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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, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO __________
COMMISSION FILE NUMBER 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)
4041 FOREST PARK AVENUE
ST. LOUIS, MO 63108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(314) 615-6940
(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 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. / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes / / No /X/
The initial public offering of the registrant's common stock was completed
on August 12, 2004, prior to which date there was no public market in the
registrant's common equity.
The number of outstanding shares of the registrant's common stock on
February 28, 2004 was 27,206,460.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's next Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
STEREOTAXIS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
----
PART I.
Item 1. Business 3
Item 2. Properties 28
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II.
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Registrant Purchases of Equity
Securities 29
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 30
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 54
Item 8. Financial Statements and Supplementary Data 55
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 80
Item 9a. Controls and Procedures 80
Item 9b. Other Information 80
PART III.
Item 10. Directors and Executive Officers of the Registrant 80
Item 11. Executive Compensation 81
Item 12. Security Ownership of Certain Beneficial Owners and
Management 81
Item 13. Certain Relationships and Related Transactions 81
Item 14. Principal Accounting Fees and Services 81
PART IV.
Item 15. Exhibits and Financial Statement Schedules 82
SIGNATURES 83
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 85
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 56
INDEX TO EXHIBITS 86
2
PART I
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:
* our business strategy;
* our value proposition;
* the ability of physicians to perform certain medical procedures with
our products safely, effectively and efficiently;
* the adoption of our products by hospitals and physicians;
* the market opportunity for our products, including expected demand
for our products;
* the timing and prospects for regulatory approval of our additional
disposable interventional devices;
* our plans for hiring additional personnel;
* our estimates regarding our capital requirements; and
* 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 "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Factors that May Affect Future Results" 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.
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 stent
delivery devices, both our own and those we are co-developing
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with strategic partners, through the blood vessels and chambers of the
heart to treatment sites and then 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 stent 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 stent delivery devices directly at their working tip. To our
knowledge, we have no direct competitors in this field. 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.
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 $18.8 million in 2004 and $5.0 million in
2003. As of December 31, 2004, we had sold and delivered 30 Stereotaxis
Systems, including 20 in the U.S. and 10 internationally, and physicians
have used these systems to perform approximately 1,100 cardiology
procedures. We also had purchase orders and other commitments for an
additional $20 million of our Stereotaxis 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 Stereotaxis System is designed primarily for the interventional
treatment of coronary artery disease, or interventional cardiology, and for
the interventional treatment of abnormal heart rhythms known as
arrhythmias, or electrophysiology. Our Stereotaxis System consists of the
following proprietary components:
* our NIOBE cardiology magnet system, which utilizes permanent magnets
to navigate catheters, guidewires and stent delivery devices through
complex paths in the blood vessels and chambers of the heart to carry
out treatment;
* our NAVIGANT 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 stent delivery device;
* our CARDIODRIVE automated catheter advancer, which is used to
remotely advance and retract the catheter in the patient's heart; and
* our suite of interventional catheters, guidewires and stent delivery
devices, which we refer to as disposable interventional devices.
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. and in the European Union,
and we anticipate applying through Siemens and J&J to begin clinical trials
in Japan in 2005. Current and potential purchasers of our Stereotaxis
System include leading research and academic hospitals as well as medium
and high volume commercial and regional medical centers around the world.
We estimate that there are more than 750 new and replacement cardiology
cath labs being installed worldwide each year. We also estimate that the
initial imaging equipment and installation costs for a new or replacement
cardiology cath lab today can range as high as $2 million, for a total
cardiology cath lab installation market potentially in excess of $1.5
billion per year.
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The market for cardiovascular medical devices worldwide exceeds $12
billion per year and is estimated to be growing at 12% annually. Physicians
are currently performing approximately 1.8 million interventional
cardiology procedures and approximately 800,000 electrophysiology
procedures worldwide each year. This procedure base continues to grow, due
to patient demand for less invasive procedures, cost containment pressure
and an increasing incidence of coronary artery disease and arrhythmias.
While the Stereotaxis System potentially has broad applicability for many
of these procedures, we believe that it can provide significant advantages
relative to manual interventional methods for approximately 15% of
interventional cardiology procedures, or approximately 270,000 procedures
annually, including procedures for stent delivery and the treatment of
complex lesions. In electrophysiology, we believe that the Stereotaxis
System can provide significant advantages for approximately 30% of
procedures, or about 240,000 procedures annually, including procedures for
ablation and the placement of pacing leads. As a result, we believe that
the Stereotaxis System can provide substantial clinical benefits compared
to manual interventional methods in more than 500,000 worldwide annual
procedures.
The Stereotaxis System is designed to address the needs of patients,
hospitals, physicians, and third-party payors on a cost-effective basis by:
* meeting patient demands for less invasive procedures, while improving
patient safety and outcomes;
* enabling new procedures in interventional cardiology and
electrophysiology that currently cannot be performed, or are
extremely difficult to perform, with manual methods;
* enhancing the productivity of existing complex interventional
procedures, by both shortening procedure times and making them more
predictable, thereby improving cath lab scheduling efficiency and
lowering total costs;
* decreasing the number of disposable interventional devices used per
procedure, thereby potentially lowering provider costs;
* providing ease of use and lowering physician skill barriers for
complex cardiology procedures; and
* decreasing exposure to x-ray fluoroscopy fields for patients and
physicians and reducing the use of contrast dye injections, both of
which are potentially harmful.
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 J&J's 3D catheter
location sensing technology, and developing compatible disposable
interventional devices, in order to continue to introduce new solutions to
the cath lab. Together, Siemens and Philips have a combined installed base
of more than 2,200 cardiology cath labs in the U.S., while J&J has the
leading market position in 3D catheter location sensing technology, an
important technology in complex electrophysiology ablation procedures. 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 and Philips have agreed to provide
worldwide service for our integrated systems. In connection with these
alliances, Siemens invested $10 million and J&J invested $9.5 million in
our equity in private placements prior to our initial public offering, and
Philips agreed to make payments of up to $7.5 million relating to the
integration of its x-ray fluoroscopy system with the Stereotaxis System.
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
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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, with a procedure cost that
can range as high as $100,000.
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 stent 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 navigation to the treatment site, after
which a catheter or stent 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.
6
THE GROWING IMPORTANCE OF THE CATH LAB
We believe that the cath lab's position as a hospital profit center,
coupled with the growth of interventional procedures, has made it possible
for decision-makers to justify large expenditures on capital equipment for
use within the cath lab. As a result, hospitals with cath labs have tended
to be early adopters of new technologies.
There has also been a major trend toward using digital rather than
analog instrument systems in the cath lab, resulting in the rapid
replacement of analog electrophysiology recording systems with digital
recording systems and the current rapid replacement of analog x-ray
fluoroscopy systems with digital x-ray fluoroscopy systems. Additionally,
new sources of diagnostic information such as 3D catheter location sensing
technology and catheter-based ultrasound are being introduced to the cath
lab. As a result, interventional procedures require physicians to analyze
large quantities of information from many disparate imaging and information
sources. We believe that the Stereotaxis System provides an important link
in completing the digital transformation of the cath lab, because it is the
only system that integrates the visualization and information systems in
the cath lab with digital control of the working tip of catheters,
guidewires and stent delivery devices. Furthermore, because the Stereotaxis
System brings precise remote digital instrument control and programmability
to the cath lab, we believe it can displace conventional manual control of
disposable interventional devices for complex cardiology procedures in the
same way that digital control, or "fly by wire" technology, replaced
mechanical control of the modern jet airplane.
Interventional techniques are routinely used in interventional
cardiology to treat partially occluded coronary arteries with balloon
angioplasty and to place coronary stents, and in electrophysiology to treat
certain types of arrhythmias. In the U.S. there are more than 1.1 million
interventional cardiology procedures performed for the treatment of
coronary artery disease each year, which represents approximately 60% of
the total number of such procedures performed on a worldwide basis. Each
year in the U.S., there are also more than 500,000 electrophysiology
procedures for treatment of arrhythmia, including more than 340,000
electrophysiology mapping procedures and more than 160,000 ablation
procedures, which represents approximately 65% of the total number of
electrophysiology procedures performed on a worldwide basis. Interventional
treatments are also emerging for atrial fibrillation and congestive heart
failure, and industry estimates indicate that the U.S. procedure base for
these diseases has the potential to grow rapidly if more effective
interventional treatments are available.
There are approximately 3,700 cardiology cath labs in the U.S.
installed at approximately 1,900 hospitals. Based on procedure volume, we
estimate that there are over 2,000 cardiology cath labs located throughout
the rest of the world. We estimate that there are more than 750 new and
replacement cardiology cath labs installed each year worldwide.
CURRENT CHALLENGES IN THE CATH LAB
Although great strides have been made 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.
7
Manually controlled catheters, guidewires and stent 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 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:
* real-time x-ray fluoroscopy images;
* a real-time location-sensing system providing the 3D location of the
catheter tip;
* a pre-operative map of the electrical activity or anatomy of the
patient's heart;
* real-time recording of electrical activity of the heart; and
* 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:
* Expand the market by enabling new treatments for major diseases and
permitting the treatment of more complex existing cases. Treatment of
a number of major diseases, including chronic totally occluded
coronary arteries 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 totally occluded coronary arteries
and atrial fibrillation to be treated interventionally on a much
broader scale than today, and may permit physicians to predictably
treat complex cases involving partially occluded coronary arteries
and arrhythmias.
* 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
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treating a number of cardiac conditions, including arrhythmias, where
precise placement of an ablation catheter against a beating inner
heart wall is necessary, and congestive heart failure, where precise
navigation within the coronary venous system for optimal placement of
pacemaker leads is required. 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.
* 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.
* Improve the efficacy of complex cardiology procedures by enhancing
physician skill levels. 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,
leading 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.
* Improve patient and physician safety by reducing procedure times and
minimizing x-ray exposure and the use of contrast dye injections.
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. Shorter procedure times and improved navigation
result in reduced use of contrast dye injections which are
potentially harmful to the patient. 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 and helps alleviate orthopedic
problems that often result from wearing heavy lead vests to shield
them from x-ray exposure during procedures.
BUSINESS STRATEGY
Our goal is to establish the Stereotaxis System as the standard of
care for complex interventional procedures in cardiology by bringing
magnetic instrument control into standard interventional clinical practice.
The key elements of our strategy for achieving this goal are to:
* Leverage the efficiency and productivity improvements enabled by our
system to present a compelling economic justification to hospitals.
We believe our system enhances the rate of return to hospitals by
optimizing cath lab economics, reducing procedure times, disposable
interventional device usage and staffing requirements during
procedures. This allows us to present a compelling economic
justification to hospitals for the purchase of our systems.
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* Integrate our system with our key strategic partners' products and
leverage our partnerships to assist in further development,
commercialization, sales and service of our products. We are
integrating our system with Siemens' and Philips' widely used imaging
equipment and J&J's advanced 3D catheter location sensing technology
to provide seamless integration of instrument control and
visualization and a toolkit of disposable interventional devices that
we believe will enable new therapeutic solutions in the cath lab. We
have also entered into a manufacturing and supply agreement with Lake
Region Manufacturing, one of the world's leading manufactures of
guidewires for use in interventional medicine, to provide high volume
capability for guidewires. We intend to continue leveraging the
sales, distribution, service and maintenance expertise of our
strategic partners to facilitate co-placement of integrated systems
and disposable interventional devices and to support and maintain our
equipment at installed sites. See "Business--Collaborations" for a
further description of our strategic partnerships. We intend to
selectively expand the number of co-marketing agreements that we have
with major companies in the cath lab market in order to augment the
effectiveness of our direct sales force and distribution network, and
to add distributors to extend coverage to key areas outside the U.S.
We also intend to selectively enter into additional licensing,
development and manufacturing partnerships with major disposables
companies in order to expand the number of magnetically controlled
disposable interventional devices that can be used with the
Stereotaxis System. We will continue to outsource major components
and sub-assemblies of our equipment to maximize manufacturing
flexibility and lower fixed costs, while maintaining quality control
by completing final system assembly and inspection in-house.
* Provide an essential digital link in the cath lab between imaging
systems and instrument control. We intend to maintain an open
architecture approach to connectivity in the cath lab in order to
encourage the major imaging companies to consider Stereotaxis an
essential ingredient for digital integration and automation in the
cath lab. We believe that integrating our system with key imaging and
visualization technologies using an open architecture approach is a
key element in establishing our system as the standard of care for
complex interventional procedures.
* Expand clinical applications for, and utilization of, our technology.
We intend to pursue clinical research with leading interventional
cardiologists and electrophysiologists in order to further develop
and expand the range of clinical applications for magnetic instrument
control in the field of cardiology. We also intend to provide
comprehensive training and educational programs for physicians
regarding the use and benefits of our system in order to increase the
overall utilization of our technology. We believe that we can build
on our experience in the cardiology field to expand the scope of our
technology to other major clinical areas where there are potential
unmet needs for better device navigation and control.
* Capitalize on our technology leadership to enhance our competitive
position. We intend to enhance and maintain our technology leadership
with focused research and development. We also intend to build on our
"first mover" advantage to establish Stereotaxis as the preferred
approach for cath lab automation, by providing continuous improvement
of our technology and user-friendly software. We will continue to
protect our intellectual property through additions to our already
significant patent portfolio in order to cover the key aspects of our
technology, including new magnet designs, catheter and guidewire
designs, remote control systems, systems integration and automation
and software development.
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 joystick-operated technology, which 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
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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 J&J, 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 we have completed the initial integration with
Philips' digital x-ray fluoroscopy system. In addition, we are integrating
the Stereotaxis System with J&J'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 J&J's ablation tip technology. We
believe that the combination of these features will provide more effective
instrument control and therapy delivery.
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 consolidates
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:
* 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;
* sophisticated embedded device software and system control algorithms
that are integrated with our disposable interventional devices to
facilitate ease of use and improved navigation of these devices;
* computer joystick 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
* 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 the FDA clearance and the CE Mark 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. and
Europe.
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DISPOSABLES AND OTHER ACCESSORIES
Our system is designed to use a toolkit of proprietary disposable
interventional devices. The toolkit currently consists of:
* our suite of CRONUS(R) 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;
* our TANGENT(R) electrophysiology mapping catheter used to locate
aberrant electrical signals in the heart;
* our HELIOS(R) electrophysiology ablation catheter used for certain
arrhythmia treatments; and
* the Celcius ablation and Navistar mapping and catheters co-developed
with J&J, as described below.
We have received the FDA clearance and the CE Mark necessary for us
to market our suite of CRONUS coronary guidewires and our electrophysiology
mapping catheter in the U.S. and Europe. In addition, we have received the
CE Mark for our HELIOS electrophysiology ablation catheter and, in the
U.S., we have completed clinical trials in 2004 and expect to subsequently
file for a PMA.
Through our alliance with J&J, we are co-developing a range of
ablation catheters that can be navigated with our system, with and without
J&J's 3D catheter location sensing technology. We are also developing
disposable interventional devices for other applications. In addition, we
have developed plastic software keys, or smart chips, that allow our system
to recognize specific disposable interventional devices in order to prevent
unauthorized use of our system.
In March 2005, we announced the first commercial use of our
Stereotaxis system with the Celcius(TM) RMT ablation catheter, the
Navistar(TM) RMT mapping and ablation catheter and the CARTO(TM) RMT mapping
and ablation system in Europe. These products, which had recently received
CE Marking authorization in Europe and other countries that recognize the CE
Mark, are the first products to be commercialized pursuant to our strategic
alliance with J&J. We expect that approvals in the United States will follow
in 2005 and that Biosense Webster will continue to develop other
magnetically enabled catheters into 2006.
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 and reduce their manufacturing costs 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
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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.
Physicians are currently performing approximately 1.8 million
interventional cardiology procedures worldwide each year, and we estimate
that approximately 15%, or 270,000, of these procedures 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:
* 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.
* Tortuous Anatomy.
We estimate that between 10 and 15% of all 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.
* 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.
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* 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-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.
Based on an analysis of industry data, we have determined that
physicians are currently performing approximately 800,000 electrophysiology
procedures worldwide each year, including approximately 500,000
electrophysiological mapping procedures, approximately 240,000 ablation
procedures and approximately 60,000 other procedures such as treatment of
atrial fibrillation and congestive heart failure. 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, which we estimate to be approximately 30% of
all electrophysiology procedures performed worldwide each year. We estimate
that the number of these complex procedures is growing at a rate of
approximately 12% per year. These procedures include:
* Lengthy Ablations.
For the more routine but lengthy mapping and ablation procedures, our
system offers the unique benefit of automating the procedure and
directing catheter movement from the control room, saving the
physician time and helping to avoid unnecessary exposure to high
doses of radiation.
* 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 they 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 success rates that are only in the 50% to 80% range. 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.
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* 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 estimate that approximately 50,000 biventricular
pacing leads are currently placed per year worldwide. Industry
estimates indicate, however, that if there were a more effective
method of placing these pacing leads, more than 700,000 congestive
heart failure patients per year in the U.S. would be eligible for the
procedure.
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.
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 four technology leaders in
the global cath lab market, Siemens, Philips, J&J and Lake Region
Manufacturing, that we believe will aid us in commercializing our
Stereotaxis System. We believe our two imaging partners, Siemens and
Philips, have a combined installed base of more than 2,200 cardiology cath
labs in the U.S.
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We believe that these collaboration arrangements are favorable to
Stereotaxis because they:
* provide for the integration of our system with market leading digital
imaging and 3D catheter location sensing technology, as well as
disposable interventional devices;
* allow us to leverage the sales, distribution, service and maintenance
expertise of our strategic partners; and
* 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. and Europe. Under this alliance and under a separate services
agreement, Siemens provides site planning, project management, equipment
maintenance and support services for our products directly to our
customers. To date, all 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. Where Siemens' proprietary technology is incorporated into
products being co-developed under this expanded alliance, there are
restrictions on our ability to use that technology to sell Stereotaxis
Systems integrated with other third party x-ray imaging systems. These
restrictions expire no later than December 31, 2005. 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.
Concurrently with entering into the expanded alliance, Siemens
invested $10 million in our Series E preferred stock in 2003. Siemens also
held a $2 million note convertible into Stereotaxis common stock, which was
issued by us in connection with the purchase of certain of Siemens'
intellectual property in August 2003. Both the Series E preferred stock and
this note were converted into our common stock in connection with our IPO
in August 2004. See "Certain Relationships and Related Party Transactions".
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 to achieve seamless integration of our instrument
control technology and Philips' digital x-ray imaging on a user friendly
basis. 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. Philips also agreed to pay our engineering and other
costs of the integration and related research and development work, and
agreed to purchase a maximum of three promotional integrated Stereotaxis
Systems from us for installation at agreed upon "centers of excellence."
Additionally, Philips has agreed to pay various co-placement fees to
Stereotaxis for each of the first 70 systems integrated with Philips that
are shipped commercially. The total amount
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that we are entitled to receive from Philips under this agreement for
research and development costs, co-placement fees and the purchase of our
promotional integrated Stereotaxis Systems is capped at $7.5 million.
DISPOSABLES PARTNERS
J&J Alliance. We entered into an alliance with J&J in May 2002
pursuant to which we agreed to integrate J&J's advanced Biosense 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 J&J in order to
place J&J Biosense CARTO Systems and our Stereotaxis Systems that, together
with the co-developed catheters, will 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 J&J's full line of non-location
sensing mapping and ablation catheters that are relevant to our targeted
applications in electrophysiology.
The co-developed catheters will be manufactured and distributed by
J&J, and each of the parties agreed to contribute to the resources required
for their development. We are entitled to royalty payments from J&J,
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 J&J and granted J&J certain notice and discussion rights
for product development activities we undertake relating to localization
and magnetically enabling interventional disposable devices in cardiology
fields outside of electrophysiology and mapping. In connection with our
expanded alliance, J&J also invested $9.5 million in our Series E-1
preferred stock in 2003. This preferred stock was converted into our common
stock in connection with our IPO in August 2004.
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 J&J 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 J&J 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 J&J 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. See "Certain Relationships and Related
Party Transactions".
Lake Region. We entered into an agreement with Lake Region
Manufacturing, Inc., one of the world's leading manufacturers of guidewires
for the development and production of magnetically enabled guidewires in
January 2005. The agreement provides Stereotaxis with the wherewithal to
increase both the availability and the technological sophistication of its
guidewires to better meet customer needs.
RESEARCH AND DEVELOPMENT
Our research and development team consists of 49 people focused on
system and disposable interventional device 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.
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Our research and development efforts are focused in three major
areas:
* continuing to enhance our existing system through ongoing product and
software development;
* designing new proprietary disposable interventional devices for use
with our system; and
* developing next generation versions of our system.
Our research and development team collaborates with our strategic
partners, Siemens, Philips, and J&J, 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.
We have historically spent a significant portion of our capital
resources on research and development, incurring $18.4 million in 2004,
$13.9 million in 2003 and $14.7 million in 2002 in research and development
expenses.
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
of our 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 complete the final assembly and
testing of those components in-house in order to control quality. This
permits us to focus on our core competencies in magnet design, magnetic
physics, magnetic instrument control and navigational algorithms.
Approximately 8,000 square feet of our St. Louis, Missouri facility is
dedicated to systems assembly, testing and inspection.
DISPOSABLE INTERVENTIONAL DEVICES
Our manufacturing strategy for disposable interventional devices is
to outsource their manufacture through subcontracting and through our
alliance with J&J 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 also entered
into a manufacturing agreement with Lake Region Manufacturing to provide
high volume capability for guidewires.
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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 regulatory agency
audited each facility in 2001, found them to be in compliance with the
requirements of ISO 9001, and issued a formal certification from the ISO
Registrar in January of 2002. 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 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 "Factors That May Affect Future Results" for a discussion
of various risks associated with our manufacturing strategy.
SALES AND MARKETING
We market our products in the U.S. and Europe through a direct sales
force of senior sales specialists, 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 Siemens and Philips to
co-market integrated systems on a worldwide basis. This approach allows us
to coordinate our marketing efforts with our strategic partners while still
dealing directly with the customer. J&J will exclusively distribute our
electrophysiology mapping and ablation catheters, co-developed pursuant to
our alliance with them. We intend to increase our sales personnel and the
number of account managers significantly over the next 24 months and to
enter into distribution and sales representative arrangements to market our
products in the rest of the world.
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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.
Step One: System sales. Our system sales strategy involves both
direct selling, through our own sales force, and co-marketing with our
strategic imaging partners, by leveraging these relationships to identify
new or replacement cath labs being installed and then co-marketing
integrated systems to the customer. Siemens and Philips have a major share
of the cath lab installation market and therefore compete for a substantial
number of potential cath lab installations on a worldwide basis, which
gives us access to a large number of potential customers. These customers
fall into three broad categories:
* leading research institutions with physician thought leaders who are
interested in performing complex new procedures enabled by our
system;
* high-volume commercial institutions interested in the efficiency
benefits of our system; and
* medium volume regional centers that are competing intensely for
patients, attempting to minimize referrals of complex cases to other
centers and focusing on gaining market share in their regional
markets.
Once we have identified potential customers, we approach capital
equipment sales in five stages that bring significant predictability to our
sales process. This allows us to measure the progress of each account in
discrete steps through our sales funnel, and tailor our sales activity at
each stage. The five-stage process includes the following, and has taken an
average of 18 months for our 30 systems delivered to date:
* Build initial customer interest: presentation of our value
proposition;
* Gain commitment: formal proposal with cost justification rationale;
* Secure capital budget allocation: customer begins formal budget
approval process for system acquisition;
* Receive institutional approval: customer completes budget approval
process and executes purchase order; and
* System installation: installation begins as part of overall cath lab
construction or refurbishment.
As of December 31, 2004, we had received purchase orders and other
commitments for approximately $20 million of our Stereotaxis 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 of 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. All of our systems placed to date have been integrated with
Siemens' digital x-ray fluoroscopy systems. We have several purchase orders
with a commitment for installation with Philips and we anticipate
installing systems integrated with Philips' digital x-ray fluoroscopy
system beginning in early 2005.
Step Two: Recurring sales of disposable interventional devices,
software and service. Each of our systems utilizes proprietary disposable
interventional devices, both our own and those we are co-developing with
strategic partners, as well as software tailored to specific clinical
applications. We provide training and clinical support to users of our
systems in order to increase their familiarity with system features and
benefits, and thereby increase usage. More frequent usage should result in
increased consumption of disposable interventional devices and software.
While a basic one-year warranty is included with each system, we believe
service contracts providing for enhanced levels of support and service
beyond the basic warranty will become an important additional source of
revenue.
Our relationships with physician thought leaders in the fields of
interventional cardiology and electrophysiology are an important component
of our selling efforts. These relationships are typically built around
research
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collaborations, and they enable us to better understand and articulate the
most useful features and benefits of our system, and to develop new
solutions to long-standing challenges in interventional medicine. We will
continue to seek support and collaboration from highly regarded physicians
in order to perform important research and accelerate market awareness and
adoption of our systems.
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 J&J. 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 "Factors
That May Affect Future Results" for a discussion of various risks
associated with reimbursement from third-party payors.
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 believe that we have an extensive patent portfolio that
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, 2004, we had 42 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 69 pending U.S.
patent applications, 17 pending non-U.S. patent applications, and six
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 eight issued patents and 11
pending applications. We have 16 issued patents and 19 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 10 issued patents and
18 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
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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 have developed plastic software keys, or smart
chips, that allow our system to recognize specific disposable
interventional devices in order to prevent unauthorized use of our system.
We anticipate that these smart chips will be an important part of our
disposable interventional device strategy going forward.
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
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 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. 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 commercial success will depend in part on obtaining and
maintaining patent protection and trade secret protection of our
technologies and products as well as successfully defending these patents
against third-party challenges. Some of our technology was co-developed
with third parties and these third parties may claim rights in our
intellectual property. We may also be liable for patent infringement by
third parties whose products we use or combine with ours and for which we
have no right to indemnification. In addition, many countries, including
certain European countries, have compulsory licensing laws under which a
patent owner may be compelled to grant licenses to third parties in some
circumstances (for example, the patent owner has failed to "work" the
invention in that country, or the third party has patented improvements).
Many countries also 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 will only be able to protect our technologies from unauthorized
use by third parties to the extent that valid and enforceable patents or
trade secrets cover them. We expect to face expensive and time-consuming
infringement actions, validity challenges and other intellectual property
claims and proceedings, which are frequent in the medical device industry,
and which divert management's
22
attention from our business. There are other risks associated with our
patent portfolio and other intellectual property. Please refer to "Factors
That May Affect Future Results" for a more complete description of these
risks.
University of Virginia. We have exclusively licensed six patents
related to the field of magnetically guiding an element through the body
and viewing it for medical use from the University of Virginia Patent
Foundation. The UVA patents address earlier versions of our system which we
do not believe are essential to the protection of our current business
activities, although one of these patents could be construed to cover some
of our current activities. To date, we have expensed a five percent royalty
on sales of products that might arguably be covered by this patent and our
business model assumes continued payment of this royalty to UVA. However,
we have become aware of prior art that caused us to question the validity
of this patent, and as a result, we have initiated re-examination of the
patent in the U.S. Patent and Trademark Office. If this reexamination finds
the patent partially or completely invalid, our royalty obligations under
the license agreement could be reduced or eliminated. We believe that our
other patents would be sufficient to protect our technology in that event.
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. We believe
Stereotaxis has an important "first mover" advantage in establishing
clinical standards in these areas. See "Factors That May Affect Future
Results" for a discussion of other competitive risks facing our business.
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
23
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
application, or PMA, process.
If clinical data is 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.
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.
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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 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, family of CRONUS
coronary guidewires, and TANGENT electrophysiology mapping catheter have
been cleared by the FDA to be used in interventional procedures. In
addition, we have received the CE Mark for our HELIOS electrophysiology
ablation catheter and, in the U.S., we have completed clinical trials in
2004 and expect to subsequently file a PMA.
We are subject to risks associated with U.S. government regulation.
See "Factors That May Affect Future Results" for a discussion of the
specific regulatory risks associated with our business.
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 are pursuing the right to affix the CE mark to
certain guidewires that have received 510(k) clearance in the U.S. If we
modify existing 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 in 2005 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, and we have begun to formulate
our clinical plans for regulatory approval. We are currently formulating
our clinical and regulatory plans for China and anticipate using Siemens to
coordinate regulatory approval and distribute our products in China. We
will evaluate regulatory approval in other foreign countries on an
opportunistic basis.
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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 who allegedly offered
unlawful inducements to potential or existing customers in an attempt to
procure their business. As part of our compliance program, we review our
sales contracts and marketing materials to help assure compliance with the
Anti-Kickback Statute and similar state laws. 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
26
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
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
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 of between $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
27
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, 2004, we had 140 employees, 49 of whom were
engaged directly in research and development, 30 in manufacturing and
service, 12 in regulatory, clinical affairs and quality activities, 35 in
sales and marketing activities and 14 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.
ITEM 2. PROPERTIES
We lease approximately 31,000 square feet of manufacturing and
office space in St. Louis, Missouri. The St. Louis facility is leased
through December 31, 2005. On November 18, 2004, we entered into an office
lease agreement under which we will lease space in a new building to be
constructed in St. Louis. Once the building is completed, we will move our
current St. Louis, Missouri operations to the leased space in the new
building. The lease for the new premises is effective December 1, 2005 and
has a term of ten years, with two renewal options of three years each. The
minimum annual rental under the terms of the lease ranges from
approximately $705,000 in 2006 to approximately $1,177,000 in 2015,
including rent for expansion space provided for in the lease.
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, 2004.
28
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 HIGH LOW
------- ---- ---
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, 2005, there were approximately 176 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.
USE OF PROCEEDS FROM IPO
We effected the initial public offering of our common stock pursuant
to a Registration Statement on Form S-1 (File No. 333-115253) that was
declared effective by the Securities and Exchange Commission on August 11,
2004 and pursuant to which shares were offered on August 12, 2004.
The net proceeds from the offering, after an underwriting discount
and other expenses, were approximately $41.4 million. We have begun to use,
and intend to continue to use, the net proceeds of the offering for general
corporate purposes, including: working capital; continued sales, marketing
and clinical support initiatives relating to the commercialization of our
products; and continued research and development.
Pending other uses, we have invested the remaining net proceeds of
the offering primarily in short-term, investment grade, interest-bearing
instruments.
29
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,
2004 2003 2002 2001 2000
-----------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Sales $ 18,816,860 $ 5,014,877 $ 18,900 $ - $ -
Cost of Sales 10,672,262 4,051,313 39,760 - -
-----------------------------------------------------------------------------------------
Gross Profit 8,144,598 963,564 (20,860) - -
-----------------------------------------------------------------------------------------
Operating costs and expenses:
Research and development 18,437,108 13,886,462 14,742,015 14,359,131 8,871,585
General and administrative 6,315,987 5,028,142 4,528,637 2,645,563 1,625,621
Sales and marketing 10,964,925 5,999,310 2,230,565 951,280 386,229
-----------------------------------------------------------------------------------------
Total operating costs and
expenses 35,718,020 24,913,914 21,501,217 17,955,974 10,883,435
-----------------------------------------------------------------------------------------
Loss from operations (27,573,422) (23,950,350) (21,522,077) (17,955,974) (10,883,435)
Interest and other income, net 315,953 (86,487) 63,419 950,776 1,334,319
-----------------------------------------------------------------------------------------
Net loss $ (27,257,469) $(24,036,837) $(21,458,658) $(17,005,198) $ (9,549,116)
=========================================================================================
Basic and diluted net loss per
share (1) $ (2.38) $ (18.37) $ (19.21) $ (23.01) $ (20.64)
=========================================================================================
Shares used in computing basic
and diluted net loss per share 11,470,310 1,308,805 1,117,301 739,088 462,616
=========================================================================================
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 45,648,834 $ 26,480,612 $ 28,834,123 $ 30,452,205 $ 24,712,254
Working Capital 49,672,005 22,764,719 25,483,149 26,660,162 22,859,357
Total Assets 71,187,756 37,323,419 32,920,872 31,750,413 25,170,000
Long-term debt, less current
maturities 1,000,000 2,243,768 2,281,321 - -
Accumulated deficit (114,673,234) (87,415,765) (63,378,928) (41,920,270) (24,915,072)
Total stockholders' equity $ 58,394,468 $ 25,266,428 $ 24,006,646 $ 27,476,496 $ 23,255,756
(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.
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 below under the caption "Factors That May Affect
30
Future Results." 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. and
Europe.
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 primary to developing prototypes and performing research and
development activities 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 such 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.
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, 2004, we
had incurred cumulative net losses of approximately $114.7 million. We
expect to incur
31
additional losses through the first half of 2006 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 expect to use substantial financial
resources from our initial public offering to expand our sales and marketing
and customer support activities.
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 and
Philips have 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 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. Other
revenue represents a system sale for which the cost of production was
charged to research and development costs in 2002 and 2001.
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.
32
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. 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. Stock compensation expense is
amortized over the vesting period of the underlying option, generally two
to four years. Unearned deferred compensation for non-employees is
periodically remeasured through the vesting date.
The amount of deferred compensation expense to be recorded in future
periods may decrease if unvested options for which we have recorded
deferred compensation are subsequently cancelled or expire, or may increase
if the fair market value of our stock increases or we make additional
grants of non-qualified stock options to members of our scientific advisory
board or other non-employees.
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.
In assessing the realizability of deferred tax assets, management
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. Management 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, management determined that a 100%
valuation allowance of deferred tax assets was appropriate.
33
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.
RESULTS OF OPERATIONS
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 95% 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 $18.4 million for the year ended December 31, 2004 from $13.9
million for the year ended December 31, 2003, an increase of approximately
33%. 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. Any payments received from
Philips in excess of amounts recognized as earned are included in accrued
liabilities on the balance sheet.
34
General and Administrative Expenses. General and administrative
expenses increased to $6.3 million for the year ended December 31, 2004
from $5.0 million for the year ended December 31, 2003, an increase of 26%.
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 $11.0 million for the year ended December 31, 2004 from $6.0 million for
the year ended December 31, 2003, an increase of approximately 83%. The
increase related primarily to increased salary, benefits and travel
expenses associated with hiring additional sales personnel and expanded
marketing programs.
Interest Income. Interest income increased approximately 116% to
$811,000 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.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Revenues. We generated $5.0 million in revenue in 2003 compared to
$18,900 in 2002. This increase in revenues was attributable to the
commencement of commercial sales of our systems following regulatory
approval in 2003. As described above, we recognized revenue in 2003 from
the sale of eight systems, including one predecessor system for which the
cost of production was charged to research and development for previous
years. This system, which is reflected as "other revenue" in our financial
statements, is similar to a prototype in that it was placed prior to our
receipt of FDA approval and was developed and installed primarily to
demonstrate the effectiveness of our new technology. Because of
uncertainties regarding whether payment would be ultimately received for
this system, the full cost was expensed to research and development during
the system's construction, principally during 2001. In 2003, following
acceptance and the commencement of commercial use, the customer paid for
the predecessor system. As a result, we recognized revenue in 2003 upon
payment for the system.
Cost of Revenues. Cost of revenues increased to $4.1 million in 2003
from $39,800 in 2002. This increase in cost of revenues was attributable
primarily to the commencement of sales of our NIOBE system and associated
cost of goods sold for those systems. As a percentage of our revenues, cost
of revenues, excluding "Other revenue," was 95% in the year ended December
31, 2003. In 2002, our cost of revenues greatly exceeded our revenues
because we did not have commercial revenues from the sale of systems in
2002.
Research and Development Expenses. Research and development expenses
decreased to $13.9 million in 2003 from $14.7 million in 2002, a decrease
of approximately 6%. Our research and development expenses were higher in
2002 primarily because we were developing prototypes required for
regulatory approval of our products.
General and Administrative Expenses. General and administrative
expenses increased to $5.0 million in 2003 from $4.5 million in 2002, an
increase of approximately 11%. The increase from 2002 to 2003 was directly
attributable to personnel additions made to support the commercial launch
of our products in 2003.
Sales and Marketing Expenses. Sales and marketing expenses increased
to $6.0 million in 2003 from $2.2 million in 2002, an increase of
approximately 169%. The increase related primarily to increased salary,
benefits and travel expenses associated with the hiring of additional sales
personnel and the expansion of our marketing programs.
Interest Income. Interest income decreased to $375,000 for 2003 from
$434,000 for 2002, a decrease of approximately 14%. The decrease was
primarily the result of lower interest rates realized on balances invested.
35
Interest Expense. Interest expense increased to $462,000 for 2003
from $371,000 for 2002, an increase of approximately 25%. The increase was
primarily the result of higher interest expense from increased borrowings
under various Silicon Valley Bank lines of credit.
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, 2004, 2003 and 2002 to reflect these uncertainties. As of
December 31, 2004, we had federal and state net operating loss
carryforwards of approximately $108.1 million and federal research and
development credit carryforwards of approximately $2.1 million. The net
operating loss and research and development credit carryforwards will
expire on various dates beginning in 2005 through 2024, respectively, if
not utilized. We may not be able to utilize certain of these loss
carryforwards and credits prior to their expiration. Of the $108.1 million
net operating loss, $5.6 million is limited as to its use prior to December
31, 2007.
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. At
December 31, 2004, we had working capital of approximately $49.7 million,
compared to $22.8 million at December 31, 2003.
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 $28.7 million and $5.1 million of investments in corporate debt
securities, U.S. government agency notes and commercial paper at December
31, 2004 and 2003, respectively.
The following table summarizes our cash flow by operating, investing
and financing activities for each of years ended December 31, 2004, 2003
and 2002 (in thousands):
2004 2003 2002
---- ---- ----
Cash Flow provided by (used in) Operating Activities $(31,814) $(24,469) $(22,029)
Cash Flow provided by (used in) Investing Activities (29,654) (7,182) 1,480
Cash Flow provided by (used in) Financing Activities 57,019 24,174 20,719
Net cash (used in) operating activities. We used approximately $31.8
million, $24.5 million and $22.0 million of cash in operating activities
during the year ended December 31, 2004, 2003 and 2002, respectively,
primarily as a result of operating losses during these periods. Cash used
for working capital purposes increased to $5.9 million during the year
ended December 31, 2004 from $1.4 million during the year ended December
31, 2003 primarily as a result of an increase in accounts receivable from
increased sales and billings for sales deposits from customers offset
36
by an increase in deferred revenue related to installed systems on which
revenue has not yet been recognized and from deposits received from
customers.
Net cash provided by (used in) investing activities. We used
approximately $29.7 million of cash for investing activities during the
year ended December 31, 2004, substantially all for the purchase of
investments, compared to $7.2 million during the year ended December 31,
2003. The 2003 investing activities included purchases of property, plant
and equipment of approximately $2.1 million. Cash from investing activities
of $1.5 million during the year ended December 31, 2002 was substantially
all from the sale of short-term investments.
Net cash provided by financing activities. 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. 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. We received
approximately $20.7 million from financing activities during 2002,
primarily as a result of the sale of our Series D-1 and D-2 preferred stock
and related common stock warrants in January and December 2002.
As of December 31, 2004, we had outstanding balances under various
equipment loan agreements with Silicon Valley Bank, consisting of an
aggregate of $1.9 million. In April 2004, we entered into an amendment to
our working capital revolving line of line of credit to increase our
borrowing capacity from $3.0 to $8.0 million. As of December 31, 2004 we
had no outstanding borrowings under this working capital line of credit and
had borrowing capacity of $8.0 million, subject to collateralization by
qualifying receivables and inventory balances with a maturity of April
2006.
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 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 1.5 to 1. We were also required to maintain a minimum tangible net
worth of at least $50.0 million as of the end of each calendar month.
Effective November 3, 2004, this minimum tangible net worth requirement was
amended to $30 million. 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. We are in compliance with
all covenants of this agreement.
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 at
least the first half of 2006. Throughout 2005, 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 have substantially increased the overall level of
our research and development expenses from their levels in 2003 as a result
of the
37
alliance agreements described above and otherwise, and we expect that these
expenses will continue at substantially their current levels in the near
term. In addition, 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 initial public
offering, 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.
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) $ 910 $1,000 $ - $ - $ 1,910
Operating leases 792 1,493 1,638 6,550 10,473
Capital leases 11 9 7 - 27
Research and alliance agreements 6,160 1,679 350 - 8,189
------------------------------------------------------------
Total $7,873 $4,181 $1,995 $6,550 $20,599
============================================================
(1) We have not included interest payable on our revolving credit agreement in these amounts because it is calculated
at a variable rate.
38
RECENT ACCOUNTING PRONOUNCEMENTS
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, 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
July 1, 2005. These new accounting rules will lead to a decrease in
reported earnings and we have not yet determined the exact impact SFAS No.
123(R) will have on our financial statements.
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 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 the Company's
financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
39
OUR COLLABORATIONS WITH SIEMENS, PHILIPS AND J&J MAY FAIL, OR WE MAY NOT BE
ABLE TO ENTER INTO ADDITIONAL PARTNERSHIPS OR COLLABORATIONS IN THE FUTURE.
We are collaborating with Siemens, Philips and J&J 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.
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:
* any of our collaboration partners delays or fails in the integration
of its technology with our Stereotaxis System as planned;
* 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
* we become involved in disputes with one or more of our collaboration
partners regarding our collaborations.
Siemens, Philips and J&J, 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.
YOU 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.
40
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. and Europe through a
direct sales force of sales specialists, supported by account managers that
provide training, clinical support, and other services to our customers. If
we are unable to increase our 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:
* our inability to recruit and retain adequate numbers of qualified
sales and marketing personnel;
* the inability of sales personnel to obtain access to or persuade
adequate numbers of hospitals and physicians to purchase and use our
products;
* unforeseen costs associated with maintaining and expanding an
independent sales and marketing organization; and
* 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.
WE MAY LOSE OR FAIL TO ATTRACT 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. If we are unable
to gain such support and collaboration, 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. 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 products at equal or lesser cost, it could render our
products obsolete or unmarketable. We cannot be certain that
41
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 process for a Stereotaxis
System is long and involves multiple stages, the completion of many of
which are outside of our control. 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, assembly and
installation of the system has typically taken six to eight months after a
customer agreed to purchase a system. Assembly and installation could take
even longer if our system is part of a larger construction project at the
customer site. These factors may 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.
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. For
example, in two hospitals where we installed our system, it interfered with
equipment located in adjacent rooms. In order to correct these particular
situations, we installed additional shielding and made other adjustments to
our equipment. 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.
42
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. We have only a limited history of commercial
placements from which to judge our rate of warranty claims. 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.
If we 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:
* enhance our existing products or develop new ones;
* expand our operations;
* hire, train and retain employees; or
* 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 additional and increasing net losses for at
least the next several years as we seek additional regulatory approvals,
launch new products and generally scale up our sales, marketing and
manufacturing operations to commercialize our products. We had net losses
of approximately $27.3 million in 2004, $24.0 million in 2003, $21.5
million in 2002, and at December 31, 2004 we had an accumulated deficit of
approximately $114.7 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 in these areas, 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
43
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 at the
expense of profitability.
OUR 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. We also depend on various
third party suppliers for the magnets we use in our NIOBE cardiology magnet
systems and for our guidewires and electrophysiology catheters. 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:
* we may not be able to control the quality and cost of our system or
respond to unanticipated changes and increases in customer orders;
* we may lose access to critical services and components, resulting in
an interruption in the manufacture, assembly and shipment of our
systems; and
* 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, J&J, to manufacture a
number of disposable interventional devices for use with our Stereotaxis
System. If J&J cannot 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 OUR
MAGNETS, ONE OF OUR KEY SYSTEM COMPONENTS, ARE SOURCED FROM JAPAN.
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
44
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. 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 are manufacturing a limited
number of our disposable interventional devices ourselves in a pilot
manufacturing program and intend to continue to subcontract the manufacture
of others to third parties. 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 are also moving our St. Louis operations to new facilities
in the St. Louis area in 2005. Moving to a new facility could disrupt our
systems assembly or testing activities and divert the attention of our
management and other key personnel from our business operations.
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 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
45
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 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
from third parties who hold patents covering technology used in specific
interventional procedures. If we cannot obtain those licenses, 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.
46
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 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 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 market our unapproved
disposable interventional devices in the U.S. until the necessary clearance
or approvals from the FDA have been received and can only place these
devices with 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 for these disposable devices. If
these clearances or approvals are not received or are substantially
delayed, 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
47
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 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 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. For example, as a result of our own ongoing quality testing,
in January 2004 we voluntarily recalled our CRONUS guidewires. 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,
48
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.
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 DEFECTS MAY BE DISCOVERED IN OUR PRODUCTS.
Our products incorporate 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 will not experience errors or
performance problems in the future. If we experience software errors or
performance problems, we would likely also experience:
* loss of revenue;
* delay in market acceptance of our products;
* damage to our reputation;
* additional regulatory filings;
* product recalls;
* increased service or warranty costs; and/or
* 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, due to the
breadth of many health care laws and regulations, we cannot assure you that
they will not 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:
* 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;
49
* 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;
* 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;
* 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
* 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 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 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 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. 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, 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
50
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 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, Michael P. Kaminski, our Chief Operating Officer and
William M. Kelley, one of our directors. Mr. Kelley has extensive
experience in the medical device industry, and we believe his industry
contacts enable us to have proposals reviewed by key hospital
decision-makers earlier in the sales process than may otherwise be the
case. 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:
* currency fluctuations that could impact the demand for our products
or result in currency exchange losses;
* export restrictions, tariff and trade regulations and foreign tax
laws;
* customs duties, export quotas or other trade restrictions;
* economic and political instability; and
* shipping delays.
51
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, 2004, 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:
* discourage, delay or prevent a change in the control of our company
or a change in our management;
* adversely affect the voting power of holders of common stock; and
* 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 J&J, 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 J&J
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 J&J 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.
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.
52
As of December 31, 2004, we had outstanding 27,187,042 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 are presently evaluating and
monitoring 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:
* demand for our products;
* the performance of third-party contract manufacturers and component
suppliers;
* our ability to develop sales and marketing capabilities;
* the success of our collaborations with Siemens, Philips and J&J and
others;
* our ability to develop, introduce and market new or enhanced versions
of our products on a timely basis;
* our ability to obtain regulatory clearances or approvals for our new
products; and
* 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.
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:
* actual or anticipated variations in our results of operations or
those of our competitors;
* the receipt or denial of regulatory approvals;
53
* announcements of new products, technological innovations or product
advancements by us or our competitors;
* developments with respect to patents and other intellectual property
rights;
* changes in earnings estimates or recommendations by securities
analysts or our failure to achieve analyst earnings estimates; and
* 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to currency fluctuations. We operate mainly in the
U.S. and Europe 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.
54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Registered Public
Accounting Firm 56
Balance Sheets at December 31, 2004 and 2003 57
Statements of Operations for the years ended December 31,
2004, 2003 and 2002 58
Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002 59
Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002 62
Notes to the Financial Statements 63
Schedule II--Valuation and Qualifying Accounts 85
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.
55
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, 2004 and 2003, and the related statements of
operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2004. These financial statements are
the responsibility of the Company's management. Our audit also included the
financial statement schedule listed in the Index at Item 15(a). 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. We were
not engaged to perform an audit of the Company's internal control over
financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
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, 2004 and 2003, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2004 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 therein.
/s/ Ernst & Young LLP
St. Louis, Missouri
February 18, 2005
56
STEREOTAXIS, INC.
BALANCE SHEETS
DECEMBER 31,
2004 2003
--------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,907,516 $ 21,356,247
Short-term investments 28,741,318 5,124,365
Accounts receivable, net of allowance for uncollectible
accounts of $146,223 and $116,725 in 2004 and 2003,
respectively 8,621,205 559,721
Current portion of long-term receivables 168,795 155,331
Inventories 4,673,994 4,430,228
Prepaid expenses and other current assets 2,351,058 876,264
--------------------------------
Total current assets 61,463,886 32,502,156
Property and equipment, net 1,557,847 2,309,467
Intangible assets, net 1,811,111 1,944,444
Long-term receivables 337,590 465,993
Other assets 120,697 101,359
Long-term investments 5,896,625 -
--------------------------------
Total assets $ 71,187,756 $ 37,323,419
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 910,434 $ 2,289,314
Accounts payable 2,129,473 1,697,497
Accrued liabilities 5,710,216 4,936,233
Deferred contract revenue 3,041,758 814,393
--------------------------------
Total current liabilities 11,791,881 9,737,437
Long-term debt, less current maturities 1,000,000 2,243,768
Other liabilities 1,407 75,786
Stockholders' equity:
Convertible preferred stock, issued in series, par value
$0.001; 10,000,000 and 65,000,000 shares authorized at
2004 and 2003, respectively; 61,055,286 shares issued
and outstanding at 2003; liquidation preference of
$146,819,436 at 2003 - 61,055
Common stock, par value of $0.001; 100,000,000 and
80,000,000 shares authorized at 2004 and 2003,
respectively; 27,187,042 and 1,515,150 shares issued
at 2004 and 2003, respectively 27,187 1,515
Additional paid-in capital 174,143,587 113,921,587
Deferred compensation (671,950) (835,801)
Treasury stock, 36,519 and 18,316 shares at 2004 and
2003, respectively (162,546) (17,750)
Notes receivable from sale of stock (173,432) (448,413)
Accumulated deficit (114,673,234) (87,415,765)
Accumulated other comprehensive loss (95,144) -
--------------------------------
Total stockholders' equity 58,394,468 25,266,428
--------------------------------
Total liabilities and stockholders' equity $ 71,187,756 $ 37,323,419
================================
See accompanying notes.
57
STEREOTAXIS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2004 2003 2002
--------------------------------------------------
Systems revenue $ 17,219,080 $ 3,808,036 $ -
Disposables, service and accessories revenue 1,597,780 480,941 18,900
Other revenue - 725,900 -
--------------------------------------------------
Total revenue 18,816,860 5,014,877 18,900
Costs of revenue 10,672,262 4,051,313 39,760
--------------------------------------------------
Gross profit (loss) 8,144,598 963,564 (20,860)
Operating expenses:
Research and development 18,437,108 13,886,462 14,742,015
Sales and marketing 10,964,925 5,999,310 2,230,565
General and administrative 6,315,987 5,028,142 4,528,637
--------------------------------------------------
Total operating expenses 35,718,020 24,913,914 21,501,217
--------------------------------------------------
Operating loss (27,573,422) (23,950,350) (21,522,077)
Interest income 811,049 375,361 434,470
Interest expense (495,096) (461,848) (371,051)
--------------------------------------------------
Net loss $(27,257,469) $(24,036,837) $(21,458,658)
==================================================
Net loss per common share:
Basic and diluted $ (2.38) $ (18.37) $ (19.21)
==================================================
Weighted average shares used in computing net loss per
common share:
Basic and diluted 11,470,310 1,308,805 1,117,301
==================================================
See accompanying notes.
58
STEREOTAXIS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock
-----------------------------------------
Additional
Comprehensive Paid-In Deferred Treasury
Income (Loss) Shares Amount Shares Amount Capital Compensation Stock
------------- ---------- ------- --------- ------ -------------------------------------
Balance at December 31, 2001 $ - 43,488,275 $43,488 1,261,800 $1,262 $70,837,047 $(1,059,508) $(2,156)
Issuance of Series D-3
convertible preferred stock
at $2.17 per share, net of
issuance costs of $287,262 - 7,940,951 7,941 - - 15,352,459 - -
Exercise of stock warrants - 205,791 206 - - 289,365 - -
Exercise of stock options - - - 128,123 128 94,210 - -
Interest receivable from sale
of stock - - - - - - - -
Deferred compensation - - - - - 98,474 (98,474) -
Stock-based compensation - - - - - - 483,638 -
Payments of notes receivable
from sale of stock - - - - - - - -
Issuance of warrants to
purchase common stock - - - - - 1,584,202 - -
Issuance of warrants to
purchase convertible
preferred stock in
connection with long-term
debt - - - - - 192,637 - -
Net Loss (21,458,658) - - - - - - -
Other comprehensive income
(loss):
Unrealized loss on short
term investments - - - - - - - -
------------
Comprehensive Loss $(21,458,658) - - - - - - -
-------------------------------------------------------------------------------------------------
Balance at December 31, 2002 51,635,017 $51,635 1,389,923 $1,390 $88,448,394 $(674,344) $(2,156)
Notes Accummulated
Receivable Other Total
From Sale Accummulated Comprehensive Stockholders'
Of Stock Deficit Income (Loss) Equity
----------------------------------------------------------
Balance at December 31, 2001 $(423,172) $(41,920,270) $ - $ 27,476,691
Issuance of Series D-3
convertible preferred stock
at $2.17 per share, net of
issuance costs of $287,262 - - - 15,360,400
Exercise of stock warrants - - - 289,571
Exercise of stock options - - - 94,338
Interest receivable from sale
of stock (28,758) - - (28,758)
Deferred compensation - - - -
Stock-based compensation - - - 483,638
Payments of notes receivable
from sale of stock 12,585 - - 12,585
Issuance of warrants to
purchase common stock - - - 1,584,202
Issuance of warrants to
purchase convertible
preferred stock in
connection with long-term
debt - - - 192,637
Net Loss - (21,458,658) - (21,458,658)
Other comprehensive income
(loss):
Unrealized loss on short
term investments - - - -
Comprehensive Loss - - - -
----------------------------------------------------------
Balance at December 31, 2002 $(439,345) $(63,378,928) $ - $ 24,006,646
See accompanying notes.
59
STEREOTAXIS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
Convertible
Preferred Stock Common Stock
-----------------------------------------
Additional
Comprehensive Paid-In Deferred
Income (Loss) Shares Amount Shares Amount Capital Compensation
------------- ---------- ------- --------- ------ ---------------------------
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 (653,625)
Stock-based compensation - - - - - - 492,168
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 $(835,801)
Notes Accummulated
Receivable Other Total
Treasury From Sale Accummulated Comprehensive Stockholders'
Stock Of Stock Deficit Income (Loss) Equity
------------------------------------------------------------------------
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 - - - - -
Stock-based compensation - - - - 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 $(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 Deferred
Income (Loss) Shares Amount Shares Amount Capital Compensation
------------- ----------- -------- ---------- ------ ---------------------------
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 - - - - - - 654,501
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 (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 $(671,950)
===========================================================================
Notes Accumulated
Receivable Other Total
Treasury From Sale Accumulated Comprehensive Stockholders'
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
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 - - - - -
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 $(162,546) (173,432) $(114,673,234) $(95,144) $58,394,468
======================================================================
See accompanying notes.
61
STEREOTAXIS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2004 2003 2002
--------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(27,257,469) $(24,036,837) $(21,458,658)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 754,710 447,786 406,766
Amortization 133,333 55,556 -
Stock-based compensation 452,130 492,168 483,638
Loss on asset disposal 42,425 - -
Changes in operating assets and liabilities:
Accounts receivable (8,061,484) (123,575) (80,550)
Notes receivable 114,939 (621,324) -
Inventories (243,766) (2,069,621) (2,360,607)
Prepaid expenses and other current assets (1,272,409) (405,987) (368,106)
Other assets (19,338) 18,778 (77,337)
Accounts payable 431,976 192,136 169,638
Accrued liabilities 773,983 2,379,901 468,440
Deferred revenue 2,227,365 (837,607) 826,000
Other 109,735 39,232 (38,159)
--------------------------------------------------
Net cash used in operating activities (31,813,870) (24,469,394) (22,028,935)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of equipment 1,489,904 - -
Purchase/disposal of equipment (1,535,420) (2,057,671) (308,512)
Sale of available-for-sale investments 6,936,710 - 1,788,105
Purchase of available-for-sale investments (36,545,431) (5,124,365) -
--------------------------------------------------
Net cash (used in) provided by investing activities (29,654,237) (7,182,036) 1,479,593
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 2,000,000 1,829,690 3,874,627
Payments under long-term debt (2,622,647) (2,482,240) (688,995)
Proceeds from issuance of stock and warrants, net of
issuance costs 57,522,153 24,829,113 17,521,148
Purchase of treasury stock (90) (15,594) -
Payments received on notes receivable from sale of
common stock 119,960 12,585 12,585
--------------------------------------------------
Net cash provided by financing activities 57,019,376 24,173,554 20,719,365
--------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,448,731) (7,477,876) 170,023
Cash and cash equivalents at beginning of period 21,356,247 28,834,123 28,664,100
--------------------------------------------------
Cash and cash equivalents at end of period $ 16,907,516 $ 21,356,247 $ 28,834,123
==================================================
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 $ 422,085 $ 394,287 $ 371,051
==================================================
See accompanying notes.
62
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 stent 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.
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,
2004, 2003 and 2002. 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
medical centers for acquisition of magnetic systems and associated
disposable device sales. Credit is granted on a limited basis, with most
balances due 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.
63
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 one to
five 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, 2004 and 2003 is $188,889
and $55,556, respectively. Amortization expense in 2004 and 2003 is
$133,333 and $55,556, respectively, as determined under the straight-line
method. The estimated future amortization of intangible assets is $133,333
annually through June 2019.
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. Other revenue represents a system sale for which the cost
of production was charged to research and development costs in 2002 and
2001.
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, 2004, 2003 and 2002, the
64
Company incurred $103,494, $278,320 and $33,580, respectively, for costs in
excess of contractual revenues, primarily on certain system sales.
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. Directed research performed
by hospitals (which, at times, may also be customers) at the Company's
request are expensed in the period such services are provided. Amounts paid
for directed research were $481,949, $128,424, and $100,041 in 2004, 2003,
and 2002, respectively. 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.
65
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 employee compensation:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2004 2003 2002
--------------------------------------------------
Net loss, as reported $(27,257,469) $(24,036,837) $(21,458,658)
Add total stock-based compensation cost
included in net loss 452,130 492,168 483,638
Deduct total stock-based compensation
expense under fair value method (2,873,162) (1,793,447) (1,104,659)
--------------------------------------------------
Pro forma net loss $(29,678,501) $(25,338,116) $(22,079,679)
==================================================
Net loss per share, basic and diluted, as
reported $ (2.38) $ (18.37) $ (19.21)
Net loss per share, basic and diluted,
pro forma $ (2.59) $ (19.36) $ (19.76)
The fair value of each option is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions for the years ended 2004, 2003 and 2002: dividend yield
of 0%, expected volatility ranging from 70% to 120%, risk-free interest
rates ranging from 1.09% to 5.28%, and an initial expected life ranging
from six to ten years. The weighted average fair value of the options at
grant date was $7.49, $5.94, and $4.75, for 2004, 2003 and 2002,
respectively. Future pro forma results of operations may be materially
different from amounts reported, as future years will include the effects
of additional stock option grants.
Option valuation models require the input of highly subjective
assumptions. Because the Company's employee stock options 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.
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. The
Company intends to adopt the provisions of SFAS No. 123(R) effective July
1, 2005. These new accounting rules will lead to a decrease in reported
earnings and the Company has not yet determined the exact impact SFAS No.
123(R) will have on its 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 excluded all preferred stock, outstanding options
and warrants, and shares subject to repurchase from the calculation of
diluted loss per common share because all such securities are antidilutive
for all periods presented.
66
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, accounted for $3,996,568, or 21%, of total
net sales for the year ended December 31, 2004. 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 $95,144 at December 31, 2004.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform to current year presentation.
67
3. INVESTMENTS
The following table summarizes available-for-sale securities
included in short and long-term investments as of the respective dates:
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
FAIR FAIR
COST UNREALIZED VALUE COST UNREALIZED VALUE
--------------------------------------------------------------------------------------------------
GAINS LOSSES GAINS LOSSES
-------- --------- ----- ------
Short-term investments:
Corporate debt $ 6,895,637 $ - $(276,708) $ 6,618,929 $5,124,365 $ - $ - $5,124,365
U.S. government agency 12,044,291 102,617 - 12,146,908 - - - -
Commercial paper 9,838,684 136,797 - 9,975,481 - - - -
--------------------------------------------------------------------------------------------------
Total short-term
investments 28,778,612 239,414 (276,708) 28,741,318 5,124,365 - - 5,124,365
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 $34,733,087 $240,502 $(335,646) $34,637,943 $5,124,365 $ - $ - $5,124,365
==================================================================================================
The Company views its available-for-sale portfolio as available for
use in its current operations. The following is a summary of the cost and
estimated fair value of available-for-sale securities at December 31, 2004,
by maturity date:
2004
FAIR
COST VALUE
-----------------------------
Mature in less than 1 year $28,778,612 $28,741,318
Mature in one year 5,954,475 5,896,625
-----------------------------
Total $34,733,087 $34,637,943
=============================
68
4. INVENTORY
Inventory consists of:
DECEMBER 31,
2004 2003
-----------------------------
Raw Materials $ 1,401,591 $ 975,052
Work in Process 498,174 487,344
Finished Goods 2,886,984 3,073,584
Reserve for obsolescence (112,755) (105,752)
-----------------------------
$ 4,673,994 $ 4,430,228
=============================
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
2004 2003
-----------------------------
Equipment $ 2,972,314 $ 1,806,186
Equipment held for lease - 1,533,094
Leasehold improvements 380,062 309,213
-----------------------------
3,352,376 3,648,493
Less accumulated depreciation 1,794,529 1,339,026
-----------------------------
$ 1,557,847 $ 2,309,467
=============================
Equipment held for lease at December 31, 2003 consisted of medical
devices provided to customers under a prepaid 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. During 2004, the Company sold all equipment held for
lease. Depreciation expense for the years ended December 31, 2004, 2003 and
2002 is $628,725, $447,786, and $406,766, respectively.
6. 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. Amounts paid to this
investor under this agreement totaled $3,417,522 and $972,190 in 2004 and
2003, respectively. In addition, the Company is entitled to receive royalty
payments from the investor based on a profit formula pertaining to sales of
certain disposable devices. The Company has not received any royalty
payments to date under this agreement. 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.
69
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
2004 2003
---------------------------
Accrued salaries, bonus, and benefits $2,006,700 $1,570,063
Accrued research and development 1,446,201 727,143
Accrued legal and other professional fees 623,411 968,532
Other 1,633,904 1,670,495
---------------------------
$5,710,216 $4,936,233
===========================
8. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
2004 2003
---------------------------
Revolving credit agreement, due June 2006 $ - $1,250,000
Term note, due December 2004 - 711,469
Term note, due September 2005 243,768 571,613
Term note, due June 2007 1,666,666 -
Pay-in-kind note, due August 2006 - 2,000,000
---------------------------
1,910,434 4,533,082
Less current maturities 910,434 2,289,314
---------------------------
$1,000,000 $2,243,768
===========================
In January 2002, the Company entered into a term note due in
December 2004 with its primary lender for $2,000,000 (January 2002 term
note). In conjunction with the January 2002 term note, the Company issued
its primary lender warrants to purchase 14,081 shares of Company's common
stock at a price per share of $7.81. The total proceeds under the January
2002 term note of $2,000,000 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 January 2002 term note, the Company was required to
make equal payments of principal and interest, at 10%, through December
2004 plus a final payment of 4% of the original note.
The warrants expire after five years and can be exercised at any
time. The fair value assigned to the warrants of $92,793 was reflected in
additional paid-in capital on the balance sheet and amortized to interest
expense over the life of the January 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 March 2002, the Company entered into a revolving line of credit
agreement (Revolving Credit Agreement) with a maximum borrowing capacity of
$2,000,000, limited to the value of qualifying receivable and inventory
balances, with its primary lender. In conjunction with the Revolving Credit
Agreement, the Company issued its primary lender warrants to purchase 10,241
shares of the Company's common stock at a price per share of $7.81. The
Revolving Credit Agreement was amended in July 2003 to increase the maximum
borrowing capacity to $3,000,000, and in April 2004 to increase the maximum
borrowing capacity to $8,000,000. Borrowings under the Revolving Credit
Agreement are subject to monthly interest at the lender's prime rate plus
1.25%, subject
70
to a minimum interest rate of 5.25%, and are due in full in April 2006. 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 1.5 to 1. In November,
2004, the Agreement was amended to require that the Company maintain a
minimum tangible net worth of at least $30.0 million. Remaining available
borrowing capacity at December 31, 2004 is $8,000,000.
The warrants issued in conjunction with the Revolving Credit
Agreement expire after five years and can be exercised at any time. The
fair value assigned to the warrants of $67,264 is reflected in additional
paid-in capital on the balance sheet and amortized to interest expense over
the 12-month life of the Revolving Credit Agreement. 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 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 is required
to make equal payments of principal and interest, at 10%, through September
2005 plus a final payment of 3% of the original note.
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.
The January 2002 term note, Revolving Credit Agreement, October 2002
term note and April 2004 term note (collectively, the Credit Agreements)
are secured by substantially all of the Company's assets. The Credit
Agreements also include certain equity level covenants and require the
Company to maintain minimum liquidity levels. 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
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. As of December 31, 2003, $67,561 of
interest was accrued on this note. 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.
Contractual principal maturities of long-term debt at December 31,
2004 are as follows:
2005 $ 910,434
2006 666,667
2007 333,333
----------
$1,910,434
==========
71
9. LEASE OBLIGATIONS
The Company leases its facilities under operating leases. For the
years ended December 31, 2004, 2003, and 2002 rent expense was $857,533,
$660,901, and $569,079, respectively.
In November 2004, the Company entered into an office lease agreement
under which the Company will lease space in a new building. The Company
intends to move its current headquarters to the new facilities in St.
Louis, MO. The escalating lease is effective December 1, 2005 and has a
term of ten years.
The future minimum lease payments under noncancelable leases as of
December 31, 2004 are as follows:
OPERATING
YEAR LEASE
- ---------------------------------------------------------
2005 $ 792,239
2006 784,992
2007 707,561
2008 747,766
2009 890,272
Beyond 2009 6,550,023
-----------
Total minimum lease payments $10,472,853
===========
10. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On August 12, 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. On September 3, 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 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. No dividends
have been declared or paid as of December 31, 2004.
72
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,
2004 2003
----------------------------
Convertible preferred stock - 16,959,801
Warrants 1,135,526 894,204
Stock option plan 2,439,765 1,975,265
Employee Stock Purchase Plan 277,777 -
----------------------------
3,853,068 19,829,270
============================
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, 2004 and 2003, shares subject to
repurchase were 8,681 and 55,497, 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
As of December 31, 2003, the Company had convertible preferred stock
outstanding as follows:
PRICE PAID LIQUIDATION VALUE
DATE ISSUED SERIES PER SHARE NUMBER OF SHARES DECEMBER 31, 2003
- -----------------------------------------------------------------------------------------------------------------------
December 1990 A $0.50 400,000 $ 461,667
April 1993 A 0.45 2,222,222 2,216,666
September 1994 A 1.00 50,000 49,875
December 1994 B 0.72 4,139,117 5,611,952
April 1995 B 0.72 520,833 669,705
November 1996-February 1997 B 0.72 2,352,949 2,860,793
June-December 1998 C 1.50 11,999,987 27,737,470
April 2000 D 2.17 11,751,147 34,849,985
November-December 2001 D-1 2.17 10,052,020 26,357,234
October 2002 C 1.50 205,791 345,986
December 2002 D-2 2.17 7,940,950 19,026,849
January 2003 D-2 2.17 2,764,979 6,550,002
June 2003 E 2.93 3,412,970 10,541,668
December 2003 E-1 2.93 3,242,321 9,539,584
----------------------------------------
61,055,286 $146,819,436
========================================
As a result of our reverse 1-for-3.6 common stock split in July
2004, the conversion ratio for preferred shares into common shares was
automatically adjusted accordingly.
Prior to the conversion of preferred stock to common stock in
conjunction with our initial public offering in August 2004, preferred
stockholders were entitled to cumulative dividends at the rate of $0.05,
$0.07, $0.15, $0.217, $0.217, $0.217, $0.293, $0.293, and $0.293 per share
per annum (post split basis) on each outstanding share of Series A, B, C,
D, D-1, D-2, E, E-1, and E-2 preferred stock as adjusted for stock splits
and recapitalizations, if declared by the Board of Directors, payable in
preference to common stock dividends. No dividends have been declared or
paid by the Company.
73
Prior to the conversion of preferred stock to common stock in
conjunction with our initial public offering in August 2004, preferred
shareholders were entitled to certain liquidation preferences. Preferred
shares' liquidation value equaled the original purchase price plus amounts
equal to all dividends in arrears. Cumulative dividends in arrears totaled
$0 and $32,171,521 at December 31, 2004 and 2003, respectively; however, as
mentioned above, no dividends have been declared. Prior to the conversion
of preferred stock into common stock, holders of common stock were entitled
to their pro-rata share of the assets of the Company after liquidation
payments were made to the preferred stockholders. As of December 31, 2004,
all of the Company's preferred shares had been converted to common shares.
NOTES RECEIVABLE
At December 31, 2004 and 2003, an officer of the Company,
consultants, members of the Board of Directors, and employees have
outstanding promissory notes including accrued and unpaid interest totaling
$173,432 and $448,413, 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 4.5% to 8.0%
per annum and are due from 2005 through 2006. These notes receivable are
reflected on the balance sheets as a component of stockholders' equity.
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, 2004 and 2003, the Board of Directors has
reserved a total of 2,439,765 and 1,975,265 respectively, shares 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 and non-qualified stock options 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.
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. The options generally vest 100% on the first
anniversary of each grant.
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. The exercise
price of each incentive stock option shall be not 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 be not 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 in each case will provide for vesting of at least 20% of the total
number of shares subject to the option per year.
74
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. In February 2002, the Compensation Committee of the
Board of Directors resolved to remove any performance or milestone related
provisions of certain stock option arrangements. The intrinsic value of
these options related to the unvested portion of these options is being
amortized to compensation expense over the remaining vesting period. In
addition, in February 2002, the Board accelerated vesting on certain stock
options granted to certain advisors to the Company and to nonemployee Board
members.
As of December 31, 2004, 2003, and 2002, 1,362,239, 683,906, and
237,077 options were vested and outstanding under all stock plans,
respectively.
A summary of the options outstanding is as follows:
WEIGHTED
NUMBER OF RANGE OF AVERAGE PRICE
SHARES EXERCISE PRICE PER SHARE
---------------------------------------------------
Outstanding, December 31, 2001 746,219 $0.14-$1.62 $1.14
Granted 775,694 $4.75-$5.94 $4.96
Exercised (128,123) $0.25-$1.62 $2.39
Forfeited (103,268) $0.54-$5.94 $0.72
---------
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
=========
As of December 31, 2004 and 2003, the weighted average remaining
contractual life of the options outstanding was 8.1 years and 8.0 years,
respectively.
DEFERRED COMPENSATION
For the years ended December 31, 2004, 2003, and 2002, the Company
recorded stock-based compensation expense related primarily to grants of
non-qualified options to consultants and other nonemployees of $452,130,
$492,168, and $483,638, 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,
2004, deferred compensation of $671,950 is expected to be expensed over the
term of the underlying options in future years as follows:
2005 $422,574
2006 223,135
2007 26,241
--------
Total $671,950
========
75
Deferred compensation is recorded as a separate component of
stockholders' equity. As of December 31, 2004 and 2003, $610,093 and
$688,851, respectively, of deferred compensation is subject to periodic
remeasurement.
In 2003, the Company recognized additional deferred compensation of
$360,297 related to modification of an option grant to allow an employee to
retain and continue to vest in outstanding options upon change to
nonemployee status.
WARRANTS
As of December 31, 2004, 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 and 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 and were credited to additional paid-in capital
at their fair value with a corresponding reduction to preferred offering
proceeds. During 2004, warrants for 57,604 were exercised under a cashless
exercise provision of the warrant agreements for a net issuance of 20,104
shares of common stock.
Additionally, in connection with closing its credit agreements in
2002, the Company issued to its primary lender warrants to purchase 29,322
shares of its common stock at $7.81 per share exercisable through various
times in 2007. These warrants were accounted for as described in Note 8.
The fair values of all warrants were estimated using the Black-Scholes
valuation method.
11. INCOME TAXES
The provision for income taxes consists of:
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------------------------------
Deferred:
Federal $ 9,502,076 $ 8,683,446 $ 7,521,820
State and local 950,374 879,474 861,391
------------------------------------------------
10,452,450 9,562,920 8,383,211
Valuation allowance (10,452,450) (9,562,920) (8,383,211)
------------------------------------------------
$ - $ - $ -
================================================
76
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,
2004 2003 2002
---------------------------------
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 (1.5%) 0.3% 0.5%
Research credits 2.2% 2.3% 0.9%
Valuation allowance (38.3%) (40.2%) (39.0%)
---------------------------------
Effective income tax rate 0.0% 0.0% 0.0%
=================================
In assessing the realizability of deferred tax assets, management
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. Management 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, management determined that a 100%
valuation allowance of deferred tax assets was appropriate.
The components of the deferred tax asset are as follows:
DECEMBER 31,
2004 2003
-------------------------------
Current accruals $ 664,869 $ 1,212,564
Depreciation and amortization 815,785 833,002
Deferred compensation 685,653 540,246
Net operating loss carryovers 40,718,018 30,418,180
Research and development credit carryovers 2,697,032 2,077,280
-------------------------------
45,581,357 35,081,272
Valuation allowance (45,581,357) (35,081,272)
-------------------------------
$ - $ -
===============================
As of December 31, 2004, the Company has federal net operating loss
carryforwards of $108,127,100. The net operating loss carryforwards will
expire at various dates beginning in 2005, approximately $2,093,000 will
expire between 2005 and 2009 and approximately $106,034,000 will expire
between 2010 and 2024, if not utilized. As of December 31, 2004, the
Company had federal research and development credit carryforwards of
$2,697,000, which will expire at various dates beginning in 2006 through
2024, if not utilized. Of the $108.1 million net operating loss,
approximately $5.6 million is limited as to its use prior to December 31,
2007.
12. RESTRUCTURING CHARGE
During 2002, the Company decided to discontinue its embolic product
line. This resulted in the Company incurring total restructuring expenses,
included in research and development, of approximately $267,000, consisting
77
primarily of employee severance costs and cancellation of contract research
agreements. The Company utilized this entire accrual in 2003.
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,
2004 2003 2002
--------------------------------------------------
Basic and diluted:
Net loss $(27,257,469) $(24,036,837) $(21,458,658)
Weighted average common shares
outstanding 11,502,781 1,424,216 1,326,537
Less weighted average shares subject to
repurchase 32,471 115,411 209,236
--------------------------------------------------
Weighted average shares used in basic and
diluted net loss per share 11,470,310 1,308,805 1,117,301
==================================================
Net loss per share $ (2.38) $ (18.37) $ (19.21)
==================================================
The following table sets forth the number of common shares that
could result from conversion or exercise of the following instruments as of
the year ended:
DECEMBER 31,
2004 2003 2002
----------------------------------------------
Preferred stock (as if converted) - 16,959,801 14,343,060
Options to purchase common stock 2,253,170 1,676,220 1,290,523
Common stock subject to repurchase 8,681 55,498 168,250
Warrants 1,135,526 894,204 779,022
----------------------------------------------
3,397,377 19,585,723 16,580,855
==============================================
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, 2004, 2003, and
2002, the Company expensed $361,008, $264,965, and $222,081, respectively,
related to the plan.
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, 2004 and 2003:
BASIC AND
DILUTED
NET GROSS NET LOSS PER
SALES PROFIT LOSS SHARE
----------------------------------------------------------------
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)
2003
First quarter $ 386,073 $ (114,864) $(4,905,670) $(3.96)
Second quarter 1,742,967 660,400 (4,846,292) (3.77)
Third quarter 1,040,932 439,310 (6,194,112) (4.68)
Fourth quarter 1,844,905 (21,282) (8,090,763) (5.83)
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 Europe. Management
considers all such sales to be part of a single operating segment.
Geographic revenues are as follows:
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------------------------
United States $12,578,610 $3,577,899 $18,900
International 6,238,250 1,436,978 -
------------------------------------------
Total $18,816,860 $5,014,877 $18,900
==========================================
All of the Company's long-lived assets are located in the United
States.
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: 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")), as of the end of the period covered by this
report. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures. 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 provided
reasonable assurance that the disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Company in the report
that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting: The Company's management,
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the Company's internal
control over financial reporting to determine whether any changes occurred
during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, the Company's internal control
over financial reporting. Based on that evaluation, there has been no such
change during the period covered by this report.
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, 2005, 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
4041 Forest Park Avenue
St. Louis, MO 63108
314-615-6940
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
80
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.
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, 2004.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS (1) WARRANTS AND RIGHTS COLUMN (A))(1)
------------- ----------------------- -------------------- -----------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders 3,388,696 $6.52 464,372
Equity compensation plans not
approved by security
holders - - -
--------- ----- -------
Total 3,388,696 $6.52 464,372
========= ===== =======
(1) Includes 277,777 shares reserved for issuance under the 2004 Employee
Stock Purchase Plan. Excludes automatic annual increases to shares by
which on January 1 of 2005, 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.
81
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 86.
82
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)
By: /s/ BEVIL J. HOGG
----------------------------
Bevil J. Hogg, President and
Date: March 28, 2005 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 28, 2005
FRED A. MIDDLETON
/s/ BEVIL J. HOGG
- --------------------------------------- President and Chief Executive Officer March 28, 2005
BEVIL J. HOGG (principal executive officer)
/s/ JAMES M. STOLZE
- --------------------------------------- Vice President and Chief Financial March 28, 2005
JAMES M. STOLZE Officer (principal financial officer
and principal accounting officer)
/s/ ABHI ACHARYA
- --------------------------------------- Director March 28, 2005
ABHI ACHARYA
/s/ CHRISTOPHER ALAFI
- --------------------------------------- Director March 28, 2005
CHRISTOPHER ALAFI
/s/ JOHN C. APLIN
- --------------------------------------- Director March 28, 2005
JOHN C. APLIN
83
/s/ DAVID W. BENFER
- --------------------------------------- Director March 28, 2005
DAVID W. BENFER
/s/ RALPH G. DACEY, JR.
- --------------------------------------- Director March 28, 2005
RALPH G. DACEY, JR.
/s/ GREGORY R. JOHNSON
- --------------------------------------- Director March 28, 2005
GREGORY R. JOHNSON
/s/ WILLIAM M. KELLEY
- --------------------------------------- Director March 28, 2005
WILLIAM M. KELLEY
/s/ RANDALL D. LEDFORD
- --------------------------------------- Director March 28, 2005
RANDALL D. LEDFORD
/s/ ABHIJEET J. LELE
- --------------------------------------- Director March 28, 2005
ABHIJEET J. LELE
/s/ WILLIAM C. MILLS III
- --------------------------------------- Director March 28, 2005
WILLIAM C. MILLS III
/s/ DAVID J. PARKER
- --------------------------------------- Director March 28, 2005
DAVID J. PARKER
84
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND THE END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURNS:
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
Year ended December 31, 2002 - 3,850 (2,200) 1,650
ALLOWANCE FOR INVENTORIES VALUATION:
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
Year ended December 31, 2002 - 84,580 - 84,580
85
EXHIBIT INDEX
NUMBER DESCRIPTION
3.1 Restated Articles of Incorporation of the Company,
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 Company, 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.
86
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.
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 10.3 of the Registrant's Form 10-Q (File No.
000-50884) for the fiscal quarter ended September 30, 2004.
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 10.4 of
the Registrant's Form 10-Q (File No. 000-50884) for the
fiscal quarter ended September 30, 2004.
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.
87
10.10# Form of Notice of Performance Share Award under the 2002
Stock Incentive Plan, incorporated by reference to Exhibit
10.5 of the Registrant's Form 10-Q (File No. 000-50884) for
the fiscal quarter ended September 30, 2004.
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
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.
10.20+ Supply Agreement dated July 1, 2003 between the Registrant
and Magnet Sales & Manufacturing 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 10.13.
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 Lease, having an effective date of August 15, 2001, between
the Registrant and Emerging Technologies Building II, LLC,
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
10.15.
88
10.23+ 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.
10.24 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.
10.25+ Software Distribution Agreement dated March 3, 2004 between
the Registrant and Siemens Aktiengesellschaft, 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 10.18.
10.26+ Third Party Service Agreement dated August 5, 2002 between
the Registrant and Siemens Medical Solutions USA, 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
10.19.
10.27+ Research Agreement between the Registrant, Siemens AG and
Landesbetrieb Krankenhauser, 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 10.20.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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.
10.33 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.
10.34 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
89
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.
10.35 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.
10.36+ Distributor Agreement dated September 17, 2003 between the
Registrant and AB Medica, 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 10.29.
10.37 Promissory Note dated November 20, 2001 by Douglas M. Bruce
payable to the order of Stereotaxis, 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 10.30.
10.38+ 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.
10.39* Office Lease dated November 15, 2004 between the Registrant
and Cortex West Development I, LLC
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)
- --------------
# 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.
* Confidential treatment requested as to certain portions,
which portions are omitted and filed separately with the
Securities and Exchange Commission.
90