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STXS > SEC Filings for STXS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for STEREOTAXIS, INC.

Form 10-Q for STEREOTAXIS, INC.


8-Nov-2012

Quarterly Report


ITEM 2. 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-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011. Operating results are not necessarily indicative of results that may occur in future periods. As described in Note 10 to the financial statements, on July 10, 2012, the Company effected a one-for-ten Reverse Stock Split of the Company's common stock. All information set forth in the following discussion and analysis gives effect to such Reverse Stock Split.

This report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Our actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth in Item 1A "Risk Factors" and in our Annual Report on Form 10-K for the year ended December 31, 2011. Forward-looking statements discuss matters that are not historical facts and 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 the Epoch Solution, which is an advanced remote robotic navigation system for use in a hospital's interventional surgical suite, or "interventional lab", that we believe revolutionizes the treatment of arrhythmias and coronary artery disease by enabling enhanced safety, efficiency and efficacy for catheter-based, or interventional, procedures. The Epoch Solution is comprised of the Niobe ES Robotic Magnetic Navigation System ("Niobe ES system"), Odyssey Information Management Solution ("Odyssey Solution"), and the Vdrive Robotic Navigation System ("Vdrive").

The Niobe 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 externally applied magnetic fields that govern the motion of the working tip of the catheter or guidewire, resulting in improved navigation, efficient procedures and reduced x-ray exposure.

In addition to the Niobe system and its components, Stereotaxis also has developed the Odyssey Solution, which consolidates all lab information enabling doctors to focus on the patient for optimal procedure efficiency. The system also features a remote viewing and recording capability called Odyssey Cinema, which is an innovative solution delivering synchronized content for optimized workflow, advanced care and improved productivity. This tool includes an archiving capability that allows clinicians to store and replay entire procedures or segments of procedures. This information can be accessed from locations throughout the hospital local area network and over the global Odyssey Network providing physicians with a tool for clinical collaboration, remote consultation and training.

Our Vdrive system provides navigation and stability for diagnostic and therapeutic devices designed to improve interventional procedures. The Vdrive system complements the Niobe ES system control of therapeutic catheters for fully remote procedures and enables single-operator workflow and is sold as two options, the Vdrive system and the Vdrive Duo system. In addition to the Vdrive system and the Vdrive Duo system, we also manufacture and market various disposable components which can be manipulated by these systems.

We promote the full Epoch Solution in a typical hospital implementation, subject to regulatory approvals or clearances. The full Epoch Solution implementation requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically includes equipment and installation charges. The recurring payments typically include disposable costs for each procedure, equipment service costs beyond warranty period, and software licenses and Odyssey Network fees. In hospitals where the full Epoch Solution has not been implemented, equipment upgrade or expansion can be implemented upon purchasing of the necessary upgrade or expansion.

The core components of Stereotaxis systems have received regulatory clearance in the U.S., Europe, Canada and elsewhere; the V-Loop circular catheter manipulator is currently in human clinical trials and V-Sono ICE catheter manipulator is under regulatory review by the U.S. Food and Drug Administration.

Since our inception, we have generated significant losses. As of September 30, 2012, we had incurred cumulative net losses of approximately $380 million. The Company expects such losses to continue through at least the year ended December 31, 2012. In May 2011, the Company introduced the Niobe ES, which is the latest generation of the Niobe Robotic Magnetic Navigation System and will replace the Niobe II system going forward. Due to the fact that the Niobe ES system and upgrades from Niobe II to Niobe ES systems were not available to customers until December 2011, the product change created a rapid shift away from sales of the current Niobe II system, resulting in lower System Revenue in 2011. As of September 30, 2012, the Company had performed 60 installations to upgrade Niobe II systems to Niobe ES systems and has received positive feedback from the physicians at these sites. The Company reduced operating expenses by $3.7 million or 29% from first quarter 2012 levels in the 2012 third quarter and anticipates achieving a 15% to 20% reduction from first quarter levels in the fourth quarter of 2012.


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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 U.S. generally accepted accounting principles. 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. For a complete listing of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2011.

Revenue Recognition

For arrangements with multiple deliverables, the Company allocates the total revenue to each deliverable based on the provisions of general accounting principles for revenue recognition and multiple-deliverable revenue arrangements and recognizes revenue for each separate element as the criteria for revenue recognition are met. Each element is assigned an estimated selling price using vendor-specific objective evidence, third party evidence, or management's estimate.

Under our revenue recognition policy, a portion of revenue for the Niobe, Odyssey Vision, Odyssey Cinema, and Vdrive systems is recognized upon delivery, provided that title has passed, there are no uncertainties regarding acceptance, persuasive evidence of an arrangement exists, the sales price is fixed and determinable, and collection of the related receivable is reasonably assured. Revenue for Niobe, Odyssey Vision Standard HD, Odyssey Vision Quad, Odyssey Enterprise Cinema, and Vdrive systems is recognized upon delivery due to the fact that third parties became qualified to perform installations. Revenue is recognized for other types of Odyssey systems upon completion of installation, since there are no qualified third party installers. When installation is the responsibility of the customer, revenue from system sales is recognized upon shipment since these arrangements do not include an installation element or right of return privileges. The Company does not recognize revenue in situations in which inventory remains at a Stereotaxis warehouse or in situations in which title and risk of loss have not transferred to the customer. However, the Company may deliver systems to a non-hospital site at the customer's request as outlined in the terms and conditions of the sales agreement, in which case the Company evaluates whether the substance of the transaction meets the delivery and performance requirements for revenue recognition under "bill and hold" guidance. Amounts collected prior to satisfying the above revenue recognition criteria are reflected as deferred revenue.

Revenue from services and license fees, whether sold individually or as a separate unit of accounting in a multiple-deliverable arrangement, is deferred and amortized over the service or license fee period, which is typically one year. Revenue from services is derived primarily from the sale of annual product maintenance plans. We recognize revenue from disposable device sales or accessories upon shipment and establish an appropriate reserve for returns. The return reserve, which is applicable only to disposable devices, is estimated based on historical experience which is periodically reviewed and updated as necessary. In the past, changes in estimate have had only a de minimus effect on revenue recognized in the period. We believe that the estimate is not likely to change significantly in the future.

Costs of systems revenue include direct product costs, installation labor and other costs, estimated warranty costs, and initial training and product maintenance costs. These costs are recorded at the time of sale. Costs of disposable revenue include direct product costs and estimated warranty costs and are recorded at the time of sale. Cost of revenue from services and license fees are recorded when incurred.


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Results of Operations

Comparison of the Three Months Ended September 30, 2012 and 2011

Revenue. Revenue increased from $8.5 million for the three months ended September 30, 2011 to $11.6 million for the three months ended September 30, 2012, an increase of approximately 35%. Revenue from the sale of systems rose from $2.0 million to $5.0 million, an increase of approximately 147%. We recognized revenue on two Niobe ES, a total of $0.6 million for Niobe ES upgrades, $0.5 million for Vdrive systems and a total of $1.6 million for Odyssey and Odyssey Cinema systems during the 2012 period, versus one Niobe system and a total of $1.0 million for Odyssey and Odyssey Cinema systems during the 2011 period. Revenue from sales of disposable interventional devices, service and accessories was flat at $6.5 million for the three months ended September 30, 2012 and 2011 with disposable sales, royalty and service revenue being consistent.

Cost of Revenue. Cost of revenue increased from $2.7 million for the three months ended September 30, 2011 to $3.5 million for the three months ended September 30, 2012, an increase of approximately 31%. Cost of revenue for systems sold rose from $1.7 million for the three months ended September 30, 2011 to $2.4 million for the three months ended September 30, 2012, an increase of approximately 41%. This increase was primarily due to one more Niobe system and higher Odyssey and Odyssey Cinema system sales. Cost of revenue for disposables, service and accessories increased from $0.9 million for the three months ended September 30, 2011 to $1.1 million for the three months ended September 30, 2012, an increase of approximately 13%. The increase was primarily due to Niobe ES upgrades received in exchange for new or extended premium service contracts. As a percentage of our total revenue, overall gross margin increased to 70% for the three months ended September 30, 2012 from 69% for the three months ended September 30, 2011. Gross margin for systems was 52% for the three months ended September 30, 2012 compared to 15% for the three months ended September 30, 2011. The improvement is primarily attributable to higher production volumes and related cost absorption. Gross margin for disposables, service and accessories was 84% for the current quarter compared to 86% for the three months ended September 30, 2011. The decline is mainly due to the additional cost of Niobe ES upgrades received in exchange for new or extended premium service contracts.

Research and Development Expenses. Research and development expenses declined from $3.5 million for the three months ended September 30, 2011 to $1.9 million for the three months ended September 30, 2012, a decrease of approximately 46%. The decrease is primarily due to the completion of major development efforts of the Epoch Solution and Odysseysystem upgrades in 2011, as well as reduced headcount expenses as part of the Company's efforts to reduce 2012 operating expenses.

Sales and Marketing Expenses. Sales and marketing expenses decreased from $6.9 million for the three months ended September 30, 2011 to $4.1 million for the three months ended September 30, 2012, a decline of approximately 41%. The decrease was due to primarily due to reduced headcount and related travel and relocation expenses as well as lower marketing and consulting expenses as part of the Company's efforts to reduce operating expenses.

General and Administrative Expenses. General and administrative expenses include regulatory, clinical, finance, information systems, legal, general management and training expenses. General and administrative expenses decreased to $3.0 million from $4.5 million for the three months ended September 30, 2012 and 2011, respectively, a decrease of approximately 34%. The decrease was primarily due to reduced headcount and related travel and relocation expenses as well as lower spending on registrations in Japan as our products approach the end of clinical trials, bad debt expense and foreign currency effects.


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Other Income. Other income represents the change in market value of certain warrants classified as a derivative and recorded as a current liability under general accounting principles for determining whether an instrument (or embedded feature) is indexed to an entity's own stock. Other income also includes the adjustment in fair value of the derivative asset and liability related to the conversion features embedded in the subordinated convertible debentures. The primary drivers of fluctuations in this balance are changes in the Company's stock price from one period to the next.

Interest Expense. Interest expense increased to $1.6 million for the three months ended September 30, 2012 from $0.8 million for the three months ended September 30, 2011, due to the Cowen financing in November 2011 and additional $2.5 million borrowing in August 2012, and the issuance of $8.5 million in Debentures in May 2012. Interest expense also includes the amortization of the debt discount on the Debentures totaling $0.2 million for the three months ended September 30, 2012.

Comparison of the Nine months Ended September 30, 2012 and 2011

Revenue. Revenue rose from $30.4 million for the nine months ended September 30, 2011 to $34.4 million for the nine months ended September 30, 2012, an increase of approximately 13%. Revenue from the sale of systems increased from $11.4 million to $14.1 million, an improvement of approximately 24%. We recognized revenue on six Niobe ES, a total of $2.7 million for Niobe ES upgrades, and a total of $4.8 million for Odyssey systems during the 2012 period, versus five Niobe systems and a total of $5.3 million for Odyssey systems during the 2011 period. Revenue from sales of disposable interventional devices, service and accessories increased to $20.3 million for the nine months ended September 30, 2012 from $19.0 million for the nine months ended September 30, 2011, approximately 7% higher. The increase was attributable to improved utilization due to Niobe ES upgrades and to a lesser extent the increased base of installed systems, the resulting disposable sales, offset by lower royalty income resulting from a reduction in the royalty rate effective January 1, 2012.

Cost of Revenue. Cost of revenue increased from $9.2 million for the nine months ended September 30, 2011 to $10.5 million for the nine months ended September 30, 2012, a rise of approximately 14%. As a percentage of our total revenue, overall gross margin decreased from 70% for the nine months ended September 30, 2011 to 69% for the nine months ended September 30, 2012 as higher systems margins offset lower disposable, service and accessories margins and a higher mix of lower margin systems revenue. Cost of revenue for systems sold increased from $6.4 million for the nine months ended September 30, 2011 to $6.9 million for the nine months ended September 30, 2012, a rise of approximately 8%, primarily due to higher Niobe ES and Vdrive system sales. Gross margin for systems was 51% for the nine months ended September 30, 2012 compared to 43% for the nine months ended September 30, 2011. The improvement is primarily attributable to higher production volumes and related cost absorption. Cost of revenue for disposables, service and accessories increased to $3.6 million during the 2012 period from $2.7 million during the 2011 period, resulting in a decrease in gross margin to 82% from 86% between these periods. The decrease in gross margin is due to a higher mix of lower margin disposables revenue, lower royalties and providing Niobe ES upgrades in exchange for new or extended premium service contracts.

Research and Development Expenses. Research and development expenses decreased from $10.2 million for the nine months ended September 30, 2011 to $6.9 million for the nine months ended September 30, 2012, a decline of approximately 32%. The decrease is primarily due to the completion of major development efforts of the Epoch Solution and Odyssey system upgrades in 2011, as well as reduced headcount expenses as part of the Company's efforts to reduce 2012 operating expenses.

Sales and Marketing Expenses. Sales and marketing expenses declined from $24.9 million for the nine months ended September 30, 2011 to $16.3 million for the nine months ended September 30, 2012, a decrease of approximately 35%. The decrease was principally due to reduced headcount and related travel and relocation expenses as well as reduced marketing and consulting expenses as part of the Company's efforts to reduce operating expenses.

General and Administrative Expenses. General and administrative expenses include regulatory, clinical, finance, information systems, legal, general management and training expenses. General and administrative expenses decreased to $10.3 million from $13.4 million for the nine months ended September 30, 2012 and 2011, respectively, a decline of approximately 23%. The decrease was primarily due to reduced headcount and related travel and relocation expenses, lower spending on registrations in Japan as our products approach the end of clinical trials, and decreased bad debt expense and consulting costs, partially offset by foreign currency effects.

Other Income. Other income represents the change in market value of certain warrants classified as a derivative and recorded as a current liability under general accounting principles for determining whether an instrument (or embedded feature) is indexed to an entity's own stock. Other income also includes the adjustment in fair value of the derivative asset and liability related to the conversion features embedded in the subordinated convertible debentures. The primary drivers of fluctuations in this balance are changes in the Company's stock price from one period to the next.

Interest Expense. Interest expense increased to $4.9 million for the nine months ended September 30, 2012 from $2.4 million for the nine months ended September 30, 2011, due to the Cowen financing in November 2011 and additional $2.5 million borrowing in August 2012, and the issuance of $8.5 million in Debentures in May 2012. Interest expense also includes the amortization of the debt discount on the Debentures totaling $0.4 million for the nine months ended September 30, 2012.


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Liquidity and Capital Resources

Liquidity refers to the liquid financial assets available to fund our business operations and pay for near-term obligations. These liquid financial assets consist of cash and cash equivalents. At September 30, 2012 we had $9.9 million of cash and equivalents. We had a working capital deficit of approximately $1.9 million and $6.6 million as of September 30, 2012 and December 31, 2011, respectively. The decrease in working capital deficit is due principally to the financing transaction completed in May 2012, as discussed in Notes 9 and 10.


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Cash flow

The following table summarizes our cash flow by operating, investing and financing activities for each of nine month periods ended September 30, 2012 and 2011 (in thousands):

                                                        Nine Months Ended
                                                          September 30,
                                                       2012           2011
        Cash Flow used in Operating Activities       $ (12,041 )    $ (19,959 )
        Cash Flow used in Investing Activities       $    (130 )    $    (973 )
        Cash Flow provided by Financing Activities   $   8,130      $   2,663

Net cash used in operating activities. We used approximately $12.0 million and $20.0 million of cash for operating activities during the nine months ended September 30, 2012 and 2011, respectively. This decrease was primarily driven by a lower net loss of $21.6 million and a decrease of $2.4 million due to the net presentation of the Biosense Webster royalty in operating activities in 2011 partially offset by a $10.3 million net increase in working capital - principally due to higher accounts receivable and lower deferred revenue - and $6.4 million increase in the non- cash gain associated with the adjustment of warrants and debt conversion features.

Net cash used in investing activities. We used approximately $0.1 million of cash for purchases of equipment for the nine month period ended September 30, 2012 compared to $1.0 million for the nine month period ended September 30, 2011. The decrease was due to higher expenditures in 2011 for equipment related to new product development as well as equipment used for trade shows.

Net cash provided by financing activities. We generated approximately $8.1 million of cash for the nine month period ended September 30, 2012 compared to $2.7 million generated for the nine month period ended September 30, 2011. This increase in cash generated was primarily due to $7.7 million from the issuance of subordinated convertible debentures and warrants, $9.1 million from stock and warrants and $2.5 million in additional borrowing from Cowen partially offset by $7.1 million net payments under our revolving line of credit, $3.0 million related to the term note, and $1.1 million for Cowen debt.

In May 2012, the Company entered into financing agreements for gross proceeds of approximately $18.5 million. Upon closing the financing transactions, the Company amended its agreement with its primary lender. See Notes 9 and 10 for additional details.

We expect to have negative cash flow from operations throughout 2012. We also expect to continue the development and commercialization of our existing products and, to a lesser extent, our research and development programs and the advancement of new products into clinical development. We expect that our sales and marketing, research and development, and general and administrative expenses will decrease throughout 2012. Although our operating expenses have significantly declined in 2012, we cannot assure that our existing cash, cash equivalents and borrowing facilities will be sufficient to fund our operating expenses and capital equipment requirements through the next 12 months. We may be required to raise capital or pursue other financing strategies to continue our operations. We are striving to generate positive cash flow from operations. However, until we can generate significant cash flow from our operations, we expect to continue to fund our operations with cash resources primarily generated from the proceeds of our past and future public offerings, private sales of our equity securities, working capital and equipment financing loans, and other financing strategies. 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. We also cannot assure that additional financing will be available on a timely basis on terms acceptable to us or at all. If adequate funds are not available to us, through the extension of our existing debt facility or otherwise, we may not be able to maintain customer and vendor relationships; hire, train and retain employees; maintain or expand our operations; or respond to competitive pressures. Further, 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 sales, 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.

While the Company remains focused on continuing the third quarter positive operating and financial trends, the Company also recognizes the need to strengthen its balance sheet. As a result, an independent financial advisor has been engaged to assist management and the Board of Directors in reviewing all possible strategic and financial alternatives, including the sale of non-core assets or distribution rights and geographic partnerships. There can be no assurance as to whether any particular strategic or financing alternative will be recommended by the Board, and the Company does not intend to disclose information on the progress of this evaluation until such time as deemed appropriate by the Board.


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Borrowing facilities

Revolving line of credit

The revolving line of credit and the Company's term notes (collectively, the "Credit Agreements") are secured by substantially all of the Company's assets. . . .

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