,921,127 | $44,006,162 | $(85,035) | -0.19% | - Operating activities: The decrease in cash used in operating activities was driven by a decrease in operating loss and decreased use of working capital[163] - Financing activities: The significant decrease in cash from financing activities in 2021 compared to 2020 is primarily due to the absence of proceeds from the Paycheck Protection Program loan ($2.2 million) and a larger stock issuance ($15.0 million) that occurred in the prior year[165] Notes to Financial Statements This section provides detailed disclosures and explanations for the unaudited interim financial statements 1. Description of Business Stereotaxis designs and markets robotic magnetic navigation systems for arrhythmia treatment, with capital and recurring revenue - Stereotaxis designs, manufactures, and markets advanced robotic magnetic navigation systems (Genesis RMN, Niobe) and the Odyssey Solution for interventional surgical suites, primarily for treating arrhythmias[28][30] - The systems enable image-guided delivery of catheters using externally applied magnetic fields, improving navigation, efficiency, and reducing x-ray exposure[29] - The business model includes upfront capital payments for equipment and installation, and recurring payments for disposable costs, equipment service, and ongoing software enhancements[31] 2. Summary of Significant Accounting Policies This section outlines significant accounting policies, including basis of presentation, COVID-19 risks, and revenue recognition Basis of Presentation Unaudited financial statements adhere to U.S. GAAP for interim reporting, with results not indicative of full-year performance - The unaudited financial statements are prepared in accordance with U.S. GAAP for interim financial information and Form 10-Q instructions, including only normal recurring adjustments[34] - Operating results for the six-month period ended June 30, 2021, are not necessarily indicative of results for the full year or future periods[34] Risks and Uncertainties (COVID-19) The COVID-19 pandemic has disrupted business operations, impacting sales, installations, and potentially delaying hospital purchases - The COVID-19 pandemic has caused business disruptions, including travel restrictions affecting sales, marketing, installation, distribution, and service networks[37] - Hospital customers may delay or cancel purchases due to economic pressures, impacting system sales and demand for disposable products as resources are diverted from non-coronavirus areas[38] - Manufacturing operations and supply chains have been manageably interrupted, but future severe interruptions could materially adversely affect the business[39] Cash and Cash Equivalents Short-term investments with maturities of three months or less are classified as cash equivalents, primarily in money market accounts - The Company considers all short-term investments with original maturities of three months or less as cash equivalents[43] - Cash is placed with high-credit-quality financial institutions and primarily invested in money market accounts[43] Restricted Cash Restricted cash represents funds obligated under contractual agreements, totaling $1.9 million as of June 30, 2021 - Restricted cash primarily consists of funds obligated under contractual agreements, totaling $1.9 million at June 30, 2021, compared to none at December 31, 2020[44] Compensating Cash Arrangement The Company maintains a $0.3 million compensating balance for a letter of credit established in July 2020 - The Company is required to maintain a $0.3 million compensating balance for a letter of credit entered into in July 2020[45] Financial Instruments Financial instruments are generally carried at fair value, with certain assets measured at Level 2 fair value - Financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and debt, with carrying values approximating fair value[46] - The Company measures certain financial assets (restricted cash and cash equivalents in money market funds) at fair value on a recurring basis, classified as Level 2 in the fair value hierarchy[48] Revenue and Costs of Revenue Revenue from system sales, disposables, royalties, and recurring services is recognized under ASC 606 - Revenue is generated from initial capital sales of systems, recurring sales of disposable devices, royalties from co-developed catheters, and ongoing software enhancements and service contracts[49] - Revenue recognition follows ASC 606, where individual products and services are accounted for as separate performance obligations if distinct, and revenue is allocated based on relative standalone selling price[51][52] Revenue Mix by Stream | Revenue Stream | % of Total Revenue (6 Months Ended June 30, 2021) | % of Total Revenue (6 Months Ended June 30, 2020) | |---|---|---| | Systems | 30% | <1% | | Disposables | 25% | 31% | | Royalty | 7% | 9% | | Other Recurring Revenue | 35% | 56% | | Sublease | 3% | 4% | Assets Recognized from the Costs to Obtain a Contract with a Customer Sales incentive programs are capitalized as contract acquisition costs, totaling $0.2 million as of June 30, 2021 - Sales incentive programs for the sales team are capitalized as contract acquisition costs, totaling $0.2 million at June 30, 2021, and $0.3 million at December 31, 2020[62] Share-Based Compensation Share-based compensation for options and SARs uses Black-Scholes, while market-based awards use Monte Carlo simulations - Share-based compensation for stock options and stock appreciation rights is valued using the Black-Scholes model, while restricted shares/units are valued at fair market value on the grant date[65] - For market-based awards, compensation expense is recognized over the minimum service period using Monte Carlo simulations, regardless of market target achievement probability[66] Net Earnings (Loss) per Common Share Basic EPS is calculated from net loss, with diluted EPS being anti-dilutive due to net loss - Basic EPS is calculated by dividing net loss by the weighted average common shares outstanding. Diluted EPS considers all potentially dilutive common shares, but these were anti-dilutive for all periods presented due to net loss[68][69] Net Loss Per Share Attributable to Common Stockholders | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |---|---|---|---|---| | Net loss attributable to common stockholders | $(1,545,595) | $(2,263,232) | $(3,410,543) | $(4,578,486) | | Weighted average common shares | 75,547,574 | 71,628,762 | 75,362,521 | 70,749,401 | | Basic EPS | $(0.02) | $(0.03) | $(0.05) | $(0.06) | | Diluted EPS | $(0.02) | $(0.03) | $(0.05) | $(0.06) | Recently Issued Accounting Pronouncements The Company adopted ASU 2019-12 with no financial impact and anticipates adopting ASU 2016-13 in Q1 2023 - The Company adopted ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," effective for fiscal years beginning after December 15, 2020, with no impact on financial statements[71] - The Company anticipates adopting ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326)," in Q1 2023, which modifies credit loss measurement to a current expected credit loss (CECL) method, but does not expect a significant impact[72] 3. Inventories Total inventory increased, driven by raw materials and work in process, while the reserve for excess and obsolescence decreased Inventories Composition | Inventory Component | June 30, 2021 | December 31, 2020 | Change | % Change | |---|---|---|---|---| | Raw materials | $3,284,691 | $2,950,912 | $333,779 | 11.31% | | Work in process | $919,214 | $433,026 | $486,188 | 112.28% | | Finished goods | $2,397,991 | $2,987,039 | $(589,048) | -19.72% | | Reserve for excess and obsolescence | $(2,455,205) | $(3,075,520) | $620,315 | -20.17% | | Total inventory | $4,146,691 | $3,295,457 | $851,234 | 25.83% | - The reserve for excess and obsolescence primarily includes Niobe Systems and related raw materials and spare parts[73] 4. Prepaid Expenses and Other Assets Prepaid expenses and other assets increased, primarily due to higher prepaid expenses and deposits Prepaid Expenses and Other Assets Composition | Component | June 30, 2021 | December 31, 2020 | Change | % Change | |---|---|---|---|---| | Prepaid expenses | $1,165,885 | $754,062 | $411,823 | 54.61% | | Prepaid commissions | $235,745 | $271,174 | $(35,429) | -13.07% | | Deposits | $1,411,544 | $855,970 | $555,574 | 64.91% | | Other assets | $116,725 | $143,323 | $(26,598) | -18.56% | | Total prepaid expenses and other assets | $2,929,899 | $2,024,529 | $905,370 | 44.72% | 5. Property and Equipment Net property and equipment increased due to reduced accumulated depreciation, despite a decrease in total gross property Property and Equipment Composition | Component | June 30, 2021 | December 31, 2020 | Change | % Change | |---|---|---|---|---| | Equipment | $4,940,877 | $6,488,984 | $(1,548,107) | -23.86% | | Leasehold improvements | $2,299,550 | $2,338,441 | $(38,891) | -1.66% | | Construction in process | $149,721 | $- | $149,721 | N/A | | Total gross property and equipment | $7,390,148 | $8,827,425 | $(1,437,277) | -16.28% | | Less: Accumulated depreciation | $(7,098,570) | $(8,632,296) | $1,533,726 | -17.77% | | Net property and equipment | $291,578 | $195,129 | $96,449 | 49.43% | - The company retired approximately $1.6 million of fully depreciated assets during the three and six months ended June 30, 2021[75] 6. Leases The Company accounts for operating leases under ASC 842 and signed a new 10-year facility lease effective January 2022 - Operating lease agreements are recognized on the balance sheet as ROU assets and corresponding lease liabilities[77] Lease Costs and Cash Flows | Lease Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |---|---|---|---|---| | Operating lease cost | $582,712 | $585,584 | $1,165,424 | $1,171,170 | | Sublease income | $(246,530) | $(246,530) | $(493,060) | $(493,060) | | Total net lease cost | $350,224 | $358,358 | $703,068 | $712,884 | | Cash paid within operating cash flows | $539,204 | $588,897 | $1,170,290 | $1,225,247 | - On March 1, 2021, the Company entered into a 10-year lease for a new 43,100 sq ft principal executive office and manufacturing facility in St. Louis, effective January 1, 2022, with annual rent from $0.8 million to $1.0 million[83] 7. Accrued Liabilities Accrued liabilities decreased, primarily due to reduced salaries and benefits, partially offset by increases in warranties Accrued Liabilities Composition | Accrued Liability | June 30, 2021 | December 31, 2020 | Change | % Change | |---|---|---|---|---| | Accrued salaries, bonus, and benefits | $1,424,592 | $2,044,826 | $(620,234) | -30.33% | | Accrued licenses and maintenance fees | $483,879 | $483,879 | $0 | 0.00% | | Accrued warranties | $222,206 | $157,615 | $64,591 | 40.98% | | Accrued taxes | $167,979 | $172,744 | $(4,765) | -2.76% | | Accrued professional services | $453,348 | $138,359 | $314,989 | 227.66% | | Other | $312,071 | $343,043 | $(30,972) | -9.03% | | Total accrued liabilities | $3,064,075 | $3,340,466 | $(276,391) | -8.27% | | Total current accrued liabilities | $2,857,479 | $3,209,235 | $(351,756) | -10.96% | 8. Debt and Credit Facilities The Company had no outstanding debt as of June 30, 2021, following the full forgiveness of its $2.2 million PPP loan - The Company had no debt as of June 30, 2021[11] - A $2.2 million Paycheck Protection Program (PPP) loan received in April 2020 was fully forgiven by the SBA in June 2021, leading to a net gain from debt extinguishment of approximately $2.2 million[87] 9. Convertible Preferred Stock and Stockholders' Equity This note details the Company's capital structure, including common and preferred stock, and the CEO Performance Award 2020 Equity Financing In May 2020, the Company issued 3.66 million common shares at $4.10 per share, generating approximately $15.0 million in net proceeds - On May 25, 2020, the Company issued 3,658,537 shares of common stock at $4.10 per share in a direct registered offering, generating net proceeds of approximately $15.0 million[90] Series B Convertible Preferred Stock In August 2019, 5.61 million Series B Convertible Preferred Shares were issued at $2.05 per share, convertible one-for-one - On August 7, 2019, 5,610,121 shares of Series B Convertible Preferred Stock were issued in a private placement at $2.05 per share, convertible into common stock on a one-for-one basis[91] - Series B Preferred Stock is non-voting, has a blocker on conversion if the holder exceeds a specified voting security ownership threshold, and is reported in stockholders' equity[91] Series A Convertible Preferred Stock and Warrants In September 2016, the Company issued Series A Convertible Preferred Stock and warrants for 36.9 million common shares - In September 2016, the Company issued 24,000 shares of Series A Convertible Preferred Stock ($1,000 stated value, convertible at $0.65 per share) and warrants to purchase 36,923,078 common shares (exercise price $0.70, exercisable through September 29, 2021)[92][94] - Series A Preferred Stock bears cumulative dividends at 6% per annum, ranks senior to common stock in liquidation, and is reported in the mezzanine section of the balance sheet due to redemption conditions outside the Company's control[92][93] 2021 CEO Performance Award Unit Grant The CEO received a 10-year performance award of up to 13 million shares tied to market capitalization milestones - On February 23, 2021, the CEO was granted a 10-year performance award of up to 13,000,000 shares, vesting in ten tranches tied to market capitalization milestones ranging from $1.0 billion to $5.5 billion, subject to continued employment through December 31, 2030[95][96][97] - Stock-based compensation expense for this award, estimated using Monte Carlo simulations, began on the grant date and will be recognized on an accelerated basis through 2030, totaling $2.5 million for the six months ended June 30, 2021[99][100] - As of June 30, 2021, approximately $54.9 million of unrecognized stock-based compensation expense remains for the CEO Performance Award[100] 2012 Stock Award Plan Shareholders approved an increase in authorized shares under the 2012 Stock Incentive Plan, with remaining shares available for grants - Shareholders approved an amendment on May 20, 2021, increasing authorized shares under the 2012 Stock Incentive Plan by four million[102] - As of June 30, 2021, 5,144,178 shares remained available for future grants under equity plans, with $5.7 million in unrecognized compensation cost (excluding the CEO Performance Award) to be amortized over up to four years[102][103] Option, Stock Appreciation Rights, and Restricted Stock Unit Activity (Six Months Ended June 30, 2021) | Metric | Outstanding, Dec 31, 2020 | Granted | Exercised | Forfeited | Outstanding, June 30, 2021 | |---|---|---|---|---|---| | Options/SARs (Number) | 2,456,979 | 829,000 | (270,458) | (170,480) | 2,845,041 | | Options/SARs (Wtd Avg Exercise Price) | $2.90 | $6.97 | $1.97 | $6.88 | $3.93 | | Restricted Stock Units (Number) | 1,112,473 | 205,000 | (272,500) | - | 1,044,973 | | Restricted Stock Units (Wtd Avg Grant Date Fair Value) | $2.46 | $5.16 | $2.88 | - | $2.88 | 10. Fair Value Measurements Fair value measurements primarily apply to restricted cash and cash equivalents, classified as Level 2 in the hierarchy - Financial assets measured at fair value on a recurring basis include restricted cash and cash equivalents in money market funds[105][108] Assets Measured at Fair Value on a Recurring Basis | Asset | June 30, 2021 (Total Fair Value) | December 31, 2020 (Total Fair Value) | Fair Value Hierarchy Level | |---|---|---|---| | Cash invested in money market accounts | $1,866,831 | $1,429,331 | Level 2 | - The Company had no financial liabilities valued at fair value on a recurring basis as of June 30, 2021, or December 31, 2020, and no assets or liabilities classified as Level 1 or Level 3[106][107][109] 11. Product Warranty Provisions Product warranty covers capital systems for one year, with accruals based on historical experience and increasing due to adjustments - Capital systems are warranted against defects for one year following installation, with costs estimated based on historical experience and current product performance[110] Product Warranty Accrual Activity | Metric | June 30, 2021 | December 31, 2020 | |---|---|---| | Warranty accrual, beginning of period | $157,615 | $141,697 | | Accrual adjustment for product warranty | $139,831 | $49,974 | | Payments made | $(75,240) | $(34,056) | | Warranty accrual, end of period | $222,206 | $157,615 | 12. Commitments and Contingencies Management believes legal proceedings will not materially affect financial position, and new letters of credit were entered into - Management believes that the ultimate resolution of pending or threatened legal proceedings will not have a material effect on the Company's financial position, results of operations, or liquidity[112] - In February 2021, the Company entered into letters of credit totaling approximately $1.3 million, valid through 2022[113] - In April 2021, a letter of credit for approximately $1.8 million was entered into pursuant to a new lease agreement, with the first installment of $0.4 million delivered[113] 13. Subsequent Events No subsequent events were reported - No subsequent events were reported[114] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial condition, results of operations, COVID-19 impact, and liquidity Overview Stereotaxis develops robotic magnetic navigation systems for arrhythmia treatment, utilizing a business model with capital and recurring revenue streams - Stereotaxis develops robotic magnetic navigation systems (Genesis RMN, Niobe, Odyssey Solution) for catheter-based procedures in interventional labs, focusing on treating arrhythmias[117][118][119] - The systems use externally applied magnetic fields for image-guided catheter delivery, improving navigation, efficiency, and reducing x-ray exposure[118] - The company's revenue model includes upfront capital payments for systems and recurring payments for disposable devices, service, and software enhancements[120] COVID-19 Pandemic The COVID-19 pandemic continued to impact procedure volumes, with ongoing disruptions anticipated across geographies and supply chains - Q1 2021 procedure volumes improved slightly (5% higher than Q1 2020) but remained approximately 15% below Q1 2019 levels, with Asia Pacific recovering to pre-pandemic levels while other geographies remained impacted[123] - Q2 2021 procedure volumes were consistent with Q1 2021 and nearly 40% higher than Q2 2020, despite varied vaccine rollouts and ongoing travel restrictions/supply chain concerns[124][125] - Significant, periodic disruptions to procedure volumes, service activities, and system placements are anticipated in 2021, with potential delays in capital system orders and risks to manufacturing operations and supply chains[126][128] Critical Accounting Policies and Estimates This section reiterates critical accounting policies, including revenue recognition, leases, and share-based compensation Revenue Recognition Revenue from system sales, disposables, royalties, and recurring services is recognized under ASC 606 based on distinct performance obligations - Revenue is generated from system sales, disposable devices, royalties, and recurring software enhancements/service contracts, recognized under ASC 606[130] - For system sales, revenue is recognized upon customer acceptance, including an implied obligation for one year of software enhancements recognized ratably[134] - Disposable revenue is recognized at shipment or delivery, while other recurring revenue (maintenance, software enhancements) is deferred and amortized over the service period[135][138] Assets Recognized from the Costs to Obtain a Contract with a Customer Sales incentive programs are capitalized as contract acquisition costs, expected to generate future economic benefits - Sales incentive programs are capitalized as contract acquisition costs, expected to generate future economic benefits from revenue-generating contracts[141] Leases Operating leases are recognized as ROU assets and liabilities under ASC 842, based on the present value of future minimum lease payments - Operating leases are recognized on the balance sheet as ROU assets and lease liabilities under ASC 842, based on the present value of future minimum lease payments using the incremental borrowing rate[142][143] - The Company elected the practical expedient not to separate non-lease components from lease components and applies the short-term lease exemption for leases less than twelve months[144] Cost of Contracts Costs of systems revenue include direct product, installation, warranty, and training, recognized at the time of sale - Costs of systems revenue include direct product costs, installation, warranty, and initial training, recognized at the time of sale[145] - Costs of disposable revenue include direct product costs and warranty, recognized at the time of sale. Service and license fee costs are recognized when incurred, and sublease revenue costs are recognized on a straight-line basis[145] Share-Based Compensation Share-based compensation for time-based awards uses Black-Scholes, while market-based awards use Monte Carlo simulations - Share-based compensation expense for time-based awards (stock options, SARs) is determined using the Black-Scholes model and amortized over the vesting period (generally four years)[147] - For market-based awards, fair value is estimated using Monte Carlo simulations, and expense is recognized over the minimum service period regardless of market target achievement[148] Results of Operations This section compares financial performance for the three and six months ended June 30, 2021, highlighting significant revenue growth, increased costs, and higher operating expenses Comparison of the Three Months Ended June 30, 2021 and 2020 Total revenue increased by 69% to $9.1 million, though gross margin decreased and operating expenses rose significantly - Total revenue increased by 69% to $9.1 million, driven by a substantial increase in system sales (from <$0.1 million to $2.7 million) and a 20% increase in disposables, service, and accessories revenue[150] - Cost of revenue increased by 132% to $2.5 million, leading to a decrease in overall gross margin from 80% to 72%, primarily due to changes in product mix and increased system sales volumes[151] - Operating expenses increased across all categories: R&D by 37% ($2.7 million), Sales and Marketing by 20% ($3.0 million), and General and Administrative by 150% ($4.2 million), with the latter primarily due to higher stock-based compensation for the CEO Performance Award and professional service fees[152][153][154] Comparison of the Six Months Ended June 30, 2021 and 2020 Total revenue increased by 59% to $17.7 million, while gross margin decreased and operating expenses significantly increased - Total revenue increased by 59% to $17.7 million, with system sales rising significantly (from <$0.1 million to $5.3 million) and disposables, service, and accessories revenue increasing by 12% to $11.9 million[156] - Cost of revenue increased by 152% to $5.1 million, resulting in a decrease in overall gross margin from 82% to 71%, mainly due to product mix changes and increased system sales[157] - Operating expenses increased: R&D by 24% ($5.1 million), Sales and Marketing by 10% ($6.0 million), and General and Administrative by 83% ($6.4 million), largely driven by the CEO Performance Award's stock-based compensation and higher professional service fees[158][159][160] Liquidity and Capital Resources This section discusses the Company's liquidity, cash position, and working capital, detailing cash flow activities - As of June 30, 2021, the Company had $44.2 million in cash and cash equivalents (including restricted cash) and working capital of $41.8 million, up from $39.1 million at December 31, 2020[163] Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |---|---|---| | Cash flow used in operating activities | $(271) | $(3,337) | | Cash flow used in investing activities | $(150) | $(71) | | Cash flow provided by financing activities | $402 | $17,232 | - The decrease in cash used in operating activities was driven by a lower operating loss and reduced working capital usage. The significant decrease in cash from financing activities was due to the $15.0 million equity financing and $2.2 million PPP loan in 2020 not recurring in 2021[163][165] Capital Resources As of June 30, 2021, the Company reported no outstanding debt - As of June 30, 2021, the Company had no outstanding debt[166] Revolving Line of Credit The Company's working capital line of credit matured on June 30, 2020, and was not renewed - The Company's working capital line of credit with Silicon Valley Bank matured on June 30, 2020, and was not renewed[167] Paycheck Protection Program The $2.2 million PPP Loan was fully forgiven by the SBA in June 2021, resulting in a net gain from debt extinguishment - The $2.2 million PPP Loan received in April 2020 was fully forgiven by the SBA in June 2021, resulting in a net gain from debt extinguishment of approximately $2.2 million[168] Common Stock Common stockholders are entitled to one vote per share and dividends when declared, with no dividends paid as of June 30, 2021 - Common stockholders are entitled to one vote per share and dividends when declared, subject to priority rights of other stock classes. No dividends have been declared or paid as of June 30, 2021[169] 2020 Equity Financing In May 2020, the Company issued 3.66 million common shares at $4.10 per share, generating approximately $15.0 million in net proceeds - On May 25, 2020, the Company issued 3,658,537 common shares at $4.10 per share in a direct registered offering, yielding approximately $15.0 million in net proceeds[170] Series B Convertible Preferred Stock Issued 5.61 million shares of Series B Convertible Preferred Stock in August 2019 at $2.05 per share, convertible one-for-one into common stock - Issued 5,610,121 shares of Series B Convertible Preferred Stock in August 2019 at $2.05 per share, convertible one-for-one into common stock, non-voting, and reported in stockholders' equity[171] Series A Convertible Preferred Stock and Warrants Issued 24,000 shares of Series A Convertible Preferred Stock and warrants for 36.9 million common shares in September 2016 - Issued 24,000 shares of Series A Convertible Preferred Stock (convertible at $0.65 per share) and warrants for 36,923,078 common shares (exercise price $0.70, exercisable through September 29, 2021) in September 2016[172][173] - Series A Preferred Stock carries a 6% cumulative annual dividend, ranks senior to common stock in liquidation, and is classified in the mezzanine section due to redemption conditions outside the Company's control[172] Off-Balance Sheet Arrangements The Company has no relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements - The Company has no relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements and does not engage in non-exchange traded contract trading activities[173] Item 3. [Reserved] This item is reserved and contains no information Item 4. Controls and Procedures Management deemed disclosure controls and procedures effective as of June 30, 2021, with no material changes to internal control - The Company's disclosure controls and procedures were evaluated as effective by management, including the CEO and CFO, as of June 30, 2021[175] - No material changes to the Company's internal control over financial reporting occurred during the period covered by the report[176] Part II Other Information This section provides other information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings Management believes ongoing legal proceedings will not materially affect the Company, and a class action complaint was dismissed - Management believes that the ultimate resolution of pending or threatened legal proceedings will not have a material adverse effect on the Company's business, financial condition, or results of operations[178] - A class action complaint filed in April 2021 alleging disclosure deficiencies regarding the CEO Performance Award was voluntarily dismissed by the plaintiff in May 2021 after the Company filed a proxy statement supplement[179][180] Item 1A. Risk Factors This section updates risk factors, focusing on the CEO Performance Stock Unit Grant, including compensation expense and potential dilution Risks Related to the February 2021 CEO Performance Stock Unit Grant Risks include significant compensation expense, potential substantial stockholder dilution, and change-of-control provisions - The Company will incur significant additional stock-based compensation expense (approximately $54.9 million unrecognized as of June 30, 2021) for the CEO Performance Award, regardless of whether market capitalization milestones are achieved, increasing the difficulty of achieving profitability[182] - Stockholders may experience substantial dilution if the CEO achieves all milestones and receives 13,000,000 shares, potentially leading to the CEO beneficially owning approximately 10% of outstanding common stock[183] - Certain provisions in the PSU Agreement, particularly regarding change in control, may discourage mergers or acquisitions even if beneficial to stockholders[184] - The Company is highly dependent on the services of its CEO, Mr. Fischel, and there is no assurance that the compensation package, including the CEO Performance Award, will ensure his long-term retention[185] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported - No unregistered sales of equity securities or use of proceeds were reported[186] Item 3. Defaults upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities were reported[187] Item 4. [Reserved] This item is reserved and contains no information Item 5. Other Information No other information was reported - No other information was reported[189] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, stock incentive plans, and certifications - Exhibits include Restated Articles of Incorporation, Certificate of Amendment, Certificates of Designations for Series A and B Preferred Stock, Restated Bylaws, Amended and Restated 2012 Stock Incentive Plan, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and XBRL documents[191] Signatures This section contains the required signatures for the Form 10-Q, confirming its submission by the CEO and CFO - The report is signed by David L. Fischel, Chief Executive Officer, and Kimberly R. Peery, Chief Financial Officer, on August 12, 2021[194]