The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this report on Form 10-K. Operating results are not necessarily indicative of results that may occur in future periods.
This report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Our actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth in Item 1A. "Risk Factors." Forward-looking statements discuss matters that are not historical facts. Forward-looking statements include, but are not limited to, discussions regarding our operating strategy, sales and marketing strategy, regulatory strategy, our industry generally, overall economic conditions, our financial condition, liquidity and capital resources, our results of operations, and the impact of the recent coronavirus ("COVID-19") pandemic and our responses to it. Such statements include, but are not limited to, statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "estimates," "projects," "can," "could," "may," "will," "would," or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Overview
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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.
In addition to the robotic magnetic navigation systems and their components,
We promote our full suite of products in a typical hospital implementation, subject to regulatory approvals or clearances. This implementation requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically includes equipment and installation charges. The recurring payments typically include disposable costs for each procedure, equipment service costs beyond the warranty period, and ongoing software updates. In hospitals where our full suite of products has not been implemented, equipment upgrade or expansion can be implemented upon purchasing of the necessary upgrade or expansion.
We have received regulatory clearance, licensing and/or CE Mark approvals
necessary for us to market the Genesis RMN System in the
Not all products have and/or require regulatory clearance in all of the markets we serve. Please refer to "Regulatory Approval" in Item 1 for a description of the regulatory clearance, licensing, and/or approvals we currently have or are pursuing.
As of
We have strategic relationships with technology leaders 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 next generation systems 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.
COVID-19 Pandemic
Prior to the spread of COVID-19, we experienced procedure trends consistent with
the fourth quarter of 2019. We also saw strength in new capital orders.
Beginning in
As the pandemic spread throughout the first quarter of 2020, various local restrictions on travel, mandatory closures, social distancing protocols and shelter-in-place orders negatively impacted our ability to complete installation and service activities, which resulted in declines in system and service revenue in the first quarter.
Our supply-chain also experienced some impact as some suppliers struggled to
source sub-components in February when most factories in
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During the early portion of the second quarter, weekly procedures in
During the third quarter of 2020, weekly procedures continued to recover and approached the levels seen before the pandemic.
During the fourth quarter of 2020, periodic resurgence of COVID-19 caused hospitals and patients in some areas to again postpone procedures. Overall, weekly procedures during the fourth quarter remained generally consistent with the recovery seen in the third quarter.
Ongoing
Even with the anticipated rollout of an effective vaccine, we do not expect all markets to recover at the same pace. The impact that the pandemic will have on our business will likely continue to vary by individual geography based on the extent of the outbreak in each area, the timing of the vaccine distribution, specific governmental restrictions and the availability of testing capabilities, personal protective equipment, and hospital facilities, as well as decisions by our vendors, suppliers, customers and, ultimately, patients in response to the pandemic, none of which we are able to currently and accurately predict. While we cannot reliably estimate the depth or length of the impact, we continue to anticipate significant, periodic disruptions to our procedures volumes, service activities and system placements into 2021. In addition, we would expect that additional capital system orders will also experience some delay.
Capital markets and worldwide economies have also been significantly impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic recession could have a material adverse effect on our long-term business as hospitals curtail and reduce capital and overall spending or redirect such spending to treatments related directly to the pandemic. To-date, our manufacturing operations and supply chains have been minimally interrupted, but we cannot guarantee that such will not be interrupted further in the future. If our manufacturing operations or supply chains are interrupted, it may not be possible for us to timely manufacture relevant products at required levels, or at all. A material reduction or interruption to any of our manufacturing processes could have a material adverse effect on our business, operating results, and financial condition. Further, the COVID-19 pandemic and local actions, such as "shelter-in-place" orders and restrictions on our ability to travel and access our customers or temporary closures of our facilities or the facilities of our suppliers and their contract manufacturers, could also significantly impact our sales and our ability to ship our products and supply our customers. Any of these events could negatively impact the number of procedures performed and the number of system placements and have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based on our financial statements, which have been prepared in accordance
with
Revenue Recognition
The Company accounts for revenue in accordance with Accounting Standards Codification Topic 606 ("ASC 606"), Revenue from Contracts with Customers.
We generate revenue from the initial capital sales of systems as well as
recurring revenue from the sale of our proprietary disposable devices, from
royalties paid to the Company on the sale by
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.
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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 as 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 typically over the
first year following installation of the system as the customer receives the
right to software updates throughout the period and is included in Other
Recurring Revenue. The Company's system contracts generally do not provide a
right of return. Systems are generally covered by a one-year assurance type
warranty; warranty costs were less than
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 periods presented.
Royalty:
The Company is entitled to royalty payments from
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.
Sublease Revenue:
A portion of our principal executive office is subleased to a third party
through 2021. In accordance with
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 recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. 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. See Note 2 to the financial statements for additional detail on deferred revenue. The Company did not have any impairment losses on its contract assets for the periods presented.
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
sheets were
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On
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as the Company's leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-lease components from lease components for the Company's operating leases. Additionally, the Company applies the short-term lease measurement and recognition exemption in which right of use assets and lease liabilities are not recognized for leases less than twelve months.
Cost of Contracts
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 recorded at the time of sale. Costs of disposable revenue include direct product costs and estimated warranty costs and are recorded at the time of sale. Cost of revenue from services and license fees are recorded when incurred. Cost of sublease revenue is recorded on a straight-line basis.
Stock-based Compensation
Stock compensation expense, which is a non-cash charge, results from stock option and stock appreciation rights grants made to employees, and directors at the fair value of the option granted, and from grants of restricted shares and units to employees, directors, and third-party consultants. The fair value of options and stock appreciation rights granted was determined using the Black-Scholes valuation method which gives consideration to the estimated value of the underlying stock at the date of grant, the exercise price of the option, the expected dividend yield and volatility of the underlying stock, the expected life of the option and the corresponding risk-free interest rate. The fair value of the grants of restricted shares and units was determined based on the closing price of our stock on the date of grant. Stock compensation expense for options, stock appreciation rights and for time-based restricted share grants and units is amortized on a straight-line basis over the vesting period of the underlying issue, generally over four years except for grants to directors which are generally earned over a period of six months. Stock compensation expense for performance-based restricted shares, if any, is amortized on a straight-line basis over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives. Compensation expenses related to grants to non-employees are re-measured quarterly through the vesting date. Compensation expense is recognized only for those options expected to vest, net of actual forfeitures. Estimates of the expected life of options have been based on the average of the vesting and expiration periods, which is the simplified method under general accounting principles for share-based payments. Estimates of volatility utilized in calculating stock-based compensation have been prepared based on historical data. Actual experience to date has been consistent with these estimates.
The amount of compensation expense to be recorded in future periods may increase if we make additional grants of options, stock appreciation rights or restricted shares. The amount of expense to be recorded in future periods may decrease if the requisite service periods are not completed.
Valuation of Inventory
We value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out (FIFO) method, or its current estimated market value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and reserve accordingly. Our reserve estimate for excess and obsolete is based on expected future use. Our reserve estimates have historically been consistent with our actual experience as evidenced by actual sale or disposal of the goods. Excess manufacturing overhead costs attributable to idle facility expenses or abnormally low production volumes are excluded from inventory and recorded as an expense in the period incurred.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We have established a valuation allowance against the entire amount of our deferred tax assets net of liabilities because we are not able to conclude, due to our history of operating losses, that it is more likely than not that we will be able to realize any portion of the deferred tax assets.
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In assessing whether and to what extent deferred tax assets are realizable, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, limitations imposed by Section 382 of the Internal Revenue Code and projections for future losses over periods which the deferred tax assets are deductible, we determined that a 100% valuation allowance of deferred tax assets net of liabilities was appropriate.
Results of Operations
Comparison of the Years ended
Revenue. Revenue decreased from
Cost of Revenue. Cost of revenue increased from
Research and Development Expense. Research and development expense decreased
from
Sales and Marketing Expense. Sales and marketing expense decreased from
General and Administrative Expense. General and administrative expenses include
finance, information systems, legal, and general management expenses. General
and administrative expense increased from
Interest Income (Expense). Interest income for the years ended
Income Taxes
Realization of deferred tax assets is dependent upon future earnings, the timing
and amount of which are uncertain. Accordingly, net deferred tax assets have
been fully offset by valuation allowances as of
Liquidity and Capital Resources
Liquidity refers to the liquid financial assets available to fund our business operations and pay for near-term obligations. These liquid financial assets consist of cash and cash equivalents. We are continuously and critically reviewing our liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 pandemic.
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As of
Capital Resources
As of
Revolving Line of Credit
The Company had a working capital line of credit with its primary lender,
Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted
on
Common Stock
The holders of common stock are entitled one vote for each share held and to
receive dividends whenever funds are legally available and when declared by the
Board of Directors subject to the prior rights of holders of all classes of
stock having priority rights as dividends and certain conditions of our
agreement with our primary lender. No dividends have been declared or paid as of
2020 Equity Financing
As disclosed in Note 9, on
2019 Equity Financing and Series B Convertible Preferred Stock
As disclosed in Note 9, on
Series A Convertible Preferred Stock and Warrants
In
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The warrants issued in conjunction with the Series A Preferred Stock (the "SPA
Warrants") have an exercise price of
Liquidity
The following table summarizes our cash flow by operating, investing and
financing activities for years ended
Year EndedDecember 31, 2020 2019
Cash flow used in operating activities
(71 ) (29 )
Cash flow provided by financing activities 17,340 24,032
Net cash used in operating activities. We used approximately
Net cash used in investing activities. We used less than
Net cash provided by financing activities. We generated approximately
At
The Company had a working capital line of credit with its primary lender,
As of
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could have arisen if we had engaged in these relationships.
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