UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-50884
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STEREOTAXIS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3120386
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
4320 FOREST PARK AVENUE
ST. LOUIS, MO 63108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(314) 678-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K.[X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer|X| Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the registrants common stock held by
non-affiliates of the registrant on the last business day of the
registrant's most recently completed second fiscal quarter (based on the
closing sales prices on the Nasdaq Stock Exchange on June 30, 2005) was
approximately $154 million.
The number of outstanding shares of the registrant's common stock on
February 28, 2006 was 33,725,677.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's next Annual Meeting of
Stockholders to be held May 25, 2006 are incorporated by reference into Part
III of this Form 10-K.
STEREOTAXIS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I.
Item 1. Business 3
Item 1a. Risk Factors 26
Item 1b. Unresolved Staff Comments 42
Item 2. Properties 42
Item 3. Legal Proceedings 42
Item 4. Submission of Matters to a Vote of Security Holders 42
PART II.
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Registrant Purchases of Equity Securities 43
Item 6. Selected Financial Data 44
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 45
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 55
Item 8. Financial Statements and Supplementary Data 56
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 80
Item 9a. Controls and Procedures 80
Item 9b. Other Information 82
PART III.
Item 10. Directors and Executive Officers of the Registrant 82
Item 11. Executive Compensation 83
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 83
Item 13. Certain Relationships and Related Transactions 83
Item 14. Principal Accounting Fees and Services 83
PART IV.
Item 15. Exhibits and Financial Statement Schedules 84
SIGNATURES 85
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 81
INDEX TO EXHIBITS 88
2
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including the sections entitled
"Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations", contains forward-looking statements. These
statements relate to, among other things:
o our business strategy;
o our value proposition;
o the timing and prospects for regulatory approval of our additional
disposable interventional devices;
o our estimates regarding our capital requirements;
o the ability of physicians to perform certain medical procedures
with our products safely, effectively and efficiently;
o the adoption of our products by hospitals and physicians;
o the market opportunity for our products, including expected demand
for our products;
o our plans for hiring additional personnel; and
o any of our other plans, objectives, expectations and intentions
contained in this annual report that are not historical facts.
These statements relate to future events or future financial
performance, and involve known and unknown risks, uncertainties and other
factors that may cause our actual results, levels of activity, performance
or achievements to be materially different from any future results, levels
of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may", "will", "should", "could",
"expects", "plans", "intends", "anticipates", "believes", "estimates",
"predicts", "potential" or "continue" or the negative of such terms or other
comparable terminology. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. These statements
are only predictions.
Factors that may cause our actual results to differ materially from
our forward-looking statements include, among others, changes in general
economic and business conditions and the risks and other factors set forth
in "Item 1A--Risk Factors" and elsewhere in this annual report on Form 10-K.
Our actual results may be materially different from what we expect.
We undertake no duty to update these forward-looking statements after the
date of this annual report, even though our situation may change in the
future. We qualify all of our forward-looking statements by these cautionary
statements.
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OVERVIEW
We design, manufacture and market an advanced cardiology instrument
control system for use in a hospital's interventional surgical suite, or
"cath lab", that we believe revolutionizes the treatment of coronary artery
disease and arrhythmias by enabling important new therapeutic solutions and
enhancing the efficiency and efficacy of existing catheter-based, or
interventional, procedures. Our Stereotaxis System allows physicians to more
effectively navigate proprietary catheters, guidewires and other delivery
devices, both our own and those we are co-developing with strategic
partners, through the blood vessels and chambers of the heart to treatment
sites in order to effect treatment. This is achieved using
computer-controlled, externally applied magnetic fields that precisely and
directly govern the motion of the internal, or working, tip of the catheter,
guidewire or other delivery device. We believe that our Stereotaxis System
represents a revolutionary technology in the cath lab, bringing precise
remote digital instrument control and programmability to the cath lab, and
has the potential to become the standard of care for a broad range of
complex cardiology procedures.
We believe that our Stereotaxis System is the only technology to be
commercialized that allows remote, computerized control of catheters,
guidewires and other delivery devices directly at their working tip. To our
knowledge, we have no direct competitors in this field that have currently
commercially available devices. We also believe that our technology
represents an important advance in the ongoing trend toward digital
instrumentation in the cath lab and provides substantial, clinically
important improvements and cost efficiencies over manual interventional
methods, which require years of physician training and often result in long
and unpredictable procedure times with sub-optimal therapeutic outcomes.
We began commercial shipments in 2003, following U.S. and European
regulatory approval of the core components of the Stereotaxis System, and
had revenues of approximately $15.0 million in 2005, $18.8 million in 2004
and $5.0 million in 2003. As of December 31, 2005, we had sold and delivered
43 Stereotaxis Systems, including 29 in the U.S. and 14 internationally, and
physicians have used these systems to perform approximately 3,000
cardiology procedures. At December 31, 2005, we also had purchase orders and
other commitments for an additional $26 million of our Stereotaxis Systems,
compared to $20 million at December 31, 2004. Of the December 31, 2005
purchase orders and commitments, we expect approximately $8 million to be
filled beyond calendar year 2006. There can be no assurance that we will
recognize revenue in any particular period or at all because some of our
purchase orders and other commitments are subject to contingencies that are
outside our control. In addition, these orders and commitments may be
revised, modified or canceled, either by their express terms, as a result of
negotiations or by project changes or delays.
The Stereotaxis System is designed primarily for the interventional
treatment of abnormal heart rhythms known as arrhythmias, or
electrophysiology, including enhancing the placement of complex pacemakers
for cardiac resynchronization therapy, or CRT and for the interventional
treatment of coronary artery disease, or interventional cardiology. To date
the preponderance of the Stereotaxis installations worldwide are intended
for use in electrophysiology.
Our Stereotaxis System consists of the following proprietary
components:
o our NIOBE(R) cardiology magnet system, which utilizes permanent
magnets to navigate catheters, guidewires and other delivery
devices through complex paths in the blood vessels and chambers of
the heart to carry out treatment;
o our NAVIGANT(R) advanced user interface, or physician control
center, which physicians use to visualize and track procedures and
to provide instrument control commands that govern the motion of
the working tip of the catheter, guidewire or other delivery
device;
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o our CARDIODRIVE(TM) automated catheter advancer, which is used to
remotely advance and retract the catheter in the patient's heart;
and
o our suite of interventional catheters, guidewires and other
delivery devices, which we refer to as disposable interventional
devices as further discussed on Page 10.
The Stereotaxis System is designed to be installed in both new and
replacement cath labs worldwide. We currently have regulatory clearance to
market our NIOBE cardiology magnet system, our NAVIGANT advanced user
interface, our CARDIODRIVE automated catheter advancer and various
disposable interventional devices in the U.S., Canada, Europe and in China,
and we anticipate applying through Siemens and Biosense Webster to begin
clinical trials in Japan in 2006. Current and potential purchasers of our
Stereotaxis System include leading research and academic hospitals as well
as community and regional medical centers around the world.
We have alliances with each of Siemens AG Medical Solutions,
Philips Medical Systems and Biosense Webster, a subsidiary of Johnson &
Johnson. Through these alliances, we are integrating our Stereotaxis System
with Siemens' and Philips' market leading digital imaging and Biosense
Webster's 3D catheter location sensing technology, and developing compatible
disposable interventional devices, in order to continue to introduce new
solutions to the cath lab. The Siemens and Philips alliances provide for
coordination of our sales and marketing with that of our partners to
facilitate co-placement of integrated systems. In addition, Siemens has
agreed to provide worldwide service for our integrated systems and we are in
discussions with Philips to provide the same.
The core elements of our Stereotaxis System are protected by an
extensive patent portfolio, as well as substantial know-how and trade
secrets.
BACKGROUND
Traditionally, cardiac procedures have been performed via open
chest heart bypass surgery. This procedure is very invasive, requiring
cutting open the rib cage and spreading it apart in order to gain access to
the heart. This enables the physician to directly view the patient's heart
during the procedure and to operate manually. Additionally, the patient is
typically placed on a heart lung bypass device. While generally very
effective, the procedure is highly traumatic for the patient, and usually
requires a long hospital stay, followed by a significant period of
convalescence. Conventional cardiac surgery is also expensive.
Minimally invasive surgical procedures for cardiology were devised
to mitigate many of the drawbacks of bypass surgery while maintaining
essential elements of visualization and instrument control. These procedures
utilize an endoscope for visualization, which is inserted through an
incision in the patient's body. While these minimally invasive surgical
techniques have been used for a number of cardiac procedures, in most
instances they have not been as effective as conventional cardiac surgery.
As a result, bypass surgery, despite its drawbacks, has remained the
predominant method for cardiac surgical procedures.
Interventional cardiology represents the next, and most recent,
step in the evolution of less invasive cardiac procedures. These procedures
are performed in the cath lab, where real-time x-ray imaging, often enhanced
by the injection of contrast dye, provides visualization enabling physicians
to insert and navigate guidewires, catheters and other delivery devices into
the vasculature or open chambers of the heart to deliver therapy. Instrument
control in typical interventional cardiology procedures for the treatment of
coronary artery disease requires the physician to manually manipulate the
external end of a long, slender guidewire in order to indirectly control and
position the working tip of the instrument. This requires significant skill
and, depending upon the type and location of the lesion being treated, can
be very difficult and time consuming. The guidewire is typically used for
5
navigation to the treatment site, after which a catheter or other delivery
device is threaded over the guidewire to perform the necessary treatment.
Guidewires are also typically used to place pacemaker leads used in cardiac
resynchronization therapy for the treatment of congestive heart failure. In
electrophysiology mapping and ablation procedures, physicians use
specialized catheters that are manually navigated using a system of
mechanical control cables to map the patient's heart, and then to ablate the
heart tissue to eliminate arrhythmias. This also requires significant skill,
and, depending on the type and location of the arrhythmia, can be very
difficult and time consuming to perform.
Interventional cardiology and electrophysiology procedures have
proven to be very effective at treating coronary artery disease and
arrhythmias at sites accessible through the vasculature without the patient
trauma, complications, recovery times and cost generally associated with
open surgery. With the advent of drug-eluting stents, the number of
potential patients who could benefit from interventional cardiology
procedures has grown. However, major challenges associated with manual
approaches to interventional cardiology and electrophysiology persist. In
interventional cardiology, these challenges include difficulty in navigating
the disposable interventional device through tortuous vasculature and
crossing certain types of complex lesions to deliver drug-eluting stents to
effect treatment. As a result, numerous patients who could be candidates for
an interventional approach continue to be referred to bypass surgery. In
electrophysiology, these challenges include precisely navigating the tip of
the mapping and ablation catheter to the treatment site on the heart wall
and maintaining tissue contact throughout the cardiac cycle to effect
treatment, and, for atrial fibrillation, performing complex ablations within
the left atrium of the heart. As a result, large numbers of patients are
referred to palliative drug therapy that can have harmful side effects.
We believe the Stereotaxis System represents a revolutionary step
in the trend toward highly effective, but less invasive, cardiac procedures.
As the first technology to permit direct, computerized control of the
working tip of a disposable interventional device, the Stereotaxis System
enables physicians to perform cardiac procedures interventionally that
historically would have been very difficult or impossible to perform in this
way and significantly improves the efficiency of existing complex procedures
in the cath lab.
CURRENT CHALLENGES IN THE CATH LAB
Although great strides have been made in devices and in applying
manual interventional techniques, significant challenges remain that reduce
cath lab productivity and limit both the number of complex procedures and
the types of diseases that can be treated. These challenges primarily
involve the limitations of manual instrument control and the lack of
integration of the information systems used by physicians in the cath lab.
As a result, many complex procedures in interventional cardiology are
referred to highly invasive bypass surgery and many complex cases in
electrophysiology are treated with palliative drug therapy.
Limitations of Instrument Control
Navigation in the blood vessels and the chambers of the heart can
be difficult because the path that a disposable interventional device must
follow to arrive at the treatment site and deliver therapy can be complex
and tortuous. Physicians using manual methods often utilize a range of
different catheters and guidewires in succession in an attempt to find the
right device or devices for the procedure being performed.
Manually controlled catheters, guidewires and other delivery
devices, even in the hands of the most skilled specialist, have inherent
instrument control limitations. In traditional interventional procedures,
the device is manually manipulated by the physician who twists and pushes
the external end of the instrument in an iterative process to thread the
instrument through the blood vessels to
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the treatment site. Manual control of the working tip becomes increasingly
difficult as more turns are required to navigate the instrument to the
treatment site, as the blood vessels to be navigated become smaller and less
accessible or more blocked, and as greater precision is required to carry
out therapy at the treatment site.
Lack of Integration of Information Systems
While sophisticated imaging, mapping and location-sensing systems
have provided visualization for interventional procedures and allowed
interventional physicians to treat more complex conditions, the substantial
lack of integration of these information systems requires the physician to
mentally integrate and process large quantities of information from
different sources in real time during an interventional procedure. For
example, a physician ablating heart tissue to eliminate an arrhythmia will
often be required to mentally integrate information from a number of
sources, including:
o real-time x-ray fluoroscopy images;
o a real-time location-sensing system providing the 3D location of
the catheter tip;
o a pre-operative map of the electrical activity or anatomy of the
patient's heart;
o real-time recording of electrical activity of the heart; and
o temperature feedback from an ablation catheter.
Each of these systems displays data differently, requiring
physicians to continuously reorient themselves to the different formats and
displays as they shift their focus from one data source to the next while at
the same time manually controlling the interventional instrument.
THE STEREOTAXIS VALUE PROPOSITION
The Stereotaxis System addresses the current challenges in the cath
lab by providing precise computerized control of the working tip of the
interventional instrument and by integrating this control with the
visualization and information systems used during interventional cardiology
and electrophysiology procedures, on a cost justified basis. We believe that
the Stereotaxis System is the only technology to be commercialized that
allows remote, computerized control of disposable interventional devices
directly at their working tip.
We believe that the Stereotaxis System will:
o Expand the market by enabling new treatments for major diseases and
enhancing the treatment of more complex existing cases. Treatment
of a number of major diseases, including chronic total occlusions
and placement of bi-ventricular pacing devices and atrial
fibrillation, is highly problematic using conventional
catheter-based techniques. Additionally, many patients with
multi-vessel disease and certain complex arrhythmias are often
referred to other therapies because of the difficulty in
controlling the working tip of disposable interventional devices.
As a result, these patients are typically referred to more invasive
surgeries or largely ineffective drug therapy. Because the
Stereotaxis System provides precise, computerized control of the
working tip of disposable interventional devices, we believe that
it will potentially enable chronic total occlusions and atrial
fibrillation to be treated interventionally on a much broader scale
than today, and may permit physicians to
7
predictably treat complex cases involving partially occluded
coronary arteries and arrhythmias.
o Improve outcomes by optimizing therapy. Difficulty in controlling
the working tip of disposable interventional devices leads to
sub-optimal results in many procedures. Precise instrument control
is necessary for treating a number of cardiac conditions. To treat
arrhythmias, precise placement of an ablation catheter against a
beating inner heart wall is necessary. To treat congestive heart
failure, precise navigation within the coronary venous system for
optimal placement of pacemaker leads is required. For coronary
artery disease, precise and correct navigation and placement of
expensive drug-eluting stents also have a significant impact on
procedure costs and outcomes. We believe the Stereotaxis System can
enhance procedure results by improving navigation of disposable
interventional devices to treatment sites, and by effecting more
precise treatments once these sites are reached.
o Enhance hospital efficiency by reducing and standardizing procedure
times, disposables utilization and staffing needs. Interventional
procedure times currently range from several minutes to many hours
as physicians often engage in repetitive, "trial and error"
maneuvers due to difficulties with manually controlling the working
tip of disposable interventional devices. By reducing both
navigation time and the time needed to carry out therapy at the
target site, we believe that the Stereotaxis System can reduce
complex interventional procedure times compared to manual
procedures. We believe the Stereotaxis System can also reduce the
variability in procedure times compared to manual methods. Greater
standardization of procedure times allows for more efficient cath
lab scheduling. We also believe that additional cost savings from
the Stereotaxis System result from decreased use of multiple
catheters and guidewires in procedures compared with manual methods
and also from decreased staff requirements during procedures, which
further enhances the rate of return to hospitals.
o Enhance physician skill levels in order to improve the efficacy of
complex cardiology procedures. Training required for physicians to
carry out manual interventional procedures typically takes years,
over and above the training required to become a specialist in
cardiology. This has led to a shortage of interventional physicians
for more complex procedures. The Stereotaxis System can allow
procedures that previously required the highest levels of manual
dexterity and skill to be performed effectively by a broader range
of interventionalists, with more standardized outcomes. In
addition, interventional physicians can be trained to use the
Stereotaxis System in a relatively short period of time. The
Stereotaxis System can also be programmed to carry out sequences of
complex navigation automatically.
o Improve patient and physician safety by reducing procedure times
and minimizing x-ray exposure. During conventional catheter-based
procedures, both the physician, who stands by the patient table to
manually control the catheter, and the patient are exposed to the
potentially harmful x-ray fluoroscopy field. This exposure can be
minimized by reducing procedure times. Reducing procedure times is
also beneficial to the patient because there is a direct
correlation between complication rates and procedure length. The
Stereotaxis System can further improve physician safety by enabling
them to conduct procedures remotely from an adjacent control room,
which reduces their exposure to harmful radiation.
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OVERVIEW OF THE STEREOTAXIS SYSTEM
Our proprietary Stereotaxis System provides the physician with
precise remote digital instrument control through user friendly "point and
click" and/or virtual catheter technology. It can be operated either from
beside the patient table, as in traditional interventional procedures, or
from a room adjacent to the patient and outside the x-ray fluoroscopy field.
The NIOBE cardiology magnet system navigates disposable interventional
devices to the treatment site through complex paths in the blood vessels and
chambers of the heart to carry out treatment using computer controlled,
externally applied magnetic fields to directly govern the motion of the
working tip of these devices, each of which has a magnetically sensitive tip
that predictably responds to magnetic fields generated by our system.
Because the working tip of the disposable interventional device is directly
controlled by these external magnetic fields, the physician has the same
degree of control regardless of the number or type of turns, or the distance
traveled, by the working tip to arrive at its position in the blood vessels
or chambers of the heart, which results in highly precise digital control of
the working tip of the disposable interventional device while still giving
the physician the option to manually advance the catheter.
Through our alliances with Siemens, Philips and Biosense Webster,
this precise digital instrument control has been integrated with the
visualization and information systems used during interventional cardiology
and electrophysiology procedures in order to provide the physician with a
fully-integrated and automated information and instrument control system. We
have integrated our Stereotaxis System with Siemens' digital x-ray
fluoroscopy system, and with Philips' digital x-ray fluoroscopy system. In
addition, we have integrated the Stereotaxis System with Biosense Webster's
3D catheter location sensing technology, to provide accurate real-time
information as to the 3D location of the working tip of the instrument, and
with Biosense Webster's ablation tip technology. The combination of these
technologies was fully launched in 2005.
The components of the Stereotaxis System are identified and
described below:
Systems
NIOBE Cardiology Magnet System. Our NIOBE cardiology magnet system
utilizes two permanent magnets mounted on articulating or pivoting arms that
are enclosed within a stationary housing, with one magnet on either side of
the patient table, inside the cath lab. These magnets generate magnetic
navigation fields that are less than 10% of the strength of fields typically
generated by MRI equipment and therefore require significantly less
shielding, and cause significantly less interference, than MRI equipment.
NAVIGANT Advanced User Interface. The NAVIGANT advanced user interface
is an integrated information and control center that integrtates the key
information sources used by interventional cardiologists and
electrophysiologists and allows these physicians to provide instrument
control directions to precisely govern the motion of the working tip of
disposable interventional devices.
The NAVIGANT advanced user interface consists of:
o configurable display screens located both next to the patient table
inside the cath lab and in the adjacent control room, outside the
x-ray fluoroscopy field, that provide advanced visualization and
information integration to the physician;
o sophisticated embedded device software and system control
algorithms that are integrated with our disposable interventional
devices to facilitate ease of use automation, and improved
navigation of these devices;
9
o virtual catheter or mouse control which the physician uses to
direct the motion of the working tip of the disposable
interventional device, either from inside the cath lab or from the
adjacent control room; and
o a software package designed for interventional cardiology or
electrophysiology, or both, as well as optional application
software tailored for specific clinical procedures.
CARDIODRIVE Automated Catheter Advancer. Where the physician is
conducting the procedure from the adjacent control room, the CARDIODRIVE
automated catheter advancer is used to advance and retract the catheter in
the patient's heart while the NIOBE magnets precisely steer the working tip
of the device.
We have received regulatory marketing clearance, licensing and CE
Mark approvals necessary for us to market the NIOBE cardiology magnet
system, the NAVIGANT advanced user interface and the CARDIODRIVE automated
catheter advancer in the U.S., Canada, Europe and China.
DISPOSABLES AND OTHER ACCESSORIES
Our system is designed to use a toolkit of proprietary disposable
interventional devices. The toolkit currently consists of:
o our suite of CRONUS(R), ASSERT(TM) and TITAN(TM) coronary
guidewires suitable for use in interventional cardiology procedures
for the introduction and placement of over-the-wire therapeutic
devices, such as biventricular pacing leads used in cardiac
resynchronization therapy for treating congestive heart failure;
o our TANGENT(R) electrophysiology mapping catheter used to locate
aberrant electrical signals in the heart;
o our HELIOS(R) electrophysiology ablation catheter used for certain
arrhythmia treatments; and
o the CARTO(R) RMT electromechanical mapping system, CELSIUS(R) RMT
and NAVISTAR(R) RMT Diagnostic/Ablation Steerable Tip Catheters
co-developed with Biosense Webster, as described below.
We have received FDA clearance, Canadian licensing and the CE Mark
necessary for us to market our suite of CRONUS, ASSERT and TITAN coronary
guidewires in the U.S., Canada and Europe. In addition, we have received FDA
and CE Mark clearance for our TANGENT mapping catheter in the U.S., Canada,
and Europe, and the CE Mark for our HELIOS electrophysiology ablation
catheter in Europe. In the U.S. we completed clinical trials with the HELIOS
in 2004 and filed for a PMA in 2005.
In March 2005, we announced the first commercial use of our
Stereotaxis system with the CELSIUS(R) RMT ablation catheter, the
NAVISTAR(R) RMT Diagnostic/Ablation Steerable Tip catheter and the CARTO(R)
RMT navigation and ablation system in Europe. Biosense Webster received FDA
approval in September 2005 for use in the U.S. of the CARTO(R) RMT
navigation system with the Stereotaxis Niobe system. In December 2005,
Biosense Webster received approval from the FDA for the CELSIUS(R) RMT
Diagnostic/Ablation Steerable Tip Catheter and in February 2006 Biosense
Webster received FDA approval for the
10
NAVISTAR(R) RMT Diagnostic/Ablation Steerable Tip Catheter. These products
are the first products to be commercialized pursuant to our strategic
alliance with Biosense Webster. We continue to co-develop a range of
ablation catheters that can be navigated with our system, with and without
Biosense Webster's 3D catheter location sensing technology. We are also
developing disposable interventional devices for other applications. In
addition, we can utilize plastic security keys, with embedded smart chips
and associated software, that allow our system to recognize specific
disposable interventional devices in order to prevent unauthorized use of
our system.
We believe that we can adapt most disposable interventional devices
for use with our system by using our proprietary technology to add an
inexpensive micro-magnet at their working tip. This micro-magnet is
activated by an external magnetic field, which allows interventional devices
with tip dimensions as small as 14 thousandths (0.014) of an inch to be
oriented and positioned in a predictable and controllable fashion. We
believe this approach to bringing digital control to disposable
interventional devices using embedded magnets can simplify the overall
design of these devices because mechanical controls are no longer required.
CLINICAL APPLICATIONS
We have initially focused our clinical and commercial efforts on
applications of the Stereotaxis System in complex interventional cardiology
procedures for the treatment of coronary artery disease, and in
electrophysiology procedures for the treatment of arrhythmias. Our system
potentially has broad applicability in other areas, such as interventional
neurosurgery, interventional neuroradiology, peripheral vascular,
pulmonology, urology, gynecology and gastrointestinal medicine, and our
patent portfolio has been structured to permit expansion into these areas.
Interventional Cardiology
Nearly half a million people die annually from coronary artery
disease, a condition in which the formation of plaque in the coronary
arteries obstructs the supply of blood to the heart, making this the leading
cause of death in the U.S. Despite various attempts to reduce risk factors,
each year over one million patients undergo interventional procedures in an
attempt to open blocked vessels and another half a million patients undergo
open heart surgery to bypass blocked coronary arteries.
Blockages within a coronary artery, often called lesions, are
categorized by degree of obstruction as partial occlusions, non-chronic
total occlusions and chronic total occlusions. Lesions are also categorized
by the degree of difficulty with which they can be opened as simple or
complex. If the blockage is in an easy to reach location, it can typically
be treated by pushing a guidewire through the portion of the vessel that is
blocked with plaque, expanding a small balloon to compress the plaque
against the artery walls in order to open the artery, and then finally
deploying a stent, which is a small metal scaffold, to help keep the artery
open. If a blockage is located within tortuous vasculature, however, the
physician must navigate the guidewire through a series of sharp turns,
making the blockage very difficult to reach. Even if such lesions are
reached, delivering a balloon or stent to the treatment site through
tortuous anatomy can be difficult. In addition, complex lesions, such as
chronic total occlusions, longer lesions, and lesions located within smaller
diameter vessels, are often very difficult or time consuming to open with
manual interventional techniques.
We estimate that approximately 15% of these interventional cardiology
procedures currently being performed are complex and therefore require
longer procedure times and may have sub-optimal outcomes. We believe that
our system can substantially benefit this subset of complex interventional
cardiology procedures, including procedures involving:
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o Complex partial occlusions, complex non-chronic total occlusions
and chronic total occlusions. Treatment of these complex lesions is
generally more problematic due to the difficulty in steering and
pushing a guidewire through them. Because our system provides
precise computerized control of the working tip of a guidewire, it
can enable physicians to more easily locate small openings in, and
to advance a guidewire across, these lesions. Also, our
magnetically steerable microcatheter can help steer a variety of
conventional wire products, some of which are designed to cross
complex lesions, but which otherwise lack the controlled steering
needed to avoid perforating the vessel wall. The ability to cross
complex lesions such as chronic total occlusions has grown
increasingly important due to the effectiveness of drug eluting
stents in treating these lesions. Since approximately one-fifth of
patients referred to bypass surgery have chronic total occlusions,
we believe a significant number of patients could be treated
interventionally instead of surgically if more of these lesions
could be opened for stenting.
o Tortuous Anatomy. Some interventional procedures require physicians
to navigate a disposable interventional device through a series of
sharp turns in the patient's vasculature. Navigating through
tortuous anatomy using manual interventional techniques can be very
time consuming and physicians often cannot reach the lesion or
manipulate the balloon or stent across the lesion once it is
reached. Because our system allows the working tip of disposable
interventional devices to be precisely oriented regardless of the
number of turns that have occurred, our technology allows
physicians to more effectively navigate these devices through
complex vasculature and deliver balloons and stents to treatment
sites for therapy.
o Stent placement. The likelihood of restenosis, or re-blockage of
cleared arteries, is greatly increased in multi-vessel diseased
patients whose blockages are typically more diffusely distributed
throughout longer lengths of the vessel. As a result, these
patients are often referred to invasive bypass surgery. We expect
that drug-eluting stents, which dramatically reduce the likelihood
of restenosis, will enable patients with more complex lesions to be
treated interventionally rather than with bypass surgery. In order
to treat this new group of patients, however, physicians will need
to place stents in more challenging or remote locations. By using
externally applied magnetic fields to precisely direct a stent
through a patient's vasculature, we believe that our system allows
these devices to be more easily navigated to these difficult to
reach treatment sites.
o Small Vessels. Based on our interpretation of various medical
studies, we have determined that diabetic patients usually comprise
about 20 to 30% of U.S. hospital's interventional procedure volume.
These patients generally have smaller vessels, which often contain
longer lesions with more diffusely distributed blockages, as well
as tortuous anatomy, making guidewire navigation and stent delivery
extremely difficult. We believe that these patients can benefit
significantly from the improved disposable interventional device
navigation enabled by our system.
Electrophysiology
The rhythmic beating of the heart results from the transmission of
electrical impulses through the heart. When these electrical impulses are
mis-timed or uncoordinated, the heart fails to function properly, resulting
in complications that can range from fatigue to stroke or death. Over four
million people in the U.S. currently suffer from the resulting abnormal
heart rhythms, which are known as arrhythmias.
Drug therapies for arrhythmias often fail to adequately control the
arrhythmia and may have significant side effects. Consequently, physicians
have increasingly sought more permanent, non-
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pharmacological, solutions for arrhythmias. The most common interventional
treatment for arrhythmias, and in particular tachyarrhythmias, where the
patient's heart rate is too high or irregular, is an ablation procedure in
which the diseased tissue giving rise to the arrhythmia is isolated or
destroyed. Prior to performing an electrophysiology ablation, a physician
typically performs a diagnostic procedure in which the electrical signal
patterns of the heart wall are "mapped" to identify the heart tissue
generating the aberrant electrical signals. Following the mapping procedure,
the physician may then use an ablation catheter to disable the aberrant
signal or signal path, restoring the heart to its normal rhythm. In cases
where an ablation is anticipated, physicians will choose an ablation
catheter and perform both the mapping and ablation with the same catheter.
We believe the Stereotaxis System is particularly well-suited for
those electrophysiology procedures which are time consuming or which can
only be performed by highly experienced physicians. These procedures
include:
o General Mapping and Ablations. For the more routine mapping and
ablation procedures, our system offers the unique benefit of
precise catheter movement and consistent heart wall contact.
Additionally, the system can control the procedure and direct
catheter movement from the control room, saving the physician time
and helping to avoid unnecessary exposure to high doses of
radiation.
o Atrial Fibrillation. A common cause of sustained abnormal heart
rhythm, atrial fibrillation, is a particular type of arrhythmia
characterized by rapid, disorganized contractions of the heart's
upper chambers, the atria, which lead to ineffective heart pumping
and blood flow and can be a major risk factor for stroke. The
majority of potential patients cannot benefit from manual
catheter-based procedures for atrial fibrillation because the
procedures are extremely complex and are performed by only the most
highly skilled electrophysiologists. They also typically have much
longer procedure times than conventional ablation cases and lower
success rates. We believe that our system can allow these
procedures to be performed by a broader range of
electrophysiologists and, by automating some of the more complex
ablation routines, can standardize and reduce procedure times and
significantly improve outcomes.
o Bi-Ventricular Pacing. Congestive heart failure is a potentially
fatal condition in which the heart muscle is damaged to the point
that it is unable to provide adequate blood flow rate through the
body. A new therapy, dual chamber cardiac resynchronization
therapy, or bi-ventricular pacing, has shown promise in the
treatment of a certain type of congestive heart failure in which
the left and right sides of the left ventricle do not contract at
the same time. The procedure used to carry out this therapy
involves the placement of a pacemaker lead into the coronary venous
system of the heart. Interventional treatment of this patient
population is growing rapidly but the placement of the venous
pacing lead with manual interventional technologies is highly
challenging and time consuming, and less than optimal lead
placement can contribute to poor outcomes. The unpredictability of
procedure times also makes efficient cath lab scheduling very
difficult in these cases.
We believe that our system can address the current challenges in
electrophysiology by permitting the physician to remotely navigate
disposable interventional devices from a control room outside the x-ray
field. Our system also allows for more predictable and efficient navigation
of these devices to the treatment site, including the left atrium for atrial
fibrillation procedures, and enables appropriate contact force to be
maintained to effect ablations on the wall of the beating heart. We also
believe that our system will significantly lower the skill barriers required
for physicians to perform complex electrophysiology procedures and,
additionally, improve cath lab efficiency and reduce disposable
interventional device utilization.
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Interventional Neuroradiology, Neurosurgery and Other Interventional
Applications
Physicians used a predecessor to our NIOBE system to conduct a
number of procedures for the treatment of brain aneurysms, a condition in
which a portion of a blood vessel wall balloons and which can result in
debilitating or fatal hemorrhagic strokes. Traditional treatment for brain
aneurysms involves highly invasive open brain surgery. Interventional
procedures have evolved for filling the aneurysm with platinum micro-coils
delivered to the site in order to reduce blood flow within the aneurysm. We
believe that the Stereotaxis System has the potential to be adapted for use
in the interventional treatment of brain aneurysms, by enabling physicians
to reach a broader range of aneurysm targets, and by making procedure times
for these cases more predictable.
The Stereotaxis System also has a range of potential applications
in minimally invasive neurosurgery, including biopsies and the treatment of
tumors, treatment of vascular malformations and, when deliverables are
commercialized by third parties, delivery of pharmacological compounds and
deep brain stimulators. We have successfully conducted what we believe to be
the first human surgical procedures ever conducted using computerized
control in our neurosurgery program by navigating complex pathways through
brain tissue to multiple target sites. The Stereotaxis System also has
applicability in the respiratory, gastro-intestinal and genito-urinary
systems, for diagnosis and treatment of diseases affecting the lungs,
prostate, kidneys, colon and small intestine. We do not anticipate any
significant revenue from these programs in the near term.
COLLABORATIONS
We have entered into collaborations with technology leaders in the
global cath lab market, including Siemens, Philips, and Biosense Webster
that we believe will aid us in commercializing our Stereotaxis System. We
believe our two imaging partners, Siemens and Philips, have a significant
percentage of the installed base in the U.S.
We believe that these collaboration arrangements are favorable to
Stereotaxis because they:
o provide for the integration of our system with market leading
digital imaging and 3D catheter location sensing technology, as
well as disposable interventional devices;
o allow us to leverage the sales, distribution, service and
maintenance expertise of our strategic partners; and
o enable operational flexibility by not requiring us to provide any
of our strategic partners with a right of first refusal in the
event that another party wants to acquire us or with board
representation where a strategic partner has made a debt or equity
investment in us.
Imaging Partners
Siemens Alliance. In June 2001, we entered into an alliance with
Siemens, a global leader in cath lab equipment sales, including x-ray
fluoroscopy systems. Under this alliance, we successfully integrated our
Stereotaxis System with Siemens' digital fluoroscopy system to provide
advanced cath lab visualization and instrument control through user-friendly
computerized interfaces. We also coordinate our sales efforts with Siemens
to co-place integrated systems at leading hospital sites in the U.S., Europe
and in Asia. Under this alliance and under a separate services agreement,
Siemens
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provides site planning, project management, equipment maintenance and
support services for our products directly to our customers. To date, most
of our systems placed for clinical use have been integrated with Siemens'
digital fluoroscopy systems.
In May 2003, we entered into an expanded alliance with Siemens,
under which we are collaborating to produce what we believe will be market
leading technology to provide physicians with real-time 3D visualization of
a patient's anatomy during a procedure by integrating pre-operative MRI and
CT data with x-ray fluoroscopic data. We also agreed to integrate our
instrument control technology with Siemens' imaging technology in order to
develop new solutions in cardiology and, potentially, in interventional
radiology. We have also entered into a separate development agreement for
the Japanese market under which Siemens will coordinate regulatory approval
and distribute, install and service our Stereotaxis Systems, whether
integrated with the x-ray system of Siemens, or other third parties, in
Japan. We have also entered into a software distribution agreement with
Siemens under which we have the right to sublicense Siemens' 3D
pre-operative image navigation software as part of our NAVIGANT advanced
user interface.
Philips Alliance. In October 2003, we entered into an alliance with
Philips, another recognized global leader in cath lab sales, pursuant to
which we agreed to integrate our Stereotaxis System with Philips' digital
x-ray fluoroscopy system. We also agreed with Philips to identify areas of
concentration for bringing new solutions to integration of information
sources and instrument control in the cath lab in cardiology and neurology.
Under this alliance, we will coordinate our sales efforts with Philips in
order to co-place our integrated systems. We also have an agreement relating
to shared engineering and development costs.
Disposables Devices Partners
Biosense Webster Alliance. We entered into an alliance in May 2002
pursuant to which we agreed to integrate Biosense Webster's advanced 3D
catheter location sensing technology, which we believe has the leading
market position in this important field of visualization for
electrophysiology procedures, with our instrument control system, and to
jointly develop associated location sensing electrophysiology mapping and
ablation catheters that are navigable with the Stereotaxis System. We
believe that these integrated products will provide physicians with the
elements required for effective complex electrophysiology procedures: highly
accurate information as to the exact location of the catheter in the body
and highly precise control over the working tip of the catheter. We also
agreed to coordinate our sales force efforts with Biosense Webster in order
to place Biosense CARTO(R) RMT Systems and our Stereotaxis Systems that,
together with the co-developed catheters, comprise the full integration of
our instrument control and 3D location sensing technologies in the cath lab.
We expanded this alliance in November 2003 to include the parallel
integration of our instrument control technology with Biosense Webster's
full line of non-location sensing mapping and ablation catheters that are
relevant to our targeted applications in electrophysiology.
The co-developed catheters are manufactured and distributed by
Biosense Webster, and each of the parties agreed to contribute to the
resources required for their development. We are entitled to royalty
payments from Biosense Webster, payable quarterly based on a profit formula
for sales of the co-developed catheters, and our revenue share increases
under certain circumstances. Under this alliance, we agreed to certain
restrictions on our ability to co-develop and distribute catheters
competitive with those we are developing with Biosense Webster and granted
Biosense Webster certain notice and discussion rights for product
development activities we undertake relating
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to localization and magnetically enabling interventional disposable devices
in cardiology fields outside of electrophysiology and mapping.
Either party may terminate this alliance in certain specified
"change of control" situations, although the termination would not be
effective until one year after the change of control and then would be
subject to a wind-down period during which Biosense Webster would continue
to supply co-developed catheters to us or to our customers for three years
(or, for non-location sensing mapping and ablation catheters, until our
first sale of a competitive product after a change of control, if earlier
than three years). If we terminate the agreement under this provision, we
must pay a termination fee to Biosense Webster equal to 5% of the total
equity value of Stereotaxis in the change of control transaction, up to a
maximum of $10 million. We also agreed to notify Biosense Webster if we
reasonably consider that we are engaged in substantive discussions in
respect of the sale of the company or substantially all of our assets.
RESEARCH AND DEVELOPMENT
We have assembled an experienced group of engineers and physicists
with recognized expertise in magnetics, software, control algorithms,
systems integration and disposable interventional device modeling and
design.
Our research and development efforts are focused in three major areas:
o continuing to enhance our existing system through ongoing product
and software development;
o designing new proprietary disposable interventional devices for use
with our system; and
o developing next generation versions of our system.
Our research and development team collaborates with our strategic
partners, Siemens, Philips, and Biosense Webster, to integrate our
Stereotaxis System's open architecture platform with key imaging, location
sensing and information systems in the cath lab. We have also collaborated
with a number of highly regarded interventional physicians in key clinical
areas and have entered into agreements with a number of universities and
research institutions, which serve to increase our access to world class
physicians and scientists and to expand our name recognition in the medical
community.
CUSTOMER SERVICE AND SUPPORT
Stereotaxis has contracted with Siemens to provide worldwide
maintenance and support services to our customers for our integrated
products. This allows us to leverage Siemens' extensive maintenance and
support infrastructure for direct, on-site technical support activities,
including its call center, customer support engineers and service parts
logistics and delivery. It also provides a single point of contact for the
customer and allows us to focus on providing installation, training, and
back-up technical support. We have followed the same strategy with Philips
and intend to do the same with other potential collaboration partners in the
future.
Our back-up technical support includes a combination of on-line,
telephone and on-site technical assistance services 24 hours a day, seven
days a week. We have also hired service and support engineers with
networking and medical equipment expertise, and have outsourced a portion
16
of our installation and support services. We offer several different levels
of support to our customers, including basic hardware and software
maintenance, extended product maintenance, and rapid response capability for
both parts and service.
MANUFACTURING
NIOBE Systems
Our manufacturing strategy for our NIOBE system is to sub-contract
the manufacture of major components and to eventually subcontract the final
assembly and testing of those components. This permits us to focus on our
core competencies in magnet design, magnetic physics, magnetic instrument
control and navigational algorithms. Approximately 11,000 square feet of our
St. Louis, Missouri facility is dedicated to systems assembly, testing and
inspection as well as to demonstration and research.
Disposable Interventional Devices
Our manufacturing strategy for disposable interventional devices is
to outsource their manufacture through subcontracting and through our
alliance with Biosense Webster and to expand partnerships for other
interventional devices. We currently maintain pilot level manufacturing
capability along with strong relationships with component level suppliers.
We also manufacture prototype disposables to facilitate product development.
We have approximately 5,000 square feet allocated to disposables
manufacturing, assembly, testing and inspection with approximately 1,300
square feet of clean rooms in Maple Grove, Minnesota. We have entered into
manufacturing agreements to provide high volume capability for devices other
than catheters.
Software
The software components of the Stereotaxis System, including
control and application software, are developed both internally and with
integrated modules we purchase or license. We perform final testing of
software products in-house prior to their commercial release.
General
Our manufacturing facilities operate under processes that meet the
FDA's requirements under the Quality System Regulation, or QSR. In 2003, the
FDA audited our Maple Grove, Minnesota facility for regulatory compliance,
and no deficiencies were noted. A European notified body regularly audited
each facility every year since 2001 and found the facilities to be in
compliance with European requirements. The initial certification was issued
in January 2002 for compliance with ISO 9001. The most recent issuance of
formal certification is for ISO 13485:2003. If we fail to remain in
compliance with the FDA or ISO 9001 standards, we may be required to cease
all or part of our operations for some period of time until we can
demonstrate that appropriate steps have been taken to comply with such
standards. We cannot be certain that our facilities will comply with the FDA
or ISO 9001 standards in future audits by regulatory authorities.
Our products require a number of complex operations, including
multiple fabrication and assembly processes. We purchase both custom and
off-the-shelf components from a number of certified suppliers and subject
them to stringent quality processes. We apply periodic quality reviews of
our suppliers and have established a supplier selection approval process.
Some of the components necessary for the assembly of our products are
supplied by a single supplier. Establishing additional or replacement
suppliers for certain of those components cannot be done quickly. The
disruption of the supply of components could cause a significant increase in
the costs of these components, which
17
could affect our profitability. We purchase components through both short
and long-term supply arrangements and generally do not maintain large
volumes of inventory. We currently have a long-term supply agreement for the
supply of the permanent magnet assemblies used in our Stereotaxis System. We
believe we have the ability to double our manufacturing capacity within six
months to accommodate a significant increase in sales volume of our
Stereotaxis System.
Lead times for materials and components ordered by us and our
contract manufacturers vary and depend on factors such as the specific
supplier, contract terms and demand for a component at a given time. We and
our contract manufacturers acquire materials, complete standard
subassemblies and assemble fully configured systems based on sales
forecasts. If orders do not match forecasts, we and our contract
manufacturers may have excess or inadequate inventory of materials and
components. See Please refer to "Item 1A--Risk Factors" in this annual
report for a discussion of various risks associated with our manufacturing
strategy.
SALES AND MARKETING
We market our products in the U.S and internationally through a
direct sales force of senior sales specialists, distributors and sales
agents, supported by account managers that provide training, clinical
support, and other services to our customers. In addition, our strategic
alliances form an important part of our sales and marketing strategy. We
leverage the sales forces of our imaging partners to co-market integrated
systems on a worldwide basis. This approach allows us to maximize our leads
and knowledge of the market opportunities while using our resources to sell
directly to the customer. Biosense Webster will exclusively distribute our
electrophysiology mapping and ablation catheters, co-developed pursuant to
our alliance with them. We intend to increase our capital sales personnel
and clinical account managers over the next 24 months and to enter into
additional distribution and sales representative arrangements to market our
products in the rest of the world.
Our sales and marketing process has two important steps: (1)
selling systems directly and through co-marketing agreements with our
imaging partners, Siemens and Philips and through distributors; and (2)
leveraging our installed base of systems to drive recurring sales of
disposable interventional devices, software and service.
REIMBURSEMENT
We believe that substantially all of the procedures, whether
commercial or in clinical trials, conducted in the U.S. with the Stereotaxis
System have been reimbursed to date and that substantially all commercial
procedures in Europe have been reimbursed. We expect that third-party payors
will reimburse, under existing billing codes, our line of guidewires, as
well as our line of ablation catheters and those on which we are
collaborating with Biosense Webster. We expect healthcare facilities in the
U.S. to bill various third-party payors, such as Medicare, Medicaid, other
government programs and private insurers, for services performed with our
products. We believe that procedures performed using our products, or
targeted for use by products that do not yet have regulatory clearance or
approval, are generally already reimbursable under government programs and
most private plans. Accordingly, we believe providers in the U.S. will
generally not be required to obtain new billing authorizations or codes in
order to be compensated for performing medically necessary procedures using
our products on insured patients. We cannot assure you that reimbursement
policies of third-party payors will not change in the future with respect to
some or all of the procedures using the Stereotaxis System. See "Item
1A--Risk Factors" for a discussion of various risks associated with
reimbursement from third-party payors.
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INTELLECTUAL PROPERTY
Our strategy is to patent the technology, inventions and
improvements that we consider important to the development of our business.
As a result, we have an extensive patent portfolio that we believe protects
the fundamental scope of our technology, including our magnet technology,
navigational methods, procedures, systems, disposables interventional
devices and our 3D integration technology. As of December 31, 2005, we had
48 issued U.S. patents, eight exclusively licensed U.S. patents, one
exclusively licensed non-U.S. patent and three non-exclusively licensed U.S.
patents. In addition, we had 97 pending U.S. patent applications, 4 co-owned
U.S. patent applications, 7 licensed U.S. patent applications, 20 pending
non-U.S. patent applications, and 15 Patent Cooperation Treaty applications.
We also have a number of invention disclosures under consideration and
several applications that are being prepared for filing. Accordingly, we
anticipate that the number of pending U.S. patent applications will
increase.
Our patent portfolio covering magnet systems, including our NIOBE
cardiology magnet system, is comprised of 10 issued patents and 13 pending
applications. We have 16 issued patents and 31 pending applications covering
methods of magnetically controlling magnetic medical devices, including the
fundamental method of magnetically orienting and mechanically advancing
devices in the body. In addition, we have 13 issued patents and 27 pending
applications covering disposable interventional devices, including
electrophysiology catheters, guidewires, atherectomy devices, neuro and
other devices and our CARDIODRIVE automated catheter advancer. Finally, we
have 19 pending patent applications for our disposable interventional
devices, interfaces and navigation techniques that cover non-magnetic
medical navigation.
The patent positions of medical device companies, including ours,
can be highly uncertain and involve complex and evolving legal and factual
questions. One or more of the above patent applications may be denied. In
addition, our issued patents may be challenged, based on prior art
circumvented or otherwise not provide protection for the products we
develop. Furthermore, we may not be able to obtain patent licenses from
third parties required for the development of new products for use with our
system. We also note that U.S. patents and patent applications may be
subject to interference proceedings and U.S. patents may be subject to
reexamination proceedings in the U.S. Patent and Trademark Office (and
foreign patents may be subject to opposition or comparable proceedings in
the corresponding foreign patent office), which proceedings could result in
either loss of the patent or denial of the patent application or loss or
reduction in the scope of one or more of the claims of the patent or patent
application. In addition, such interference, reexamination and opposition
proceedings may be costly. In the event that we seek to enforce any of our
owned or exclusively licensed patents against an infringing party, it is
likely that the party defending the claim will seek to invalidate the
patents we assert, which, if successful could result in the entire loss of
our patent or the relevant portion of our patent and not just with respect
to that particular infringer. Any litigation to enforce or defend our
patents rights, even if we were to prevail, could be costly and
time-consuming and would divert the attention of our management and key
personnel from our business operations.
It would be technically difficult and costly to reverse engineer
our Stereotaxis System, which contains numerous complex algorithms that
control our disposable devices inside the magnetic fields generated by the
Stereotaxis System. We further believe that our patent portfolio is broad
enough in scope to enable us to obtain legal relief if any entity not
licensed by us attempted to market disposable devices that can be navigated
by the NIOBE system. We can also utilize plastic security keys, with embeded
smart chips and associated software, that allow our system to recognize
specific disposable interventional devices in order to prevent unauthorized
use of our system.
We have also developed substantial know-how in magnet design,
magnetic physics and magnetic instrument control that was developed in
connection with the development of the Stereotaxis System, which we maintain
as trade secrets. This centers around our proprietary magnet
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design, which is a critical aspect of our ability to design, manufacture and
install a cost-effective cardiology magnet system that is small enough to be
installed in a standard cath lab.
We seek to protect our proprietary information by requiring our
employees, consultants, contractors, outside partners and other advisers to
execute nondisclosure and assignment of invention agreements upon
commencement of their employment or engagement, through which we seek to
protect our intellectual property. These agreements to protect our
unpatented technology provide only limited and possibly inadequate
protection of our rights. Third parties may therefore be able to use our
unpatented technology, reducing our ability to compete. In addition,
employees, consultants and other parties to these agreements may breach them
and adequate remedies may not be available to us for their breaches. Many of
our employees were previously employed at universities or other medical
device companies, including potential competitors. We could in the future be
subject to claims that these employees or we have used or disclosed trade
secrets or other proprietary information of their former employers.
Litigation may be necessary to defend against these claims. If we fail in
defending such claims, in addition to paying monetary damages, we may lose
valuable intellectual property rights or personnel. Even if we are
successful in defending against these claims, litigation could result in
substantial costs and divert the attention of management and key personnel
from our business operations. We also generally seek confidentiality
agreements from third parties that receive our confidential data or
materials.
Our intellectual property involves certain risks and uncertainties.
Please refer to "Item 1A--Risk Factors" in this annual report for a
description of these risks and uncertainties.
COMPETITION
The markets for medical devices are intensely competitive and are
characterized by rapid technological advances, frequent new product
introductions, evolving industry standards and price erosion.
We consider our primary competition to be existing manual
catheter-based interventional techniques and surgical procedures. To our
knowledge, we are the only company that has commercialized remote, digital
and direct control of the working tip of catheters and guidewires for
interventional use. Our success depends in part on convincing hospitals and
physicians to convert existing interventional procedures to
computer-assisted procedures.
We expect to face competition from companies that are developing
new approaches and products for use in interventional procedures, including
robotic approaches that may be directly competitive with our technology.
Many of these companies have an established presence in the field of
interventional cardiology, including the major imaging, capital equipment
and disposables companies that are currently selling products in the cath
lab. We also face competition from companies who currently market or are
developing drugs or gene therapies to treat the conditions for which our
products are intended.
We believe that the primary competitive factors in the market we
address are capability, safety, efficacy, ease of use, price, quality,
reliability and effective sales, support, training and service. The length
of time required for products to be developed and to receive regulatory and
reimbursement approval is also an important competitive factor. See "Item
1A--Risk Factors" for a discussion of other competitive risks facing our
business.
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GOVERNMENT REGULATION
The healthcare industry, and thus our business, is subject to
extensive federal, state, local and foreign regulation. Some of the
pertinent laws have not been definitively interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of
interpretations. In addition, these laws and their interpretations are
subject to change.
Both federal and state governmental agencies continue to subject
the healthcare industry to intense regulatory scrutiny, including heightened
civil and criminal enforcement efforts. As indicated by work plans and
reports issued by these agencies, the federal government will continue to
scrutinize, among other things, the billing practices of healthcare
providers and the marketing of healthcare products. The federal government
also has increased funding in recent years to fight healthcare fraud, and
various agencies, such as the U.S. Department of Justice, the Office of
Inspector General of the Department of Health and Human Services, or OIG,
and state Medicaid fraud control units, are coordinating their enforcement
efforts.
We believe that we have structured our business operations and
relationships with our customers to comply with all applicable legal
requirements. However, it is possible that governmental entities or other
third parties could interpret these laws differently and assert otherwise.
We discuss below the statutes and regulations that are most relevant to our
business and most frequently cited in enforcement actions.
U.S. Food and Drug Administration, or FDA, Regulation
The Food and Drug Administration strictly regulates the medical
devices we produce under the authority of the Federal Food, Drug and
Cosmetic Act, or FFDCA, the regulations promulgated under the FFDCA, and
other federal and state statutes and regulations. The FFDCA governs, among
other things, the pre-clinical and clinical testing, design, manufacture,
safety, efficacy, labeling, storage, record keeping, post market reporting
and advertising and promotion of medical devices.
Our medical devices are categorized under the statutory framework
described in the FFDCA. This framework is a risk-based system which
classifies medical devices into three classes from lowest risk (Class I) to
highest risk (Class III). In general, Class I and II devices are either
exempt from the need for FDA clearance or cleared for marketing through a
premarket notification, or 510(k), process. Our devices that are considered
to be general tools, such as our NIOBE cardiology magnet system and our
suite of guidewires, or that provide diagnostic information, such as our
TANGENT electrophysiology mapping catheters, are subject to 510(k)
requirements. These devices are cleared for use as general tools which have
utility in a variety of interventional procedures. Our therapeutic devices,
such as our HELIOS ablation catheters, are subject to the premarket
approval, or PMA, process.
If clinical data are needed to support a marketing application for
our devices, generally, an investigational device exemption, or IDE, is
assembled and submitted to the FDA. The FDA reviews and must approve the IDE
before the study can begin. In addition, the study must be approved by an
Institutional Review Board covering each clinical site. When all approvals
are obtained, we initiate a clinical study to evaluate the device. Following
completion of the study, we collect, analyze and present the data in an
appropriate submission to the FDA, either a 510(k) or PMA.
Under the 510(k) process, the FDA determines whether or not the
device is "substantially equivalent" to a predicate device. In making this
determination, the FDA compares both the new device and the predicate
device. If the two devices are comparable in intended use, safety, and
effectiveness, the device may be cleared for marketing.
21
Under the PMA process, the FDA examines detailed data relating to
the safety and effectiveness of the device. This information includes
design, development, manufacture, labeling, advertising, pre-clinical
testing, and clinical study data. Prior to approving the PMA, the FDA
generally will conduct an inspection of the facilities producing the device
and one or more clinical sites where the study was conducted. The facility
inspection evaluates the company's readiness to commercially produce and
distribute the device. The inspection includes an evaluation of compliance
under the Quality System Regulation (QSR). Under certain circumstances, the
FDA may convene an advisory panel meeting to seek review of the data
presented in the PMA. If the FDA's evaluation is favorable, the PMA is
approved, and we can market the device in the U.S. The FDA may approve the
PMA with conditions, such as post-market surveillance requirements.
We evaluate changes made following 510(k) clearance or PMA approval
for significance and if appropriate, make a subsequent submission to the
FDA. In the case of a significant change being made to a 510(k) device, we
submit a new 510(k). For a PMA device, we will either need approval through
a PMA supplement or will need to notify the FDA.
For our 510(k) devices, we design the submission to cover multiple
models or variations in order to minimize the number of submissions. For our
PMA devices, we often rely upon the PMA approvals of our strategic partners
to utilize the PMA supplement regulatory path rather than pursue an original
PMA. Because of the differences in the amount of data and numbers of
patients in clinical trials, a PMA supplement process is often much shorter
than the amount of time and data required for approval of an original PMA.
Currently our NIOBE cardiology magnet system, NAVIGANT advanced
user interface, CARDIODRIVE automated catheter advancer, the CRONUS and
ASSERT families of coronary guidewires, TANGENT electrophysiology mapping
catheter and a TITAN guidewire have been cleared by the FDA to be used in
interventional procedures. We have received the CE Mark for our HELIOS
electrophysiology ablation catheter and, in the U.S., we have filed a PMA
for this device. In addition, we have received the CE Mark for our family of
TITAN guidewires.
Foreign Regulation
In order for us to market our products in other countries, we must
obtain regulatory approvals and comply with extensive safety and quality
regulations in other countries. These regulations, including the
requirements for approvals or clearance and the time required for regulatory
review, vary from country to country. Failure to obtain regulatory approval
in any foreign country in which we plan to market our products may harm our
ability to generate revenue and harm our business.
The primary regulatory environment in Europe is that of the
European Union, which consists of 25 countries encompassing most of the
major countries in Europe. The European Union requires that manufacturers of
medical products obtain the right to affix the CE Mark to their products
before selling them in member countries of the European Union. The CE Mark
is an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In order to
obtain the right to affix the CE Mark to products, a manufacturer must
obtain certification that its processes meet certain European quality
standards. Compliance with the Medical Device Directive, as certified by a
recognized European Notified Body, permits the manufacturer to affix the CE
Mark on its products and commercially distribute those products throughout
the European Union.
We have received the right to affix the CE Mark to each of our
products that has received 510(k) clearance in the U.S. and also for our
HELIOS ablation catheter. We have not applied for the right to affix the CE
Mark to our TANGENT mapping catheter as it is not currently marketed. If we
modify existing
22
products or develop new products in the future, including new devices, we
will need to apply for permission to affix the CE Mark to such products. We
will be subject to regulatory audits, currently conducted biannually, in
order to maintain any CE Mark permissions we have already obtained. We
cannot be certain that we will be able to obtain permission to affix the CE
Mark for new or modified products or that we will continue to meet the
quality and safety standards required to maintain the permissions we have
already received. If we are unable to maintain permission to affix the CE
Mark to our products, we will no longer be able to sell our products in
member countries of the European Union.
In addition, through Siemens, we intend to submit an application
for regulatory approval to commence a clinical study with the Japanese
Ministry of Health, Labor and Welfare for commercial use of the Stereotaxis
System in Japan. Siemens has agreed to coordinate the regulatory approval
process and act as distributor for our NIOBE cardiology magnet system and
NAVIGANT advanced user interface in Japan. We have received regulatory
approval for our system and for our TANGENT mapping catheter and the NIOBE
cardiology magnet system. We will continue to pursue regulatory approval of
additional devices. We will evaluate regulatory approval in other foreign
countries on an opportunistic basis.
Anti-Kickback Statute
The federal healthcare program Anti-Kickback Statute prohibits
persons from knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in exchange for or to induce
either the referral of an individual, or furnishing or arranging for a good
or service, for which payment may be made under a federal healthcare program
such as the Medicare and Medicaid programs. The definition of "remuneration"
has been broadly interpreted to include anything of value, including for
example gifts, discounts, the furnishing of supplies or equipment, credit
arrangements, payments of cash and waivers of payments. Several courts have
interpreted the statute's intent requirement to mean that if any one purpose
of an arrangement involving remuneration is to induce referrals of federal
healthcare covered business, the statute has been violated. Penalties for
violations include criminal penalties and civil sanctions such as fines,
imprisonment and possible exclusion from Medicare, Medicaid and other
federal healthcare programs. In addition, some kickback allegations have
been claimed to violate the Federal False Claims Act, discussed in more
detail below.
The Anti-Kickback Statute is broad and prohibits many arrangements
and practices that are lawful in businesses outside of the healthcare
industry. Recognizing that the Anti-Kickback Statute is broad and may
technically prohibit many innocuous or beneficial arrangements, Congress
authorized the OIG to issue a series of regulations, known as the "safe
harbors" which it did, beginning in July of 1991. These safe harbors set
forth provisions that, if all their applicable requirements are met, will
assure healthcare providers and other parties that they will not be
prosecuted under the Anti-Kickback Statute. The failure of a transaction or
arrangement to fit precisely within one or more safe harbors does not
necessarily mean that it is illegal or that prosecution will be pursued.
However, conduct and business arrangements that do not fully satisfy each
applicable safe harbor may result in increased scrutiny by government
enforcement authorities such as the OIG.
Many states have adopted laws similar to the Anti-Kickback Statute.
Some of these state prohibitions apply to referral of patients for
healthcare items or services reimbursed by any source, not only the Medicare
and Medicaid programs.
Government officials have focused their enforcement efforts on
marketing of healthcare services and products, among other activities, and
recently have brought cases against sales personnel
23
who allegedly offered unlawful inducements to potential or existing
customers in an attempt to procure their business. As part of our compliance
program, we have established a formal Clinical Compliance Committee and
appointed a Clinical Compliance Officer to help ensure compliance with the
Anti-Kickback Statute and similar state laws and we train our employees on
our healthcare compliance policies. However, we cannot rule out the
possibility that the government or other third parties could interpret these
laws differently and assert otherwise.
HIPAA
The Health Insurance Portability and Accountability Act of 1996, or
HIPAA, created two new federal crimes: healthcare fraud and false statements
relating to healthcare matters. The healthcare fraud statute prohibits
knowingly and willfully executing a scheme to defraud any healthcare benefit
program, including private payors. A violation of this statute is a felony
and may result in fines, imprisonment or exclusion from government sponsored
programs. The false statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in connection with the
delivery of or payment for healthcare benefits, items or services. A
violation of this statute is a felony and may result in fines or
imprisonment.
In addition to creating the two new federal healthcare crimes,
HIPAA also establishes uniform standards governing the conduct of certain
electronic healthcare transactions and protecting the security and privacy
of individually identifiable health information maintained or transmitted by
healthcare providers, health plans and healthcare clearinghouses. Two
standards have been promulgated under HIPAA: the Standards for Privacy of
Individually Identifiable Health Information, which restrict the use and
disclosure of certain individually identifiable health information, and the
Standards for Electronic Transactions, which establish standards for common
healthcare transactions, such as claims information, plan eligibility,
payment information and the use of electronic signatures. In addition, the
Security Standards will require covered entities to implement certain
security measures to safeguard certain electronic health information by
April 21, 2005. Although we believe we are not a covered entity and
therefore do not need to comply with these standards, our customers
generally are covered entities and frequently ask us to comply with certain
aspects of these standards. While the government intended this legislation
to reduce administrative expenses and burdens for the healthcare industry,
our compliance with certain provisions of these standards may entail
significant and costly changes for us. If we fail to comply with these
standards, it is possible that we could be subject to criminal penalties.
In addition to federal regulations issued under HIPAA, some states
and foreign countries have enacted privacy and security statutes or
regulations that, in some cases, are more stringent than those issued under
HIPAA. In those cases, it may be necessary to modify our operations and
procedures to comply with the more stringent state laws, which may entail
significant and costly changes for us. We believe that we are in compliance
with such state laws and regulations. However, if we fail to comply with
applicable state laws and regulations, we could be subject to additional
sanctions.
Federal False Claims Act
Another trend affecting the healthcare industry is the increased
use of the federal False Claims Act and, in particular, actions under the
False Claims Act's "whistleblower" or "qui tam" provisions. Those provisions
allow a private individual to bring actions on behalf of the government
alleging that the defendant has defrauded the federal government. The
government must decide whether to intervene in the lawsuit and to become the
primary prosecutor. If it declines to do so, the individual may choose to
pursue the case alone, although the government must be kept apprised of
24
the progress of the lawsuit. Whether or not the federal government
intervenes in the case, it will receive the majority of any recovery. If the
individual's litigation is successful, the individual is entitled to no less
than 15%, but no more than 30%, of whatever amount the government recovers.
In recent years, the number of suits brought against healthcare providers by
private individuals has increased dramatically. In addition, various states
have enacted laws modeled after the federal False Claims Act.
When an entity is determined to have violated the federal False
Claims Act, it may be required to pay up to three times the actual damages
sustained by the government, plus civil penalties from $5,500 to $11,000 for
each separate false claim. There are many potential bases for liability
under the federal False Claims Act. Liability arises, primarily, when an
entity knowingly submits, or causes another to submit, a false claim for
reimbursement to the federal government. Although simple negligence should
not give rise to liability, submitting a claim with reckless disregard or
deliberate ignorance of its truth or falsity could result in substantial
civil liability. The False Claims Act has been used to assert liability on
the basis of inadequate care, improper referrals, and improper use of
Medicare numbers when detailing the provider of services, in addition to the
more predictable allegations as to misrepresentations with respect to the
services rendered. We are unable to predict whether we could be subject to
actions under the False Claims Act, or the impact of such actions. However,
the costs of defending claims under the False Claims Act, as well as
sanctions imposed under the Act, could significantly affect our financial
performance.
Certificate of Need Laws
In approximately two-thirds of the states, a certificate of need or
similar regulatory approval is required prior to the acquisition of
high-cost capital items or various types of advanced medical equipment, such
as our Stereotaxis System. At present, many of the states in which we sell
Stereotaxis Systems have laws that require institutions located in those
states to obtain a certificate of need in connection with the purchase of
our system, and some of our purchase orders are conditioned upon our
customer's receipt of necessary certificate of need approval. Certificate of
need laws were enacted to contain rising health care costs, prevent the
unnecessary duplication of health resources, and increase patient access for
health services. In practice, certificate of need laws have prevented
hospitals and other providers who have been unable to obtain a certificate
of need from acquiring new equipment or offering new services. A further
increase in the number of states regulating our business through certificate
of need or similar programs could adversely affect us. Moreover, some states
may have additional requirements. For example, we understand that
California's certificate of need law also incorporates seismic safety
requirements which must be met before a hospital can acquire our Stereotaxis
System.
EMPLOYEES
As of December 31, 2005, we had 161 employees, 54 of whom were
engaged directly in research and development, 24 in manufacturing and
service, 15 in regulatory, clinical affairs and quality activities, 52 in
sales and marketing activities and 16 in general administrative and
accounting activities. None of our employees is covered by a collective
bargaining agreement, and we consider our relationship with our employees to
be good.
AVAILABILITY OF INFORMATION
We make certain filings with the SEC, including our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments and exhibits to those reports, available free of
charge in the Investor Relations section of our website,
http://www.stereotaxis.com, as soon as reasonably practicable after they are
filed with the SEC. The filings are also available through the SEC at the
SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or
by calling 1-800-SEC-0330. Further, these filings are available on the
Internet at http://www.sec.gov.
25
ITEM 1A. RISK FACTORS
HOSPITAL DECISION-MAKERS MAY NOT PURCHASE OUR STEREOTAXIS SYSTEM OR MAY
THINK THAT IT IS TOO EXPENSIVE.
The market for our products and related technology is not well
established. To achieve continued sales, hospitals must purchase our
products, and in particular, our NIOBE cardiology magnet system. The NIOBE
cardiology magnet system, which is the core of our Stereotaxis System, is a
novel device, and hospitals and physicians are traditionally slow to adopt
new products and treatment practices. Moreover, the Stereotaxis System is an
expensive piece of capital equipment, representing a significant portion of
the cost of a new or replacement cath lab. If hospitals do not widely adopt
our Stereotaxis System, or if they decide that it is too expensive, we may
never become profitable. Any failure to sell as many Stereotaxis Systems as
our business plan requires could also have a seriously detrimental impact on
our results of operations, financial condition and cash flow.
PHYSICIANS MAY NOT USE OUR PRODUCTS IF THEY DO NOT BELIEVE THEY ARE SAFE AND
EFFECTIVE.
We believe that physicians will not use our products unless they
determine that the Stereotaxis System provides a safe, effective and
preferable alternative to interventional methods in general use today.
Currently, there is only limited clinical data on the Stereotaxis System
with which to assess safety and efficacy. If longer-term patient studies or
clinical experience indicate that treatment with our system or products is
less effective, less efficient or less safe than our current data suggest,
our sales would be harmed, and we could be subject to significant liability.
Further, unsatisfactory patient outcomes or patient injury could cause
negative publicity for our products, particularly in the early phases of
product introduction. In addition, physicians may be slow to adopt our
products if they perceive liability risks arising from the use of these new
products. It is also possible that as our products become more widely used,
latent defects could be identified, creating negative publicity and
liability problems for us and adversely affecting demand for our products.
If physicians do not use our products, we likely will not become profitable
or generate sufficient cash to survive as a going concern.
26
OUR COLLABORATIONS WITH SIEMENS, PHILIPS, BIOSENSE WEBSTER OR OTHER PARTIES
MAY FAIL, OR WE MAY NOT BE ABLE TO ENTER INTO ADDITIONAL PARTNERSHIPS OR
COLLABORATIONS IN THE FUTURE.
We are collaborating with Siemens, Philips, Biosense Webster or
other parties to integrate our instrument control technology with their
respective imaging products or disposable interventional devices and to
co-develop additional disposable interventional devices for use with our
Stereotaxis System. For the immediate future, a significant portion of our
revenues from system sales will be derived from these integrated products.
In addition, each of Siemens and Philips has agreed to provide
post-installation maintenance and support services to our customers for our
integrated systems and we are in discussions with Philips to provide the
same.
Our product commercialization plans could be disrupted, leading to
lower than expected revenue and a material and adverse impact on our results
of operations and cash flow, if:
o any of our collaboration partners delays or fails in the
integration of its technology with our Stereotaxis System as
planned;
o any of our collaboration partners does not co-market and co-promote
our integrated products diligently or does not provide maintenance
and support services as we expect; or
o we become involved in disputes with one or more of our
collaboration partners regarding our collaborations.
Siemens, Philips and Biosense Webster, as well as some of our other
collaborators, are large, global organizations with diverse product lines
and interests that may diverge from our interests in commercializing our
products. Accordingly, our collaborators may not devote adequate resources
to our products, or may experience financial difficulties, change their
business strategy or undergo a business combination that may affect their
willingness or ability to fulfill their obligations to us. In particular, we
have had only limited experience with respect to the integration of our
system with Philips' imaging products.
The failure of one or more of our collaborations could have a
material adverse effect on our financial condition, results of operations
and cash flow. In addition, if we are unable to enter into additional
partnerships in the future, or if these partnerships fail, our ability to
develop and commercialize products could be impacted negatively and our
revenues could be adversely affected.
INVESTORS MAY HAVE DIFFICULTY EVALUATING OUR BUSINESS AND OPERATING RESULTS
BECAUSE WE ARE STILL IN THE EARLY STAGES OF COMMERCIALIZING OUR PRODUCTS.
We have been engaged in research and product development since our
inception in 1990. Our initial focus was on the development of neurosurgical
applications for our technology, and during the first several years
following our inception, we devoted our resources primarily to developing
prototypes and performing research and development activities in this area.
Starting around 1998, we shifted our primary focus over the next two years
to developing applications for our technology to treat cardiovascular
disease and, in 2003, began limited commercial shipments of products we
developed for treatment in this area. To date, our investments in our
products have produced relatively little revenue, and our operating expenses
are high relative to that revenue. Our lack of a significant operating
history also impairs an investor's ability to make a comparative evaluation
of us, our products and our prospects.
WE HAVE LIMITED EXPERIENCE SELLING, MARKETING AND DISTRIBUTING PRODUCTS,
WHICH COULD IMPAIR OUR ABILITY TO INCREASE REVENUES.
We currently market our products in the U.S., Europe and the rest
of the world through a direct sales force of sales specialists, distributors
and sales agents, supported by account managers
27
that provide training, clinical support, and other services to our
customers. If we are unable to increase our sales force or effectively
utilize our existing sales force significantly in the foreseeable future, we
may be unable to generate the revenues we have projected in our business
plan. Factors that may inhibit our sales and marketing efforts include:
o our inability to recruit and retain adequate numbers of qualified
sales and marketing personnel;
o the inability of sales personnel to obtain access to or persuade
adequate numbers of hospitals and physicians to purchase and use
our products;
o unforeseen costs associated with maintaining and expanding an
independent sales and marketing organization; and
o increased government scrutiny with respect to marketing activities
in the health care industry.
In addition, if we fail to effectively use distributors or contract
sales persons for distribution of our products where appropriate, our
revenues and profitability would be adversely affected.
OUR MARKETING STRATEGY IS DEPENDENT ON COLLABORATION WITH PHYSICIAN "THOUGHT
LEADERS."
Our research and development efforts and our marketing strategy
depend heavily on obtaining support and collaboration from highly regarded
physicians at leading commercial and research hospitals, particularly in the
U.S. and Europe If we are unable to gain and/or maintain such support and
collaboration or if the reputation or standing of these physicians is
impaired or otherwise adversely affected, our ability to market the
Stereotaxis System and, as a result, our financial condition, results of
operations and cash flow could be materially and adversely affected.
WE MAY NOT BE ABLE TO RAPIDLY TRAIN PHYSICIANS IN NUMBERS SUFFICIENT TO
GENERATE ADEQUATE DEMAND FOR OUR PRODUCTS.
In order for physicians to learn to use the Stereotaxis System,
they must attend one or more training sessions in order to familiarize
themselves with a sophisticated user interface. Market acceptance could be
delayed by lack of physician willingness to attend training sessions or by
the time required to complete this training. An inability to train a
sufficient number of physicians to generate adequate demand for our products
could have a material adverse impact on our financial condition and cash
flow.
CUSTOMERS MAY CHOOSE TO PURCHASE COMPETING PRODUCTS AND NOT OURS.
Our products must compete with established manual interventional
methods. These methods are widely accepted in the medical community, have a
long history of use and do not require the purchase of an additional
expensive piece of capital equipment. In addition, many of the medical
conditions that can be treated using our products can also be treated with
existing pharmaceuticals or other medical devices and procedures. Many of
these alternative treatments are widely accepted in the medical community
and have a long history of use.
We also face competition from companies that are developing drugs
or other medical devices or procedures to treat the conditions for which our
products are intended. The medical device and pharmaceutical industries make
significant investments in research and development, and innovation is rapid
and continuous. For example, we are aware that two private companies are
developing non-magnetic assisted navigation devices that could compete
directly with the Stereotaxis System. However, to the best of our knowledge,
these products have not been commercialized. If these or other new products
or technologies emerge that provide the same or superior benefits as our
28
products at equal or lesser cost, it could render our products obsolete or
unmarketable. We cannot be certain that physicians will use our products to
replace or supplement established treatments or that our products will be
competitive with current or future products and technologies.
Most of our other competitors also have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater name recognition and a larger base of customers than we do. In
addition, as the markets for medical devices develop, additional competitors
could enter the market. We cannot assure you that we will be able to compete
successfully against existing or new competitors. Our revenues would be
reduced or eliminated if our competitors develop and market products that
are more effective and less expensive than our products.
IF WE ARE UNABLE TO FULFILL OUR CURRENT PURCHASE ORDERS AND OTHER
COMMITMENTS ON A TIMELY BASIS OR AT ALL, WE MAY NOT BE ABLE TO ACHIEVE
FUTURE SALES GROWTH.
We currently have outstanding purchase orders and other commitments
for our systems. There can be no assurance that we will recognize revenue in
any particular period or at all because some of our purchase orders and
other commitments are subject to contingencies that are outside our control.
In addition, these orders and commitments may be revised, modified or
canceled, either by their express terms, as a result of negotiations or by
project changes or delays. The installation of our system is inherently
controlled by the cath lab construction or renovation process which
comprises multiple stages, all of which are outside of our control. Although
the actual installation of our system requires only a few weeks, and can be
accomplished by either our staff or by subcontractors, successful
installation of our system can be subjected to delays related to the overall
construction or renovation process. If we experience any failures or delays
in completing the installation of these systems, our reputation would suffer
and we may not be able to sell additional systems. Substantial delays in the
installation process also increase the risk that a customer would attempt to
cancel a purchase order. This would have a negative effect on our revenues
and results of operations.
WE WILL LIKELY EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD RESULT
IN SUBSTANTIAL FLUCTUATIONS IN OUR QUARTERLY RESULTS OF OPERATIONS.
We anticipate that our system will continue to have a lengthy sales
cycle because it consists of a relatively expensive piece of capital
equipment, the purchase of which requires the approval of senior management
at hospitals, inclusion in the hospitals' cath lab budget process for
capital expenditures, and, in some instances, a certificate of need from the
state or other regulatory approval. In addition, our system has typically
been installed six to eight months after the receipt of a purchase order
from a hospital due to the construction cycle for the new or replacement
interventional suite in which the equipment will be installed. In some
cases, this time frame has been extended further because the interventional
suite construction is part of a larger construction project at the customer
site and this may happen with existing or future purchase orders. These
factors have contributed, and may continue to contribute to substantial
fluctuations in our quarterly operating results, particularly in the near
term and during any other periods in which our sales volume is relatively
low. As a result, in future quarters our operating results could fall below
the expectations of securities analysts or investors, in which event our
stock price would likely decrease.
IF THE MAGNETIC FIELDS GENERATED BY OUR SYSTEM ARE NOT COMPATIBLE WITH, OR
INTERFERE WITH, OTHER WIDELY USED EQUIPMENT IN THE CATH LAB, SALES OF OUR
PRODUCTS WOULD BE NEGATIVELY AFFECTED.
29
Our system generates magnetic fields that directly govern the
motion of the internal, or working, tip of disposable interventional
devices. If other equipment in the cath lab or elsewhere in a hospital is
incompatible with the magnetic fields generated by our system, or if our
system interferes with such equipment, we may be required to install
additional shielding, which may be expensive and which may not solve the
problem. Although we have modified our shielding approach, if magnetic
interference is a problem at additional institutions, it would increase our
installation costs at those institutions and could limit the number of
hospitals that would be willing to purchase and install our systems, either
of which would adversely affect our financial condition, results of
operations and cash flow.
THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT COULD
BE EXPENSIVE, DIVERT MANAGEMENT'S ATTENTION AND HARM OUR REPUTATION AND
BUSINESS.
Our business exposes us to significant risks of product liability
claims. The medical device industry has historically been litigious, and we
could face product liability claims if the use of our products were to cause
injury or death. The coverage limits of our product liability insurance
policies may not be adequate to cover future claims, and we may be unable to
maintain product liability insurance in the future at satisfactory rates or
adequate amounts. A product liability claim, regardless of its merit or
eventual outcome, could divert management's attention, result in significant
legal defense costs, significant harm to our reputation and a decline in
revenues.
OUR COSTS COULD SUBSTANTIALLY INCREASE IF WE RECEIVE A SIGNIFICANT NUMBER OF
WARRANTY CLAIMS.
We generally warrant each of our products against defects in
materials and workmanship for a period of 12 months from the acceptance of
our product by a customer. If product returns or warranty claims increase,
we could incur unanticipated additional expenditures for parts and service.
In addition, our reputation and goodwill in the cath lab market could be
damaged. While we have established reserves for liability associated with
product warranties, unforeseen warranty exposure in excess of those reserves
could materially and adversely affect our financial condition, results of
operations and cash flow.
WE MAY NOT GENERATE CASH FROM OPERATIONS NECESSARY TO COMMERCIALIZE OUR
EXISTING PRODUCTS AND INVEST IN NEW PRODUCTS.
Although we recently completed a public offering of our common
stock in which we raised approximately $61.7 million of net proceeds, we may
require additional funds to meet our working capital and capital expenditure
needs in the future. We cannot be certain that we will be able to obtain
additional financing on favorable terms or at all. If we need additional
capital and cannot raise it on acceptable terms, we may not be able to,
among other things:
o enhance our existing products or develop new ones;
o expand our operations;
o hire, train and retain employees; or
o respond to competitive pressures or unanticipated capital
requirements.
Our failure to do any of these things could result in lower
revenues and adversely affect our financial condition and results of
operations, and we may have to curtail or cease operations.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND MAY NOT BE PROFITABLE IN
THE FUTURE.
We have incurred substantial net losses since inception, and we
expect to incur substantial net losses in 2006 as we seek additional
regulatory approvals, launch new products and generally
30
continue to scale up our sales, marketing and manufacturing operations to
continue the commercialization our products. We had net losses of
approximately $43.6 million in 2005, $27.3 million in 2004 and $24.0 million
in 2003, and at December 31, 2005 we had an accumulated deficit of
approximately $158 million. A small portion of our accumulated deficit is
attributable to investments in development of products for neurosurgical
applications, which was our primary focus in the first several years after
our inception in 1990. Because we may not be successful in completing the
development or commercialization of our technology, your return on these
investments may be limited. Moreover, the extent of our future losses and
the timing of profitability are highly uncertain, and we may never achieve
profitable operations. If we require more time than we expect to generate
significant revenues and achieve profitability, we may not be able to
continue our operations. Our failure to achieve profitability could
negatively impact the market price of our common stock. Even if we do become
profitable, we may not be able to sustain or increase profitability on a
quarterly or annual basis. Furthermore, even if we achieve significant
revenues, we may choose to pursue a strategy of increasing market
penetration and presence or expand or accelerate new product development or
clinical research activities at the expense of profitability.
OUR INCREASED RELIANCE ON CONTRACT MANUFACTURERS AND ON SUPPLIERS, AND IN
SOME CASES, A SINGLE SUPPLIER, COULD HARM OUR ABILITY TO MEET DEMAND FOR OUR
PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.
We depend on contract manufacturers to produce most of the
components of our systems and other products such as our guidewires and
electrophysiology catheters. We also depend on various third party suppliers
for the magnets we use in our NIOBE cardiology magnet systems. In addition,
some of the components necessary for the assembly of our products are
currently provided to us by a single supplier, including the magnets for our
NIOBE cardiology magnet system, and we generally do not maintain large
volumes of inventory. Our reliance on these third parties involves a number
of risks, including, among other things, the risk that:
o we may not be able to control the quality and cost of our system or
respond to unanticipated changes and increases in customer orders;
o we may lose access to critical services and components, resulting
in an interruption in the manufacture, assembly and shipment of our
systems; and
o we may not be able to find new or alternative components for our
use or reconfigure our system and manufacturing processes in a
timely manner if the components necessary for our system become
unavailable.
If any of these risks materialize, it could significantly increase our costs
and impair product delivery.
In addition, if these manufacturers or suppliers stop providing us
with the components or services necessary for the operation of our business,
we may not be able to identify alternate sources in a timely fashion. Any
transition to alternate manufacturers or suppliers would likely result in
operational problems and increased expenses and could delay the shipment of,
or limit our ability to provide, our products. We cannot assure you that we
would be able to enter into agreements with new manufacturers or suppliers
on commercially reasonable terms or at all. Additionally, obtaining
components from a new supplier may require a new or supplemental filing with
applicable regulatory authorities and clearance or approval of the filing
before we could resume product sales. Any disruptions in product flow may
harm our ability to generate revenues, lead to customer dissatisfaction,
damage our reputation and result in additional costs or cancellation of
orders by our customers.
We also rely on our collaboration partner, Biosense Webster, and
other parties to manufacture a number of disposable interventional devices
for use with our Stereotaxis System. If these parties cannot
31
manufacture sufficient quantities of disposable interventional devices to
meet customer demand, or if their manufacturing processes are disrupted, our
revenues and profitability would be adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL MANUFACTURING AND TRADE COULD NEGATIVELY
IMPACT THE AVAILABILITY AND COST OF OUR PRODUCTS BECAUSE MATERIALS USED TO
MANUFACTURE OUR MAGNETS, ONE OF OUR KEY SYSTEM COMPONENTS, ARE SOURCED FROM
JAPAN AND CHINA.
We purchase the permanent magnets for our NIOBE cardiology magnet
system from a manufacturer that uses material produced in Japan, and certain
of the production work for these magnets is performed for this manufacturer
in China. In addition, we purchase our magnets for our disposable
interventional devices directly from a manufacturer in Japan, and a number
of other components for our system in foreign jurisdictions, including
components sourced locally in connection with installations. Any event
causing a disruption of imports, including the imposition of import
restrictions, could adversely affect our business. The flow of components
from our vendors could also be adversely affected by financial or political
instability in any of the countries in which the goods we purchase are
manufactured, if the instability affects the production or export of product
components from those countries. Trade restrictions in the form of tariffs
or quotas, or both, could also affect the importation of those product
components and could increase the cost and reduce the supply of products
available to us. In addition, decreases in the value of the U.S. dollar
against foreign currencies could increase the cost of products we purchase
from overseas vendors.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND ASSEMBLING OUR PRODUCTS AND
MAY ENCOUNTER PROBLEMS AT OUR MANUFACTURING FACILITIES OR OTHERWISE
EXPERIENCE MANUFACTURING DELAYS THAT COULD RESULT IN LOST REVENUE.
We do not have extensive experience in manufacturing, assembling or
testing our products on a commercial scale. In addition, for our NIOBE
cardiology magnet systems, we subcontract the manufacturing of major
components and complete the final assembly and testing of those components
in-house. As a result, we may be unable to meet the expected future demand
for our Stereotaxis System. In addition, the products we design may not
satisfy all of the performance requirements and we may need to improve or
modify the design or production process in order to do so. We may also
experience quality problems, substantial costs and unexpected delays in our
efforts to upgrade and expand our manufacturing, assembly and testing
capabilities. If we incur delays due to quality problems or other unexpected
events, we will be unable to produce a sufficient supply of systems
necessary to meet our future growth expectations In addition, we design,
test and manufacture a portion of the disposable devices that are used with
our NIOBE magnetic navigation system. In order to do so, we will need to
retain qualified employees for our assembly and testing operations. In
addition, we are dependent on the facilities we lease in St. Louis, Missouri
and Maple Grove, Minnesota in order to manufacture and assemble certain
products. We could encounter problems at either of these facilities, which
could delay or prevent us from assembling or testing our products or
maintaining our pilot manufacturing capabilities or otherwise conducting
operations. We moved our St. Louis operations to new facilities in the St.
Louis area in early 2006.
WE MAY BE UNABLE TO PROTECT OUR TECHNOLOGY FROM USE BY THIRD PARTIES.
Our commercial success will depend in part on obtaining patent and
other intellectual property right protection for the technologies contained
in our products and on successfully defending these rights against third
party challenges. The patent positions of medical device companies,
including ours, can be highly uncertain and involve complex and evolving
legal and factual questions. We cannot assure you that we will obtain the
patent protection we seek, that any protection we do obtain will be found
valid and enforceable if challenged or that it will confer any
32
significant commercial advantage. U.S. patents and patent applications may
also be subject to interference proceedings and U.S. patents may be subject
to reexamination proceedings in the U.S. Patent and Trademark Office, and
foreign patents may be subject to opposition or comparable proceedings in
the corresponding foreign patent office, which proceedings could result in
either loss of the patent or denial of the patent application or loss, or
reduction in the scope of one or more of the claims of, the patent or patent
application. In addition, such interference, reexamination and opposition
proceedings may be costly. Thus, any patents that we own or license from
others may not provide any protection against competitors. Our pending
patent applications, those we may file in the future or those we may license
from third parties may not result in patents being issued. If issued, they
may not provide us with proprietary protection or competitive advantages
against competitors with similar technology.
Some of our technology was developed in conjunction with third
parties, and thus there is a risk that a third party may claim rights in our
intellectual property. Outside the U.S., we rely on third-party payment
services for the payment of foreign patent annuities and other fees.
Non-payment or delay in payment of such fees, whether intentional or
unintentional, may result in loss of patents or patent rights important to
our business. Many countries, including certain countries in Europe, have
compulsory licensing laws under which a patent owner may be compelled to
grant licenses to third parties (for example, the patent owner has failed to
"work" the invention in that country, or the third party has patented
improvements). In addition, many countries limit the enforceability of
patents against government agencies or government contractors. In these
countries, the patent owner may have limited remedies, which could
materially diminish the value of the patent. We also cannot assure you that
we will be able to develop additional patentable technologies. If we fail to
obtain adequate patent protection for our technology, or if any protection
we obtain becomes limited or invalidated, others may be able to make and
sell competing products, impairing our competitive position.
Our trade secrets, nondisclosure agreements and other contractual
provisions to protect unpatented technology provide only limited and
possibly inadequate protection of our rights. As a result, third parties may
be able to use our unpatented technology, and our ability to compete in the
market would be reduced. In addition, employees, consultants and others who
participate in developing our products or in commercial relationships with
us may breach their agreements with us regarding our intellectual property,
and we may not have adequate remedies for the breach.
Our competitors may independently develop similar or alternative
technologies or products that are equal or superior to our technology and
products without infringing any of our patent or other intellectual property
rights, or may design around our proprietary technologies. In addition, the
laws of some foreign countries do not protect intellectual property rights
to the same extent as do the laws of the U.S., particularly in the field of
medical products and procedures.
THIRD PARTIES MAY ASSERT THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY
RIGHTS.
Successfully commercializing our products will depend in part on
not infringing patents held by third parties. It is possible that one or
more of our products, including those that we have developed in conjunction
with third parties, infringes existing patents. We may also be liable for
patent infringement by third parties whose products we use or combine with
our own and for which we have no right to indemnification. In addition,
because patent applications are maintained under conditions of
confidentiality and can take many years to issue, there may be applications
now pending of which we are unaware and which may later result in issued
patents that our products infringe. Whether a product infringes a patent
involves complex legal and factual issues and may not become clear until
finally determined by a court in litigation. Our competitors may assert that
our products infringe patents held by them. Moreover, as the number of
competitors in our market grows, the possibility of a patent infringement
claim against us increases. If we were not successful in obtaining a license
or redesigning our products, we could be subject to litigation. If we lose
in this
33
kind of litigation, a court could require us to pay substantial damages or
prohibit us from using technologies essential to our products covered by
third-party patents. An inability to use technologies essential to our
products would have a material adverse effect on our financial condition,
results of operations and cash flow and could undermine our ability to
continue operating as a going concern.
EXPENSIVE INTELLECTUAL PROPERTY LITIGATION IS FREQUENT IN THE MEDICAL DEVICE
INDUSTRY.
Infringement actions, validity challenges and other intellectual
property claims and proceedings, whether with or without merit, can be
expensive and time-consuming and would divert management's attention from
our business. We have incurred, and expect to continue to incur, substantial
costs in obtaining patents and may have to incur substantial costs defending
our proprietary rights. Incurring such costs could have a material adverse
effect on our financial condition, results of operations and cash flow.
WE MAY NOT BE ABLE TO OBTAIN ALL THE LICENSES FROM THIRD PARTIES NECESSARY
FOR THE DEVELOPMENT OF NEW PRODUCTS.
As we develop additional disposable interventional devices for use
with our system, we may find it advisable or necessary to seek licenses or
otherwise make payments in exchange for rights from third parties who hold
patents covering technology used in specific interventional procedures. For
example, we recently made a substantial payment to the University of
Virginia Patent Foundation to eliminate any requirement for us to pay
royalties of Stereotaxis products that address clinical applications in the
cardiovascular, peripheral vascular and certain other clinical fields. If we
cannot obtain the desired licenses or rights, we could be forced to try to
design around those patents at additional cost or abandon the product
altogether, which could adversely affect revenues and results of operations.
If we have to abandon a product, our ability to develop and grow our
business in new directions and markets would be adversely affected.
OUR PRODUCTS AND RELATED TECHNOLOGIES CAN BE APPLIED IN DIFFERENT
INDUSTRIES, AND WE MAY FAIL TO FOCUS ON THE MOST PROFITABLE AREAS.
The Stereotaxis System is designed to have the potential for
expanded applications beyond interventional cardiology and
electrophysiology, including congestive heart failure, structural heart
repair, interventional neurosurgery, interventional neuroradiology,
peripheral vascular, pulmonology, urology, gynecology and gastrointestinal
medicine. However, we have limited financial and managerial resources and
therefore may be required to focus on products in selected industries and to
forego efforts with regard to other products and industries. Our decisions
may not produce viable commercial products and may divert our resources from
more profitable market opportunities. Moreover, we may devote resources to
developing products in these additional areas but may be unable to justify
the value proposition or otherwise develop a commercial market for products
we develop in these areas, if any. In that case, the return on investment in
these additional areas may be limited, which could negatively affect our
results of operations.
WE MAY BE SUBJECT TO DAMAGES RESULTING FROM CLAIMS THAT OUR EMPLOYEES OR WE
HAVE WRONGFULLY USED OR DISCLOSED ALLEGED TRADE SECRETS OF THEIR FORMER
EMPLOYERS.
Many of our employees were previously employed at universities or
other medical device companies, including our competitors or potential
competitors. We could in the future be subject to claims that these
employees or we have used or disclosed trade secrets or other proprietary
information of their former employers. Litigation may be necessary to defend
against these claims. If we fail in defending such claims, in addition to
paying monetary damages, we may lose valuable intellectual property rights
or personnel. A loss of key research personnel or their work product
34
could hamper or prevent our ability to commercialize certain potential
products, which could severely harm our business. Even if we are successful
in defending against these claims, litigation could result in substantial
costs and be a distraction to management. Incurring such costs could have a
material adverse effect on our financial condition, results of operations
and cash flow.
IF WE OR OUR STRATEGIC PARTNERS FAIL TO OBTAIN OR MAINTAIN NECESSARY FDA
CLEARANCES FOR OUR MEDICAL DEVICE PRODUCTS, OR IF SUCH CLEARANCES ARE
DELAYED, WE WILL BE UNABLE TO CONTINUE TO COMMERCIALLY DISTRIBUTE AND MARKET
OUR PRODUCTS.
Our products are medical devices that are subject to extensive
regulation in the U.S. and in foreign countries where we do business. Unless
an exemption applies, each medical device that we wish to market in the U.S.
must first receive either 510(k) clearance or pre-market approval, or PMA,
from the U.S. Food and Drug Administration pursuant to the Federal Food,
Drug, and Cosmetic Act. The FDA's 510(k) clearance process usually takes
from four to 12 months, but it can take longer. The process of obtaining PMA
approval is much more costly, lengthy and uncertain, generally taking from
one to three years or even longer. Although we have 510(k) clearance for our
current Stereotaxis System, including a limited number of disposable
interventional devices, and are able to market our system commercially in
the U.S., our business model relies significantly on revenues from
additional disposable interventional devices for which there is no current
FDA clearance or approval. We cannot commercially market our unapproved
disposable interventional devices in the U.S. until the necessary clearance
or approvals from the FDA have been received. Until such time, we can only
supply these devices to research institutions for permitted investigational
use. In addition, we are working with third parties with whom we are
co-developing disposable products. In some cases, these companies are
responsible for obtaining appropriate regulatory clearance or approval to
market these disposable devices. If these clearances or approvals are not
received or are substantially delayed or if we are not able to offer s
sufficient array of approved disposable interventional devices, we may not
be able to successfully market our system to as many institutions as we
currently expect, which could have a material adverse impact on our
financial condition, results of operations and cash flow.
Furthermore, obtaining 510(k) clearances, pre-market approvals, or
PMAs, or premarket approval supplements, or PMA supplements, from the FDA
could result in unexpected and significant costs for us and consume
management's time and other resources. The FDA could ask us to supplement
our submissions, collect non-clinical data, conduct clinical trials or
engage in other time-consuming actions, or it could simply deny our
applications. In addition, even if we obtain a 510(k) clearance or PMA or
PMA supplement approval, the clearance or approval could be revoked or other
restrictions imposed if post-market data demonstrates safety issues or lack
of effectiveness. We cannot predict with certainty how, or when, the FDA
will act. Obtaining regulatory approvals in foreign markets entails similar
risks and uncertainties and can involve additional product testing and
additional administrative review periods. If we are unable to obtain the
necessary regulatory approvals, our financial condition and cash flow may be
adversely affected. Also, a failure to obtain approvals may limit our
ability to grow domestically and internationally.
IF WE OR OUR STRATEGIC PARTNERS FAIL TO OBTAIN REGULATORY APPROVALS IN OTHER
COUNTRIES FOR PRODUCTS UNDER DEVELOPMENT, WE WILL NOT BE ABLE TO
COMMERCIALIZE THESE PRODUCTS IN THOSE COUNTRIES.
In order to market our products outside of the U.S., we and our
strategic partners must establish and comply with numerous and varying
regulatory requirements of other countries regarding safety and efficacy.
Approval procedures vary among countries and can involve additional product
testing and additional administrative review periods. The time required to
obtain approval in other countries might differ from that required to obtain
FDA approval. The regulatory approval
35
process in other countries may include all of the risks detailed above
regarding FDA approval in the U.S. Regulatory approval in one country does
not ensure regulatory approval in another, but a failure or delay in
obtaining regulatory approval in one country may negatively impact the
regulatory process in others. Failure to obtain regulatory approval in other
countries or any delay or setback in obtaining such approval could have the
same adverse effects described above regarding FDA approval in the U.S. In
addition, we are relying on our strategic partners in some instances to
assist us in this regulatory approval process in countries outside the U.S.
and Europe, for example, in Japan.
WE MAY FAIL TO COMPLY WITH CONTINUING REGULATORY REQUIREMENTS OF THE FDA AND
OTHER AUTHORITIES AND BECOME SUBJECT TO SUBSTANTIAL PENALTIES.
Even after product clearance or approval, we must comply with
continuing regulation by the FDA and other authorities, including the FDA's
Quality System Regulation, or QSR, requirements, labeling and promotional
requirements and medical device adverse event and other reporting
requirements. Any failure to comply with continuing regulation by the FDA or
other authorities could result in enforcement action that may include
suspension or withdrawal of regulatory approvals, recalling products,
ceasing product marketing, seizure and detention of products, paying
significant fines and penalties, criminal prosecution and similar actions
that could limit product sales, delay product shipment and harm our
profitability.
Additionally, any modification to an FDA 510(k)-cleared device that
could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, requires a new 510(k)
clearance. Device modifications to a PMA approved device or its labeling may
require either a new PMA or PMA supplement approval, which could be a costly
and lengthy process. In the future, we may modify our products after they
have received clearance or approval, and we may determine that new clearance
or approval is unnecessary. We cannot assure you that the FDA would agree
with any of our decisions not to seek new clearance or approval. If the FDA
requires us to seek clearance or approval for any modification, we also may
be required to cease marketing or recall the modified product until we
obtain FDA clearance or approval which could also limit product sales, delay
product shipment and harm our profitability. In addition, Congress could
amend the Federal Food, Drug and Cosmetic Act, and the FDA could modify its
regulations promulgated under this law in a way so as to make ongoing
regulatory compliance more burdensome and difficult.
In many foreign countries in which we market our products, we are
subject to regulations affecting, among other things, product standards,
packaging requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. Many of these regulations are
similar to those of the FDA. In addition, in many countries the national
health or social security organizations require our products to be qualified
before procedures performed using our products become eligible for
reimbursement. Failure to receive, or delays in the receipt of, relevant
foreign qualifications could have a material adverse effect on our business,
financial condition and results of operations. Due to the movement toward
harmonization of standards in the European Union, we expect a changing
regulatory environment in Europe characterized by a shift from a
country-by-country regulatory system to a European Union-wide single
regulatory system. We cannot predict the timing of this harmonization and
its effect on us. Adapting our business to changing regulatory systems could
have a material adverse effect on our business, financial condition and
results of operations. If we fail to comply with applicable foreign
regulatory requirements, we may be subject to fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution.
36
OUR SUPPLIERS OR WE MAY FAIL TO COMPLY WITH THE FDA QUALITY SYSTEM
REGULATION.
Our manufacturing processes must comply with the FDA's quality
system regulation, or QSR, which covers the methods and documentation of the
design, testing, production, control, quality assurance, labeling, packaging
and shipping of our products. The FDA enforces the QSR through inspections.
We cannot assure you that we would pass such an inspection. Failure to pass
such an inspection could force a shut down of our manufacturing operations,
a recall of our products or the imposition of other sanctions, which would
significantly harm our revenues and profitability. Further, we cannot assure
you that our key component suppliers are or will continue to be in
compliance with applicable regulatory requirements and will not encounter
any manufacturing difficulties. Any failure to comply with the FDA's QSR by
us or our suppliers could significantly harm our available inventory and
product sales.
SOFTWARE OR OTHER DEFECTS MAY BE DISCOVERED IN OUR PRODUCTS.
Our products incorporate many components, including sophisticated
computer software. Complex software frequently contains errors, especially
when first introduced. Because our products are designed to be used to
perform complex interventional procedures, we expect that physicians and
hospitals will have an increased sensitivity to the potential for software
defects. We cannot assure you that our software or other components will not
experience errors or performance problems in the future. If we experience
software errors or performance problems, we would likely also experience:
o loss of revenue;
o delay in market acceptance of our products;
o damage to our reputation;
o additional regulatory filings;
o product recalls;
o increased service or warranty costs; and/or
o product liability claims relating to the software defects.
IF WE FAIL TO COMPLY WITH HEALTH CARE REGULATIONS, WE COULD FACE SUBSTANTIAL
PENALTIES AND OUR BUSINESS, OPERATIONS AND FINANCIAL CONDITION COULD BE
ADVERSELY AFFECTED.
While we do not control referrals of health care services or bill
directly to Medicare, Medicaid or other third-party payors, many health care
laws and regulations apply to our business. We could be subject to health
care fraud and patient privacy regulation by both the federal government and
the states in which we conduct our business. The regulations that may affect
our ability to operate include:
o the federal healthcare program Anti-Kickback Law, which prohibits,
among other things, persons from soliciting, receiving or providing
remuneration, directly or indirectly, to induce either the referral
of an individual, for an item or service or the purchasing or
ordering of a good or service, for which payment may be made under
federal health care programs such as the Medicare and Medicaid
programs;
o federal false claims laws which prohibit, among other things,
individuals or entities from knowingly presenting, or causing to be
presented, claims for payment from Medicare, Medicaid, or other
third-party payors that are false or fraudulent, and which may
apply to entities like us which provide coding and billing advice
to customers;
o the federal Health Insurance Portability and Accountability Act of
1996, or HIPAA, which prohibits executing a scheme to defraud any
health care benefit program or making false statements relating to
health care matters and which also imposes certain requirements
relating to the privacy, security and transmission of individually
identifiable health information;
37
o state law equivalents of each of the above federal laws, such as
anti-kickback and false claims laws which may apply to items or
services reimbursed by any third-party payor, including commercial
insurers, and state laws governing the privacy of health
information in certain circumstances, many of which differ from
each other in significant ways and often are not preempted by
HIPAA, thus complicating compliance efforts; and
o federal self-referral laws, such as STARK, which prohibits a
physician from making a referral to a provider of certain health
services with which the physician or the physician's family member
has a financial interest.
If our operations are found to be in violation of any of the laws
described above or any other governmental regulations that apply to us, we
may be subject to penalties, including civil and criminal penalties,
damages, fines, loss of reimbursement for our products under federal or
state government health programs such as Medicare and Medicaid and the
curtailment or restructuring of our operations. Any penalties, damages,
fines, curtailment or restructuring of our operations could adversely affect
our ability to operate our business and our financial results. The risk of
our being found in violation of these laws is increased by the fact that
many of them have not been fully interpreted by the regulatory authorities
or the courts, and their provisions are open to a variety of
interpretations. Any action against us for violation of these laws, even if
we successfully defend against it, could cause us to incur significant legal
expenses and divert our management's attention from the operation of our
business. Moreover, to achieve compliance with applicable federal and state
privacy, security, and electronic transaction laws, we may be required to
modify our operations with respect to the handling of patient information.
Implementing these modifications may prove costly. At this time, we are not
able to determine the full consequences to us, including the total cost of
compliance, of these various federal and state laws.
THE APPLICATION OF STATE CERTIFICATE OF NEED REGULATIONS AND COMPLIANCE WITH
FEDERAL AND STATE LICENSING OR OTHER INTERNATIONAL REQUIREMENTS COULD
SUBSTANTIALLY LIMIT OUR ABILITY TO SELL OUR PRODUCTS AND GROW OUR BUSINESS.
Some states require health care providers to obtain a certificate
of need or similar regulatory approval prior to the acquisition of high-cost
capital items such as our Stereotaxis System. In many cases, a limited
number of these certificates are available. As a result of this limited
availability, hospitals and other health care providers may be unable to
obtain a certificate of need for the purchase of our Stereotaxis System.
Further, our sales and installation cycle for the Stereotaxis System is
typically longer in certificate of need states due to the time it takes our
customers to obtain the required approvals. In addition, our customers must
meet various federal and state regulatory and/or accreditation requirements
in order to receive payments from government-sponsored health care programs
such as Medicare and Medicaid, receive full reimbursement from third party
payors and maintain their customers. Our international customers may be
required to meet similar or other requirements. Any lapse by our customers
in maintaining appropriate licensure, certification or accreditation, or the
failure of our customers to satisfy the other necessary requirements under
government-sponsored health care programs or other requirements, could cause
our sales to decline.
HOSPITALS OR PHYSICIANS MAY BE UNABLE TO OBTAIN REIMBURSEMENT FROM
THIRD-PARTY PAYORS FOR PROCEDURES USING THE STEREOTAXIS SYSTEM, OR
REIMBURSEMENT FOR PROCEDURES MAY BE INSUFFICIENT TO RECOUP THE COSTS OF
PURCHASING OUR PRODUCTS.
We expect that U.S. hospitals will continue to bill various
third-party payors, such as Medicare, Medicaid and other government programs
and private insurance plans, for procedures performed with our products,
including the costs of the disposable interventional devices used in these
procedures. If in the future our disposable interventional devices do not
fall within U.S. reimbursement categories and our procedures are not
reimbursed, or if the reimbursement is
38
insufficient to cover the costs of purchasing our system and related
disposable interventional devices, the adoption of our systems and products
would be significantly slowed or halted, and we may be unable to generate
sufficient sales to support our business. Our success in international
markets also depends upon the eligibility of our products for reimbursement
through government-sponsored health care payment systems and third-party
payors. In both the U.S. and foreign markets health care cost-containment
efforts are prevalent and are expected to continue. These efforts could
reduce levels of reimbursement available for procedures involving our
products and, therefore, reduce overall demand for our products as well. A
failure to generate sufficient sales could have a material adverse impact on
our financial condition, results of operations and cash flow.
WE MAY LOSE OUR KEY PERSONNEL OR FAIL TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL.
We are highly dependent on the principal members of our management
and scientific staff, in particular Bevil J. Hogg, our President and Chief
Executive Officer and Michael P. Kaminski, our Chief Operating Officer. In
order to pursue our plans and accommodate planned growth, we may choose to
hire additional personnel. Attracting and retaining qualified personnel will
be critical to our success, and competition for qualified personnel is
intense. We may not be able to attract and retain personnel on acceptable
terms given the competition for qualified personnel among technology and
healthcare companies and universities. The loss of any of these persons or
our inability to attract and retain other qualified personnel could harm our
business and our ability to compete. In addition, Douglas M. Bruce, our
Senior Vice President, Research & Development, coordinates our scientific
staff and the research and development projects they undertake; the loss of
Mr. Bruce or other members of our scientific staff may significantly delay
or prevent product development and other business objectives.
OUR GROWTH WILL PLACE A SIGNIFICANT STRAIN ON OUR RESOURCES, AND IF WE FAIL
TO MANAGE OUR GROWTH, OUR ABILITY TO DEVELOP, MARKET AND SELL OUR PRODUCTS
WILL BE HARMED.
Our business plan contemplates a period of substantial growth and
business activity. This growth and activity will likely result in new and
increased responsibilities for management personnel and place significant
strain upon our operating and financial systems and resources. To
accommodate our growth and compete effectively, we will be required to
improve our information systems, create additional procedures and controls
and expand, train, motivate and manage our work force. We cannot be certain
that our personnel, systems, procedures and controls will be adequate to
support our future operations. Any failure to effectively manage our growth
could impede our ability to successfully develop, market and sell our
products.
WE FACE CURRENCY AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES.
We intend to continue to devote significant efforts to marketing
our systems and products outside of the U.S. This strategy will expose us to
numerous risks associated with international operations, which could
adversely affect our results of operations and financial condition,
including the following:
o currency fluctuations that could impact the demand for our products
or result in currency exchange losses;
o export restrictions, tariff and trade regulations and foreign tax
laws;
o customs duties, export quotas or other trade restrictions;
o economic and political instability; and
o shipping delays.
39
In addition, contracts may be difficult to enforce and receivables
difficult to collect through a foreign country's legal system.
RISKS RELATED TO OUR COMMON STOCK
OUR PRINCIPAL STOCKHOLDERS CONTINUE TO OWN A LARGE PERCENTAGE OF OUR VOTING
STOCK, AND THEY HAVE THE ABILITY TO SUBSTANTIALLY INFLUENCE MATTERS
REQUIRING STOCKHOLDER APPROVAL.
As of December 31, 2005, our executive officers, directors and
individuals or entities affiliated with them beneficially own or control a
substantial percentage of the outstanding shares of our common stock.
Accordingly, these executive officers, directors and their affiliates,
acting as a group, will have substantial influence over the outcome of
corporate actions requiring stockholder approval, including the election of
directors, any merger, consolidation or sale of all or substantially all of
our assets or any other significant corporate transaction. These
stockholders may also delay or prevent a change of control, even if such a
change of control would benefit our other stockholders. This significant
concentration of stock ownership may adversely affect the trading price of
our common stock due to investors' perception that conflicts of interest may
exist or arise.
WE HAVE NEVER PAID DIVIDENDS ON OUR CAPITAL STOCK, AND WE DO NOT ANTICIPATE
PAYING ANY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We have paid no cash dividends on any of our classes of capital
stock to date and we currently intend to return our future earnings to fund
the development and growth of our business. In addition, the terms of our
loan agreement prohibit us from declaring dividends without the prior
consent of our lender. As a result, capital appreciation, if any, of our
common stock will be your sole source of gain for the foreseeable future.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS, DELAWARE LAW AND ONE OF OUR
ALLIANCE AGREEMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER.
Our certificate of incorporation and bylaws and Delaware law
contain provisions that might enable our management to resist a takeover.
These provisions may:
o discourage, delay or prevent a change in the control of our company
or a change in our management;
o adversely affect the voting power of holders of common stock; and
o limit the price that investors might be willing to pay in the
future for shares of our common stock.
In addition, under our alliance with Biosense Webster, either party
may terminate the alliance under certain circumstances involving a "change
of control" of Stereotaxis. Any termination must be effected within 90 days
of the change of control, but would be effective one year after the change
of control. If we terminate under this provision, we must pay a termination
fee to Biosense Webster equal to 5% of the total equity value of Stereotaxis
in the change of control transaction, up to a maximum of $10 million. We
also agreed to notify Biosense Webster if we reasonably consider that we are
engaged in substantive discussions in respect of the sale of the company or
substantially all of our assets. These provisions may similarly discourage a
takeover and negatively affect our share price as described above.
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC
MARKET, OR THE PERCEPTION THAT THEY MAY OCCUR, MAY DEPRESS THE MARKET PRICE
OF OUR COMMON STOCK.
40
Sales of substantial amounts of our common stock in the public
market, or the perception that substantial sales may be made, could cause
the market price of our common stock to decline. These sales might also make
it more difficult for us to sell equity securities at a time and price that
we deem appropriate.
As of December 31, 2005, we had outstanding 27,799,092 shares of
common stock.
EVOLVING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT
IN ADDITIONAL EXPENSES AND CONTINUING UNCERTAINTY.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002,
new SEC regulations and NASDAQ National Market rules are creating
uncertainty for public companies. We continue to evaluate and monitor
developments with respect to new and proposed rules and cannot predict or
estimate the amount of the additional compliance costs we may incur or the
timing of such costs. These new or changed laws, regulations and standards
are subject to varying interpretations, in many cases due to their lack of
specificity, and as a result, their application in practice may evolve over
time as new guidance is provided by courts and regulatory and governing
bodies. This could result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure and
governance practices. Maintaining appropriate standards of corporate
governance and public disclosure may result in increased general and
administrative expenses and a diversion of management time and attention
from revenue-generating activities to compliance activities. In addition, if
we fail to comply with new or changed laws, regulations and standards,
regulatory authorities may initiate legal proceedings against us and our
business and reputation may be harmed.
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS' OR INVESTORS'
EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
The revenue and income potential of our products and our business
model are unproven, and we may be unable to generate significant revenues or
grow at the rate expected by securities analysts or investors. In addition,
our costs may be higher than we, securities analysts or investors expect. If
we fail to generate sufficient revenues or our costs are higher than we
expect, our results of operations will suffer, which in turn could cause our
stock price to decline. Our results of operations will depend upon numerous
factors, including:
o demand for our products;
o the performance of third-party contract manufacturers and component
suppliers;
o our ability to develop sales and marketing capabilities;
o the success of our collaborations with Siemens, Philips and Biosense
Webster and others;
o our ability to develop, introduce and market new or enhanced
versions of our products on a timely basis;
o our ability to obtain regulatory clearances or approvals for our
new products; and
o our ability to obtain and protect proprietary rights.
Our operating results in any particular period may not be a
reliable indication of our future performance. In some future quarters, our
operating results may be below the expectations of securities analysts or
investors. If this occurs, the price of our common stock will likely
decline.
WE EXPECT THAT THE PRICE OF OUR COMMON STOCK COULD FLUCTUATE SUBSTANTIALLY,
POSSIBLY RESULTING IN CLASS ACTION SECURITIES LITIGATION.
41
We have only been publicly traded since August 12, 2004. A limited
number of our shares trade actively in the market. The market price of our
common stock will be affected by a number of factors, including:
o actual or anticipated variations in our results of operations or
those of our competitors;
o the receipt or denial of regulatory approvals;
o announcements of new products, technological innovations or product
advancements by us or our competitors;
o developments with respect to patents and other intellectual
property rights;
o changes in earnings estimates or recommendations by securities
analysts or our failure to achieve analyst earnings estimates; and
o developments in our industry.
The stock prices of many companies in the medical device industry
have experienced wide fluctuations that have often been unrelated to the
operating performance of these companies. Following periods of volatility in
the market price of a company's securities, stockholders have often
instituted class action securities litigation against those companies. Class
action securities litigation, if instituted against us, could result in
substantial costs and a diversion of our management resources, which could
significantly harm our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of December 31, 2005, there were no unresolved written comment
from the Commission staff regarding our periodic or current reports.
ITEM 2. PROPERTIES
In December 2005 and January 2006 we moved our primary company
facilities into approximately 31,000 square feet of office and 11,000 square
feet of demonstration and assembly space in St. Louis, Missouri. This space
is leased under an agreement that expires in 2015.
We also lease approximately 10,000 square feet in Maple Grove,
Minnesota. The Minnesota facility is leased through December 31, 2006. We
believe that the Minnesota facility will be adequate to meet our needs
through 2006.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in various lawsuits and claims
arising in the normal course of business. Although the outcomes of these
lawsuits and claims are uncertain, we do not believe any of them will have a
material adverse effect on our business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2005.
42
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on The Nasdaq Stock Market under
the symbol "STXS" since August 12, 2004. The following table sets forth the
high and low closing prices of our common stock for the periods indicated
and reported by Nasdaq.
QUARTER ENDED HIGH LOW
------------- ---- ---
YEAR ENDED DECEMBER 31, 2005
First Quarter $10.43 $7.61
Second Quarter 8.09 6.08
Third Quarter 10.15 7.41
Fourth Quarter 9.11 5.83
YEAR ENDED DECEMBER 31, 2004:
August 12, 2004 to September 30, 2004 $12.44 $7.50
Fourth Quarter 10.89 8.43
As of February 28, 2006, there were approximately 124 stockholders
of record of our common stock, although we believe that there is a
significantly larger number of beneficial owners of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends. We currently
expect to retain earnings for use in the operation and expansion of our
business, and therefore do not anticipate paying any cash dividends for the
next several years.
The information required by this item regarding equity compensation
is incorporated by reference to the information set forth in Item 12 of this
Annual Report on Form 10-K.
43
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived
from, and should be read in conjunction with our consolidated financial
statements and the accompanying notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included
elsewhere in this report. The selected data in this section is not intended
to replace the consolidated financial statements. Historical results are not
indicative of the results to be expected in the future.
YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Sales $ 15,026,390 $ 18,816,860 $ 5,014,877 $ 18,900 $ -
Cost of Sales 7,720,706 10,672,262 4,051,313 39,760 -
------------------------------------------------------------------------------
Gross Profit (Loss) 7,305,684 8,144,598 963,564 (20,860) -
------------------------------------------------------------------------------
Operating costs and expenses:
Research and development 17,829,282 17,215,414 13,590,922 14,742,015 14,359,131
General and administrative 13,190,316 6,900,016 5,323,682 4,528,637 2,645,563
Sales and marketing 17,365,631 11,447,857 5,999,310 2,230,565 951,280
Royalty settlement 2,923,111 - - - -
------------------------------------------------------------------------------
Total operating costs and expenses 51,308,340 35,563,287 24,913,914 21,501,217 17,955,974
------------------------------------------------------------------------------
Loss from operations (44,002,656) (27,418,689) (23,950,350) (21,522,077) (17,955,974)
Interest and other income
(expense), net 444,821 161,220 (86,487) 63,419 950,776
------------------------------------------------------------------------------
Net loss $(43,557,835) $(27,257,469) $(24,036,837) $(21,458,658) $(17,005,198)
===============================================================================
Basic and diluted net loss per
share (1) $ (1.60) $ (2.38) $ (18.37) $ (19.21) $ (23.01)
===============================================================================
Shares used in computing basic
and diluted net loss per share 27,301,822 11,470,310 1,308,805 1,117,301 739,088
===============================================================================
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 10,735,587 $ 45,648,834 $ 26,480,612 $ 28,834,123 $ 30,452,205
Working Capital 15,896,719 50,404,840 22,764,719 25,483,149 26,660,162
Total Assets 36,658,189 71,044,697 37,323,419 32,920,872 31,750,413
Long-term debt, less current
maturities 1,972,222 1,000,000 2,243,768 2,281,321 -
Accumulated deficit (158,231,069) (114,673,234) (87,415,765) (63,378,928) (41,920,270)
Total stockholders' equity 18,125,842 58,394,468 25,266,428 24,006,646 27,476,496
<FN>
(1) The one-for-3.6 reverse stock split effective as of July 2004 has been
reflected in the calculation of the basic and diluted net loss per
share for all periods presented above.
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our financial statements and notes thereto included in this 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, industry, economic conditions,
financial condition, liquidity and capital resources and results of
operations. 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
Stereotaxis designs, manufactures and markets an advanced
cardiology instrument control system for use in a hospital's interventional
surgical suite to enhance the treatment of coronary artery disease and
arrhythmias. The Stereotaxis System is designed to enable physicians to
complete more complex interventional procedures by providing image guided
delivery of catheters and guidewires through the blood vessels and chambers
of the heart to treatment sites. This is achieved using computer-controlled,
externally applied magnetic fields that govern the motion of the working tip
of the catheter or guidewire, resulting in improved navigation, shorter
procedure time and reduced x-ray exposure. The core components of the
Stereotaxis system have received regulatory clearance in the U.S., Canada,
Europe and China.
We believe that our system represents a revolutionary technology in
the interventional surgical suite, or "cath lab", and has the potential to
become the standard of care for a broad range of complex cardiology
procedures. We also believe that our system is the only technology to be
commercialized that allows remote, computerized control of catheters and
guidewires directly at their working tip. We also believe that our
technology represents an important advance in the ongoing trend toward
digital instrumentation in the cath lab and provides substantial, clinically
important improvements and cost efficiencies over manual interventional
methods, which require years of physician training and often result in long
and unpredictable procedure times and sub-optimal therapeutic outcomes.
From our inception in June 1990 through 2002, our principal
activities were obtaining capital, business development, performing research
and development activities, funding prototype development, funding clinical
trials and funding collaborations to integrate our products with other
interventional technologies. Accordingly, we were classified as a
development stage company for accounting purposes through December 31, 2002.
Our initial focus was on the development of neurosurgical
applications for our technology, including delivery of devices to specific
sites within the brain. During that time, we primarily devoted our resources
to developing prototypes and performing research and development activities
45
in this area. Following receipt of FDA approval to begin human clinical
trials in the field of brain biopsies, we successfully completed our initial
human clinical procedures in this area in late 1998. Over the next two
years, we shifted our primary focus to developing applications for our
technology to treat cardiovascular diseases because of the significantly
larger market opportunities for these applications. During 2003, following
receipt of marketing clearance from the FDA for our current system, we
emerged from the development stage and began to generate revenue from the
placement of investigational systems and the commercial launch of our
cardiology system in the U.S. and Europe.
In August 2004, we completed an initial public offering in which we
issued and sold 5,500,000 shares of common stock. In September 2004, the
underwriters exercised an option to purchase 462,352 additional shares. In
connection with the initial public offering (including the over-allotment
option exercise), we received approximately $41.4 million in net proceeds.
In February 2006, we completed a registered direct offering of our common
stock in which we issued and sold 5,000,000 shares of our common stock at
$12.00 per share. In addition, the underwriters exercised their option to
purchase an additional 500,000 shares. In conjunction with these
transactions, we received approximately $61.7 million in net proceeds. Prior
to our initial public offering, we funded our operations primarily through
private equity financings, supplemented by bank financing. Since our
inception, we have generated significant losses. As of December 31, 2005, we
had incurred cumulative net losses of approximately $158 million. We expect
to incur additional losses through the latter part of 2007 as we continue the
development and commercialization of our products, conduct our research and
development activities and advance new products into clinical development
from our existing research programs
We have alliances with each of Siemens AG Medical Solutions,
Philips Medical Systems and Biosense Webster, Inc., a subsidiary of J&J,
through which we are integrating our Stereotaxis System with market leading
digital imaging and 3D catheter location sensing technology, as well as
disposable interventional devices, in order to continue to develop new
solutions in the cath lab. Each of these alliances provides for coordination
of our sales and marketing activities with those of our partners. In
addition, Siemens has agreed to provide worldwide service for
our integrated systems. Siemens and J&J also invested in our convertible
preferred stock, which was converted into common stock as a result of the
initial public offering.
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 accounting principles generally accepted in the
U.S. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures. We review our
estimates and judgments on an on-going basis. We base our estimates and
judgments on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
from these estimates. We believe the following accounting policies are
critical to the judgments and estimates we use in preparing our financial
statements.
REVENUE RECOGNITION
We recognize systems revenue from system sales made directly to end
users upon installation, provided there are no uncertainties regarding
acceptance, persuasive evidence of an arrangement exists, the sales price is
fixed or determinable, and collection of the related receivable is
reasonably assured. When installation is required for revenue recognition,
the determination of acceptance is made by our employees based on criteria
set forth in the terms of the sale. Revenue
46
from system sales made to distributors is recognized upon shipment since
these arrangements do not include an installation element or right of return
privileges. If uncertainties exist regarding collectability, we recognize
revenue when those uncertainties are resolved. Amounts collected prior to
satisfying the above revenue recognition criteria are reflected as deferred
revenue. Amounts due beyond 12 months are reflected as long term receivables
in the balance sheet. Revenue from services, whether sold individually or as
a separable unit of accounting in a multi-element arrangement, is deferred
and amortized over the service period, which is typically one year. Revenue
from services is derived primarily from the sale of annual product
maintenance plans. We recognize revenue from disposable device sales or
accessories upon shipment and establish an appropriate reserve for returns.
For arrangements with multiple deliverables, we allocate the total
revenue to each deliverable based on its relative fair value in accordance
with the provisions of Emerging Issues Task Force (EITF) Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" and recognize revenue for
each separate element as the above criteria are met.
STOCK-BASED COMPENSATION
We account for employee and director stock options using the
intrinsic-value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations and have adopted the disclosure-only provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Stock options issued to non-employees, principally individuals
who provide scientific advisory services, are recorded at their fair value
as determined in accordance with SFAS No. 123 and EITF No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, and amortized
over the service period.
Stock compensation expense, which is a noncash charge, results from
stock option grants made to employees at exercise prices below the deemed
fair value of the underlying common stock, and from stock option grants made
to non-employees at the fair value of the option granted, from grants of
stock appreciation rights for which the number of shares cannot yet be
determined and from grants of restricted shares to employees. The fair value
of options 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. When we were a private
company, the deemed fair value of the underlying common stock was determined
by management and the Board of Directors based on their best estimates using
information from preferred stock financing transactions or other significant
changes in the business. The fair value of the grants of restricted shares
was determined based on the closing price of our stock on the date of grant.
Stock compensation expense for options, and for time-based restricted share
grants is amortized over the vesting period of the underlying issue,
generally two to four years. Stock compensation expense for stock
appreciation rights is amortized over the vesting period and is remeasured
through the vesting date. Stock compensation expense for performance-based
restricted shares is amortized over the anticipated vesting period, is
remeasured through the vesting date and is subject to adjustment based on
the probable or actual achievement of objectives. Unearned deferred
compensation for non-employees and for stock appreciation rights is
periodically remeasured through the vesting date.
The amount of deferred compensation expense to be recorded in
future periods may decrease if unvested options or stock appreciation rights
or performance-based restricted shares for which we have recorded deferred
compensation are subsequently cancelled or expire, or may increase
47
if the fair market value of our stock increases or if we make additional
grants of non-qualified stock options to members of our scientific advisory
board or other non-employees or if we make additional grants of restricted
shares.
In December 2004 the FASB issued SFAS No. 123 (R), "Share-Based
Payments"(SFAS No. 123 (R)). This Statement replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB No. 25
"Accounting for Stock Issued to Employees." SFAS 123 (R) requires all
stock-based compensation to be recognized as an expense in the financial
statements and that such cost be measured according to the fair value of the
instruments. SFAS 123 (R)) is effective for the first annual period
beginning after June 15, 2005. We plan to adopt the provisions of this
Statement in the first quarter of calendar year 2006 on the modified
prospective basis utilizing the Black Scholes valuation model to determine
the fair value of the stock. The impact of the adoption of SFAS 123(R)
cannot be determined at this time because it will depend on the levels of
share-based payments granted in the future and the price of our stock in the
future. The Company currently provides the pro forma disclosures required by
SFAS No. 148, "Accounting for Stock-based Compensation - Transition and
Disclosure." Had we adopted SFAS 123(R) in prior periods, we believe the
impact of the standard would have approximated the amounts described in Note
2 to our financial statements.
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 obsolete items and provide a reserve upon identification of
potential obsolete items.
INTANGIBLE ASSETS
Intangible assets are comprised of purchased technology with a
finite life. The acquisition cost of purchased technology is capitalized and
amortized over its useful life in accordance with SFAS No. 142, Goodwill and
Other Intangible Assets. We review the assigned useful life on an on-going
basis for consistency with the period over which cash flows are expected to
be generated from the asset and consider the potential for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The process of estimating useful
lives and evaluating potential impairment is subjective and requires
management to exercise judgment in making assumptions related to future cash
flows and discount rates.
DEFERRED INCOME TAXES
We account for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred assets and
liabilities are determined based on the difference between the financial
statement and tax bases 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 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.
48
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 was appropriate.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Revenues. Revenues decreased to $15.0 million for the year ended
December 31, 2005 from $18.8 million for the year ended December 31, 2004, a
decrease of approximately 20%. Revenues from sales of systems decreased to
$12.8 million for the year ended December 31, 2005 from $17.2 million for
the year ended December 31, 2004, a decrease of approximately 26%. Revenues
from the sale of systems decreased primarily because we sold 13 systems in
2005 compared to 22 systems in 2004 as domestic revenues and order rates
were negatively impacted by delays in approval of catheters for use with the
system. Average selling price increased approximately 19% in 2005 as
contrasted with 2004. Revenues from sales of disposable interventional
devices, service and accessories increased to $2.3 million for the year
ended December 31, 2005 from $1.6 million for the year ended December 31,
2004, an increase of approximately 42%. This increase was attributable to
the increased base of installed systems.
Cost of Revenues. Cost of revenues decreased to $7.7 million for
the year ended December 31, 2005 from $10.7 million for the year ended
December 31, 2004, a decrease of approximately 28%. This decrease in cost of
revenues was attributable primarily to the decreased number of systems sold
and associated cost of goods sold for those systems. As a percentage of our
revenues, cost of revenues was 51% in the year ended December 31, 2005
compared to 57% in the year ended December 31, 2004. During the year ended
December 31, 2005, the vast majority of the systems delivered were the
advanced NIOBE II systems whereas the majority of the systems delivered
during the prior year were NIOBE I systems. Although the average cost of the
NIOBE II systems exceeded the average cost of the NIOBE I system, the
increase in the average selling price of the system resulted in the
increased gross margin.
Research and Development Expenses. Research and development
expenses increased to $17.8 million for the year ended December 31, 2005
from $17.2 million for the year ended December 31, 2004, an increase of
approximately 4%. The increase was due principally to an increase in the
number of research and development projects, including continued integration
and development related to disposable interventional devices, further
development of the Niobe platform technology, as well as user interface
improvements.
General and Administrative Expenses. General and administrative
expenses increased to $13.2 million for the year ended December 31, 2005
from $6.9 million for the year ended December 31, 2004, an increase of 91%.
The increase relates to increased regulatory, insurance, audit and other
costs associated with the Company's public company status following the
August 2004 IPO, expanded activity in clinical compliance and regulatory
affairs, as well as limited headcount additions in the general and
administrative departments.
Sales and Marketing Expenses. Sales and marketing expenses
increased to $17.4 million for the year ended December 31, 2005 from $11.4
million for the year ended December 31, 2004, an
49
increase of approximately 52%. The increase related primarily to increased
salary, benefits and travel expenses associated with hiring additional sales
personnel and expanded marketing programs.
Royalty Settlement. Royalty settlement expense related to the
resolution of a patent licensing dispute with the University of Virginia
Patent Foundation during the year ended December 31, 2005.
Interest Income. Interest income increased approximately 45% to
$950,000 for the year ended December 31, 2005 from $656,000 for the year
ended December 31, 2004. Interest income increased due to higher realized
rates on investments during the year ended December 31, 2005.
Interest Expense. Interest expense remained relatively unchanged as
the decrease in average borrowings was offset by amortization of warrant
expense related to the affiliate line of credit.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Revenues. Revenues increased to $18.8 million for the year ended
December 31, 2004 from $5.0 million for the year ended December 31, 2003, an
increase of approximately 275%. Revenues from sales of systems increased to
$17.2 million for the year ended December 31, 2004 from $3.8 million for the
year ended December 31, 2003, an increase of approximately 352%. Revenues
from the sale of systems increased primarily because we sold 22 systems in
2004 compared to eight systems in 2003 and because of an increase in average
selling price. Revenues from sales of disposable interventional devices,
service and accessories increased to $1.6 million for the year ended
December 31, 2004 from $481,000 for the year ended December 31, 2003, an
increase of approximately 232%. This increase was attributable to the
increased base of installed systems.
Cost of Revenues. Cost of revenues increased to $10.7 million for
the year ended December 31, 2004 from $4.1 million for the year ended
December 31, 2003, an increase of approximately 163%. This increase in cost
of revenues was attributable primarily to the increased number of systems
sold and associated cost of goods sold for those systems, offset by an
approximate 17% reduction in average cost per system recognized. As a
percentage of our revenues, cost of revenues, excluding "Other revenue," was
57% in the year ended December 31, 2004 compared to 94% in the year ended
December 31, 2003. The improvement in the cost of revenue as a percentage of
revenues was primarily a result of previously mentioned cost reduction as
well as an increase in average selling price per system.
Research and Development Expenses. Research and development
expenses increased to $17.2 million for the year ended December 31, 2004
from $13.6 million for the year ended December 31, 2003, an increase of
approximately 27%. The increase was due principally to an increase in the
number of research and development projects with our strategic partners,
primarily related to disposable interventional devices, further development
of the Niobe platform technology, and salary and benefits for additional
personnel performing research activities. In addition, during the year ended
December 31, 2004 we recognized an offset to our development expenses under
our agreement with Philips relating to the integration of our system with
Philips' digital x-ray fluoroscopy system.
General and Administrative Expenses. General and administrative
expenses increased to $6.9 million for the year ended December 31, 2004 from
$5.3 million for the year ended December 31, 2003, an increase of
approximately 30%. The increase was due to an increase in our business
activity related to the commercialization of our products, including
personnel and clinical trials as well as legal and other costs.
Sales and Marketing Expenses. Sales and marketing expenses
increased to $11.4 million for the year ended December 31, 2004 from $6.0
million for the year ended December 31, 2003, an increase of approximately
91%. The increase related primarily to increased salary, benefits and travel
expenses associated with hiring additional sales personnel and expanded
marketing programs.
50
Interest Income. Interest income increased approximately 75% to
$656,000 for the year ended December 31, 2004 from $375,000 for the year
ended December 31, 2003. Interest income increased due to greater invested
balances and higher realized rates on short-term investments during the year
ended December 31, 2004.
Interest Expense. Interest expense remained relatively unchanged as
the average borrowings and average rates were relatively unchanged.
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
December 31, 2005 and 2004 to reflect these uncertainties. As of December
31, 2005, we had federal and state net operating loss carryforwards of
approximately $150 million and federal research and development credit
carryforwards of approximately $3.4 million. The net operating loss and
research and development credit carryforwards will expire on various dates
beginning in 2006 through 2025, respectively, if not utilized. We may not be
able to utilize certain of these loss carryforwards and credits prior to
their expiration.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed our operations
almost entirely from the private sale of equity securities, totaling
approximately $127 million net of offering expenses. To a much lesser
extent, we also financed our operations through working capital and
equipment financing loans. We raised funds from these sources because, as a
developing company, we were not able to fund our activities solely from the
cash provided by our operations.
In August 2004, we completed an initial public offering in which we
issued and sold 5,500,000 shares of common stock. In September 2004, the
underwriters exercised their option to purchase an additional 462,352
shares. In connection with the initial public offering and over-allotment
exercise, we received approximately $41.4 million in net proceeds.
In February 2006, we completed a registered direct offering of our
common stock in which we issued and sold 5,000,000 shares of our common
stock at $12.00 per share. In addition, the underwriters exercised their
option to purchase an additional 500,000 shares. In conjunction with these
transactions, we received approximately $61.7 million in net proceeds. At
December 31, 2005, prior to completion of the 2006 offering, we had working
capital of approximately $15.9 million, compared to $50.4 million at
December 31, 2004.
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, as well as
investments. In addition to our cash and cash equivalent balances, we
maintained $5.5 million and $34.6 million of investments in corporate debt
securities, U.S. government agency notes and commercial paper at December
31, 2005 and 2004, respectively.
The following table summarizes our cash flow by operating,
investing and financing activities for each of years ended December 31,
2005, 2004 and 2003 (in thousands):
51
2005 2004 2003
---- ---- ----
Cash Flow used in Operating Activities $(40,986) $ (31,814) $ (24,469)
Cash Flow provided by (used in) Investing Activities 26,664 (29,654) (7,182)
Cash Flow provided by Financing Activities 2,625 57,019 24,174
Net cash used in operating activities. We used approximately $41.0
million, $31.8 million and $24.5 million of cash in operating activities
during the year ended December 31, 2005, 2004 and 2003, respectively,
primarily as a result of operating losses during these periods. Cash
generated from working capital purposes increased to $458,000 during the
year ended December 31, 2005 from $5.9 million used during the year ended
December 31, 2004 primarily as a result of a decrease in accounts
receivable, an increase in accounts payable and deferred revenue offset by
increased inventories and prepaid expenses.
Net cash provided by (used in) investing activities. We generated
approximately $26.7 million of cash from investing activities during the
year ended December 31, 2005, substantially all from the maturity or sale of
investments, compared to a use of $29.7 million during the year ended
December 31, 2004. The 2004 investing activities were substantially all for
the purchase of investments. We used $2.3 million and $1.5 million for the
purchase of property and equipment in 2005 and 2004 respectively. Cash used
in investing activities of $7.2 million during the year ended December 31,
2003 included purchases of property and equipment of approximately $2.1
million.
Net cash provided by financing activities. We realized
approximately $2.6 million from financing activities during the year ended
December 31, 2005 from proceeds from the issuance of long-term debt from our
equipment and revolving credit facilities with Silicon Valley Bank, net of
repayments. We generated $1.6 million from the issuance of stock as a result
of exercises of warrants and options. We received approximately $57.0
million from financing activities during the year ended December 31, 2004,
primarily as a result of the completion of our initial public offering (and
exercise by the underwriters of their over-allotment option) in August and
September 2004 and the sale of our Series E-2 preferred stock and related
common stock warrants in January and February 2004. We also realized $2.0
million in proceeds from the issuance of long-term debt from our equipment
loan with Silicon Valley Bank and repaid approximately $2.6 million of
equipment loans and revolving credit facility during 2004. We received
approximately $24.2 million from financing activities during 2003, primarily
as a result of the sale of our Series D-2 preferred stock and related common
stock warrants and from the sale of our Series E and E-1 preferred stock in
January, June and December 2003.
As of December 31, 2005, we had outstanding balances under various
equipment loan agreements with Silicon Valley Bank, consisting of an
aggregate of $3.0 million. In November 2005, we entered into an amendment to
our working capital revolving line of line of credit to increase our
borrowing capacity from $8.0 to $10.0 million, to remove the tangible net
worth covenant, and to extend the maturity of this line to April 2007. As of
December 31, 2005 we had $1.0 million outstanding under this working capital
line of credit and had borrowing capacity of $6.4 million, subject to
collateralization by qualifying receivables and inventory balances.
These credit facilities with Silicon Valley Bank are secured by
substantially all of our assets. The credit agreements include customary
affirmative, negative and financial covenants. For example, we are
restricted from incurring additional debt, disposing of or pledging our
assets, entering into
52
merger or acquisition agreements, making certain investments, allowing
fundamental changes to our business, ownership, management or business
locations, and from making certain payments in respect of stock or other
ownership interests, such as dividends and stock repurchases. Under our loan
arrangements, we are required to maintain a ratio of "quick" assets (cash,
cash equivalents, accounts receivable and short-term investments) to current
liabilities minus deferred revenue of at least 1.25 to 1. We are also
required under the credit agreements to maintain our primary operating
account and the majority of our cash and investment balances in accounts
with the lender. As of December 31, 2005 we are in compliance with all
covenants of this agreement.
In November 2005 we entered into a six-month commitment with
certain investors providing for the availability of $20 million in unsecured
borrowings. This commitment can be drawn at any time during the initial
six-month commitment period. Any funds drawn will mature upon the earlier of
a strategic financing of not less than $30 million or May 2006. The
commitment period, as well as the maturity date on any funds drawn under the
commitment, is subject to one six-month extension, through November 2006, at
our sole election. The funds drawn would be subordinate to our bank debt but
senior to other indebtedness. The lenders received five-year warrants to
purchase shares of our common stock upon commitment of the funds. Additional
five-year warrants would be issuable upon both drawing of the funds as well
as our exercise of the extension of the commitment period or maturity date.
We can cause the warrants to be exercised if certain conditions are
satisfied before March 31, 2006. We have not drawn funds under this
agreement and we do not intend to extend it beyond its May 2006 expiration.
In August 2003, we issued a $2.0 million cumulative convertible
pay-in-kind 8%, 3-year note to Siemens pursuant to an agreement under which
we purchased certain technology. The outstanding principal, together with
accrued and unpaid interest, of $2.17 million automatically converted into
271,739 shares of common stock upon the closing of our initial public
offering, at a conversion price equal to $8.00 per share, the initial price
to the public of our shares of common stock in the offering.
We expect to have negative cash flow from operations through most
of 2007. Throughout 2006, we expect to continue the development and
commercialization of our products, the continuation of our research and
development programs and the advancement of new products into clinical
development. We expect that our research and development expenditures will
increase above the 2005 levels for at least a part of 2006, and our selling,
general and administrative expenses will continue to increase in order to
support our product commercialization efforts and to implement procedures
required by our status as a public company. Until we can generate
significant cash flow from our operations, we expect to continue to fund our
operations with existing cash resources that were primarily generated from
the proceeds of our public offerings, private sales of our equity securities
and working capital and equipment financing loans. In the future, we may
finance future cash needs through the sale of other equity securities,
strategic collaboration agreements and debt financings. We cannot accurately
predict the timing and amount of our utilization of capital, which will
depend on a number of factors outside of our control.
While we believe our existing cash, cash equivalents and
investments will be sufficient to fund our operating expenses and capital
equipment requirements through at least the next 12 months, we cannot assure
you that we will not require additional financing before that time. We also
cannot assure you that such additional financing will be available on a
timely basis on terms acceptable to us or at all, or that such financing
will not be dilutive to our stockholders. If adequate funds are not
available to us, we could be required to delay development or
commercialization of new products, to license to third parties the rights to
commercialize products or technologies that we would otherwise seek to
commercialize ourselves or to reduce the marketing, customer support or
other resources devoted to our products, any of which could have a material
adverse effect on our business, financial condition and results of
operations.
53
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 arise if we had
engaged in these relationships.
CONTRACTUAL OBLIGATIONS
The following table summarizes all significant contractual payment
obligations by payment due date:
PAYMENTS BY PERIOD
(IN THOUSANDS)
UNDER 1 - 3 3 - 5 OVER
CONTRACTUAL OBLIGATIONS 1 YEAR YEARS YEARS 5 YEARS TOTAL
Long-term debt (1) $ 1,000 $ 1,972 $ - $ - $ 2,972
Operating leases 902 1,590 1,658 4,435 8,585
Capital leases 6 15 13 - 34
Research and alliance agreements 2,130 514 150 - 2,794
--------------------------------------------------------------------
Total $ 4,038 $ 4,091 $ 1,821 $4,435 $14,385
====================================================================
<FN>
(1) We have not included interest payable on our revolving credit agreement
in these amounts because it is calculated at a variable rate.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment". SFAS No. 123(R) supersedes APB Opinion No. 25, which
requires recognition of an expense when goods or services are provided. SFAS
No. 123(R) requires 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. We are required
to adopt the provisions of SFAS No. 123(R) effective January 1, 2006.
Recently, FASB issued three other staff positions applicable at the time we
adopt SFAS No. 123(R). They are FSP FAS 123(R)-2, "Practical Accommodation
to the Application of Grant Date As Defined in FASB Statement No. 123(R)";
FSP FAS 123(R)-3, "Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards"; and FSP FAS 123(R)-4,
"Classification of Options and Similar Instruments Issued As Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a
Contingent Event."
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs,"
an amendment of ARB No. 43. The amendments clarify that abnormal amounts of
idle facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current period charges and require the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during
54
fiscal years beginning after the date SFAS No. 151 was issued. The adoption
of SFAS No. 151 is not expected to have a material impact on our financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to currency fluctuations. We operate mainly in the
U.S. , Europe and Asia and we expect to continue to sell our products
outside of the U.S. We expect to transact this business primarily in U.S.
dollars and in Euros, although we may transact business in other currencies
to a lesser extent. Future fluctuations in the value of these currencies may
affect the price competitiveness of our products. In addition, because we
have a relatively long installation cycle for our systems, we will be
subject to risk of currency fluctuations between the time we execute a
purchase order and the time we deliver the system and collect payments under
the order, which could adversely affect our operating margins. We have not
hedged exposures in foreign currencies or entered into any other derivative
instruments. As a result, we will be exposed to some exchange risks for
foreign currencies. For example, if the currency exchange rate were to
fluctuate by 10%, our revenues could be affected by as much as 2 to 3%.
We also have exposure to interest rate risk related to our
investment portfolio and our borrowings. The primary objective of our
investment activities is to preserve principal while at the same time
maximizing the income we receive from our invested cash without
significantly increasing the risk of loss.
Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are
in short-term debt instruments. We invest our excess cash primarily in U.S.
government securities and marketable debt securities of financial
institutions and corporations with strong credit ratings. These instruments
generally have maturities of two years or less when acquired. We do not
utilize derivative financial instruments, derivative commodity instruments
or other market risk sensitive instruments, positions or transactions.
Accordingly, we believe that while the instruments we hold are subject to
changes in the financial standing of the issuer of such securities, we are
not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices or other
market changes that affect market risk sensitive instruments.
We do not believe that inflation has had a material adverse impact
on our business or operating results during the periods covered by this
report.
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
-------
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm 57
Balance Sheets at December 31, 2005 and 2004 58
Statements of Operations for the years ended December 31, 2005, 2004 and 2003 59
Statements of Stockholders' Equity for the years ended December 31, 2005, 2004
and 2003 60
Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 63
Notes to the Financial Statements 64
Schedule II--Valuation and Qualifying Accounts 87
All other schedules have been omitted because they are not applicable or the
required information is shown in the Financial Statements or the Notes
thereto.
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Stereotaxis, Inc.
We have audited the accompanying balance sheets of Stereotaxis, Inc. (the
Company) as of December 31, 2005 and 2004, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 2005. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Stereotaxis, Inc. at
December 31, 2005 and 2004, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth herein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of
Stereotaxis, Inc.'s internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 13, 2006 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 13, 2006
57
STEREOTAXIS, INC.
BALANCE SHEETS
DECEMBER 31,
2005 2004
--------------------------------
ASSETS
Current assets:
Cash and cash equivalents $5,210,794 $16,907,516
Short-term investments 5,524,793 28,741,318
Accounts receivable, net of allowance for uncollectible 5,897,072 8,439,074
accounts of $29,576 and $146,223 in 2005 and 2004,
respectively
Current portion of long-term receivables 461,520 168,795
Inventories 9,404,792 4,673,994
Prepaid expenses and other current assets 5,128,852 2,390,130
--------------------------------
Total current assets 31,627,823 61,320,827
Property and equipment, net 3,078,313 1,557,847
Intangible assets, net 1,677,778 1,811,111
Long-term receivables 146,520 337,590
Other assets 127,755 120,697
Long-term investments - 5,896,625
--------------------------------
Total assets $36,658,189 $71,044,697
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $1,000,000 $ 910,434
Accounts payable 4,866,156 2,129,473
Accrued liabilities 5,648,693 5,567,157
Deferred contract revenue 4,216,255 2,308,923
--------------------------------
Total current liabilities 15,731,104 10,915,987
Long-term debt, less current maturities 1,972,222 1,000,000
Long-term deferred contract revenue 801,005 732,835
Other liabilities 28,016 1,407
Stockholders' equity:
Preferred stock, par value $0.001; 10,000,000 shares - -
authorized at 2005 and 2004, none outstanding at
2005 and 2004
Common stock, par value of $0.001; 100,000,000 shares 27,836 27,187
authorized at 2005 and 2004, 27,835,611 and 27,187,042
shares issued at 2005 and 2004, respectively
Additional paid-in capital 179,286,612 174,143,587
Deferred compensation (2,569,760) (671,950)
Treasury stock, 36,519 shares at 2005 and 2004 (162,546) (162,546)
Notes receivable from sale of stock (180,619) (173,432)
Accumulated deficit (158,231,069) (114,673,234)
Accumulated other comprehensive loss (44,612) (95,144)
--------------------------------
Total stockholders' equity 18,125,842 58,394,468
--------------------------------
Total liabilities and stockholders' equity $36,658,189 $71,044,697
================================
See accompanying notes.
58
STEREOTAXIS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2005 2004 2003
---------------------------------------------------
Systems revenue $ 12,760,593 $ 17,219,080 $ 3,808,036
Disposables, service and accessories revenue 2,265,797 1,597,780 480,941
Other revenue - - 725,900
---------------------------------------------------
Total revenue 15,026,390 18,816,860 5,014,877
Costs of revenue 7,720,706 10,672,262 4,051,313
---------------------------------------------------
Gross profit 7,305,684 8,144,598 963,564
Operating expenses:
Research and development 17,829,282 17,215,414 13,590,922
Sales and marketing 17,365,631 11,447,857 5,999,310
General and administrative 13,190,316 6,900,016 5,323,682
Royalty settlement 2,923,111 - -
---------------------------------------------------
Total operating expenses 51,308,340 35,563,287 24,913,914
---------------------------------------------------
Operating loss (44,002,656) (27,418,689) (23,950,350)
Interest income 949,918 656,316 375,361
Interest expense (505,097) (495,096) (461,848)
---------------------------------------------------
Net loss $(43,557,835) $(27,257,469) $(24,036,837)
===================================================
Net loss per common share:
Basic and diluted $ (1.60) $ (2.38) $ (18.37)
===================================================
Weighted average shares used in computing net loss per
common share:
Basic and diluted 27,301,822 11,470,310 1,308,805
===================================================
See accompanying notes.
59
STEREOTAXIS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock
------------------------ -----------------------
Additional
Comprehensive Paid-In
Income (Loss) Shares Amount Shares Amount Capital
----------------------------------------------------------------------------------
Balance at December 31, 2002 $ - 51,635,017 $51,635 1,389,923 $1,390 $ 88,448,394
Issuance of Series D-2
convertible preferred stock at
$2.17 per share, net of
issuance costs of $17,953 - 2,764,978 2,765 - - 5,454,716
Issuance of Series E
convertible preferred stock at
$2.93 per share, net of
issuance costs of $605,106 - 3,412,970 3,413 - - 9,391,481
Issuance of Series E-1 convertible
preferred stock at $2.93 per
share, net of issuance costs of
$403,931 - 3,242,321 3,242 - - 9,092,827
Exercise of options - - - 125,227 125 328,933
Repurchase of common stock - - - - - -
Interest receivable from sale of
stock - - - - - -
Deferred compensation - - - - - 653,625
Stock-based compensation - - - - - -
Payments from notes receivable
from sale of stock - - - - - -
Issuance of warrants to
purchase common stock - - - - - 551,611
Net loss (24,036,837) - - - - -
Other comprehensive income
(loss):
Unrealized loss on short term
investments - - - - - -
--------------
Comprehensive Loss $(24,036,837) - - - - -
-------------------------------------------------------------------
Balance at December 31, 2003 61,055,286 $61,055 1,515,150 $1,515 $113,921,587
Notes Accumulated
Receivable Other Total
Deferred Treasury From Sale Accumulated Comprehensive Stockholders'
Compensation Stock Of Stock Deficit Income (Loss) Equity
------------------------------------------------------------------------------------
Balance at December 31, 2002 $(674,344) $ (2,156) $(439,345) $(63,378,928) $ - $ 24,006,646
Issuance of Series D-2
convertible preferred stock at
$2.17 per share, net of
issuance costs of $17,953 - - - - - 5,457,481
Issuance of Series E
convertible preferred stock at
$2.93 per share, net of
issuance costs of $605,106 - - - - - 9,394,894
Issuance of Series E-1 convertible
preferred stock at $2.93 per
share, net of issuance costs of
$403,931 - - - - - 9,096,069
Exercise of options - - - - - 329,058
Repurchase of common stock - (15,594) - - - (15,594)
Interest receivable from sale of
stock - - (21,653) - - (21,653)
Deferred compensation (653,625) - - - - -
Stock-based compensation 492,168 - - - - 492,168
Payments from notes receivable
from sale of stock - - 12,585 - - 12,585
Issuance of warrants to
purchase common stock - - - - - 551,611
Net loss - - - (24,036,837) - (24,036,837)
Other comprehensive income
(loss):
Unrealized loss on short term
investments - - - - - -
Comprehensive Loss - - - - - -
------------------------------------------------------------------------------------
Balance at December 31, 2003 $(835,801) $(17,750) $(448,413) $(87,415,765) - $ 25,266,428
See accompanying notes.
60
STEREOTAXIS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
Convertible
Preferred Stock Common Stock
------------------- ------------------
Additional
Comprehensive Paid-In
Income (Loss) Shares Amount Shares Amount Capital
-----------------------------------------------------------------------------
Issuance of Series E-2
convertible preferred stock
at $10.55 per share, net
issuance costs of $85,523 - 5,380,830 $5,381 - - $ 14,087,572
Issuance of warrants to
purchase common stock - - - - - 1,603,493
Amortization of stock-based
compensation - - - - - -
Payments of notes receivable
from sale of stock - - - - - -
Interests receivable from sale
of stock - - - - - -
Conversion of convertible
preferred stock into common
stock - (66,436,116) (66,436) 19,282,324 19,282 47,154
Conversion of convertible
promissory note - - - 271,739 272 2,173,646
Repurchase of common stock - - - - - -
Issue of common stock - - - (13) - (103)
Issuance of common stock upon
filing of initial public
offering and underwriter
over-allotment, net of issuance
costs of $2,919,794 - - - 5,962,352 5,963 41,434,041
Exercise of stock warrants - - - 20,104 20 (20)
Exercise of stock options - - - 135,386 135 385,567
Payments of interest on notes
receivable - - - - - -
Stock-based compensation - - - - - 490,650
Net Loss (27,257,469) - - - - -
Other comprehensive income
(loss) - - - - - -
Unrealized loss on short term
investments (95,144) - - - - -
--------------
Comprehensive Loss $(27,352,613) - - - - -
-------------------------------------------------------------
Balance at December 31, 2004 - $ - 27,187,042 $27,187 $174,143,587
Notes Accumulated
Receivable Other Total
Deferred Treasury From Sale Accumulated Comprehensive Stockholders'
Compensation Stock Of Stock Deficit Income (Loss) Equity
------------------------------------------------------------------------------------
Issuance of Series E-2
convertible preferred stock
at $10.55 per share, net
issuance costs of $85,523 - - - - - $ 14,092,953
Issuance of warrants to
purchase common stock - - - - - 1,603,493
Amortization of stock-based
compensation 654,501 - - - - 654,501
Payments of notes receivable
from sale of stock - - 239,560 - - 239,560
Interests receivable from sale
of stock - - 10,212 - - 10,212
Conversion of convertible
preferred stock into common
stock - - - - - -
Conversion of convertible
promissory note - - - - - 2,173,918
Repurchase of common stock - (144,899) - - - (144,899)
Issue of common stock - 103 - - - -
Issuance of common stock upon
filing of initial public
offering and underwriter
over-allotment, net of issuance
costs of $2,919,794 - - - - - 41,440,004
Exercise of stock warrants - - - - - -
Exercise of stock options - - - - - 385,702
Payments of interest on notes
receivable - - 25,209 - - 25,209
Stock-based compensation (490,650) - - - - -
Net Loss - - - (27,257,469) - (27,257,469)
Other comprehensive income
(loss) - - - - - -
Unrealized loss on short term
investments - - - - (95,144) (95,144)
Comprehensive Loss - - - - - -
------------------------------------------------------------------------------------
Balance at December 31, 2004 $(671,950) $(162,546) $(173,432) $(114,673,234) $(95,144) $ 58,394,468
61
STEREOTAXIS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock
------------
Comprehensive Additional Deferred
Income (Loss) Shares Amount Paid-In Capital Compensation
-----------------------------------------------------------------------------
Issuance of warrants to
purchase common stock $ 938,850
Amortization of stock-based
compensation 747,412
Payments of notes receivable
from sale of stock
Interests receivable from sale
of stock
Issuance of stock under
stock purchase plan 29,554 30 201,097
Exercise of stock warrants 14,888 15 (15)
Exercise of stock options 282,527 282 1,358,193
Grant of restricted shares, net
of forfeitures 321,600 322 2,644,900 (2,645,222)
Net Loss (43,557,835)
Other comprehensive income
(loss)
Unrealized loss on short term
investments 50,532
---------------
Comprehensive Loss $(43,507,303)
=============== ------------------------------------------------------
Balance at December 31, 2005 27,835,611 $ 27,836 $179,286,612 $(2,569,760)
======================================================
Notes Accumulated
Receivable Other Total
Treasury From Sale Accumulated Comprehensive Stockholders'
Stock Of Stock Deficit Loss Equity
------------------------------------------------------------------------
Issuance of warrants to $ 938,850
purchase common stock
Amortization of stock-based
compensation 747,412
Payments of notes receivable
from sale of stock 3,750 3,750
Interests receivable from sale
of stock (10,937) (10,937)
Issuance of stock under
stock purchase plan 201,127
Exercise of stock warrants -
Exercise of stock options 1,358,475
Grant of restricted shares, net
of forfeitures -
Net Loss (43,557,835) (43,557,835)
Other comprehensive income
(loss) -
Unrealized loss on short term
investments 50,532 50,532
Comprehensive Loss
------------------------------------------------------------------------
Balance at December 31, 2005 $(162,546) $(180,619) $(158,231,069) $ (44,612) $ 18,125,842
========================================================================
See accompanying notes.
62
STEREOTAXIS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2005 2004 2003
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(43,557,835) $(27,257,469) $(24,036,837)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation 769,617 754,710 447,786
Amortization 397,070 133,333 55,556
Non-cash compensation 747,412 452,130 492,168
Noncash interest receivable 150,359
Loss on asset disposal 48,783 42,425 -
Changes in operating assets and liabilities:
Accounts receivable 2,542,002 (7,879,353) (123,575)
Long-term receivables (101,655) 114,939 (621,324)
Inventories (4,730,798) (243,766) (2,069,621)
Prepaid expenses and other current assets (2,064,410) (1,311,481) (405,987)
Other assets (7,058) (19,338) 18,778
Accounts payable 2,736,683 431,976 192,136
Accrued liabilities 81,536 630,924 2,379,901
Deferred revenue 1,975,502 2,227,365 (837,607)
Other 26,609 109,735 39,232
----------------------------------------------
Net cash used in operating activities (40,986,183) (31,813,870) (24,469,394)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of equipment - 1,489,904 -
Purchase of equipment (2,338,866) (1,535,420) (2,057,671)
Proceeds from the maturity/sale of available-for-sale investments 37,154,608 6,936,710 -
Purchase of available-for-sale investments (8,151,421) (36,545,431) (5,124,365)
----------------------------------------------
Net cash provided by (used in) investing activities 26,664,321 (29,654,237) (7,182,036)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 2,000,000 2,000,000 1,829,690
Payments under long-term debt (938,212) (2,622,647) (2,482,240)
Proceeds from issuance of stock and warrants, net of issuance costs 1,559,602 57,522,153 24,829,113
Purchase of treasury stock - (90) (15,594)
Payments received on notes receivable from sale of common stock 3,750 119,960 12,585
----------------------------------------------
Net cash provided by financing activities 2,625,140 57,019,376 24,173,554
----------------------------------------------
Net decrease in cash and cash equivalents (11,696,722) (4,448,731) (7,477,876)
Cash and cash equivalents at beginning of period 16,907,516 21,356,247 28,834,123
----------------------------------------------
Cash and cash equivalents at end of period $ 5,210,794 $ 16,907,516 $ 21,356,247
==============================================
Supplemental disclosures of cash flow information:
Noncash items:
Acquisition of purchased technology upon issuance of
convertible note payable $ - $ - $ 2,000,000
==============================================
Conversion of note payable and accrued interest to
common stock
$ - $ 2,173,918 $ -
==============================================
Acquisition of treasury shares in lieu of payment of
notes receivable $ - $ 144,809 $ -
==============================================
Interest paid $ 216,763 $ 422,085 $ 394,287
==============================================
See accompanying notes.
63
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Stereotaxis, Inc. (the Company) designs, manufactures, and markets
an advanced cardiology instrument control system for the interventional
treatment of coronary artery disease and arrhythmias. The Company also
markets and sells various disposable interventional devices, including
catheters, guidewires and other delivery devices, for use in conjunction
with its system. By 2003, the Company had received U.S. and European
regulatory approval for the core components of its system.
Prior to 2003, the Company's principal activities involved
obtaining capital, business development, performing research and development
activities, and funding prototype development. As such, the Company was
classified as a development-stage company from its inception on June 13,
1990 through December 31, 2002. During 2003, the Company emerged from the
development-stage and began to generate revenue from the commercial launch
of its systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all short-term deposits 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. As of December 31, 2005 $625,104
of cash is restricted pending completion of installation of a delivered
system.
INVESTMENTS
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, the Company's investment securities are classified as
available-for-sale and are carried at market value, which approximates cost.
Realized gains or losses, calculated based on the specific identification
method, were not material for the years ended December 31, 2005, 2004 and
2003. Interest and dividends on securities classified as available-for-sale
are included in interest income.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Accounts receivable primarily include amounts due from hospitals
and distributors for acquisition of magnetic systems and associated
disposable device sales. Credit is granted on a limited basis, with balances
due generally within 30 days of billing. The provision for bad debts is
based upon management's assessment of historical and expected net
collections considering business and economic conditions and other
collection indicators.
FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and long-term
debt. The carrying value of such amounts reported at the applicable balance
sheet dates approximates fair value.
INVENTORY
The Company values its inventory at the lower of cost, as
determined using the first-in, first-out (FIFO) method, or market. The
Company periodically reviews its physical inventory for obsolete items and
provides a reserve upon identification of potential obsolete items.
64
PROPERTY AND EQUIPMENT
Property and equipment consist primarily of laboratory, office, and
computer equipment and leasehold improvements and are stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives or life of the base lease term, ranging from three to ten
years.
LONG-LIVED ASSETS
If facts and circumstances suggest that a long-lived asset may be
impaired, the carrying value is reviewed. If this review indicates that the
carrying value of the asset will not be recovered, as determined based on
projected undiscounted cash flows related to the asset over its remaining
life, the carrying value of the asset is reduced to its estimated fair
value.
INTANGIBLE ASSETS
Intangible assets consist of purchased technology arising out of
collaboration with a strategic investor valued at the cost of acquisition on
the acquisition date and amortized over its estimated useful life of 15
years. Accumulated amortization at December 31, 2005 and 2004 is $322,222
and $188,889, respectively. Amortization expense in 2005 and 2004 is
$133,333 and $133,333, respectively, as determined under the straight-line
method. The estimated future amortization of intangible assets is $133,333
annually through July 2018.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of income and loss during the reporting period. Actual results could differ
from those estimates.
REVENUE AND COSTS OF REVENUE
The Company recognizes systems revenue from system sales made
directly to end users upon installation, provided there are no uncertainties
regarding acceptance, persuasive evidence of an arrangement exists, the
sales price is fixed or determinable, and collection of the related
receivable is reasonably ensured. When installation is required for revenue
recognition, the determination of acceptance is made by the Company's
employees based on criteria set forth in the terms of the sale. Revenue from
system sales made to distributors is recognized upon shipment since these
arrangements do not include an installation element or right of return
privileges. If uncertainties exist regarding collectability, the Company
recognizes revenue when those uncertainties are resolved. Amounts collected
prior to satisfying the above revenue recognition criteria are reflected as
deferred revenue. Co-placement fees from strategic partners for the
Company's collaboration in certain sales and marketing efforts will be
recognized as revenue when earned under the terms of the respective
agreements. Revenue from services, whether sold individually or as a
separable unit of accounting in a multi-element arrangement, is deferred and
amortized over the service period, which is typically one year. Revenue from
services is derived primarily from the sale of annual product maintenance
plans. The Company recognizes revenue from disposable device sales or
accessories upon shipment, and an appropriate reserve for returns is
established.
Costs of revenue include direct product costs, installation labor,
estimated warranty costs, and training and product maintenance costs. The
Company also includes in cost of revenue any expected loss related to
executed contracts in the period in which the loss becomes known. In the
years ended December 31, 2005, 2004 and 2003 the Company incurred $135,560,
$103,494 and $278,320, respectively, for costs in excess of contractual
revenues, primarily on certain system sales.
65
RESEARCH AND DEVELOPMENT COSTS
Internal research and development costs, including clinical and
regulatory costs incurred prior to receiving Food and Drug Administration
approval, are expensed in the period incurred. Amounts receivable from
strategic partners under research reimbursement agreements are recorded as a
contra-research and development expense in the period reimbursable costs are
incurred. Advance receipts or other unearned reimbursements are included in
accrued liabilities on the accompanying balance sheet until earned.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company has elected to follow Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for stock-based employee compensation. Under
APB No. 25, if the exercise price of the Company's employee and director
stock options equals or exceeds the estimated fair value of the underlying
stock on the date of grant and the number of options is not variable, no
compensation expense is recognized. Options are variable if the options are
forfeitable when performance milestones described in the option agreements
may not occur. When the exercise price of the employee or director stock
options is less than the estimated fair value of the underlying stock
(intrinsic value) at the date of grant or for variable options through the
vesting or forfeiture date, the Company records deferred compensation for
the intrinsic value and amortizes the amount to expense over the service
period on a straight-line basis. Deferred compensation for variable options
granted to employees and directors is periodically remeasured through the
vesting or forfeiture date.
Stock options issued to nonemployees, including individuals for
scientific advisory services, are recorded at their fair value as determined
in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF) No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction With Selling, Goods or Services,
and recognized over the service period. Deferred compensation for options
granted to nonemployees is periodically remeasured through the vesting or
forfeiture date.
Restricted shares granted to employees are valued at the fair
market value at the date of grant. The Company records deferred compensation
for the value and amortizes the amount to expense over the service period on
a straight-line basis. If the shares granted are subject to performance
criteria, the deferred compensation is periodically remeasured through the
vesting or forfeiture date. During the year ended December 31, 2005 the
Company recorded deferred compensation, net of cancellations, in the amount
of $2,646,482 related to grants of restricted shares. As of December 31,
2005, 321,600 restricted shares were outstanding at a weighted average grant
price of $7.76.
Shares granted under the 2004 Employee Stock Purchase Plan are
accounted for in accordance with APB No. 25 and no compensation expense has
been recorded.
The following table illustrates the effect on net loss if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2005 2004 2003
----------------------------------------------------
Net loss, as reported $(43,557,835) $ (27,257,469) $ (24,036,837)
Add total stock-based compensation cost
included in net loss 747,412 452,130 492,168
Deduct total stock-based compensation
expense under fair value method (3,374,460) (2,873,162) (1,793,447)
----------------------------------------------------
Pro forma net loss (46,184,883) $ (29,678,501) $ (25,338,116)
====================================================
Net loss per share, basic and diluted, as
reported $(1.60) $ (2.38) $ (18.37)
Net loss per share, basic and diluted, pro
forma $(1.69) $ (2.59) $ (19.36)
66
For purposes of the above proforma disclosure, the fair value of
each option or stock appreciation right is estimated on the date of grant
using the Black-Scholes option pricing model using the following principal
assumptions for the years ended 2005, 2004 and 2003: dividend yield of 0%,
expected volatility ranging from 50% to 120%, risk free interest rates
ranging from 1.09% to 5.28% an initial expected life ranging from five to
ten years. Future pro forma results of operations may be materially
different from the amounts reported.
Under SFAS No. 123, shares purchased by employees through the 2004
Employee Stock Purchase Plan will be considered compensatory. As such, in
2006 the expected compensation cost will be deferred and amortized over the
requisite service period.
Option valuation models require the input of highly subjective
assumptions. Because the Company's employee stock options and stock
appreciation rights have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models may not accurately reflect the fair value of employee stock
options and stock appreciation rights.
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment. SFAS No. 123(R) supersedes APB Opinion No. 25
and requires recognition of an expense when goods or services are provided.
SFAS No. 123(R) requires 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.
As a result of the release of a recent Securities and Exchange Commission
rule, we will be required to adopt the provisions of SFAS No. 123(R)
effective January 1, 2006. We plan to adopt the provisions of this statement
on the modified prospective basis utilizing the Black Scholes valuation
model to determine the fair value of the stock. The adoption of this
standard will not materially affect the stock-based compensation associated
with the Company's restricted stock which is already recorded at fair value
on the date of grant and recognized over the vesting period but will result
in the recognition of stock-based compensation in future periods for
remaining unvested stock options, stock appreciation rights and the employee
stock purchase plan as of the effective date. The impact of the adoption of
SFAS 123(R) cannot be determined at this time because it will depend on the
levels of share-based payments granted in the future and the price of our
stock in the future. Had we adopted SFAS 123(R) in prior periods, we believe
the impact of the standard would have approximated the amounts described in
Note 2 to our financial statements.
NET LOSS PER SHARE
Basic loss per common share is computed by dividing the net loss
for the period by the weighted average number of common shares outstanding
during the period. Diluted loss per share is computed by dividing the loss
for the period by the weighted average number of common and common
equivalent shares outstanding during the period.
The Company has deducted shares subject to repurchase from the
calculation of shares used in computing net loss per share, basic and
diluted. The Company has excluded all outstanding convertible preferred
stock, options, stock appreciation rights, warrants, shares subject to
repurchase and unearned restricted shares from the calculation of diluted
loss per common share because all such securities are anti-dilutive for all
periods presented. All of the Company's shares of preferred stock
outstanding immediately prior to the Company's initial public offering in
August 2004 were converted into 19,282,325 shares of common stock. As of
December 31, 2005, the Company had 2,418,988 shares of common stock issuable
upon the exercise of outstanding options and stock appreciation rights at a
weighted average exercise price of $6.07 per share and 1,369,436 shares of
common stock issuable upon the exercise of outstanding warrants at a
weighted average exercise price of $8.12 per share. The Company had 307,077
unearned restricted shares issued as of December 31, 2005.
67
INCOME TAXES
In accordance with SFAS No. 109, Accounting for Income Taxes, a
deferred income tax asset or liability is determined based on the difference
between the financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates that will be in effect when these
differences reverse. The Company provides a valuation allowance against net
deferred income tax assets unless, based upon available evidence, it is more
likely than not the deferred income tax assets will be realized.
PATENT COSTS
Costs related to filing and pursuing patent applications are expensed
as incurred, as recoverability of such expenditures is uncertain.
CONCENTRATIONS OF RISK
The majority of the company's cash, cash equivalents and
investments are deposited with one major financial institution in the United
States of America. Deposits in this institution exceed the amount of
insurance provided on such deposits.
One customer, Siemens, as our distributor, accounted for $4,392,349
and $3,996,568, or 29% and 21%, of total net sales for the years ended
December 31, 2005 and 2004, respectively. We did not have one customer
accounting for 10% or more of our total net sales for the year ended
December 31, 2003.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) generally represents all changes in
stockholders' equity except those resulting from investments by
stockholders, and includes the Company's unrealized losses on marketable
securities of $44,612 and $95,144 at December 31, 2005 and 2004,
respectively.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform to current year presentation.
68
3. INVESTMENTS
The following table summarizes available-for-sale securities
included in short and long-term investments as of the respective dates:
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST UNREALIZED VALUE COST UNREALIZED VALUE
--------------------------------------------- ------------------------------------------------
GAINS LOSSES GAINS LOSSES
----- ------ ----- ------
Short-term investments:
Corporate debt $1,813,664 $ - $(22,294) $1,791,370 $ 6,895,637 $ - $(276,708) $6,618,929
U.S.
government
agency 3,755,741 - (22,318) 3,733,423 12,044,291 102,617 - 12,146,908
Commercial
paper - - - - 9,838,684 136,797 - 9,975,481
--------------------------------------------- ------------------------------------------------
Total
short-term
investments 5,569,405 - (44,612) 5,524,793 28,778,612 239,414 (276,708) 28,741,318
Long-term investments:
Corporate debt - - - - 1,919,737 - (42,876) 1,876,861
U.S.
government
agency - - - - 4,034,738 1,088 (16,062) 4,019,764
--------------------------------------------- ------------------------------------------------
Total
long-term
investments - - - - 5,954,475 1,088 (58,938) 5,896,625
--------------------------------------------- ------------------------------------------------
Total $5,569,405 $ - $(44,612) $5,524,793 $34,733,087 $240,502 $(335,646) $34,637,943
============================================= ================================================
The Company views its available-for-sale portfolio as available for
use in its current operations and all have a maturity date of less than one
year.
4. INVENTORY
Inventory consists of:
DECEMBER 31,
2005 2004
-----------------------------
Raw Materials $2,803,516 $ 1,401,591
Work in Process 111,632 498,174
Finished Goods 6,533,082 2,886,984
Reserve for obsolescence (43,438) (112,755)
-----------------------------
$9,404,792 $ 4,673,994
=============================
5. PREPAID EXPENSES AND OTHER ASSETS
Prepaid and other assets consists of:
DECEMBER 31,
2005 2004
-----------------------------
Prepaid Expenses 3,129,967 2,216,600
Other Assets 2,126,640 294,227
-----------------------------
5,256,607 2,510,827
Less: Long-term other assets (127,755) (120,697)
-----------------------------
Total prepaid expenses and other assets $5,128,852 $2,390,130
=============================
69
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
2005 2004
-----------------------------
Equipment $3,876,947 $ 2,972,314
Equipment held for lease 303,412 -
Leasehold improvements 1,162,582 380,062
-----------------------------
5,342,941 3,352,376
Less accumulated depreciation 2,264,628 1,794,529
-----------------------------
$3,078,313 $ 1,557,847
=============================
Equipment held for lease at December 31, 2005 consisted of medical
devices provided to customers under operating lease arrangements, whereby
the Company was the lessor. Amounts prepaid under the five-year operating
leases are included in deferred revenue until earned over the term of the
lease.
7. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company has entered into an
agreement with Biosense Webster, Inc., a subsidiary of Johnson and Johnson
and an investor, under which the Company jointly develops integrated systems
and certain disposable interventional devices. In the event that the Company
elects to terminate this agreement in certain specified change of control
situations, the strategic investor would be entitled to a termination
payment of 5% of the total equity value of the Company in the change of
control transaction up to a maximum of $10 million.
In November 2005, the Company entered into a six-month commitment with
certain affiliated investors providing for the availability of $20 million
in unsecured borrowings. The lenders received five-year warrants to purchase
shares of the Company's common stock upon commitment of the funds. The
Company recorded the fair value of $938,850 to paid in capital and will
amortize the expense over the 6-month term of the commitment. During 2005,
the Company expensed $264,538 related to these warrants.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
2005 2004
-------------------------------
Accrued salaries, bonus, and benefits $2,519,080 $2,006,700
Accrued research and development 1,189,107 1,303,142
Accrued legal and other professional fees 1,025,961 623,411
Other 914,545 1,633,904
-------------------------------
$5,648,693 $5,567,157
===============================
70
9. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
2005 2004
----------------------------------
Revolving credit agreement, due April 2007 $ 1,000,000 $ -
Term note, due September 2005 - 243,768
Term note, due June 2007 1,000,000 1,666,666
Term note, due November 2008 972,222 -
--------------------------------
2,972,222 1,910,434
Less current maturities 1,000,000 910,434
--------------------------------
$ 1,972,222 $ 1,000,000
================================
The Revolving Credit Agreement with the Company's primary lender was
amended in April 2004 to increase the maximum borrowing capacity to
$8,000,000 and in November 2005 to increase the maximum borrowing capacity
to $10,000,000. Borrowings under the Revolving Credit Agreement are subject
to monthly interest at the lender's prime rate plus 1.25%, and are due in
full in April 2007. The Company is required to maintain a ratio of "quick"
assets (cash, cash equivalents, accounts receivable and short term
investments) to current liabilities (less deferred revenue) of at least 1.25
to 1. In November 2005, the Agreement was amended to eliminate a tangible
net worth covenant. Remaining available borrowing capacity at December 31,
2005 is $6,370,972. As of December 31, 2005, the Company is in compliance
with all covenants.
In October 2002, the Company entered into a term note due in September
2005 with its primary lender for $1,000,000 (October 2002 term note). In
conjunction with the October 2002 term note, the Company issued its primary
lender warrants to purchase 5,000 shares of the Company's common stock at a
price per share of $7.81. The total proceeds under the October 2002 term
note of $1,000,000 were allocated between the term note and the warrants
based on an estimate of each security's fair value at the date of issuance.
Under the October 2002 term note, the Company was required to make equal
payments of principal and interest, at 10%, through September 2005 plus a
final payment of 3% of the original note. This note was paid in full in
September 2005.
The warrants expire after five years and can be exercised at any time.
The fair value assigned to the warrants of $32,580 was reflected in
additional paid-in capital on the balance sheet and amortized to interest
expense over the life of the October 2002 term note. Fair value was
determined utilizing the Black-Scholes valuation method, assuming a
volatility of 120%, a risk-free interest rate of 3% and an expected life of
five years.
In April 2004, the Company entered into a term note due in June 2007
with its primary lender for $2,000,000, which was drawn down in June 2004
(April 2004 term note). The Company is required to make equal payments of
principal and interest, at 7%, through June 2007.
In November 2005, the Company entered into a term note due in November
2008 with its primary lender for $1,000,000 which was drawn down in November
2005 (November 2005 term note). The Company is required to make equal
payments of principal plus interest at prime plus 1.5% through November
2008.
The Revolving Credit Agreement, October 2002 term note, April 2004 term
note and November 2005 term note (collectively, the Credit Agreements) are
secured by substantially all of the Company's assets. The Company is also
required under the Credit Agreements to maintain its primary operating
account and the majority of its cash and investment balances in accounts
with the primary lender.
In August 2003, the Company issued a $2,000,000 cumulative convertible
pay-in-kind 8%, three-year note to a strategic partner pursuant to an
agreement between the parties to transfer certain purchased
71
technology to the Company, which is treated as a noncash activity in the
accompanying statement of cash flows. The balance of the note, including
accrued and unpaid interest, was automatically converted into shares of
common stock immediately prior to the closing of the initial public offering
of the Company's common stock at a conversion price equal to the gross per
share proceeds to such offering, prior to deduction of underwriting
commissions and discounts. Upon the closing of the Company's initial public
offering of its stock in August 2004, this note was converted into 271,739
shares of common stock.
In November 2005, the Company entered into a six-month commitment with
certain affiliated investors providing for the availability of $20 million
in unsecured borrowings. This commitment can be drawn at any time during the
initial six-month period commitment period. Any funds drawn will mature upon
the earlier of a strategic financing of not less than $30 million or May
2006. The commitment period, as well as the maturity date on any funds drawn
under the commitment, is subject to one six-month extension, through
November 2006, at the Company's sole election. The funds drawn would be
subordinate to our bank debt but senior to other indebtedness. The lenders
received five-year warrants to purchase shares of the Company's common stock
upon commitment of the funds. Additional five-year warrants would be
issuable upon both drawing of the funds as well as the exercise of the
extension of the commitment period or maturity date. The Company can cause
the warrants to be exercised if certain conditions are satisfied before
March 31, 2006.
Contractual principal maturities of long-term debt at December 31, 2005
are as follows:
2006 $1,000,000
2007 1,666,667
2008 305,555
-------------------
$2,972,222
===================
10. LEASE OBLIGATIONS
The Company leases its facilities under operating leases. For the years
ended December 31, 2005, 2004, and 2003 rent expense was $942,937, $857,533,
$660,901 respectively.
In January 2006, the Company moved its primary operations into new
quarters. The new premises are subject to a 10 year lease, expiring in 2015.
The future minimum lease payments under noncancelable leases as of
December 31, 2005 are as follows:
OPERATING
YEAR LEASE
- ------------------------------------------------------------
2006 $901,629
2007 777,995
2008 812,088
2009 812,088
2010 846,180
Beyond 2010 4,435,454
-----------------
Total minimum lease payments $8,585,434
=================
72
11. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In August 2004, the Company completed an initial public offering in
which it sold 5,500,000 shares of its common stock at $8.00 per share for
proceeds of approximately $38.0 million, net of underwriting discounts and
other offering costs. Upon the closing of the offering, all of the Company's
outstanding shares of convertible preferred stock converted into 19,282,325
shares of common stock including 827,953 shares issued as a result of
anti-dilution provisions with respect to certain series of our preferred
stock. In September 2004, the underwriters exercised an over-allotment
option to purchase an additional 462,352 shares, resulting in net cash
proceeds of approximately $3.4 million.
COMMON STOCK
In July 2004 the Company completed a 1-for-3.6 reverse stock split
affecting all of its outstanding shares of common stock. As a result of this
split, the conversion ratio of our convertible preferred stock into common
stock was adjusted accordingly. Upon the closing of the initial public
offering of the Company's stock all of the shares of preferred stock
automatically converted into shares of 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 the conditions
of the our Revolving Credit Agreement. No dividends have been declared or
paid as of December 31, 2005.
The Company has reserved shares of common stock for the exercise of
warrants, the issuance of options granted under the Company's stock option
plan and its stock purchase plan as follows:
DECEMBER 31,
2005 2004
-------------------------------
Warrants 1,369,436 1,135,526
Stock option plan 2,668,971 2,439,765
Employee Stock Purchase Plan 248,236 277,777
-------------------------------
4,286,643 3,853,068
===============================
The Company has outstanding shares of common stock that are subject to
the Company's right to repurchase at the original issuance price upon the
occurrence of certain events as defined in the agreements related to the
sale of such stock. As of December 31, 2005 and 2004, shares subject to
repurchase were 0 and 8,681, respectively.
CONVERTIBLE PREFERRED STOCK
Upon the closing of the Company's initial public offering in August
2004, all of the outstanding shares of convertible preferred stock converted
into 19,282,325 shares of common stock
NOTES RECEIVABLE
At December 31, 2005 and 2004, we have outstanding promissory notes
from an officer, a member of the Board of Directors and a consultant,
including accrued and unpaid interest totaling $180,619 and $173,432,
respectively, related to the sale of common stock to such individuals. The
notes are full-recourse and are also secured by the underlying stock. These
notes bear interest at a range from 7.0% to 7.5% per annum and are due in
2006. These notes receivable are reflected on the balance sheets as a
component of stockholders' equity.
73
STOCK OPTION PLANS
In 2002, the Board of Directors adopted a stock incentive plan (the
2002 Stock Incentive Plan) and a nonemployee directors' stock plan (2002
Director Plan). In 1994, the Board of Directors adopted the 1994 Stock
Option Plan. At December 31, 2005 and 2004, the Board of Directors has
reserved a total of 2,668,971 and 2,439,765 shares respectively, of the
Company's common stock to provide for current and future grants under the
2002 Stock Incentive Plan and the 2002 Director Plan and for all current
grants under the 1994 Stock Option Plan. In 2002, the Board of Directors
adopted a provision providing for an annual increase in the number of shares
reserved for stock options of the lesser of 3.25% of outstanding common
shares or 833,333 shares, on January 1 of each year through January 1, 2007.
The 2002 Stock Incentive Plan allows for the grant of incentive stock
options, non-qualified stock options, stock appreciation rights and
restricted shares to employees, Board members, and consultants. Options
granted under the 2002 Stock Incentive Plan expire no later than ten years
from the date of grant. The exercise price of each incentive stock option
shall not be less than 100% of the fair value of the stock subject to the
option on the date the option is granted. The exercise price of each
non-qualified option shall not be less than 85% of the fair value of the
stock subject to the option on the date the option is granted. The vesting
provisions of individual options may vary, but incentive stock options
generally vest 25% on the first anniversary of each grant and 1/48 per month
over the next three years. Non-qualified stock options generally vest
ratably over a period of two to four years. Stock appreciation rights
granted under the 2002 Stock Incentive Plan generally vest 25% on the first
anniversary of such grant and 1/48 per month over the next three years and
expire no later than five years from the date of grant.
Restricted share grants under the 2002 Stock Incentive Plan are either
time-based or performance-based. Time-based restricted shares generally vest
25% on each anniversary of such grant. Performance-based restricted shares
vest upon the achievement of performance objectives which are determined by
the Company's Board of Directors.
The 2002 Director Plan allows for the grant of non-qualified stock
options to the Company's nonemployee directors. Options granted under the
2002 Director Plan expire no later than ten years from the date of grant.
The exercise price of options under the 2002 Director Plan shall not be less
than 100% of the fair value of the stock subject to the option on the date
the option is granted. Initial grants of options to new directors generally
vest over a two year period. Annual grants to directors generally vest upon
the earlier of one year or the next shareholder meeting.
The 1994 Stock Option Plan allows for the grant of incentive stock
options and non-qualified stock options to employees, Board members, and
consultants to the Company. Options granted under the 1994 Stock Option Plan
expire no later than ten years from the date of grant and generally vest
over a period of two to four years. Options granted may be exercised prior
to vesting, in which case the related shares would be subject to repurchase
by the Company at original purchase price until vested. The Company no
longer grants options under the 1994 Stock Option Plan.
As of December 31, 2005, 2004, and 2003, 1,360,621, 1,362,239 and
683,906, options and stock appreciation rights were vested and outstanding
under all stock plans, respectively. As of December 31, 2005, no restricted
shares were vested.
74
A summary of the options outstanding is as follows:
NUMBER OF RANGE OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE PRICE PER SHARE
------------------------------------------------------
Outstanding, December 31, 2002 1,290,522 $0.14-$5.94 $3.35
Granted 635,972 $5.94 $5.94
Repurchased 14,323 $1.08-$1.37 $1.09
Exercised (125,227) $0.25-$5.94 $2.57
Forfeited (139,370) $0.54-$5.94 $4.33
-------------------
Outstanding, December 31, 2003 1,676,220 $0.25-$5.94 $4.29
Granted 935,553 $4.75-$11.54 $7.49
Repurchased 115 $0.78 $0.78
Exercised (135,387) $0.25-$5.94 $2.84
Forfeited (223,331) $0.54-$7.02 $6.33
-------------------
Outstanding, December 31, 2004 2,253,170 $0.25-$11.54 $5.50
Granted 649,550 $7.54-$10.09 $8.10
Exercised (282,527) $0.25-$7.02 $4.81
Forfeited (201,205) $1.37-$11.54 $8.02
-------------------
Outstanding, December 31, 2005 2,418,988 $0.25-$11.54 $6.07
===================
As of December 31, 2005 and 2004, the weighted average remaining
contractual life of the options and stock appreciation rights outstanding
was 7.0 years and 8.1 years, respectively.
A summary of the options outstanding by range of exercise price is as
follows:
YEAR ENDED DECEMBER 31, 2005
WEIGHTED WEIGHTED NUMBER WEIGHTED
AVERAGE AVERAGE OF OPTIONS AVERAGE
RANGE OF EXERCISE OPTIONS REMAINING EXERCISE CURRENTLY EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------------------------------------------------------------------
$0.25 - $1.62 316,867 5.4 years $1.40 316,867 $1.40
$4.75 - $7.97 1,835,351 7.1 years $6.40 986,504 $5.64
$8.00 - $11.54 266,770 7.6 years $9.37 57,250 $9.80
----------------------------------------------------------------------------
2,418,988 7.0 years $6.07 1,360,621 $4.83
2004 EMPLOYEE STOCK PURCHASE PLAN
Upon the effectiveness of the initial public offering in August 2004,
the Company adopted its 2004 Employee Stock Purchase Plan and reserved
277,777 shares of common stock for issuance pursuant to the plan. The
Company offered employees the opportunity to participate in the plan
beginning January 1, 2005 with an initial purchase date of June 30, 2005.
Eligible employees have the opportunity to participate in a new purchase
period every six months. As of December 31, 2005, 29,541 shares had been
purchased under this plan.
DEFERRED COMPENSATION
For the years ended December 31, 2005, 2004, and 2003, the Company
recorded stock-based compensation expense related primarily to grants of
restricted shares, stock appreciation rights and of non-qualified options to
consultants in the amount of $747,412, $452,130 and $492,168, respectively.
As further described in Note 2, the Company records stock-based compensation
expense to non-employees under EITF No. 96-18 based on the fair value of the
equity instrument issued as determined using the Black-Scholes valuation
method. As of December 31, 2005, deferred compensation of $2,569,760 is
expected to be expensed over the term of the underlying options in future
years as follows:
2006 $1,006,041
2007 910,348
2008 564,065
2009 89,306
------------------
Total $2,569,760
==================
75
Deferred compensation is recorded as a separate component of
stockholders' equity. As of December 31, 2005 and 2004, $1,949,464 and
$610,093, respectively, of deferred compensation is subject to periodic
remeasurement.
WARRANTS
The Company has issued warrants to purchase 418,819 shares of common
stock at $7.81 per share exercisable through December 2006, warrants to
purchase 446,063 shares of common stock at $7.81 exercisable through
December 2007 warrants to purchase 298,936 shares of common stock at $10.55
per share exercisable through February 2009. All such warrants were issued
in connection with a corresponding issuance of convertible preferred stock.
During 2005, the Company issued warrants to purchase 306,418 shares of
common stock at $6.53 in conjunction a commitment for unsecured borrowing
capacity from two affiliated investors. Such warrants are exercisable
through November 2010. The fair value of the warrants was credited to
additional paid-in capital and will be recognized as commitment fees over
the term of the agreement.
During 2005 and 2004, warrants for 72,507 and 57,604 shares,
respectively, were exercised under a cashless exercise provision of the
warrant agreements for a net issuance of 14,888 and 20,104 shares,
respectively, of common stock.
12. INCOME TAXES
The provision for income taxes consists of:
YEAR ENDED DECEMBER 31,
2005 2004 2003
-----------------------------------------------------
Deferred:
Federal $14,654,439 $9,502,076 $8,683,446
State and local 2,361,140 950,374 879,474
-----------------------------------------------------
$17,015,579 10,452,450 9,562,920
Valuation allowance $(17,015,579) (10,452,450) (9,562,920)
-----------------------------------------------------
$ - $ - $ -
=====================================================
The provision for income taxes varies from the amount determined by
applying the U.S. federal statutory rate to income before income taxes as a
result of the following:
YEAR ENDED DECEMBER 31,
2005 2004 2003
-----------------------------------------------
U.S. statutory income tax rate 34.0% 34.0% 34.0%
State and local taxes, net of federal tax
benefit 3.6% 3.6% 3.6%
Permanent differences between book and tax
and other (0.2%) (1.5%) 0.3%
Research credits 1.7% 2.2% 2.3%
Valuation allowance (39.1%) (38.3%) (40.2%)
-----------------------------------------------
Effective income tax rate 0.0% 0.0% 0.0%
===============================================
76
In assessing the realizability of deferred tax assets, the Company
considers 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. The Company considers 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, the Company determined that a 100%
valuation allowance of deferred tax assets was appropriate. Accordingly, a
100% valuation allowance has been established. The valuation allowance for
deferred tax assets includes $125,000 for which subsequently recognized tax
benefits will be applied directly to contributed capital.
The components of the deferred tax asset are as follows:
DECEMBER 31,
2005 2004
------------------------------------
Current accruals $ 710,833 $ 664,869
Depreciation and amortization 1,169,265 815,785
Deferred compensation 887,519 685,653
Net operating loss carryovers 56,362,965 40,655,621
Other 125,492 62,397
Research and development credit carryovers 3,434,860 2,697,032
------------------------------------
62,690,934 45,581,357
Valuation allowance (62,690,394) (45,581,357)
------------------------------------
$ - $ -
====================================
As of December 31, 2005, the Company has federal net operating loss
carryforwards of $149,902,000. The net operating loss carryforwards will
expire at various dates beginning in 2006, approximately $2,083,000 will
expire between 2006 and 2009 and approximately $147,819,000 will expire
between 2010 and 2025, if not utilized. As of December 31, 2005, the Company
had federal research and development credit carryforwards of $3,435,000,
which may be subject to limitations and will expire at various dates
beginning in 2006 through 2025, if not utilized.
13. NET LOSS PER SHARE
The following is a reconciliation of the numerator (net loss) and the
denominator (number of shares) used in the basic and diluted earnings per
share calculations:
YEAR ENDED
DECEMBER 31,
2005 2004 2003
--------------------------------------------------------
Basic and diluted:
Net loss $(43,557,835) $ (27,257,469) $ (24,036,837)
Weighted average common
shares outstanding 27,312,041 11,502,781 1,424,216
Less weighted average shares
subject to repurchase 10,219 32,471 115,411
--------------------------------------------------------
Weighted average shares used in
basic and diluted net loss per share 27,301,822 11,470,310 1,308,805
========================================================
Net loss per share $(1.60) $ (2.38) $ (18.37)
========================================================
77
The following table sets forth the number of common shares that were
excluded from the computation of earnings per share because their inclusion
would have been anti-dilutive as follows:
DECEMBER 31,
2005 2004 2003
-----------------------------------------------
Preferred stock (as if converted) - - 16,959,801
Options to purchase common stock 2,418,988 2,253,170 1,676,220
Restricted shares 308,105 - -
Common stock subject to repurchase - 8,681 55,497
Warrants 1,369,436 1,135,526 894,204
-----------------------------------------------
4,096,529 3,397,377 19,585,722
===============================================
14. EMPLOYEE BENEFIT PLAN
Beginning in 2002, the Company offered employees the opportunity to
participate in a 401(k) plan. The Company matches employee contributions
dollar for dollar up to 3% of the employee's salary during the employee's
period of participation. For the years ended December 31, 2005, 2004, and
2003, the Company expensed $450,370, $361,008, and $264,965, respectively,
related to the plan.
Beginning in 2005, the Company offered employees the opportunity to
participate in an Employee Stock Purchase Plan. Under the terms of the plan,
employees can purchase up to $12,500 of the Company's stock during each of
two six-month purchase periods per year. Such shares are purchased at 15%
discount to the lower of the market price at the beginning or the end of the
purchase period. Shares granted under the 2004 Employee Stock Purchase Plan
are accounted for in accordance with APB No. 25 and no compensation expense
has been recorded. This plan will be compensatory under SFAS 123(R).
15. 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.
78
16. QUARTERLY DATA (UNAUDITED)
The following tabulations reflect the unaudited quarterly results of
operations for the years ended December 31, 2005 and 2004:
BASIC AND
NET GROSS NET DILUTED LOSS
SALES PROFIT LOSS PER SHARE
-------------------------------------------------------------
2005
First quarter $5,086,401 $2,649,041 $(7,338,363) $(0.27)
Second quarter 6,146,226 2,948,777 (11,333,477) (0.42)
Third quarter 1,688,339 896,903 (11,906,295) (0.44)
Fourth quarter 2,105,424 810,963 (12,979,700) (0.47)
2004
First quarter $3,073,891 $591,477 $(7,849,997) $(5.34)
Second quarter 3,908,934 1,413,917 (8,366,093) (5.46)
Third quarter 5,713,611 2,984,093 (5,317,489) (0.34)
Fourth quarter 6,120,424 3,155,111 (5,723,890) (0.21)
17. SEGMENT INFORMATION
The Company considers reporting segments in accordance with SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. The
Company's system and disposable devices are developed and marketed to a
broad base of hospitals in the United States and internationally. The
Company considers all such sales to be part of a single operating segment.
Geographic revenues are as follows:
YEAR ENDED DECEMBER 31,
2005 2004 2003
--------------------------------------------
United States $10,998,617 $12,578,610 $3,577,899
International 4,027,773 6,238,250 1,436,978
--------------------------------------------
Total $15,026,390 $18,816,860 $5,014,877
============================================
All of the Company's long-lived assets are located in the United
States.
18. SUBSEQUENT EVENT
In February 2006, the Company completed a registered direct offering
of 5,500,000 shares of its common stock at $12.00 per share which included
the exercise by the underwriters of an option to purchase an additional
500,000 shares. In conjunction with these transactions, the Company received
approximately $61.7 million in net proceeds after deduction of underwriting
discounts and commissions and payment of estimated offering expenses.
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Evaluation of Disclosure Controls and Procedures: The Company's
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles in the United States of America.
As of December 31, 2005, the Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")). Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Company's disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and procedures designed to
provide reasonable assurance that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported on a timely basis.
A control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls.
The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under
all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
Internal Control over Financial Reporting: The Company's management
also assessed the effectiveness of our internal control over financial
reporting as of December 31, 2005. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control -- Integrated Framework.
Based on our assessment, our management has concluded that our internal
control over financial reporting is effective as of December 31, 2005.
The Company's independent registered public accounting firm, Ernst
& Young LLP, has issued an audit report on management's assessment of
internal control over financial reporting, which can be found below.
80
Based on the evaluation of internal control over financial
reporting, the Chief Executive Officer and Chief Financial Officer have
concluded that there have been no changes in the Company's internal controls
over financial reporting or in other factors during the period that is
covered by this report that has materially affected or is reasonably likely
to materially affect, the Company's internal control over financial
reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Stereotaxis, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Stereotaxis, Inc. maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Stereotaxis,
Inc.'s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express
an opinion on management's assessment and an opinion on the effectiveness of
the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Stereotaxis, Inc. maintained
effective internal control over financial reporting as of December 31, 2005,
is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Stereotaxis, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December
31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of
Stereotaxis, Inc. as of December 31, 2005 and 2004, and the related
statements of operations, stockholders' equity, and cash flows for each of
the three years in the period ended
81
December 31, 2005 of Stereotaxis, Inc. and our report dated March 13, 2006
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 13, 2006
ITEM 9B. OTHER INFORMATION
None.
PART III
Certain information required by Part III is omitted from this
Report on Form 10-K since we intend to file our definitive Proxy Statement
for our next Annual Meeting of Stockholders, pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended (the "Proxy Statement"), no
later than April 30, 2006, and certain information to be included in the
Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item concerning our executive officers
and directors is incorporated by reference to the information set forth in
the section entitled "Directors and Executive Officers" in our Proxy
Statement. Information regarding Section 16 reporting compliance is
incorporated by reference to the information set forth in the section
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in our
Proxy Statement.
Our Board of Directors adopted a Code of Business Conduct and
Ethics for all of our directors, officers and employees effective August 1,
2004. Stockholders may request a free copy of our Code of Business Conduct
and Ethics from our Chief Financial Officer as follows:
Stereotaxis, Inc.
Attention: James M. Stolze
4320 Forest Park Avenue, Suite 100
St. Louis, MO 63108
314-678-6100
To the extent required by law or the rules of the Nasdaq National
Market, any amendments to, or waivers from, any provision of the Code of
Business Conduct and Ethics will be promptly disclosed publicly. To the
extent permitted by such requirements, we intend to make such public
disclosure by posting the relevant material on our website
(www.stereotaxis.com) in accordance with SEC rules.
82
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding executive
compensation is incorporated by reference to the information set forth in
the sections titled "Executive Compensation" in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item regarding security ownership
of certain beneficial owners and management is incorporated by reference to
the information set forth in the section titled "Security Ownership of
Certain Beneficial Owners and Management" in our Proxy Statement.
The following table summarizes certain information regarding our
securities that may be issued pursuant to our equity compensation plans as
of December 31, 2005.
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a))(1)
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 3,788,424 $6.81 498,219
Equity compensation
plans not approved by
security holders - - -
--------------------------------------------------------------------------------------------
Total 3,788,424 $6.81 498,219
============================================================================================
<FN>
(1) Includes 248,236 shares reserved for issuance under the 2004 Employee
Stock Purchase Plan. Excludes automatic annual increases to shares by
which on January 1 of 2006 and 2007, the lesser of (i) 3.25% of the
total outstanding shares as of each such date or (ii) 833,333 shares
will be allocated to the 2002 Stock Incentive Plan. Number of shares of
common stock is subject to adjustment for changes in capitalization for
stock splits, stock dividends and similar events.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this item regarding certain
relationships and related transactions is incorporated by reference to the
information set forth in the section titled "Certain Relationships and
Related Party Transactions" in our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item regarding principal
accounting fees and services is incorporated by reference to the information
set forth in the section titled "Principal Accounting Fees and Services" in
our Proxy Statement.
83
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report
on Form 10-K
(1) Financial Statements--See Index to the Financial
Statements at Item 8 of this Report on Form 10-K.
(2) The following financial statement schedule of Stereotaxis,
Inc. is filed as part of this Report and should be read in
conjunction with the financial statements of Stereotaxis,
Inc.:
-- Schedule II: Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not
applicable, not required under the instructions, or the
information requested is set forth in the consolidated
financial statements or related notes thereto.
(3) Exhibits
See Exhibit Index appearing on page 88 herein.
84
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
STEREOTAXIS, INC.
(Registrant)
Date: March 15, 2006 By: /s/ Bevil J. Hogg
------------------------------
Bevil J. Hogg, President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bevil J. Hogg and James M. Stolze,
and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any and all amendments to
this Annual Report on Form 10-K and any other documents and instruments
incidental thereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents and/or
any of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------------------------------------- -------------------------------------------- --------------------------
/s/ FRED A. MIDDLETON Chairman of the Board of Directors March 15, 2006
- ----------------------------------------------------
FRED A. MIDDLETON
/s/ BEVIL J. HOGG President and Chief Executive Officer March 15, 2006
- ---------------------------------------------------- (principal executive officer)
BEVIL J. HOGG
/s/ JAMES M. STOLZE Vice President and Chief Financial Officer March 15, 2006
- ---------------------------------------------------- (principal financial officer and principal
JAMES M. STOLZE accounting officer)
- ---------------------------------------------------- Director March 15, 2006
ABHI ACHARYA
/s/ CHRISTOPHER ALAFI Director March 15, 2006
- ----------------------------------------------------
CHRISTOPHER ALAFI
85
/s/ DAVID W. BENFER Director March 15, 2006
- ----------------------------------------------------
DAVID W. BENFER
/s/ RALPH G. DACEY, JR. Director March 15, 2006
- ----------------------------------------------------
RALPH G. DACEY, JR.
/s/ GREGORY R. JOHNSON Director March 15, 2006
- ----------------------------------------------------
GREGORY R. JOHNSON
/s/ WILLIAM M. KELLEY Director March 15, 2006
- ----------------------------------------------------
WILLIAM M. KELLEY
/s/ ABHIJEET J. LELE Director March 15, 2006
- ----------------------------------------------------
ABHIJEET J. LELE
/s/ WILLIAM C. MILLS III Director March 15, 2006
- ----------------------------------------------------
WILLIAM C. MILLS III
/s/ ROBERT J. MESSEY Director March 15, 2006
- ----------------------------------------------------
ROBERT J. MESSEY
86
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND THE END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
--------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURNS:
Year ended December 31, 2005 $146,223 $132,221 $(248,868) $29,576
Year ended December 31, 2004 116,725 151,971 (122,473) 146,223
Year ended December 31, 2003 1,650 117,707 (2,632) 116,725
ALLOWANCE FOR INVENTORIES VALUATION:
Year ended December 31, 2005 $112,755 $207,126 $(276,443) $43,438
Year ended December 31, 2004 105,752 59,844 (52,841) 112,755
Year ended December 31, 2003 84,580 89,895 (68,723) 105,752
87
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ -----------
3.1 Restated Articles of Incorporation of the Registrant, incorporated
by reference to Exhibit 3.1 of the Registrant's Form 10-Q (File No.
000-50884) for the fiscal quarter ended September 30, 2004.
3.2 Restated Bylaws of the Registrant, incorporated by reference to
Exhibit 3.2 of the Registrant's Form 10-Q (File No. 000-50884) for
the fiscal quarter ended September 30, 2004.
4.1 Form of Specimen Stock Certificate, incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-115253)
originally filed with the Commission on May 7, 2004, as amended
thereafter, at Exhibit 4.1.
4.2 Fourth Amended and Restated Investor Rights Agreement, dated
December 17, 2002 by and among Registrant and certain stockholders,
incorporated by reference to the Registration Statement on Form S-1
(File No. 333-115253) originally filed with the Commission on May
7, 2004, as amended thereafter, at Exhibit 4.2.
4.3 Joinder Agreement to Series D-2 Preferred Stock Purchase Agreement,
Fourth Amended and Restated Investor Rights Agreement and Amendment
to Second Amended and Restated Stockholders' Agreement dated
January 21, 2003 by and among Registrant and certain stockholders,
incorporated by reference to the Registration Statement on Form S-1
(File No. 333-115253) originally filed with the Commission on May
7, 2004, as amended thereafter, at Exhibit 4.3.
4.4 Joinder and Amendment to Second Amended and Restated Stockholders'
Agreement and Fourth Amended and Restated Investor Rights
Agreement, dated May 27, 2003 by and among Registrant and certain
stockholders incorporated by reference to the Registration
Statement on Form S-1 (File No. 333-115253) originally filed with
the Commission on May 7, 2004, as amended thereafter, at Exhibit
4.4.
4.5 Second Joinder and Amendment to Second Amended and Restated
Stockholders' Agreement and Fourth Amended and Restated Investor
Rights Agreement, dated December 22, 2003 by and among Registrant
and certain stockholders, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 4.5.
4.6 Third Joinder and Amendment to Second Amended and Restated
Stockholders' Agreement and Fourth Amended and Restated Investor
Rights Agreement, dated January 28, 2004 by and among Registrant
and certain stockholders, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 4.6.
4.7 Form of Warrant Agreement issued to Series D-1 investors,
incorporated by reference to the Registration Statement on Form S-1
(File No. 333-115253) originally filed with the Commission on May
7, 2004, as amended thereafter, at Exhibit 4.7.
4.8 Warrant Agreement issued to Silicon Valley Bank dated January 31,
2002, incorporated by reference to the Registration Statement on
Form S-1 (File No. 333-115253) originally filed with the Commission
on May 7, 2004, as amended thereafter, at Exhibit 4.8.
88
4.9 Form of Warrant Agreement issued to Series D-2 investors,
incorporated by reference to the Registration Statement on Form S-1
(File No. 333-115253) originally filed with the Commission on May
7, 2004, as amended thereafter, at Exhibit 4.9.
4.10 Form of Warrant Agreement issued to Series E-2 investors,
incorporated by reference to the Registration Statement on Form S-1
(File No. 333-115253) originally filed with the Commission on May
7, 2004, as amended thereafter, at Exhibit 4.10.
4.11 Warrant Agreement issued to Silicon Valley Bank dated March 19,
2002, incorporated by reference to the Registration Statement on
Form S-1 (File No. 333-115253) originally filed with the Commission
on May 7, 2004, as amended thereafter, at Exhibit 4.11.
4.12 Warrant Agreement issued to Silicon Valley Bank dated September 30,
2002, incorporated by reference to the Registration Statement on
Form S-1 (File No. 333-115253) originally filed with the Commission
on May 7, 2004, as amended thereafter, at Exhibit 4.12.
4.13 Form of Note to be issued pursuant to that certain Note and Warrant
Purchase Agreement, dated as of November 10, 2005, between the
Registrant and the investors named therein, incorporated by
reference to Exhibit 4.1 of the Registrant's Form 10-Q (File No.
000-50884) for the fiscal quarter ended September 30, 2005.
4.14 Form of Warrant to be issued pursuant to that certain Note and
Warrant Purchase Agreement, dated as of November 10, 2005, between
the Registrant and the investors named therein, incorporated by
reference to Exhibit 4.2 of the Registrant's Form 10-Q (File No.
000-50884) for the fiscal quarter ended September 30, 2005.
10.1# 1994 Stock Option Plan, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 10.1.
10.2# Form of Incentive Stock Option Agreement under the 2002 Stock
Incentive Plan, incorporated by reference to Exhibit 10.1 of the
Registrant's Form 10-Q (File No. 000-50884) for the fiscal quarter
ended September 30, 2004.
10.3# 2002 Stock Incentive Plan, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 10.2.
10.4# Form of Non-Qualified Stock Option Agreement under the 2002 Stock
Incentive Plan, incorporated by reference to Exhibit 10.2 of the
Registrant's Form 10-Q (File No. 000-50884) for the fiscal quarter
ended September 30, 2004.
10.5# 2004 Employee Stock Purchase Plan, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 10.3.
10.6# Form of Non-Qualified Stock Option Agreement under the 2002
Non-Employee Director Plan, incorporated by reference to Exhibit
10.1 of the Registrant's Form 10-Q (File No. 000-50884) for the
fiscal quarter ended June 30, 2005.
89
10.7# 2002 Non-Employee Directors' Stock Plan, incorporated by reference
to the Registration Statement on Form S-1 (File No. 333-115253)
originally filed with the Commission on May 7, 2004, as amended
thereafter, at Exhibit 10.4.
10.8# Form of Restricted Stock Agreement under the 2002 Stock Incentive
Plan, incorporated by reference to Exhibit 10.2 of the Registrant's
Form 10-Q (File No. 000-50884) for the fiscal quarter ended June
30, 2005.
10.9# Employment Agreement dated June 23, 1997 between Bevil J. Hogg and
the Registrant, incorporated by reference to the Registration
Statement on Form S-1 (File No. 333-115253) originally filed with
the Commission on May 7, 2004, as amended thereafter, at Exhibit
10.5.
10.10# Form of Performance Share Award under the 2002 Stock Incentive
Plan, incorporated by reference to Exhibit 10.3 of the Registrant's
Form 10-Q (File No. 000-50884) for the fiscal quarter ended June
30, 2005.
10.11# Employment Agreement dated April 4, 2001 between Douglas M. Bruce
and the Registrant, incorporated by reference to the Registration
Statement on Form S-1 (File No. 333-115253) originally filed with
the Commission on May 7, 2004, as amended thereafter, at Exhibit
10.6.
10.12# Form of Subscription Agreement for the 2004 Employee Stock Purchase
Plan, incorporated by reference to Exhibit 10.6 of the Registrant's
Form 10-Q (File No. 000-50884) for the fiscal quarter ended
September 30, 2004.
10.13# Employment Agreement dated February 16, 2001 between Melissa Walker
and the Registrant, incorporated by reference to the Registration
Statement on Form S-1 (File No. 333-115253) originally filed with
the Commission on May 7, 2004, as amended thereafter, at Exhibit
10.7.
10.14# Employment Agreement dated April 17, 2002 between Michael P.
Kaminski and the Registrant, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 10.8.
10.15# Summary of Non-Employee Directors' Compensation, incorporated by
reference to Exhibit 10.15 of the Registrant's Form 10-K (File No.
000-50884) for the fiscal year ended December 31, 2005.
10.16 Collaboration Agreement dated June 8, 2001 between the Registrant
and Siemens AG, Medical Solutions, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 10.9.
10.17+ Extended Collaboration Agreement dated May 27, 2003 between the
Registrant and Siemens AG, Medical Solutions, incorporated by
reference to the Registration Statement on Form S-1 (File No.
333-115253) originally filed with the Commission on May 7, 2004, as
amended thereafter, at Exhibit 10.10.
10.18+ Development and Supply Agreement dated May 7, 2002 between the
Registrant and Biosense Webster, Inc., incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-115253)
originally filed with the Commission on May 7, 2004, as amended
thereafter, at Exhibit 10.11.
10.19+ Amendment to Development and Supply Agreement dated November 3,
2003 between the Registrant and Biosense Webster, Inc.,
incorporated by reference to the Registration Statement on Form S-1
(File No. 333-115253) originally filed with the Commission on May
7, 2004, as amended thereafter, at Exhibit 10.12.
90
10.20 Settlement Agreement effective as of June 30, 2005 between the
Registrant and the University of Virginia Patent Foundation,
incorporated by reference to Exhibit 10.1 of the Registrant's
current report on Form 8-K (File No. 000-50884) dated July 8, 2005.
10.21 Form of Indemnification Agreement between the Registrant and its
directors and executive officers, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 10.14.
10.22+ Letter Agreement, dated September 12, 2003, between the Registrant
and Philips Medizin Systeme G.m.b.H., incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-115253)
originally filed with the Commission on May 7, 2004, as amended
thereafter, at Exhibit 10.16.
10.23# Letter Agreement and Employment Agreement dated May 26, 2004
between James M. Stolze and the Registrant, incorporated by
reference to the Registration Statement on Form S-1 (File No.
333-115253) originally filed with the Commission on May 7, 2004, as
amended thereafter, at Exhibit 10.17.
10.24 Loan and Security Agreement dated January 31, 2002 between the
Registrant and Silicon Valley Bank, incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-115253)
originally filed with the Commission on May 7, 2004, as amended
thereafter, at Exhibit 10.21.
10.25 Loan Modification Agreement dated May 14, 2002 between the
Registrant and Silicon Valley Bank, incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-115253)
originally filed with the Commission on May 7, 2004, as amended
thereafter, at Exhibit 10.22.
10.26 Second Loan Modification Agreement dated July 11, 2002 between the
Registrant and Silicon Valley Bank, incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-115253)
originally filed with the Commission on May 7, 2004, as amended
thereafter, at Exhibit 10.23.
10.27 Loan and Security Agreement dated September 30, 2002 between the
Registrant and Silicon Valley Bank, incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-115253)
originally filed with the Commission on May 7, 2004, as amended
thereafter, at Exhibit 10.24.
10.28 Second Loan Modification Agreement dated September 30, 2002 to
Equipment Loan and Security Agreement dated January 31, 2002 and
Third Loan Modification Agreement to Revolving Loan and Security
Agreement dated March 19, 2002, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 10.25.
10.29 Third Loan Modification Agreement dated December 31, 2002 to
Equipment Loan and Security Agreement dated January 31, 2002 and
Fourth Loan Modification Agreement to Revolving Loan and Security
Agreement dated March 19, 2002 and First Loan Modification
Agreement to Equipment Loan and Security Agreement dated September
30, 2002 between the Registrant and Silicon Valley Bank,
incorporated by reference to the Registration Statement on Form S-1
(File No. 333-115253) originally filed with the Commission on May
7, 2004, as amended thereafter, at Exhibit 10.26.
10.30 Fourth Loan Modification Agreement dated April 2003 to Equipment
Loan and Security Agreement dated January 31, 2002 and Fifth Loan
Modification Agreement to Revolving Loan and Security Agreement
dated March 19, 2002 and Second Loan Modification Agreement to
Equipment Loan and Security Agreement dated September 30, 2002,
incorporated by reference to the Registration Statement on Form S-1
(File No. 333-115253) originally filed with the Commission on May
7, 2004, as amended thereafter, at Exhibit 10.27.
91
10.31 Loan and Security Agreement dated April 30, 2004 between the
Registrant and Silicon Valley Bank, incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-115253)
originally filed with the Commission on May 7, 2004, as amended
thereafter, at Exhibit 10.28.
10.32 Promissory Note dated November 20, 2001 by Douglas M. Bruce payable
to the order of the Registrant, incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 10.30.
10.33+ Japanese Market Development Agreement dated May 18, 2004 between
the Registrant, Siemens Aktiengesellschaft and Siemens Asahi
Medical Technologies Ltd., incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-115253) originally
filed with the Commission on May 7, 2004, as amended thereafter, at
Exhibit 10.32.
10.34+ Office Lease dated November 15, 2004 between the Registrant and
Cortex West Development I, LLC, incorporated by reference to
Exhibit 10.39 of the Registrant's Form 10-K (File No. 000-50884)
for the fiscal year ended December 31, 2005.
10.35# Form of Stock Appreciation Right Agreement under the 2002 Stock
Incentive Plan, incorporated by reference to Exhibit 10.4 of the
Registrant's Form 10-Q (File No. 000-50884) for the fiscal quarter
ended June 30, 2005.
10.36# Amendment to 2002 Non-Employee Directors' Stock Plan, incorporated
by reference to Exhibit 10.5 of the Registrant's Form 10-Q (File
No. 000-50884) for the fiscal quarter ended June 30, 2005.
10.37 Note and Warrant Purchase Agreement, dated as of November 10, 2005,
between the Registrant and the investors named therein,
incorporated by reference to Exhibit 10.1 of the Registrant's Form
10-Q (File No. 000-50884) for the fiscal quarter ended September
30, 2005.
10.38 Second Loan Modification Agreement, dated as of November 8, 2005,
between Silicon Valley Bank and the Registrant, incorporated by
reference to Exhibit 10.2 of the Registrant's Form 10-Q (File No.
000-50884) for the fiscal quarter ended September 30, 2005.
10.39# Employment Agreement dated February 22, 2005 between Ruchir Sehra
and the Registrant (filed herewith).
10.40# Summary of annual cash compensation of executive officers, dated
February, 2006 (filed herewith).
23.1 Consent of Ernst & Young LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, executed by Chief Executive
Officer).
31.2 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, executed by Chief Financial
Officer).
32.1 Section 1350 Certification (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer).
32.2 Section 1350 Certification (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer)
<FN>
- -------------
# Indicates management contract or compensatory plan
+ Confidential treatment granted as to certain portions, which portions
are omitted and filed separately with the Securities and Exchange Commission.
92