Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 2010
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
STEREOTAXIS, INC.
(Exact name of Registrant as Specified in its Charter)
| DELAWARE | 94-3120386 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
4320 Forest Park Avenue, Suite 100
St. Louis, MO 63108
(Address of Principal Executive Offices including Zip Code)
(314) 678-6100
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.001 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter (based on the closing sales prices on the NASDAQ Global Market on June 30, 2010) was approximately $129 million.
The number of outstanding shares of the registrant’s common stock on February 28, 2011 was 55,329,756.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant’s 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
Table of Contents
STEREOTAXIS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
i
Table of Contents
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 timing and prospects for regulatory approval of our additional disposable interventional devices; |
| • | the success of our business partnerships and strategic alliances; |
| • | our estimates regarding our capital requirements; |
| • | our ability to fund operations through cash flows from operations or by raising additional capital; |
| • | 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; |
| • | our plans for hiring additional personnel; 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 “Item 1A—Risk Factors” and elsewhere in this annual report on Form 10-K.
Our actual results may be materially different from what we expect. We undertake no duty to update these forward-looking statements after the date of this annual report, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.
OVERVIEW
We design, manufacture and market an advanced cardiology instrument control 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 important therapeutic solutions and enhancing the efficiency and efficacy of existing catheter-based, or interventional, procedures. Our Niobe® system allows physicians to more effectively navigate proprietary catheters, guidewires and other delivery devices, both our own and those we are co-developing with strategic partners, through the blood vessels and chambers of the heart to treatment
1
Table of Contents
sites in order to effect treatment. This is achieved using computer-controlled, externally applied magnetic fields that precisely and directly govern the motion of the internal, or working, tip of the catheter, guidewire or other interventional device. We believe that our Niobe system represents a revolutionary technology in the interventional lab, bringing precise remote digital instrument control and programmability to the interventional lab, and has the potential to become the standard of care for a broad range of complex cardiology procedures.
We believe that our Niobe system is the only commercialized technology that allows remote, computerized control of catheters, guidewires and other delivery devices directly at their working tip. We also believe that our technology represents an important advance in the ongoing trend toward digital instrumentation in the interventional lab and provides substantial, clinically important improvements and cost efficiencies over manual interventional methods, which often result in long and unpredictable procedure times with suboptimal therapeutic outcomes. We believe that our technology represents an important advance supporting efficient and effective information management and physician collaboration. The core elements of our Niobe system are protected by an extensive patent portfolio, as well as substantial know-how and trade secrets.
In addition to the Niobe system and its components, Stereotaxis also has developed the Odyssey™ Enterprise Solution, which consolidates all lab information from multiple sources enabling doctors to focus on the patient for optimal procedure efficiency. The system also features a remote viewing and recording capability called Odyssey Enterprise 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, a secure private network that allows for connection of the lab to other sites within and outside the hospital, providing physicians with a tool for clinical collaboration, remote consultation and training. The Odyssey Enterprise Solution may be acquired either in conjunction with a Niobe system or on a stand-alone basis for installation in interventional labs and other locations where clinicians desire improved clinical workflows and related efficiencies.
We began commercial shipments of our Niobe system in 2003, following U.S. and European regulatory clearance of its core components. Niobe system revenue represented 40%, 54%, and 67% of revenue for the years ended December 31, 2010, 2009, and 2008, respectively. Odyssey system revenue represented 18%, 10%, and 3% of revenue for the years ended December 31, 2010, 2009, and 2008, respectively. As of December 31, 2010, we had approximately $43 million of backlog, consisting of outstanding purchase orders and other commitments for these systems. We had backlog of approximately $37 million and $45 million as of December 31, 2009 and 2008, respectively, using the same active backlog criteria. Of the December 31, 2010 backlog, we expect approximately 67% to be recognized as revenue over the course of 2011. There can be no assurance that we will recognize such 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. 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. In addition, the sales cycle for the Niobe system is lengthy and generally involves construction or renovation activities at customer sites. Consequently, revenues and/or orders resulting from sales of our Niobe system can vary significantly from one reporting period to the next.
The Niobe system is designed primarily for use by interventional electrophysiologists in the treatment of abnormal heart rhythms known as arrhythmias and approximately 10% of usage is by interventional cardiologists in the treatment of coronary artery disease. To date the significant majority of the Stereotaxis installations worldwide are intended for use in electrophysiology.
Our Niobe system consists of the following proprietary components:
| • | our Niobe Magnetic Navigation System, which utilizes permanent magnets to navigate catheters, guidewires and other delivery devices through complex paths in the blood vessels and chambers of the heart to carry out treatment; |
2
Table of Contents
| • | 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 other interventional device; and |
| • | our Cardiodrive™ catheter advancement system, which is used to remotely advance and retract the catheter in the patient’s heart. |
The Niobe system is designed to be installed in both new and replacement interventional labs worldwide. Current and potential purchasers of our Niobe system include leading research and academic hospitals as well as community and regional medical centers around the world.
We currently have regulatory clearance to market our Niobe Magnetic Navigation System, our Navigant advanced user interface, our Cardiodrive automated catheter advancement system, our Odyssey Enterprise Solution and various disposable interventional devices in the U.S., Canada, Europe, China, and various other countries. We continue to pursue regulatory clearance and marketing approvals for additional products and in additional countries as appropriate.
We have alliances with Siemens AG Medical Solutions, Philips Medical Systems and Biosense Webster, a subsidiary of Johnson & Johnson. Through these alliances, we integrate our Niobe system with Siemens’ and Philips’ market-leading digital imaging and Biosense Webster’s 3D catheter location sensing technology. The Biosense alliance provides development of disposable interventional devices and coordination of marketing and sales efforts in order to continue to introduce new enhancements and provide innovative solutions to the interventional lab and promote the Stereotaxis platform. The Siemens and Philips alliances provide for coordination of our sales and marketing efforts with those of our partners to facilitate co-placement of integrated systems. In addition, Siemens provides worldwide service for certain of our integrated systems. Siemens accounted for 11% of total net revenue for the year ended December 31, 2010.
BACKGROUND
We have focused our clinical and commercial efforts on applications of the Niobe® system in electrophysiology procedures for the treatment of arrhythmias and in complex interventional cardiology procedures for the treatment of coronary artery disease.
The rhythmic beating of the heart results from the generation and transmission of electrical impulses. When these electrical impulses are mistimed or uncoordinated, the heart fails to function properly, resulting in complications that can range from fatigue to stroke or death. Several million people in the U.S. currently suffer from the resulting abnormal heart rhythms, which are known as arrhythmias. Electrophysiology is a fast-growing clinical specialty focused on the treatment of cardiac arrhythmias which can occur in any chamber of the heart and electrophysiologists typically treat patients with a combination of drug therapy and/or interventional catheter ablation of cardiac tissue to interrupt aberrant electrical signals.
Interventional cardiology and electrophysiology procedures have proven to be very effective at treating arrhythmias and coronary artery disease at sites accessible through the vasculature without the patient trauma, complications, recovery times and cost generally associated with open-heart surgery. With the advent of drug-eluting stents, the number of potential patients who could benefit from interventional cardiology procedures has grown. However, we believe 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 balloons or 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
3
Table of Contents
complex ablations within the left atrium of the heart. A major limitation is the manual dexterity required to perform complex ablations. As a result, large numbers of patients are referred to palliative drug therapy that can have harmful side effects.
We believe the Niobe 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 Niobe system enables physicians to perform cardiac procedures interventionally that historically would have been very difficult or impossible to perform in this way and has the potential to significantly improve both the efficiency and efficacy of these treatments. We believe that the Odyssey™ Enterprise Solution will provide physicians the ability to enhance procedure workflow, more effectively manage their interventional procedures, collaborate with other physicians, and provide the capability to record and review segments or the entire procedure.
CURRENT CHALLENGES IN INTERVENTIONAL MEDICINE
Although great strides have been made in manual device technology and in related manual interventional techniques, significant challenges remain that reduce interventional productivity and limit both the number of complex procedures and the types of diseases that can be treated manually. These challenges primarily involve the inherent mechanical limitations of manual instrument control and the lack of integration of the information systems used by physicians in the interventional lab as well as a significant amount of training and experience required to ensure proficiency. As a result, many complex cases in electrophysiology are treated with palliative drug therapy, and many complex procedures in interventional cardiology are still referred to highly invasive bypass surgery.
Limitations of Instrument Control
Manually controlled catheters, guidewires and other delivery devices, even in the hands of the most skilled specialist, have inherent instrument control limitations. In traditional interventional procedures, the device is manually manipulated by the physician who twists and pushes the external end of the instrument in an iterative process to thread the instrument through often tortuous blood vessels or into the chambers of the heart to 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. Also, each of these information systems requires a separate control panel, which further reduces the efficiency of the procedure.
4
Table of Contents
THE STEREOTAXIS VALUE PROPOSITION
Our products address the current challenges in the interventional lab by providing precise computerized control of the working tip of the interventional instrument and by integrating this control with the visualization technology and information systems used during interventional cardiology and electrophysiology procedures, on a cost-justified basis. We believe that the Niobe® system is the only commercialized technology that allows remote, computerized control of disposable interventional devices directly at their working tip.
We believe that our systems will:
| • | Expand the market by enhancing the treatment of more complex existing cases and potentially enabling new treatments for major diseases. Treatment of a number of major diseases, including atrial fibrillation, ventricular tachycardia, cardiac chronic total occlusions, and critical limb ischemia due to chronic total occlusions of peripheral arteries, is highly problematic using conventional wire and/or catheter-based techniques. Additionally, many patients with multi-vessel disease and certain complex arrhythmias, such as atrial fibrillation and ventricular tachycardia, are often referred to other more invasive or less curative therapies because of the difficulty in precisely and safely controlling the working tip of disposable interventional devices used to treat these complex cases interventionally. Because the Niobe system provides precise, computerized control of the working tip of disposable interventional devices, we believe that it will potentially enable difficult total occlusions, atrial fibrillation, and ventricular tachycardia to be treated interventionally on a much broader scale than today. |
| • | Improve outcomes by optimizing therapy. Difficulty in controlling the working tip of disposable interventional devices can lead to sub-optimal results in many procedures. Precise instrument control is necessary for treating a number of cardiac conditions. To treat arrhythmias, precise placement of an ablation catheter against a beating inner heart wall is necessary. For coronary artery disease, precise and correct navigation and placement of expensive stents also have a significant impact on procedure costs and outcomes. We believe the Niobe system can enhance procedure results by improving navigation of disposable interventional devices to treatment sites, and by effecting more precise, safe, treatments once these sites are reached. |
| • | Improve clinical workflow and information management. The Odyssey™ Enterprise Solution will improve clinical workflow and information management efficiency by integrating and synchronizing the multiple sources of diagnostic and imaging information found in the interventional labs into a large-screen user interface with single mouse control via the Odyssey Vision system. Odyssey Enterprise Cinema systems can provide the customer with remote viewing and recording capabilities. By connecting the lab to other Odyssey sites both within and outside of the hospital via a secure private network, Odyssey Network Connect™ will provide the customer with on-demand support and the ability to participate in site-to-site collaboration and remote training. |
| • | 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 Niobe system can reduce complex procedure times compared to manual procedures. We believe the Niobe system can also reduce the variability in procedure times compared to manual methods. Greater standardization of procedure times allows for more efficient scheduling of interventional cases including staff requirements. We also believe that additional cost savings from the Niobe system result from decreased use of multiple catheters, guidewires and contrast media in procedures compared with manual methods further enhancing the rate of return to hospitals. |
5
Table of Contents
| • | Enhance physician skill levels in order to improve the efficacy of complex cardiology procedures. Training required for physicians to safely and effectively carry out manual interventional procedures typically takes years, over and above the training required to become a specialist in cardiology. This has led to a shortage of physicians who are skilled in performing more complex procedures. We believe that the Niobe system can allow procedures that previously required the highest levels of manual dexterity and skill to be performed effectively by a broader range of interventional physicians, with more standardized outcomes. In addition, interventional physicians can learn to use the Niobe system in a relatively short period of time. The Niobe system can also be programmed to carry out sequences of complex navigation automatically further enhancing ease of use. We believe the Odyssey Enterprise Solution can allow advanced training online thereby accelerating learning. |
| • | Improve patient and physician safety. The Niobe system has been used in more than 37,000 procedures and the incidence of all reported major adverse cardiac events associated with the use of the system for all procedures is approximately 0.1%. This represents what we believe to be a clinically significant improvement in major complication rates over conventional procedures, which can range as high as 2-5% for complex ablations. Additionally, during conventional catheter-based procedures, each of the physicians who stand by the patient table to manually control the catheter, the nursing staff assisting with the procedure, and the patient are exposed to the potentially harmful x-ray radiation from the fluoroscopy field. This exposure can be minimized by reducing procedure times. Reducing procedure times is also beneficial to the patient because of the direct correlation between complication rates and procedure length. The Niobe 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 the orthopedic burden of wearing lead. |
OUR PRODUCTS
Niobe® System
Our proprietary Niobe system provides the physician with precise remote digital instrument control through user friendly “point and click” computer mouse control, in combination with sophisticated image integration and 3D reconstruction. It can be operated either from beside the patient table, as in traditional interventional procedures, or from a room adjacent to the patient and outside the x-ray fluoroscopy field. The Niobe Magnetic Navigation System allows the operator to navigate disposable interventional devices to the treatment site through complex paths in the blood vessels and chambers of the heart to deliver treatment by using computer controlled, externally applied magnetic fields to directly govern the motion of the working tip of these devices, each of which has a magnetically sensitive tip that predictably responds to magnetic fields generated by our system. Because the working tip of the disposable interventional device is directly controlled by these external magnetic fields, the physician has the same degree of control regardless of the number or type of turns, or the distance traveled by the working tip to arrive at its position in the blood vessels or chambers of the heart. This 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 device.
Through our alliances with Siemens, Philips and Biosense Webster, this precise digital instrument control has been integrated with the visualization and information systems used during electrophysiology procedures in order to provide the physician with a fully-integrated and automated information and instrument control system. We have integrated our Niobe system with Siemens’ and with Philips’ digital x-ray fluoroscopy systems. In addition, we have integrated the Niobe system with Biosense Webster’s 3D catheter location sensing technology to provide accurate real-time information as to the 3D location of the working tip of the instrument, and with Biosense Webster’s ablation tip technology. The combination of these technologies was fully launched in 2005.
The components of the Niobe system are identified and described below:
Niobe® Magnetic Navigation System. Our Niobe Magnetic Navigation System utilizes two permanent magnets mounted on articulating and pivoting arms that are enclosed within a stationary housing, with one
6
Table of Contents
magnet on either side of the patient table. 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. The Niobe system is indicated for use in cardiac, peripheral and neurovascular applications.
Navigant™ Advanced User Interface. The Navigant advanced user interface is an integrated information and control center that integrates the key information sources used by 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 interventional labs and in the adjacent control room, outside the x-ray 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 automation, and improved navigation of these devices; |
| • | virtual catheter or mouse control which the physician uses to direct the motion of the working tip of the disposable interventional device, either from inside the interventional labs or from the adjacent control room; and |
| • | a software package for specific clinical procedures. |
Cardiodrive® Automated Catheter Advancement System. As the physician conducts the procedure from the adjacent control room, the Cardiodrive or QuikCAS™ automated catheter advancement system is used to remotely advance and retract the electrophysiology catheter in the patient’s heart while the Niobe magnets precisely steer the working tip of the device.
Odyssey™ Enterprise Solution
The Odyssey Enterprise Solution offers a fully integrated, real-time information solution to manage, control, record and share procedures across networks or around the world. We believe that Odyssey enhances the physician workflow in both interventional and electrophysiology labs through a consolidated user interface of multiple systems on a single display to enable greater focus on the case and improve the efficiency of the lab. Through the use of a single mouse and keyboard, Odyssey allows the user to command multiple systems in the lab from a single point of control. In addition, Odyssey acquires a real-time, remote view of the lab capturing synchronized procedure data for review of important events during cases. Odyssey also enables physicians to review recorded cases and create snapshots following procedures for enhanced clinical reporting, auditing and presentation. Odyssey enables physicians to establish a comprehensive master archive of procedures performed in the lab providing an excellent tool for training new staff on the standard practices. Odyssey further enables procedures to be observed remotely around the world with high speed internet access over a virtual private network even wirelessly using a standard laptop or tablet PC.
Regulatory Approval
We have received regulatory marketing clearance, licensing and CE Mark approvals necessary for us to market the Niobe Magnetic Navigation System, the Navigant advanced user interface and the Cardiodrive automated catheter advancement system in the U.S., Canada, Europe, China, and various other countries. We have received regulatory marketing clearance, licensing and CE Mark approvals necessary for us to market the Odyssey Vision in the U.S. and Europe and are in the process of obtaining necessary approvals for all of our products in various other countries. We have also developed the Vdrive robotic navigation system, which
7
Table of Contents
complements the Niobe Magnetic Navigation System. We have received regulatory marketing clearance, licensing and CE Mark approvals for us to market the Vdrive system in Europe. We are in the process of obtaining necessary clearance for Vdrive in the United States and various other countries.
Disposables and Other Accessories
Our Niobe® system is designed to use a toolkit of proprietary disposable interventional devices. The toolkit currently consists of:
| • | our Cardiodrive® or QuikCAS automated catheter advancement disposable used to provide precise remote advancement of proprietary electrophysiology catheters; |
| • | our suite of Cronus®, Assert®, Titan® and Pegasus™ coronary guidewires suitable for use in interventional cardiology procedures for the introduction and placement of over-the-wire therapeutic devices, such as stents and angioplasty balloons; and |
| • | the CARTO® RMT navigation and ablation system, CELSIUS® RMT, NAVISTAR® RMT, NAVISTAR® RMT DS, NAVISTAR® RMT THERMOCOOL® and CELSIUS® RMT THERMOCOOL® Irrigated Tip Diagnostic/Ablation Steerable Tip Catheters co-developed with Biosense Webster, as described below. |
We have received Food and Drug Administration (“FDA”) clearance and the CE Mark necessary for us to market our suite of Cronus, Assert, Titan and Pegasus coronary and RF PowerAssert™ Peripheral guidewires and our Helios® II electrophysiology ablation catheter in the U.S. and Europe. We continue to seek approvals to market our products as appropriate.
Biosense Webster has received FDA approval, Chinese SFDA approval, and CE Mark for the CARTO ® RMT navigation system for use with the Niobe system, the 4mm CELSIUS RMT Diagnostic/Ablation Steerable Tip Catheter, the 4mm NAVISTAR® RMT Diagnostic/Ablation Steerable Tip Catheter, the 8mm Navistar RMT DS Diagnostic/Ablation Steerable Tip Catheter, and the 3.5mm NAVISTAR® RMT THERMOCOOL® Irrigated Tip Catheter. In addition, Biosense Webster has received FDA approval and CE Mark for the 3.5mm CELSIUS® RMT THERMOCOOL® Irrigated Tip Catheter. We will continue to co-develop catheters that can be navigated with our system, both with and without Biosense Webster’s 3D catheter location sensing technology. In addition, we can utilize technology which allows our system to recognize specific disposable interventional devices in order to prevent unauthorized use of our system. See “Collaborations – Disposable Devices Alliance” below for a description of our arrangements with Biosense Webster.
We believe that we can adapt many of the applicable disposable interventional devices for use with our system by using our proprietary technology to add an inexpensive micro-magnet at their working tip. This micro-magnet is activated by an external magnetic field, which allows interventional devices with tip dimensions as small as 14 thousandths (0.014) of an inch to be oriented and positioned in a predictable and controllable fashion. We believe this approach to bringing digital control to disposable interventional devices using embedded magnets can simplify the overall design of these devices because mechanical controls are no longer required.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Our total U.S. revenue was $28,840,803, $22,309,477, and $29,052,328 for the years ended December 31, 2010, 2009, and 2008, respectively. Our total international revenue was $25,210,434, $28,840,078, and $11,312,845 for the years ended December 31, 2010, 2009, and 2008, respectively.
CLINICAL APPLICATIONS
We have focused our clinical and commercial efforts on applications of the Niobe® system primarily in electrophysiology procedures for the treatment of arrhythmias and secondarily in complex interventional
8
Table of Contents
cardiology procedures for the treatment of coronary artery disease. 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.
Electrophysiology
The rhythmic beating of the heart results from the transmission of electrical impulses. When these electrical impulses are mistimed or uncoordinated, the heart fails to function properly, resulting in symptoms that can range from fatigue to stroke or death. Several million people in the U.S. currently suffer from the resulting abnormal heart rhythms, which are known as arrhythmias. The most common arrhythmia in adults is atrial fibrillation. This chaotic electrical activity of the top chambers of the heart is estimated to be present in over two million people in the United States and over five million people worldwide. The incidence is expected to continue to rise as the population ages and life expectancy continues to increase. Atrial fibrillation is a major physical and economic burden. This arrhythmia is associated with stroke, heart failure, and adverse symptoms causing patients to be very motivated to seek treatment. The combination of symptoms, prevalence and co-morbidities make atrial fibrillation a major economic factor in healthcare. We believe payors are very interested in therapies that may reduce the financial impact of this disease.
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 eliminate 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. In February 2009 the FDA approved the Biosense Webster NAVISTAR® THERMOCOOL ® irrigated catheter to be labeled for the treatment of atrial fibrillation. This is the first device approved by the FDA to be labeled for the interventional treatment of this arrhythmia. We believe this important milestone will accelerate acceptance of ablations for the treatment of atrial fibrillation.
We believe the Niobe system is particularly well-suited for those electrophysiology procedures which are time consuming or which can only be performed by highly experienced physicians. These procedures include:
| • | General Mapping and Ablations. For the more routine mapping and ablation procedures, our system offers the unique benefit of precise catheter movement and consistent heart wall contact. Additionally, the system can control the procedure and direct catheter movement from the control room, saving the physician time and helping to avoid unnecessary exposure to high doses of radiation. |
| • | Atrial Fibrillation. The most commonly diagnosed 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 number of potential patients for manual catheter-based procedures for atrial fibrillation has been limited because the procedures are extremely complex and are performed by only the most highly skilled electrophysiologists. They also typically have much longer procedure times than general ablation cases and the success rates have been lower and more variable. 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 catheter maneuvers, can standardize and reduce procedure times and significantly improve outcomes. |
9
Table of Contents
| • | Ventricular Tachycardia. Ventricular tachycardia is a malignant, potentially lethal arrhythmia that is extremely difficult and time consuming to treat by catheter ablation because of the mechanical force of a conventional catheter against the heart wall. The magnetic catheter has been characterized as the ideal tool for this application. These arrhythmias can often be modified or interrupted by the pressure of a conventional catheter making it very difficult to identify the appropriate location for the ablation, whereas magnetic catheters produce fewer extra beats and provide for easier and more efficient mapping of the diseased tissue. Successful ablation of ventricular tachycardia can extend the useful life of an implantable defibrillator, reduce shocks to the patient, reduce the need for antiarrhythmic drugs or, in some cases, obviate the need for an expensive implantable device and its associated follow-up. |
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. Additionally, we believe that our system 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 efficiently apply energy 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 interventional lab efficiency and reduce disposable interventional device utilization.
Interventional Cardiology
Nearly half a million people die annually from coronary artery disease, a condition in which the formation of plaque in the coronary arteries obstructs the supply of blood to the heart, making this the leading cause of death in the U.S. Despite various attempts to reduce risk factors, each year over one million patients undergo interventional procedures in an attempt to open blocked vessels and another one half 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. Complex lesions, such as chronic total occlusions, longer lesions, and lesions located within smaller diameter vessels, are often very difficult or time consuming to open with manual interventional techniques.
We estimate that approximately 10-15% of these interventional cardiology procedures currently being performed are complex and therefore require longer procedure times and may have sub-optimal outcomes. We believe that our system can substantially benefit this subset of complex interventional cardiology procedures, including procedures involving:
| • | Occlusions. 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. 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. 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. |
Peripheral Arterial Disease (PAD)
PAD is a form of atherosclerosis or blockage of an artery which restricts blood flow to the extremities, typically the lower legs. It is the third most prevalent disease in the U.S. and the number of people affected is expected to grow to over 22 million in 2020. Individuals suffering from PAD often experience chronic total occlusions.
10
Table of Contents
Chronic total occlusions are classified as blockages that completely obstruct the flow of blood through an artery for an extended period of time, usually 30 days or more. Chronic total occlusions, which are often a factor in peripheral vascular disease, pose a serious health risk and require a safe, effective method of treatment. We believe the Niobe system can help overcome the significant challenges faced by clinicians in manually delivering guidewires and other devices across chronic total occlusions, by providing precise magnetic tip control in combination with 3-D image reconstruction of these complex vascular lesions. We do not anticipate any significant revenue from these applications in the near term.
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 bleeding and strokes. The Niobe 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 do not anticipate any significant revenue from these programs in the near term.
COLLABORATIONS
We have entered into collaborations with technology leaders in the global interventional market, including Siemens, Philips, and Biosense Webster, that we believe aid us in commercializing our Niobe® system. We believe our two imaging partners, Siemens and Philips, have a significant percentage of the installed base of imaging systems worldwide.
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. |
In 2010, we were notified by an imaging partner that, due to production constraints, they will not install any magnetically compatible x-ray systems from the fourth quarter of 2010 until the second quarter of 2011. These installation delays could adversely impact our results of operations during these periods.
Imaging Partners
Siemens Alliance. We have successfully integrated our Niobe system with Siemens’ digital fluoroscopy system to provide advanced interventional lab visualization and instrument control through user-friendly computerized interfaces. We also coordinate our sales efforts with Siemens to co-place integrated systems at leading hospital sites in the U.S., Europe and in Asia. Under this alliance and under a separate services agreement, Siemens provides equipment maintenance and support services for our products directly to our customers. 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 Niobe 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.
11
Table of Contents
In December 2010, Siemens Healthcare was named a non-exclusive, global reseller starting in the U.S., EU and Canada for Stereotaxis’ Odyssey™ Enterprise Cinema solutions. Siemens will promote and sell Odyssey Enterprise Cinema with an Interface connected to Siemens large display labs, delivering a fully integrated, real-time information management solution. The combined offering enables consolidated information from Siemens large display labs to be remotely viewed live or played back after procedures from a comprehensive case archive enhancing staff training and patient care.
Philips Alliance. We have successfully integrated our Niobe system with Philips’ digital x-ray fluoroscopy system. We also have an agreement under which we coordinate our sales and marketing efforts with Philips in order to co-place our integrated systems in addition to collaborating on the development of new solutions and sharing engineering and development costs.
Disposables Devices Alliance
Biosense Webster Alliance. We entered into an alliance in May 2002 pursuant to which we agreed to integrate Biosense Webster’s advanced 3D catheter location sensing technology, which we believe has the leading market position in this important field of visualization for electrophysiology procedures, with our instrument control system, and to jointly develop associated location sensing electrophysiology mapping and ablation catheters that are navigable with the Niobe system. We believe that these integrated products will provide physicians with the elements required for effective complex electrophysiology procedures: highly accurate information as to the exact location of the catheter in the body and highly precise control over the working tip of the catheter. We also agreed to coordinate our sales force efforts with Biosense Webster in order to place Biosense CARTO® RMT systems and our Niobe systems that, together with the co-developed catheters, comprise the full integration of our instrument control and 3D location sensing technologies in the interventional lab. We expanded this alliance in November 2003 to include the parallel integration of our instrument control technology with Biosense Webster’s full line of non-location sensing mapping and ablation catheters that are relevant to our targeted applications in electrophysiology. Under an amendment to this agreement in 2008, Biosense Webster advanced us $10 million and allowed us to defer up to $8 million of payments due to Biosense Webster for research and development related to jointly developed products. If not fully recouped by Biosense Webster from royalties otherwise owing to us on the sale of magnetically enabled co-developed catheters and/or through periodic minimum payments, any remaining advanced will be due to Biosense Webster on December 31, 2011.
The co-developed catheters are manufactured and distributed by Biosense Webster, and both of the parties agreed to contribute to the resources required for their development. We are entitled to royalty payments from Biosense Webster, payable quarterly based on a profit formula for sales of the co-developed catheters, and our royalty increases under certain circumstances. Under this alliance, we agreed to certain restrictions on our ability to co-develop and distribute catheters competitive with those we are developing with Biosense Webster and granted Biosense Webster certain notice and discussion rights for product development activities we undertake relating to localization and magnetically enabling interventional disposable devices in cardiology fields outside of electrophysiology and mapping.
Either party may terminate this alliance in certain specified “change of control” situations, although the termination would not be effective until one year after the change of control and then would be subject to a wind-down period during which Biosense Webster would continue to supply co-developed catheters to us or to our customers for three years (or, for non-location sensing mapping and ablation catheters, until our first sale of a competitive product after a change of control, if earlier than three years). If we terminate the agreement under this provision, we must pay a termination fee to Biosense Webster equal to 5% of the total equity value of Stereotaxis in the change of control transaction, up to a maximum of $10 million. If a change of control of the Company occurs after Biosense Webster has received approval from the U.S. FDA for atrial fibrillation indication for the NAVISTAR® RMT THERMOCOOL® catheter as described below, the Company would be required to pay an additional $10 million fee to Biosense Webster, and termination of the agreement by either
12
Table of Contents
party would not be effective until two years after the change of control. We also agreed to notify Biosense Webster if we reasonably believe that we are engaged in substantive discussions with respect to the sale of the Company or substantially all of our assets.
In January 2011, we executed an amendment, effective December 2010, to our agreement with Biosense Webster to extend the development and distribution alliance related to certain catheters that have been developed under previous collaboration activities between the Company and Biosense Webster on an exclusive basis until December 15, 2015 and thereafter on a nonexclusive basis until December 31, 2018. Biosense Webster’s rights to distribute such products in Japan is extended on an exclusive basis to the later of December 31, 2017 or five years after the date of approval of the applicable product for sale in Japan and on a nonexclusive basis to the later of December 31, 2020 or eight years after the date of approval of the applicable product for sale in Japan. Biosense Webster also agreed to pursue an expanded indication in the U.S. for the NAVISTAR® RMT THERMOCOOL® catheter for the treatment of atrial fibrillation. Additionally, both companies agreed to expand the product offering covered by the agreement to include a next generation irrigated magnetic catheter, which will integrate technological advancements from both companies.
RESEARCH AND DEVELOPMENT
We have assembled an experienced group of engineers and physicists with recognized expertise in magnetics, software, control algorithms, systems integration and disposable interventional device modeling and design.
Our research and development efforts are focused in the following areas:
| • | continuing to enhance our existing Niobe® and Odyssey™ systems through ongoing product and software development; and |
| • | designing new proprietary disposable interventional devices for use with our system. |
Our research and development team collaborates with our strategic partners, Siemens, Philips, and Biosense Webster, to integrate our Niobe system’s open architecture platform with key imaging, location sensing and information systems in the interventional lab. We have also collaborated with a number of highly regarded interventional physicians in key clinical areas and have entered into agreements with a number of universities and research institutions, which serve to increase our access to world class physicians and scientists and to expand our name recognition in the medical community.
CUSTOMER SERVICE AND SUPPORT
Stereotaxis provides worldwide maintenance and support services to our customers for our integrated products with the assistance of certain strategically-based representatives. By utilizing these relationships, we provide direct, on-site technical support activities, including call center, customer support engineers and service parts logistics and delivery. In certain situations, we use these third parties as a single point of contact for the customer, which allows us to focus on providing installation, training, and back-up technical support.
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 installation and support services. We offer several different levels of support to our customers, including basic hardware and software maintenance, extended product maintenance, and rapid response capability for both parts and service.
We have established a call center in our St. Louis facilities, which provides real-time clinical and technical support to our Odyssey customers worldwide via our Odyssey Network.
13
Table of Contents
MANUFACTURING
Niobe® and Odyssey™ Systems
Our manufacturing strategy for our Niobe and Odyssey systems is to sub-contract the manufacture of major subassemblies of our system to maximize manufacturing flexibility and lower fixed costs while maintaining quality control by completing final system assembly and inspection in-house.
Disposable Interventional Devices
Our manufacturing strategy for disposable interventional devices is to outsource their manufacture through subcontracting and through our alliance with Biosense Webster and to expand partnerships for other interventional devices. We work closely with our contract manufacturers and have strong relationships with component level suppliers. We have entered into manufacturing agreements to provide high volume capability for devices other than catheters.
Software
The software components of the Niobe and Odyssey systems, 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 and 2006, the FDA audited our Maple Grove, Minnesota facility for regulatory compliance, and no deficiencies were noted. In 2007 and 2008, the FDA conducted pre-approval audits related to the Helios® II ablation catheter pre-market approval, with only three minor observations noted. A European notified body has regularly audited each facility annually since 2001 and found the facilities to be in compliance with European requirements. The initial certification was issued in January 2002 for compliance with ISO 9001. The most recent issuance of formal certification is for ISO 13485:2003.
SALES AND MARKETING
We market our products in the U.S and internationally through a direct sales force of senior sales specialists, distributors and sales agents, supported by account managers and clinical specialists who provide training, clinical support, and other services to our customers. In addition, our strategic alliances form an important part of our sales and marketing strategy. We leverage the sales forces of our imaging partners to co-market integrated systems on a worldwide basis. This approach allows us to maximize our leads and knowledge of the market opportunities while using our resources to sell directly to the customer. Under the terms of our agreement, Biosense Webster exclusively distributes our electrophysiology mapping and ablation catheters, co-developed pursuant to our alliance with them.
Our sales and marketing efforts include three important elements: (1) selling Niobe® and Odyssey™ systems directly and through co-marketing agreements with our imaging partners, Siemens and Philips and through distributors; (2) leveraging our installed base of systems to drive recurring sales of disposable interventional devices, software and service; and (3) increasing the market penetration of Odyssey in standard labs.
REIMBURSEMENT
We believe that substantially all of the procedures, whether commercial or in clinical trials, conducted in the U.S. with the Niobe® system have been reimbursed to date. We expect that third-party payors will reimburse,
14
Table of Contents
under existing billing codes, procedures in which our line of guidewires, as well as our line of ablation catheters and those on which we are collaborating with Biosense Webster, are used. 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 Niobe system. See “Item 1A—Risk Factors” 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 have an extensive patent portfolio that we believe protects the fundamental scope of our technology, including our magnet technology, navigational methods, procedures, systems, disposables interventional devices and our 3D integration technology. As of December 31, 2010, we had 103 issued U.S. patents, 2 co-owned U.S. patents and 5 licensed-in U.S. patents. In addition, we had 85 pending U.S. patent applications and 3 co-owned U.S. patent applications. As of December 31, 2010 we had 21 issued foreign patents and one licensed-in foreign patent, one pending Patent Cooperation Treaty application and 18 owned and one co-owned Foreign Patent Applications. We also have a number of invention disclosures under consideration and several applications that are being prepared for filing.
The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. One or more of the above patent applications may be denied. In addition, our issued patents may be challenged, based on prior art circumvented or otherwise not provide protection for the products we develop. Furthermore, we may not be able to obtain patent licenses from third parties required for the development of new products for use with our system. We also note that U.S. patents and patent applications may be subject to interference proceedings and U.S. patents may be subject to reexamination proceedings in the U.S. Patent and Trademark Office (and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. In the event that we seek to enforce any of our owned or exclusively licensed patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which, if successful could result in the entire loss of our patent or the relevant portion of our patent and not just with respect to that particular infringer. Any litigation to enforce or defend our patents rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations.
It would be technically difficult and costly to reverse engineer our Niobe® system, which contains numerous complex algorithms that control our disposable devices inside the magnetic fields generated by the Niobe system. We further believe that our patent portfolio is broad enough in scope to enable us to obtain legal relief if any entity not licensed by us attempted to market disposable devices that can be navigated by the Niobe system. We can also utilize security keys, such as embedded smart chips or associated software that could allow our system to recognize specific disposable interventional devices in order to prevent unauthorized use of our system.
We have also developed substantial know-how in magnet design, magnet physics and magnetic instrument control that was developed in connection with the development of the Niobe system, which we maintain as trade secrets. This know-how centers around our proprietary magnet design, which is a critical aspect of our ability to design, manufacture and install a cost-effective Magnetic Navigation System that is small enough to be installed
15
Table of Contents
in a standard interventional lab. Our Odyssey™ Enterprise Solution contains numerous complex algorithms and proprietary software and hardware configurations, and requires substantial knowledge to design and assemble, which we maintain as trade secrets. These proprietary software and hardware, some of which is owned by Stereotaxis, and some of which is licensed to Stereotaxis exclusively in its field of use, is a material aspect of the ability to design, manufacture and install a cost-effective and efficient information integration, storage, and delivery platform.
We seek to protect our proprietary information by requiring our employees, consultants, contractors, outside parties and other advisers who are engaged in development work for us to execute nondisclosure and assignment of invention agreements upon commencement of their employment or engagement, through which we seek to protect our intellectual property. These agreements to protect our unpatented technology provide only limited and possibly inadequate protection of our rights. Third parties may therefore be able to use our unpatented technology, reducing our ability to compete. In addition, employees, consultants and other parties to these agreements may breach them and adequate remedies may not be available to us for their breaches. Many of our employees were previously employed at universities or other medical device companies, including potential competitors. We could in the future be subject to claims that these employees or we have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and divert the attention of management and key personnel from our business operations. We also generally seek confidentiality agreements from third parties that receive our confidential data or materials.
Our intellectual property involves certain risks and uncertainties. Please refer to “Item 1A—Risk Factors” in this annual report for a description of these risks and uncertainties.
COMPETITION
The markets for medical devices are intensely competitive and are characterized by rapid technological advances, frequent new product introductions, evolving industry standards and price erosion.
We consider the primary competition to our Niobe® system 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 also face competition from companies that are developing new approaches and products for use in interventional procedures, including robotic approaches that are directly competitive with our technology. Some of these companies may 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 interventional lab. We are aware of one public company that has commercialized a catheter delivery system which has been cleared by the FDA for mapping procedures only. In addition, we are aware of one private company with an electro-magnetic product under testing in Europe for CE Mark. We are aware of an additional private company with a catheter delivery system in clinical trials. We also face competition from companies who currently market or are developing drugs, gene or cellular therapies to treat the conditions for which our products are intended.
We face direct competition to certain products in our Odyssey™ Enterprise Solution, such as the Odyssey Vision. These competitor products primarily compete with individual components of our Odyssey Enterprise Solution. We expect to continue to face competitive pressure in this market in the future, based on the rapid pace of advancements with this technology.
16
Table of Contents
We believe that the primary competitive factors in the market we address are capability, safety, efficacy, ease of use, price, quality, reliability and effective sales, support, training and service. The length of time required for products to be developed and to receive regulatory and reimbursement approval is also an important competitive factor. See “Item 1A—Risk Factors” for a discussion of other competitive risks facing our business.
GOVERNMENT REGULATION
The healthcare industry, and thus our business, is subject to extensive federal, state, local and foreign regulation. Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. In addition, these laws and their interpretations are subject to change.
Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. As indicated by work plans and reports issued by these agencies, the federal government will continue to scrutinize, among other things, the billing practices of healthcare providers and the marketing of healthcare products. The federal government also has increased funding in recent years to fight healthcare fraud, and various agencies, such as the U.S. Department of Justice, the Office of Inspector General of the Department of Health and Human Services, or OIG, and state Medicaid fraud control units, are coordinating their enforcement efforts.
We believe that we have structured our business operations and relationships with our customers, consultants, agents, and distributors 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 Regulation
The FDA 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® Magnetic Navigation System and our suite of guidewires, or that provide diagnostic information, 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® II ablation catheters, are subject to the premarket approval, or PMA, process.
If clinical data are needed to support a marketing application for our devices, generally, an investigational device exemption, or IDE, is assembled and submitted to the FDA. The FDA reviews and must approve the IDE before the study can begin. In addition, the study must be approved by an Institutional Review Board covering each clinical site. When all approvals are obtained, we initiate a clinical study to evaluate the device. Following completion of the study, we collect, analyze and present the data in an appropriate submission to the FDA, either a 510(k) or PMA.
Under the 510(k) process, the FDA determines whether or not the device is “substantially equivalent” to a predicate device. In making this determination, the FDA compares the new device to the predicate device. If the two devices are comparable in intended use, safety, and effectiveness, the device may be cleared for marketing.
17
Table of Contents
Under the PMA process, the FDA examines detailed data relating to the safety and effectiveness of the device. This information includes design, development, manufacture, labeling, advertising, pre-clinical testing, and clinical study data. Prior to approving the PMA, the FDA generally will conduct an inspection of the facilities producing the device and one or more clinical sites where the study was conducted. The facility inspection evaluates the Company’s readiness to commercially produce and distribute the device. The inspection includes an evaluation of compliance under the Quality System Regulation (QSR). Under certain circumstances, the FDA may convene an advisory panel meeting to seek review of the data presented in the PMA. If the FDA’s evaluation is favorable, the PMA is approved, and we can market the device in the U.S. The FDA may approve the PMA with conditions, such as post-market surveillance requirements.
We evaluate changes made following 510(k) clearance or PMA approval for significance and if appropriate, make a subsequent submission to the FDA. In the case of a significant change being made to a 510(k) device, we submit a new 510(k). For a PMA device, we will either need approval through a PMA supplement or will need to notify the FDA.
For our 510(k) devices, we design the submission to cover multiple models or variations in order to minimize the number of submissions. For our PMA devices, we often rely upon the PMA approvals of our strategic partners to utilize the PMA supplement regulatory path rather than pursue an original PMA. Because of the differences in the amount of data and numbers of patients in clinical trials, a PMA supplement process is often much shorter than the amount of time and data required for approval of an original PMA.
Currently our Niobe Magnetic Navigation System, Navigant™ advanced user interface, Cardiodrive® automated catheter advancement system, Odyssey™ Vision, Helios II electrophysiology ablation catheter, the Cronus® and Assert® families of coronary guidewires, the Titan® and Pegasus™ families of guidewires and our RF guidewire have been either approved or cleared by the FDA to be used in interventional procedures. In addition, Biosense Webster has received FDA approval for the CELSIUS® RMT, the NAVISTAR® RMT, the NAVISTAR® RMT DS, the NAVISTAR® RMT THERMOCOOL®, and the CELSIUS® RMT THERMOCOOL® Irrigated Tip diagnostic/ablation steerable tip catheters as described above.
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 limit our ability to generate revenue and harm our business.
The primary regulatory environment in Europe is that of the European Union, which consists of 27 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 or PMA approval in the U.S. In addition, we have received the right to affix the CE Mark to our Vdrive robotic navigation system. 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.
18
Table of Contents
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, Biosense Webster has obtained the right to affix the CE Mark to the CELSIUS® RMT, the NAVISTAR® RMT, the NAVISTAR® RMT DS, the NAVISTAR® RMT THERMOCOOL®, and the CELSIUS® RMT THERMOCOOL® Irrigated Tip diagnostic/ablation steerable tip catheters.
We are actively pursuing approvals for our system and for various disposable devices in various other countries in which we conduct business or intend to conduct business. Where appropriate, we work through our strategic partners to obtain the requisite approvals. We will evaluate regulatory approval on additional products and in other foreign countries on an opportunistic basis.
Anti-Kickback Statute
The federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The definition of “remuneration” has been broadly interpreted to include anything of value, including for example gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, some kickback allegations have been claimed to violate the Federal False Claims Act, discussed in more detail below.
The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the OIG to issue a series of regulations, known as the “safe harbors” which it did, beginning in July 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 federal 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 federal 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 have established a formal Clinical Compliance Committee and appointed a Clinical Compliance Officer to help ensure compliance with the Anti-Kickback Statute and similar state laws and we train our employees on our healthcare compliance policies. However, we cannot rule out the possibility that the government or other third parties could interpret these laws differently and assert otherwise.
HIPAA and Other Privacy Laws
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits
19
Table of Contents
knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.
In addition to creating the two new federal healthcare crimes, HIPAA also establishes uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses. Two standards have been promulgated under HIPAA: the Standards for Privacy of Individually Identifiable Health Information, which restrict the use and disclosure of certain individually identifiable health information, and the Standards for Electronic Transactions, which establish standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures. In addition, the Security Standards require covered entities to implement certain security measures to safeguard certain electronic health information. 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 parallel with HIPAA, Stereotaxis acknowledges that it is also subject to the Privacy and Security Standards as those Standards are applicable to it under HITECH, the Health Information Technology for Economic and Clinical Health Act, which is Title XIII of the American Recovery and Reinvestment Act.
In addition to federal regulations issued under HIPAA, some states and foreign countries have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our operations and procedures to comply with the more stringent state and foreign laws, which may entail significant and costly changes for us. We believe that we are in compliance with such state and applicable foreign laws and regulations. However, if we fail to comply with applicable state or foreign 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 from $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the federal False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government. Although simple negligence should not give rise to liability, submitting a claim with reckless disregard or deliberate ignorance of its truth or falsity could result in substantial civil liability. The False Claims Act has been used to assert liability on the basis of inadequate care, improper referrals, and improper use
20
Table of Contents
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 Niobe system. At present, many of the states in which we sell Niobe systems have laws that require institutions located in those states to obtain a certificate of need in connection with the purchase of our system, and some of our purchase orders are conditioned upon our customer’s receipt of necessary certificate of need approval. Certificate of need laws were enacted to contain rising health care costs, prevent the unnecessary duplication of health resources, and increase patient access for health services. In practice, certificate of need laws have prevented hospitals and other providers who have been unable to obtain a certificate of need from acquiring new equipment or offering new services. A further increase in the number of states regulating our business through certificate of need or similar programs could adversely affect us. Moreover, some states may have additional requirements. For example, we understand that California’s certificate of need law also incorporates seismic safety requirements which must be met before a hospital can acquire our Niobe system.
Employees
As of December 31, 2010, we had 204 employees, 41 of whom were engaged directly in research and development, 92 in sales and marketing activities, 27 in manufacturing and service, 9 in regulatory, clinical affairs and quality activities, 10 in training activities and 25 in general administrative and accounting activities. A significant majority of our employees is not covered by a collective bargaining agreement, and we consider our relationship with our employees to be good.
Availability of Information
We make certain filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments and exhibits to those reports, available free of charge in the Investor Relations section of our website, http://www.stereotaxis.com, as soon as reasonably practicable after they are filed with the SEC. The filings are also available through the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330. Further, these filings are available on the Internet at http://www.sec.gov. Information contained on our website is not part of this report and such information is not incorporated by reference into this report.
21
Table of Contents
| ITEM 1A. | RISK FACTORS |
The following uncertainties and factors, among others, could affect future performance and cause actual results to differ materially from those expressed or implied by forward looking statements.
Hospital decision-makers may not purchase our Niobe® or Odyssey™ system or may think that such systems are too expensive.
The market for our products and related technology is not well developed. To achieve continued sales, hospitals must purchase our products, and in particular, our Niobe Magnetic Navigation System. The Niobe Magnetic Navigation System, which is the core of our Niobe system, is a novel device, and hospitals and physicians are traditionally slow to adopt new products and treatment practices. In addition, hospitals may delay their purchase or installation decision for the Niobe system based on the disposable interventional devices that have received regulatory clearance or approval. Moreover, the Niobe system is an expensive piece of capital equipment, representing a significant portion of the cost of a new or replacement interventional lab. Although priced significantly below a Niobe system, the Odyssey systems are still expensive products. If hospitals do not widely adopt our systems, or if they decide that they are too expensive, we may never become profitable. Any failure to sell as many systems as our business plan requires could also have a seriously detrimental impact on our results of operations, financial condition, and cash flow.
General economic conditions could materially adversely impact us.
Our operating performance is dependent upon economic conditions in the United States and in other countries in which we operate. The recent economic downturn or the lack of a robust recovery in the United States and in other countries in which we sell our products and political unrest in the Middle East may cause customers to delay purchasing or installation decisions or cancel existing orders. The Niobe and Odyssey systems are typically purchased as part of a larger overall capital project and an economic downturn or the lack of a robust recovery might make it more difficult for our customers, including distributors, to obtain adequate financing to support the project or to obtain requisite approvals. Any delay in purchasing decisions or cancellation of purchasing commitments may result in a decrease in our revenues. The credit crisis could further affect our business if key suppliers are unable to obtain financing to manufacture our products or become insolvent and we are unable to manufacture product to meet customer demand. If conditions become more severe or continue longer than we anticipate, we may experience a material negative decrease on the demand for our products which may, in turn, have a material adverse effect on our revenue, profitability, financial condition, ability to raise additional capital and the market price of our stock.
Physicians may not use our products if they do not believe they are safe, efficient and effective.
We believe that physicians will not use our products unless they determine that the Niobe system provides a safe, effective and preferable alternative to interventional methods in general use today. Currently, there is only limited clinical data on the Niobe 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.
Our collaborations with Siemens, Philips, Biosense Webster or other parties may fail, or we may not be able to enter into additional partnerships or collaborations in the future.
We are collaborating with Siemens, Philips, Biosense Webster and other parties to integrate our instrument control technology with their respective imaging products or disposable interventional devices and to co-develop
22
Table of Contents
additional disposable interventional devices for use with our Niobe system. A significant portion of our revenue from system sales will be derived from these integrated products. Siemens provides 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 Niobe system as planned; |
| • | any of our collaboration partners fails to develop or commercialize the integrated products in a timely manner; |
| • | any of our collaboration partners do not co-market and co-promote our integrated products diligently or do 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 Biosense Webster, as well as some of our other collaborators, are large, global organizations with diverse product lines and interests that may diverge from our interests in commercializing our products. Accordingly, our collaborators may not devote adequate resources to our products, or may experience financial difficulties, change their business strategy or undergo a business combination that may affect their willingness or ability to fulfill their obligations to us.
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 collaborations in the future, or if these collaborations fail, our ability to develop and commercialize products could be impacted negatively and our revenue could be adversely affected.
We have limited experience selling, marketing, and distributing products, which could impair our ability to increase revenue.
We currently market our products in the U.S., Europe and the rest of the world through a direct sales force of sales specialists, distributors and sales agents, supported by account managers and clinical specialists who provide training, clinical support, and other services to our customers. If we are unable to effectively utilize our existing sales force or increase our existing sales force in the foreseeable future, we may be unable to generate the revenue 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; |
| • | our inability to accurately forecast future product sales and utilize resources accordingly; |
| • | the inability of sales personnel to obtain access to or persuade adequate numbers of hospitals and physicians to purchase and use our products; and |
| • | unforeseen costs associated with maintaining and expanding an independent sales and marketing organization. |
In addition, if we fail to effectively use distributors or contract sales agents for distribution of our products where appropriate, our revenue and profitability would be adversely affected.
Our marketing strategy is dependent on collaboration with physician “thought leaders.”
Our research and development efforts and our marketing strategy depend heavily on obtaining support and collaboration from highly regarded physicians at leading commercial and research hospitals, particularly in the U.S. and Europe. If we are unable to gain and/or maintain such support and collaboration or if the reputation or
23
Table of Contents
standing of these physicians is impaired or otherwise adversely affected, our ability to market our products 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 Niobe system, they must attend structured training sessions in order to familiarize themselves with a sophisticated user interface. Continued market acceptance could be delayed by lack of physician willingness to attend training sessions, by the time required to complete this training, or by state or institutional restrictions on our ability to provide 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. We are aware of one public company that has commercialized a catheter delivery system which has been cleared by the FDA for mapping procedures only, and we are aware of two private companies with catheter delivery systems in clinical trials. 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 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.
Many 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 revenue 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.
Our backlog, which consists of purchase orders and other commitments, is considered by some investors to be a significant indicator of future performance. Consequently, negative changes to this backlog or its failure to grow commensurate with expectations could negatively impact our future operating results or our share price. Our backlog includes those outstanding purchase orders and other commitments that management believes will result in recognition of revenue upon delivery or installation of our systems. We cannot assure you 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 cancelled, either by their express terms, as a result of negotiations or by project changes or delays. System installation is by its nature subject to the interventional lab construction or renovation process which comprises multiple stages, all of which are outside of our control. Although the actual installation of our Niobe system requires only a few weeks, and can be accomplished by either our staff or by subcontractors,
24
Table of Contents
successful installation of our system can be subjected to delays related to the overall construction or renovation process. If we experience any failures or delays in completing the installation of these systems, our reputation would suffer and we may not be able to sell additional systems. We have experienced situations in which our purchase orders and other commitments did not result in recognizing revenue from placement of a system with a customer. In addition to construction delays, there are risks that an institution will attempt to cancel a purchase order as a result of subsequent project review by the institution or the departure from the institution of physicians or physician groups who have expressed an interest in the Niobe or Odyssey system.
These, or similar events, have occurred in the past and are likely to occur in the future, causing delays in revenue recognition or even removal of orders and other commitments from our backlog. Such events would have a negative effect on our revenue and results of operations.
We will likely experience long and variable sales and installation cycles, which could result in substantial fluctuations in our quarterly results of operations.
We anticipate that our Niobe 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’ interventional lab budget process for capital expenditures, and, in some instances, a certificate of need from the state or other regulatory approval. In addition, historically the majority of our Niobe systems have been delivered less than one year after the receipt of a purchase order from a hospital, with the timing being dependant on the construction cycle for the new or replacement interventional suite in which the equipment will be installed. In some cases, this time frame has been extended further because the interventional suite construction is part of a larger construction project at the customer site (typically the construction of a new building), which may occur with our existing and future purchase orders. We cannot assure you that the time from purchase order to delivery for systems to be delivered in the future will be consistent with our historical experience. Moreover, the global economic slowdown may cause our customers to further delay construction or significant capital purchases, which could further lengthen our sales cycle. This may contribute to substantial fluctuations in our quarterly operating results. 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 interventional labs, sales of our products would be negatively affected.
Our Niobe system generates magnetic fields that directly govern the motion of the internal, or working, tip of disposable interventional devices. If other equipment in the interventional labs 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. If magnetic interference becomes a significant issue at targeted institutions, it would increase our installation costs at those institutions and could limit the number of hospitals that would be willing to purchase and install our systems, either of which would adversely affect our financial condition, results of operations and cash flow.
The use of our products could result in product liability claims that could be expensive, divert management’s attention, and harm our reputation and business.
Our business exposes us to significant risks of product liability claims. The medical device industry has historically been litigious, and we could face product liability claims if the use of our products were to cause injury or death. The coverage limits of our product liability insurance policies may not be adequate to cover future claims, and we may be unable to maintain product liability insurance in the future at satisfactory rates or adequate amounts. A product liability claim, regardless of its merit or eventual outcome, could divert management’s attention, result in significant legal defense costs, significant harm to our reputation and a decline in revenue.
25
Table of Contents
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 following the installation of our system. 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 interventional lab market could be damaged. Unforeseen warranty exposure in excess of our established reserves for liabilities associated with product warranties could materially and adversely affect our financial condition, results of operations and cash flow.
We may not generate cash from operations or be able to raise the necessary capital to commercialize our existing products and invest in new products.
We may require additional funds to meet our operational, 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 capital requirements. |
Our failure to do any of these things could result in lower revenue and adversely affect our financial condition and results of operations, and we may have to curtail or cease operations.
While we believe our existing cash, cash equivalents and investments, and funds available from our current borrowing sources will be sufficient to fund our operating expenses and capital equipment requirements through the next 12 months, we cannot assure you that we will not otherwise require additional financing before that time. 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 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.
We have incurred substantial losses in the past and may not be profitable in the future.
We have incurred substantial net losses since inception, and we expect to incur substantial net losses into 2011 as we continue the commercialization of our products. We may not be successful in completing the development or commercialization of our technology. 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 revenue and achieve profitability, we may not be able to continue our operations. Our failure to achieve profitability could negatively impact the market price of our common stock. Even if we do become profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis. Furthermore, even if we achieve significant revenue, we may choose to pursue a strategy of increasing market penetration and presence or expand or accelerate new product development or clinical research activities at the expense of profitability.
We may not be able to comply with debt covenants and may have to repay outstanding indebtedness.
We have financed our operations through equity transactions and bank and other borrowings. Our current bank loan agreement contains financial and other covenants which, if violated, could require the repayment of existing indebtedness and lead to the lack of availability of borrowings under that agreement. There can be no
26
Table of Contents
assurance that we will be able to maintain compliance with these covenants or that we could replace this source of liquidity if these covenants were to be violated and our loans were forced to be repaid.
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 and assemble certain of the components of our systems and other products such as our guidewires and electrophysiology catheter advancement devices. We also depend on various third party suppliers for the magnets we use in our Niobe Magnetic Navigation Systems and certain components of our Odyssey Enterprise Solution. 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 Magnetic Navigation System and certain components of our Odyssey Enterprise Solution, 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, materials, or 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.
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, our contract manufacturers and we may have excess or inadequate inventory of materials and components.
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 revenue, lead to customer dissatisfaction, damage our reputation and result in additional costs or cancellation of orders by our customers.
We also rely on our collaboration partner, Biosense Webster, and other parties to manufacture a number of disposable interventional devices for use with our Niobe system. If these parties cannot manufacture sufficient quantities of disposable interventional devices to meet customer demand, or if their manufacturing processes are disrupted, our revenue and profitability would be adversely affected.
Risks associated with international manufacturing and trade could negatively impact the availability and cost of our products because materials used to manufacture our magnets, one of our key system components, are sourced from overseas.
We purchase the permanent magnets for our Niobe Magnetic Navigation System from a manufacturer that uses material produced in Japan, and we anticipate that certain of the production work for these magnets will be
27
Table of Contents
performed for this manufacturer in China. In addition, our subcontractor purchases magnets for our disposable interventional devices directly from a manufacturer in Japan. Any event causing a significant increase in price or a disruption of imports, including the imposition of import restrictions, could adversely affect our business. The flow of components from our vendors could also be adversely affected by financial or political instability in any of the countries in which the goods we purchase are manufactured, if the instability affects the production or export of product components from those countries. Trade restrictions in the form of tariffs or quotas, or both, could also affect the importation of those product components and could increase the cost and reduce the supply of products available to us. In addition, decreases in the value of the U.S. dollar against foreign currencies could increase the cost of products we purchase from overseas vendors.
We may encounter problems at our manufacturing facilities or those of our subcontractors or otherwise experience manufacturing delays that could result in lost revenue.
We subcontract the manufacture and assembly of components of our Niobe Magnetic Navigation System and all of our disposable devices. The products we design may not satisfy all of the performance requirements of our customers and we may need to improve or modify the design or ask our subcontractors to modify their production process in order to do so. In addition, we or our subcontractors may experience quality problems, substantial costs and unexpected delays related to efforts to upgrade and expand manufacturing, assembly and testing capabilities. If we incur delays due to quality problems or other unexpected events, our revenue may be impacted.
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 re-examination 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, re-examination, 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 and certain foreign patent applications for medical related devices and methods may be found unpatentable. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology.
Some of our technology was developed in conjunction with third parties, and thus there is a risk that a third party may claim rights in our intellectual property. Outside the U.S., we rely on third-party payment services for the payment of foreign patent annuities and other fees. Non-payment or delay in payment of such fees, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, the patent owner has failed to “work” the invention in that country, or the third party has patented improvements). In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. We also cannot assure you that we will be able to develop additional patentable technologies. If we fail to obtain adequate patent protection for our technology, or if any protection we obtain becomes limited or invalidated, others may be able to make and sell competing products, impairing our competitive position.
28
Table of Contents
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. Determining 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 maintain all the licenses or rights from third parties necessary for the development, manufacture, or marketing of new and existing products.
As we develop additional products and improve or maintain existing products, we may find it advisable or necessary to seek licenses or otherwise make payments in exchange for rights from third parties who hold patents covering certain technology. If we cannot obtain or maintain the desired licenses or rights for any of our products, we could be forced to try to design around those patents at additional cost or abandon the product altogether, which could adversely affect revenue 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. If we do not maintain licenses or exclusivity with suppliers of certain components of our Odyssey products, competitors may enter the market, negatively impacting our ability to develop and commercialize Odyssey products.
29
Table of Contents
Our products and related technologies can be applied in different industries, and we may fail to focus on the most profitable areas.
The Niobe system is designed to have the potential for expanded applications beyond electrophysiology and interventional cardiology, including congestive heart failure, structural heart repair, interventional neurosurgery, interventional neuroradiology, peripheral vascular, pulmonology, urology, gynecology and gastrointestinal medicine. We continue to develop the Odyssey Enterprise Solution for interventional labs that have a Niobe system installed as well as those standard interventional labs that do not have a Niobe system installed. However, we have limited financial and managerial resources and therefore may be required to focus on products in selected industries and sites 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.
The rate of technological innovation of the Odyssey Enterprise Solution might not keep pace with the rest of the market.
The rate of innovation for the market in which Odyssey competes is fast-paced and requires significant resources and innovation. The technology surrounding these products is still in its growth stages and if a larger competitor with significant capital entered the market, it could be difficult for us to maintain our advantages associated with being an early developer of this technology. In addition, connectivity with other devices in the electrophysiology lab is a key driver of value for the Odyssey system. If the Company is not able to continue to commit sufficient resources to ensure that its products are compatible with other products within the electrophysiology lab, this could have a negative impact on Odyssey revenue.
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 hospitals, 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 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 or approvals for our medical device products, or if such clearances or approvals 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 be designated as Class I, exempt from premarket approval or notification or first receive either a 510(k) clearance or a pre-market approval, or PMA, from the U.S. FDA 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 we are able to market our system commercially in the U.S., our business model relies significantly on revenue from disposable interventional devices, some of which may not
30
Table of Contents
achieve FDA clearance or approval. We cannot assure you that any of our devices will not be required to undergo the lengthier and more burdensome PMA process. We cannot commercially market any disposable interventional devices in the U.S. until the necessary clearances or approvals from the FDA have been received. In addition, we are working with third parties to co-develop disposable products. In some cases, these companies are responsible for obtaining appropriate regulatory clearance or approval to market these disposable devices. If these clearances or approvals are not received or are substantially delayed or if we are not able to offer a sufficient array of approved disposable interventional devices, we may not be able to successfully market our system to as many institutions as we currently expect, which could have a material adverse impact on our financial condition, results of operations and cash flow.
Furthermore, obtaining 510(k) clearances, PMAs or PMA supplement approvals, from the FDA could result in unexpected and significant costs for us and consume management’s time and other resources. The FDA could ask us to supplement our submissions, collect non-clinical data, conduct clinical trials or engage in other time-consuming actions, or it could simply deny our applications. In addition, even if we obtain a 510(k) clearance or PMA or PMA supplement approval, the clearance or approval could be revoked or other restrictions imposed if post-market data demonstrates safety issues or lack of effectiveness. We cannot predict with certainty how, or when, the FDA will act on our marketing applications. 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.
In August 2010, the FDA’s Center for Devices and Radiological Health (CDRH) released preliminary reports from the 510(k) Working Group and the Task Force on the Utilization of Science in Regulatory Decision Making. After an open comment period, the CDRH has prepared a plan to implement actions to improve the 510(k) program during 2011. It is unclear what impact, if any, these changes will have on our business.
If our strategic partners elect not to or we 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 clearance or approval, we must comply with continuing regulation by the FDA and other authorities, including the FDA’s Quality System Regulation, or QSR, requirements, labeling and promotional requirements and medical device adverse event and other reporting requirements. Any failure to comply with continuing regulation by the FDA or other authorities could result in enforcement action that may include suspension or withdrawal of regulatory approvals, recalling products, ceasing product manufacture and/or 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. Congress could amend the Federal Food, Drug, and Cosmetic Act, and the FDA could modify its regulations promulgated under this law in a way to make ongoing regulatory compliance more burdensome and difficult.
31
Table of Contents
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. 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 addition, if we are unable to obtain on-label approval for key applications, we may face product market adoption barriers that we cannot overcome. 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 could be subject to enforcement sanctions and 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 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 or other U.S. regulations. In addition, in many countries the national health or social security organizations require our products to be qualified before procedures performed using our products become eligible for reimbursement. Failure to receive, or delays in the receipt of, relevant foreign qualifications could have a material adverse effect on our business, financial condition and results of operations. Due to the movement toward harmonization of standards in the European Union, we expect a changing regulatory environment in Europe characterized by a shift from a country-by-country regulatory system to a European Union-wide single regulatory system. We cannot predict the timing of this harmonization and its effect on us. Adapting our business to changing regulatory systems could have a material adverse effect on our business, financial condition, and results of operations. If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension, or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
In addition, we are subject to the U.S. Foreign Corrupt Practices Act, antitrust and anti-competition laws, and similar laws in foreign countries. Any violation of these laws by our distributors or agents or by us could create a substantial liability for us and also cause a loss of reputation in the market. From time to time, we may face audits or investigations by one or more government agencies, compliance with which could be costly and time-consuming, and could divert our management and key personnel from our business operations. An adverse outcome under any such investigation or audit could subject us to fines or other penalties, which could adversely affect our business and financial results.
Our suppliers, subcontractors, 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 or our suppliers or subcontractors would pass such an inspection. If we or our suppliers or subcontractors fail to remain in compliance with the FDA or EN 13485:2003 standards, we or they may be required to cease all or part of our operations for some period of time until we or they can demonstrate that appropriate steps have been taken to comply with such standards or face other enforcement action, such as a public warning letter. We cannot be certain that our facilities or those of our suppliers or subcontractors will comply with the FDA or EN 13485:2003 standards in future audits by regulatory authorities. Failure to pass such an inspection could force a shut down of manufacturing operations, a recall of our products or the imposition of other enforcement sanctions, which would significantly harm our revenue 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 quality standards and will not encounter any manufacturing difficulties. Any failure to comply with the FDA’s QSR or EN 13485:2003 by us or our suppliers could significantly harm our available inventory and product sales.
32
Table of Contents
Software errors or other defects may be discovered in our products.
Our products incorporate many components, including sophisticated computer software. Complex software frequently contains errors, especially when first introduced. Because our products are designed to be used to perform complex interventional procedures, we expect that physicians and hospitals will have an increased sensitivity to the potential for software defects. We cannot assure you that our software or other components will not experience errors or performance problems in the future. If we experience software errors or performance problems, we would likely also experience:
| • | 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, many health care laws and regulations apply to our business. We could be subject to health care fraud and patient privacy regulation by the federal government, the states in which we conduct our business, and internationally. 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; |
| • | 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 if we 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; and the applicable Privacy and Security Standards of HITECH, the Health Information Technology for Economic and Clinical Health Act, which is Title XIII of the American Recovery and Reinvestment Act; |
| • | 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; |
| • | federal self-referral laws, such as the Stark Anti-Referral Law, 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; and |
| • | regulations pertaining to receipt of CE mark for our products marketed outside of the United States and submission to periodic regulatory audits in order to maintain these regulatory approvals. |
33
Table of Contents
If our operations are found to be in violation of any of the laws described above or any other governmental laws or regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, loss of reimbursement for our products under federal or state government health programs such as Medicare and Medicaid and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment, or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expense 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.
Healthcare policy changes, including legislation enacted in 2010, may have a material adverse effect on us.
In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the Obama administration, members of Congress, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system.
In March 2010, the President signed into law the Patient Protection and Affordable Healthcare Act, which was amended by the Health Care and Education Reconciliation Act of 2010. The law imposes a tax on medical device manufacturers and producers equal to 2.3% of the sales price for all sales beginning January 1, 2013. Other key provisions include establishing a modification linking Medicare payment to quality outcomes. These taxes, in addition to other potential healthcare policy changes at the federal and state level in the future, could have a material, negative impact on our results of operations and our cash flows.
The application of state certificate of need regulations and compliance by our customers with federal and state licensing or other international requirements could substantially limit our ability to sell our products and grow our business.
Some states require health care providers to obtain a certificate of need or similar regulatory approval prior to the acquisition of high-cost capital items such as our Niobe 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 Niobe system. Further, our sales and installation cycle for the Niobe system is typically longer in certificate of need states due to the time it takes our customers to obtain the required approvals. In addition, our customers must meet various federal and state regulatory and/or accreditation requirements in order to receive payments from government-sponsored health care programs such as Medicare and Medicaid, receive full reimbursement from third party payors, and maintain their customers. Our international customers may be required to meet similar or other requirements. Any lapse by our customers in maintaining appropriate licensure, certification or accreditation, or the failure of our customers to satisfy the other necessary requirements under government-sponsored health care programs or other requirements could cause our sales to decline.
Hospitals or physicians may be unable to obtain reimbursement from third-party payors for procedures using the Niobe system, or reimbursement for procedures may be insufficient to recoup the costs of purchasing our products.
We expect that U.S. hospitals will continue to bill various third-party payors, such as Medicare, Medicaid and other government programs and private insurance plans, for procedures performed with our products, including the costs of the disposable interventional devices used in these procedures. If in the future our
34
Table of Contents
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, scientific and sales staff. 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 personnel or our inability to attract and retain other qualified personnel could harm our business and our ability to compete. In addition, the loss of members of our scientific staff may significantly delay or prevent product development and other business objectives. A loss of key sales personnel could result in a reduction of revenue.
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 operations.
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. |
In addition, contracts may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system.
35
Table of Contents
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.
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 retain 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 an investor’s 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, our alliance agreement with Biosense Webster contains provisions that 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.
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 such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, and NASDAQ Global Market rules have in the past created uncertainty for public companies. We continue to evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional compliance costs we may incur or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance
36
Table of Contents
is provided by courts and regulatory and governing bodies. This could result in 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 expense 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 revenue 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 revenue 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 Biosense Webster 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.
Our common stock is traded on the NASDAQ Global Market and trading volume may be limited or sporadic. The market price of our common stock has experienced, and may continue to experience, substantial volatility. During 2010, our common stock traded between $3.00 and $6.02 per share, on trading volume ranging from approximately 69,000 to 2.3 million shares per day. 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; |
| • | 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; |
| • | developments in our industry; and |
| • | participants in the market for our common stock may take short positions with respect to our common stock. |
37
Table of Contents
These factors, as well as general economic, credit, political and market conditions, may materially adversely affect the market price of our common stock. As with the stock of many other public companies, the market price of our common stock has been particularly volatile during the recent period of upheaval in the capital markets and world economy. This excessive volatility may continue for an extended period of time following the filing date of this report. Furthermore, 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. Volatility in the price of our common stock on the NASDAQ Global Market may depress the trading price of our common stock, which could, among other things, allow a potential acquirer of the Company to purchase a significant amount of our common stock at low prices. Additionally, 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.
Future issuances of our securities could dilute current stockholders’ ownership.
A number of shares of our common stock are subject to stock options, stock appreciation rights and warrants. We may also decide to raise additional funds through public or private debt or equity financing to fund our operations. We cannot predict the effect, if any, that future sales of debt, our common stock, other equity securities or securities convertible into our common stock or other equity securities or the availability of any of the foregoing for future sale, will have on the market price of our common stock or notes. Sales of substantial amounts of our common stock (including shares issued upon the exercise of stock options, stock appreciation rights or the conversion of any convertible securities outstanding now or in the future), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
We have not received any written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our 2010 fiscal year and that remain unresolved.
| ITEM 2. | PROPERTIES |
Our primary company facilities are located in St. Louis, Missouri where we lease approximately 65,000 square feet of office and 12,000 square feet of demonstration and assembly space. This space is leased under an agreement through 2018. Through June 2010, we leased approximately 10,000 square feet in Maple Grove, Minnesota. Effective July 1, 2010, we entered into a new lease for 3,900 square feet of office space. The new facility is leased through October 31, 2013.
In addition, we have leased office space in Phoenix, Arizona; Amsterdam, The Netherlands; and in Beijing, China. These locations are leased through July 31, 2011, May 31, 2011 and September 30, 2011, respectively.
| 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. | [REMOVED AND RESERVED.] |
Executive Officers
See Part III – Item 10 of this report on Form 10-K for information about our Executive Officers.
38
Table of Contents
PART II
| 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 Global Market under the symbol “STXS” since August 12, 2004. The following table sets forth the high and low sales prices of our common stock for the periods indicated and reported by NASDAQ.
| High | Low | |||||||
| Year Ended December 31, 2010 |
||||||||
| First Quarter |
$ | 6.02 | $ | 3.85 | ||||
| Second Quarter |
5.25 | 3.30 | ||||||
| Third Quarter |
4.49 | 3.00 | ||||||
| Fourth Quarter |
4.22 | 3.34 | ||||||
| Year Ended December 31, 2009 |
||||||||
| First Quarter |
$ | 4.65 | $ | 2.30 | ||||
| Second Quarter |
4.88 | 2.98 | ||||||
| Third Quarter |
5.19 | 3.19 | ||||||
| Fourth Quarter |
4.67 | 3.49 | ||||||
As of February 28, 2011, there were approximately 269 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. In addition, the terms of our loan agreement prohibit us from declaring dividends without the prior consent of our lender.
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.
39
Table of Contents
STOCK PRICE PERFORMANCE GRAPH
The following graph shows the total stockholder return from December 31, 2005 through December 31, 2010 for a $100 investment in Stereotaxis, Inc., the NASDAQ Composite (U.S.) Index and the NASDAQ Medical Device Index. All values assume reinvestment of the full amount of all dividends although dividends have never been declared on Stereotaxis’ common stock. The stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
40
Table of Contents
| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data has been derived from, and should be read in conjunction with our 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 financial statements. Historical results are not indicative of the results to be expected in the future.
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Consolidated Statements of Operations Data: |
||||||||||||||||||||
| Revenue |
$ | 54,051,237 | $ | 51,149,555 | $ | 40,365,173 | $ | 39,298,809 | $ | 27,191,706 | ||||||||||
| Cost of revenue |
15,564,687 | 17,021,633 | 14,177,790 | 15,346,220 | 12,892,749 | |||||||||||||||
| Gross margin |
38,486,550 | 34,127,922 | 26,187,383 | 23,952,589 | 14,298,957 | |||||||||||||||
| Operating costs and expenses: |
||||||||||||||||||||
| Research and development |
12,244,163 | 14,260,854 | 17,422,828 | 25,471,809 | 21,794,177 | |||||||||||||||
| Sales and marketing |
30,178,818 | 28,694,540 | 28,660,663 | 29,021,117 | 22,533,882 | |||||||||||||||
| General and administrative |
15,022,689 | 15,010,490 | 21,121,164 | 18,701,726 | 16,642,359 | |||||||||||||||
| Total operating expenses |
57,445,670 | 57,965,884 | 67,204,655 | 73,194,652 | 60,970,418 | |||||||||||||||
| Operating loss |
(18,959,120 | ) | (23,837,962 | ) | (41,017,272 | ) | (49,242,063 | ) | (46,671,461 | ) | ||||||||||
| Interest and other income (expense), net (1) |
(964,367 | ) | (3,656,495 | ) | (2,868,702 | ) | 1,120,549 | 951,691 | ||||||||||||
| Net loss |
$ | (19,923,487 | ) | $ | (27,494,457 | ) | $ | (43,885,974 | ) | $ | (48,121,514 | ) | $ | (45,719,770 | ) | |||||
| Basic and diluted net loss per common share |
$ | (0.39 | ) | $ | (0.63 | ) | $ | (1.20 | ) | $ | (1.34 | ) | $ | (1.39 | ) | |||||
| Shares used in computing basic and diluted net loss per common share |
50,522,001 | 43,344,324 | 36,585,086 | 35,793,973 | 32,979,403 | |||||||||||||||
| Consolidated Balance Sheet Data: |
||||||||||||||||||||
| Cash, cash equivalents and short-term investments |
$ | 35,248,819 | $ | 30,546,550 | $ | 30,355,657 | $ | 23,656,378 | $ | 36,983,781 | ||||||||||
| Working capital |
12,395,426 | 12,878,277 | 10,097,082 | 16,925,716 | 40,383,798 | |||||||||||||||
| Total assets |
65,761,792 | 56,120,516 | 59,440,365 | 60,475,794 | 69,290,660 | |||||||||||||||
| Long-term debt, less current maturities |
8,000,000 | 10,346,655 | 12,036,723 | 1,000,000 | 305,556 | |||||||||||||||
| Accumulated deficit |
(343,376,271 | ) | (323,452,784 | ) | (295,958,327 | ) | (252,072,353 | ) | (203,950,839 | ) | ||||||||||
| Total stockholders’ equity |
10,475,246 | 7,641,343 | 4,770,681 | 24,194,407 | 44,788,992 | |||||||||||||||
| (1) | Other income recorded in 2010 includes $1.5 million in grants under the Qualifying Therapeutic Discovery Project Program. |
41
Table of Contents
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this report on Form 10-K. Operating results are not necessarily indicative of results that may occur in future periods.
This report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Our actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth in Item 1A. “Risk Factors.” Forward-looking statements discuss matters that are not historical facts. Forward-looking statements include, but are not limited to, discussions regarding our operating strategy, sales and marketing strategy, regulatory strategy, industry, economic conditions, financial condition, liquidity and capital resources and results of operations. Such statements include, but are not limited to, statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “can,” “could,” “may,” “will,” “would,” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Overview
Stereotaxis designs, manufactures and markets an advanced cardiology instrument control system for use in a hospital’s interventional surgical suite to enhance the treatment of arrhythmias and coronary artery disease. 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. The core components of the Niobe system have received regulatory clearance in the U.S., Canada, Europe, China, and various other countries.
We believe that our Niobe system represents a revolutionary technology in the interventional surgical suite, or “interventional 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 interventional 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.
In addition to the Niobe system and its components, Stereotaxis also has developed the Odyssey™ Enterprise 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 Enterprise 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. The Odyssey Enterprise Solution may be acquired in conjunction with a Niobe system or on a stand-alone basis for installation in interventional labs and other locations where clinicians often desire the benefits of Odyssey that we believe can improve clinical workflows and related efficiencies.
42
Table of Contents
In the mid 1990’s, we began focusing on developing applications for our technology to treat cardiovascular diseases because of the significant market opportunities for these applications. During 2003, following receipt of marketing clearance from the FDA for our current system, we emerged from the development stage and began to generate revenue from the placement of investigational systems and the commercial launch of our cardiology system in the U.S. and Europe.
In December 2008 we completed two concurrent registered direct offerings of our common stock. In one of the offerings, affiliates of two members of our board of directors (the “Lenders”) purchased a total of 2,024,260 shares of our common stock at $4.94 per share including warrants to purchase 4,859,504 shares of our common stock at $4.64 per share exercisable through June 2014. In the other offering, we sold 2,389,877 shares of our common stock at $4.18 per share including Series A warrants to purchase an additional 1,792,408 shares of our common stock at $5.11 per share exercisable through June 2014, Series B warrants to purchase an additional 2,148,739 shares of our common stock at $4.65 per share with an expiration date in June 2009, and Series C and D warrants to purchase up to an aggregate of 682,824 shares of our common stock which were exercisable under certain defined conditions at an exercise price of $0.001 per share through May 2009. The investors in this transaction became entitled to exercise and did exercise, all of their Series C warrants to purchase 341,412 shares of common stock in March 2009 and 279,170 of their Series D warrants in May 2009; the balance of the Series D warrants, for 62,242 shares, went unexercised. The Series A warrants to purchase 1,792,408 shares had an anti-dilution protection that was triggered in February 2009, reducing the exercise price to $3.16 per share. The Series B warrants expired unexercised. In conjunction with these transactions, we received approximately $18.8 million in net proceeds after deducting offering expenses.
In August 2009 we filed a universal shelf registration statement for the issuance and sale from time to time to the public of up to $75 million in securities, including debt, preferred stock, common stock, and warrants. The registration statement was declared effective by the SEC in September 2009.
In October 2009 we completed a public offering of our common stock in which we issued 7,475,000 shares at $4.00 per share and realized approximately $27.8 million in proceeds, net of fees and expenses.
In November 2010 we completed a public offering of our common stock in which we issued 4,600,000 shares at $3.65 per share and realized approximately $15.5 million in proceeds, net of fees and expenses.
We generate revenue from both the initial capital sales of the Niobe and Odyssey systems as well as recurring revenue from the sale of our proprietary disposable devices, from ongoing license and service contracts, and from royalties paid to the Company on the sale by Biosense Webster of co-partnered catheters. We market our products to a broad base of hospitals in the United States and internationally as detailed in Note 15 to the financial statements. Due to an increase in our installed base and to the introduction and regulatory approval of a broader range of catheters and guidewires for use with the Niobe system, recurring revenue has increased from 30% of total revenues in 2008 to 36% in 2009 and 42% in 2010.
Since our inception, we have generated significant losses. As of December 31, 2010, we had incurred cumulative net losses of approximately $343 million. We expect to incur additional losses into 2011 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 and fund additional sales and marketing initiatives.
We have alliances with each of Siemens AG Medical Solutions, Philips Medical Systems and Biosense Webster, Inc., through which we integrate our Niobe 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 interventional lab. Each of these alliances provides for coordination of our sales and marketing activities with those of our partners. In addition, Siemens is our product distributor in certain countries and has agreed to provide worldwide service for our integrated systems.
43
Table of Contents
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, revenue 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
The Company adopted Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) in the fourth quarter of 2009, effective as of January 1, 2009. Prior to the adoption of this guidance, the Company followed previously issued guidance for general accounting principles for revenue arrangements with multiple deliverables. Under this previously issued guidance, we were required to continually evaluate whether we had proper evidence to identify separate units of accounting for deliverables within certain contractual arrangements with customers. If we were unable to support the determination of vendor-specific objective evidence (“VSOE”) or third party evidence (“TPE”) of fair value on the undelivered element, we could not recognize revenue for the delivered elements.
ASU 2009-13 permits management to estimate the selling price of undelivered components of a bundled sale for which it is unable to establish VSOE or TPE. This requires management to record revenue for certain elements of a transaction even though it might not have delivered other elements of the transaction, for which it was unable to meet the requirements for establishing VSOE or TPE. The adoption of the new guidance did not materially impact revenue reported in prior periods. The Company believes that the new guidance significantly improves the reporting of these types of transactions to more closely reflect the underlying economic circumstances. This guidance also prohibits the use of the residual method for allocating revenue to the various elements of a transaction and requires that the revenue be allocated proportionally based on the relative estimated selling prices.
Under our revenue recognition policy before and after the adoption of ASU 2009-13, a portion of revenue for most system sales 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. Beginning in the quarter ended March 31, 2010, revenue for ODYSSEYTM VISION Standard HD systems was recognized upon delivery due to the fact that third parties became qualified to perform installations. However, this change did not have a material impact on revenue recognition for the year ended December 31, 2010. Beginning in the quarter ended June 30, 2010, revenue for ODYSSEY VISION Quad systems was recognized upon delivery due to the fact that third parties became qualified to perform installations. This change resulted in additional revenue of $2.6 million and additional gross margin of $1.3 million during the year ended December 31, 2010. Beginning in the quarter ended December 31, 2010, revenue for ODYSSEY ENTERPRISE CINEMA systems was recognized upon delivery due to the fact that third parties became qualified to perform installations. This change resulted in additional revenue of $0.7 million and additional $0.4 million in gross margin. 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. We may deliver systems to a non-hospital site at the customer’s request. We evaluate whether delivery has occurred considering general accounting principles for revenue recognition with respect to “bill and hold” transactions. 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 multi-element
44
Table of Contents
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.
Stock-based Compensation
Stock compensation expense, which is a non-cash charge, results from stock option and stock appreciation rights grants made to employees, directors and consultants at the fair value of the option granted, and from grants of restricted shares to employees. The fair value of options and stock appreciation rights granted was determined using the Black-Scholes valuation method which gives consideration to the estimated value of the underlying stock at the date of grant, the exercise price of the option, the expected dividend yield and volatility of the underlying stock, the expected life of the option and the corresponding risk-free interest rate. The fair value of the grants of restricted shares, was determined based on the closing price of our stock on the date of grant. Stock compensation expense for options, stock appreciation rights and for time-based restricted share grants is amortized on a straight-line basis over the vesting period of the underlying issue, generally over four years except for grants to directors which generally vest over one to two years. Stock compensation expense for performance-based restricted shares is amortized on a straight-line basis over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives. Compensation expenses related to option grants to non-employees are remeasured quarterly through the vesting date. Compensation expense is recognized only for those options expected to vest, net of estimated forfeitures. Estimates of the expected life of options have been based on the average of the vesting and expiration periods, which is the simplified method under general accounting principles for share-based payments. Estimates of volatility and forfeiture rates utilized in calculating stock-based compensation have been prepared based on historical data and future expectations. Actual experience to date has been consistent with these estimates.
The amount of compensation expense to be recorded in future periods may increase if we make additional grants of options, stock appreciation rights or restricted shares or if we determine that actual forfeiture rates are less than anticipated. The amount of expense to be recorded in future periods may decrease if we do not achieve the performance objectives by which certain restricted shares are contingent, if the requisite service periods are not completed or if the actual forfeiture rates are greater than anticipated.
Valuation of Inventory
We value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out (FIFO) method, or its current estimated market value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and reserve accordingly. Our reserve estimate for excess and obsolete is based on expected future use. Our reserve estimates have historically been consistent with our actual experience as evidenced by actual sale or disposal of the goods.
Deferred Income Taxes
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.
45
Table of Contents
In assessing whether and to what extent deferred tax assets are realizable, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, limitations imposed by Section 382 of the Internal Revenue Code and projections for future losses over periods which the deferred tax assets are deductible, we determined that a 100% valuation allowance of deferred tax assets was appropriate.
Results of Operations
Comparison of the Years ended December 31, 2010 and 2009
Revenue. Revenue increased to $54.1 million for the year ended December 31, 2010 from $51.1 million for the year ended December 31, 2009, an increase of approximately 6%. Revenue from sales of systems decreased to $31.1 million for the year ended December 31, 2010 from $32.7 million for the year ended December 31, 2009, a decrease of approximately 5%. The number of units recognized to revenue was 21 Niobe systems and a total of $9.2 million for Odyssey systems during the 2010 reporting period compared to 25 Niobe systems, and $4.6 million for Odyssey systems during the 2009 reporting period. Therefore, the decrease in system revenue was primarily due to a decrease in the number of Niobe systems sold, slightly offset by an increase in Odyssey sales. Revenue from sales of disposable interventional device royalties, service and accessories increased to $23.0 million for the year ended December 31, 2010 from $18.5 million for the year ended December 31, 2009, an increase of approximately 24%. This increase was attributable to price increases and a larger base of installed systems.
Cost of Revenue. Cost of revenue decreased to $15.6 million for the year ended December 31, 2010 from $17.0 million for the year ended December 31, 2009, a decrease of approximately 9%. Cost of revenue for systems sold decreased to $12.7 million for the year ended December 31, 2010 from $13.2 million for the year ended December 31, 2009, a decrease of approximately 4%. This decrease was primarily due to fewer Niobe units sold in 2010 compared to 2009, combined with decreased raw material costs, partially offset by the costs associated with the additional Odyssey Enterprise Systems recognized in 2010. Cost of revenue for disposable interventional devices, service and accessories decreased to $2.9 million for the year ended December 31, 2010 from $3.8 million for the year ended December 31, 2009, a decrease of approximately 25%. This decrease was due to a reduction in software costs associated with new generation software upgrades incurred in 2009. As a percentage of our revenue, total cost of revenue was approximately 29% in the year ended December 31, 2010 compared to 33% for the year ended December 31, 2009.
Research and Development Expense. Research and development expense decreased to $12.2 million for the year ended December 31, 2010 from $14.3 million for the year ended December 31, 2009, a decrease of approximately 14%. The decrease was due principally to a decrease in consulting costs related to new product development and introductions.
Sales and Marketing Expense. Sales and marketing expense increased to $30.2 million for the year ended December 31, 2010, from $28.7 million for the year ended December 31, 2009. The increase was primarily due to increased headcount.
General and Administrative Expense. General and administrative expense remained unchanged at $15.0 million for the year ended December 31, 2010, consistent with the year ended December 31, 2009. Decreases in consulting expenses and stock-based compensation expense were offset by expenses related to increased headcount.
Other Income. Other income increased to $2.1 million for the year ended December 31, 2010 from $0.9 million for the year ended December 31, 2009. The increase is due to $1.5 million in grants awarded to the Company in November 2010 under the Qualifying Therapeutic Discovery Project Program for costs incurred on
46
Table of Contents
2009 and 2010 projects. The remaining increase is due to the decrease 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.
Interest Income. Interest income decreased approximately 76% to $11,000 for the year ended December 31, 2010 from $45,000 for the year ended December 31, 2009. Interest income decreased due principally to lower average invested balances during 2010.
Interest Expense. Interest expense decreased to $3.0 million for the year ended December 31, 2010 from $4.6 million for the year ended December 31, 2009. The primary cause of this decrease was less interest expense incurred from outstanding warrants previously issued to the Lenders.
Comparison of the Years ended December 31, 2009 and 2008
Revenue. Revenue increased to $51.1 million for the year ended December 31, 2009 from $40.4 million for the year ended December 31, 2008, an increase of approximately 27%. Revenue from sales of systems increased to $32.7 million for the year ended December 31, 2009 from $28.4 million for the year ended December 31, 2008, an increase of approximately 15%. The number of units recognized to revenue was 25 Niobe systems, 23 Odyssey Vision systems, and 6 Odyssey Enterprise Cinema systems during the 2009 reporting period compared to 25 Niobe systems and 14 Odyssey Vision systems during the 2008 reporting period. The Niobe units recognized in the 2009 period carried a slightly higher average selling price, also contributing to the year over year increase in systems revenue. Revenue from sales of disposable interventional device royalties, service and accessories increased to $18.5 million for the year ended December 31, 2009 from $12.0 million for the year ended December 31, 2008, an increase of approximately 54%. This increase was attributable to price increases and a larger base of installed systems.
Cost of Revenue. Cost of revenue increased to $17.0 million for the year ended December 31, 2009 from $14.2 million for the year ended December 31, 2008, an increase of approximately 20%. Cost of revenue for systems sold increased to $13.2 million for the year ended December 31, 2009 from $12.0 million for the year ended December 31, 2008, an increase of approximately 10% primarily due to the costs associated with the additional 9 Odyssey Vision systems and 6 Odyssey Enterprise Cinema systems recognized in 2009. Cost of revenue for disposable interventional devices, service and accessories increased to $3.8 million for the year ended December 31, 2009 from $2.2 million for the year ended December 31, 2008, an increase of approximately 74%. This increase was due to the costs associated with the increased volume of disposable devices sold, higher software costs associated with new generation software upgrades and service costs associated with first generation Niobe systems. As a percentage of our revenue, total cost of revenue was approximately 33% in the year ended December 31, 2009 compared to 35% for the year ended December 31, 2008.
Research and Development Expense. Research and development expense decreased to $14.3 million for the year ended December 31, 2009 from $17.4 million for the year ended December 31, 2008, a decrease of approximately 18%. The decrease was due principally to a decrease in development costs related to new product introductions.
Sales and Marketing Expense. Sales and marketing expense remained unchanged at $28.7 million for the year ended December 31, 2009, consistent with the year ended December 31, 2008. Decreases in selected marketing activities and personnel costs were offset by the increase related to stock-based compensation expense, as well as mobile showroom disposal and demo system impairment.
General and Administrative Expense. General and administrative expense decreased to $15.0 million for the year ended December 31, 2009 from $21.1 million for the year ended December 31, 2008, a decrease of approximately 29%. The decrease relates to certain one-time expenses incurred in 2008, including expenses associated with the retirement of our CEO of $1.7 million, regulatory activity to further the Company’s product registration in Japan, and an impairment charge of $0.5 million for a long-term investment.
47
Table of Contents
Other Income. Other income represents the decrease 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.
Interest Income. Interest income decreased approximately 77% to $45,000 for the year ended December 31, 2009 from $195,000 for the year ended December 31, 2008. Interest income decreased due principally to lower average invested balances during 2009.
Interest Expense. Interest expense increased to $4.6 million for the year ended December 31, 2009 from $3.1 million for the year ended December 31, 2008. Interest expense increased primarily due to the write off of warrants issued during February 2009 related to the guarantees under the line of credit received from stockholders who are affiliates of two members of our board of directors (“Lenders”), which expired upon our October 2009 equity offering.
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, 2010, 2009 and 2008 to reflect these uncertainties. As of December 31, 2010, we had federal net operating loss carryforwards of approximately $307.6 million of which approximately $3.0 million will expire between 2011 and 2012 and approximately $304.6 million will expire between 2018 and 2030. As of December 31, 2010, we had state net operating loss carryforwards of approximately $6.8 million which will expire at various dates between 2011 and 2030 if not utilized. We may not be able to utilize all of these loss carryforwards prior to their expiration.
Liquidity and Capital Resources
Borrowing facilities
In July 2008, we amended our existing agreements with Biosense Webster. Pursuant to the amendment, Biosense Webster agreed to advance us $10.0 million against royalty amounts that were owed to us from Biosense Webster at the time the amendment was executed or that would be owed in the future. We also agreed that an aggregate of up to $8.0 million of certain agreed upon research and development expenses that were owed at the time the amendment was executed or may be owed in the future by us to Biosense Webster would be deferred and will be due, together with any unrecouped portion of the $10.0 million royalty advance, on the Final Payment Date, as defined in the amendment, but in no event later than December 31, 2011. See Note 8 for additional description of Final Payment Date. We have the right to prepay any amounts due pursuant to the amendment at any time without penalty. Commencing on May 15, 2010 we are required to make quarterly payments to Biosense Webster equal to the difference between certain aggregate royalty payments recouped by Biosense Webster from us in such quarter and $1 million, until the earlier of (1) the date all funds owed by us to Biosense Webster pursuant to the amendment are fully repaid or (2) the Final Payment Date. Interest on the outstanding and unrecouped amounts of the royalty advance and deferred research and development expenses will accrue at an interest rate of the prime rate plus 0.75%. Outstanding royalty advances and deferred research and development expenses and accrued interest thereon will be recouped by Biosense Webster from time to time by deductions from royalty amounts otherwise payable to us. As of December 31, 2010, approximately $18.0 million had been advanced by Biosense Webster to us pursuant to the amendment. As of December 31, 2010, $9.9 million of royalty amounts earned had been used to reduce the advances and the remaining approximately $7.9 million of amounts owed to Biosense Webster has been classified as short-term debt on our balance sheet.
In November 2008, we signed an Amendment to the Loan and Warrant Purchase Agreement with the Lenders in which the Lenders committed to extend their February 2008 agreement to loan us an aggregate of $20 million on an unsecured basis. As amended, the commitment expired on the earlier of March 31, 2010 or the date
48
Table of Contents
we received at least $20 million of third party, non-bank financing. This facility could also be used by us to guarantee our loan commitments to our primary bank lender, through the same extended term. In February 2009 we issued the Lenders warrants to purchase an aggregate of 1,582,280 shares of common stock at an exercise price of $3.16 per share in exchange for the extension of the commitment. The Company recorded a fair value of $2,072,786 related to these warrants.
In March 2009, the Company and its primary lending bank entered into an agreement to amend the revolving line of credit to change the total availability under the line to $25 million, to extend the term of the agreement to March 31, 2010, to modify the tangible net worth requirements, and to provide for additional borrowing capacity as it relates to advances against accounts receivable from non-U.S. customers.
In October 2009, the Company received from the Lenders an extension of their commitment to provide $10 million in either direct loans to the Company or loan guarantees to the Company’s primary bank lender through the earlier of March 31, 2011 or the date the Company receives $30 million of third party, non-bank financing, coincidental with the proposed maturity of the bank line of credit, as amended. The Company granted to the Lenders warrants to purchase 664,064 shares in exchange for their extension. The warrants are exercisable at $4.25 per share, beginning on March 1, 2010 and expiring on February 28, 2015. The fair value of these warrants of $1,649,070, calculated using the Black Scholes method, will be deferred and amortized to interest expense ratably. As the previous guarantee was no longer in effect, the Company expensed in 2009 the entire balance on the warrants issued to the Lenders in February 2009.
In December 2009, we further amended our loan agreement with our primary lender to extend the maturity of the current working capital line of credit from March 31, 2010 to March 31, 2011 and to increase the total availability under the line from $25 million to $30 million, retaining the $10 million sublimit for borrowings supported by guarantees from the Lenders. Under the revised facility we were required to maintain a minimum “tangible net worth” as defined in the agreement.
In November 2010, the Company received from the Lenders an extension of their commitment to provide $10 million in either direct loans to the Company or loan guarantees to the Company’s primary bank lender through the earlier of March 31, 2012 or the date the Company receives $30 million of third party, non-bank financing, coincidental with the proposed maturity of the bank line of credit, as amended. The Company granted to the Lenders warrants to purchase 800,000 shares in exchange for their extension. The warrants are exercisable at $4.015 per share, beginning on March 1, 2011 and expiring on February 28, 2016. The fair value of these warrants of $1,747,392, calculated using the Black Scholes method, will be deferred and amortized to interest expense ratably. As the previous guarantee was no longer in effect, the Company expensed in 2010 the entire balance on the warrants issued to the Lenders in October 2009.
In December 2010, we further amended our loan agreement with our primary lender to extend the maturity of the current working capital line of credit from March 31, 2011 to March 31, 2012. The amendment retains the $30 million total availability under the line. Under the revised facility, we are required to maintain a minimum “tangible net worth” and liquidity ratio as defined in the agreement. Additionally, the agreement provided the Company with a $10 million term loan maturing on December 31, 2013. Under this agreement, the Company provided its primary lender with warrants to purchase 111,111 shares of common stock. The warrants are exercisable at $3.60 per share, beginning on December 17, 2010 and expiring on December 17, 2015. The fair value of these warrants of $228,332, calculated using the Black Scholes method, will be deferred and amortized to interest expense ratably over the life of the term loan. As of December 31, 2010, the Company is in compliance with all of the requirements of the loan agreement.
Common Stock
In December 2008, we completed a registered direct offering in which we issued and sold 2,389,877 units (the “Units”) at the negotiated price of $4.18 per Unit, with each Unit consisting of (i) one share of the
49
Table of Contents
Company’s common stock, (ii) one warrant to purchase 0.75 shares of common stock at an exercise price of $5.11 per share (the “Series A Warrant”), for an aggregate of up to 1,792,408 shares of common stock, (iii) one six-month warrant to purchase 0.90 shares of common stock at an exercise price of $4.65 per share (the “Series B Warrant”), for an aggregate of up to 2,148,739 shares of common stock, and (iv) two warrants to purchase 0.286 shares of common stock at an exercise price of $0.001 per share (the “Series C and D Warrants”), for an aggregate of up to 682,824 shares of common stock. Exercise of the Series C and Series D warrants were conditioned upon certain events. The Series B Warrants expired unexercised. The exercise price of the Series A warrants was adjusted to $3.16 in February 2009, and is subject to further adjustment, as described in Note 10 to the Financial Statements. The investors in this transaction became entitled to exercise and did exercise, the Series C and D warrants to purchase an aggregate of 620,582 shares of common stock in March and May 2009, respectively. In addition, concurrently with such offering, we completed a registered direct offering with the Lenders in which we issued and sold 2,024,260 shares of common stock and warrants to purchase up to 4,859,504 shares of common stock, for a purchase price of $4.94 per unit. The warrants are exercisable at $4.64 per share, are exercisable on or after the date immediately following the six month anniversary of their issuance and have a five year term from that initial exercisability date. In conjunction with the two offerings, we received proceeds of approximately $18.8 million net of offering expenses. Conditioned upon the closing of the registered direct offerings, we agreed that the loan obligations of the Lenders would decrease from an aggregate of $20 million to $10 million.
In August 2009, we filed a universal shelf registration statement for the issuance and sale from time to time to the public of up to $75 million in securities, including debt, preferred stock, common stock, and warrants. The registration statement was declared effective by the SEC in September 2009.
In October 2009, we completed an offering of 7,475,000 shares of our common stock at $4.00 per share, receiving approximately $27.8 million in net proceeds.
In November 2010, we completed a public offering of our common stock in which we issued 4,600,000 shares at $3.65 per share and realized approximately $15.5 million in proceeds, net of fees and expenses.
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.
The following table summarizes our cash flow by operating, investing and financing activities for each of years ended December 31, 2010, 2009 and 2008 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Cash Flow used in operating activities |
$ | (18,910 | ) | $ | (22,309 | ) | $ | (28,655 | ) | |||
| Cash Flow provided by (used in) investing activities |
(716 | ) | (1,484 | ) | 4,986 | |||||||
| Cash Flow provided by financing activities |
24,328 | 23,984 | 37,002 | |||||||||
Net cash used in operating activities. We used approximately $18.9 million, $22.3 million and $28.7 million of cash in operating activities during the years ended December 31, 2010, 2009 and 2008, respectively, primarily as a result of operating losses during these periods. The decrease in cash used in operating activities from December 31, 2009 to December 31, 2010 is primarily due to a decrease in the net operating loss and increase in accounts payable, partially offset by share based compensation and an increase in inventory.
Net cash provided by (used in) investing activities. We used approximately $0.7 million to fund investing activities during the year ended December 31, 2010 for the purchase of property and equipment. We used $1.5 million to fund investing activities during the year ended December 31, 2009 and generated cash from investing activities of $5.0 million during the year ended December 31, 2008. The cash generated from 2008 investing activities was due to the sale of investments partially offset by purchases of property and equipment of $1.7 million.
50
Table of Contents
Net cash provided by financing activities. We realized approximately $24.3 million from financing activities during the year ended December 31, 2010 principally from the sale of our common stock in which we realized approximately $15.5 million in net proceeds and the $10 million in borrowings under our term loan. We realized approximately $24.0 million from financing activities during the year ended December 31, 2009 principally from the sale of our common stock in which we realized approximately $27.8 million in net proceeds. We realized approximately $37.0 million from financing activities during the year ended December 31, 2008 principally from the $10 million in borrowings under our line of credit, $10 million received under our agreement with Biosense Webster as described above, and the $19.7 million in net proceeds from the sale of our common stock.
At December 31, 2010, we had working capital of approximately $12.4 million, compared to $12.9 million at December 31, 2009.
As of December 31, 2010, we had an outstanding balance under our term loan of $10 million. In addition, we had $11 million outstanding under the revolving line of credit and had an unused line of approximately $19 million with current borrowing capacity of $18.5 million, including amounts already drawn. As such, we had the ability to borrow an additional $7.5 million under the revolving line of credit at December 31, 2010. As of December 31, 2010, we were in compliance with all covenants of the bank loan agreement.
These credit facilities 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, as in effect at December 31, 2010 and as modified in December 2010, we are required to maintain various levels of “tangible net worth” and liquidity as defined in the loan agreement. 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 our primary lending bank. As of the amendment date and as of December 31, 2010, we were in compliance with all covenants of this agreement.
We expect to have negative cash flow from operations into 2011. Throughout 2011, we 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 expenditures and our general and administrative expenses will increase in 2011 in order to support our product commercialization efforts. Until we can generate significant cash flow from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of our public offerings, private sales of our equity securities and working capital and equipment financing loans. In the future, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financings. We cannot accurately predict the timing and amount of our utilization of capital, which will depend on a number of factors outside of our control.
While we believe our existing cash, cash equivalents and borrowing facilities will be sufficient to fund our operating expenses and capital equipment requirements through the next 12 months, we cannot assure that we will not require additional financing before that time. We also cannot assure 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 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.
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
51
Table of Contents
been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could have arisen if we had engaged in these relationships.
Contractual Obligations
The following table summarizes all significant contractual payment obligations by payment due date:
| Payments by Period | ||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Contractual Obligations |
Under 1 Year |
1 – 3 Years |
3 – 5 Years |
Over 5 Years |
Total | |||||||||||||||
| Long-term debt (1) |
$ | 10,622 | $ | 19,634 | $ | — | $ | — | $ | 30,256 | ||||||||||
| Operating leases |
1,739 | 3,398 | 3,397 | 6,560 | 15,094 | |||||||||||||||
| Purchasing obligations |
— | 1,200 | — | — | 1,200 | |||||||||||||||
| Total |
$ | 12,361 | $ | 24,232 | $ | 3,397 | $ | 6,560 | $ | 46,550 | ||||||||||
| (1) | We have not included interest payable on our revolving credit agreement in these amounts because the interest on this obligation is calculated at a variable rate and the amount of principal outstanding fluctuates. |
Commercial Commitments
We have entered into letters of credit to support certain commitments in the aggregate amount of $0.3 million. These letters of credit expire in February 2011.
| ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Exchange Risk
We operate mainly in the U.S., Europe and Asia and we expect to continue to sell our products both within and outside of the U.S. Although the majority of our revenue and expenses are transacted in U.S. dollars, a portion of our operations are conducted in Euros and to a lesser extent, in other currencies. As such, we have foreign exchange exposure with respect to non-U.S. dollar revenues and expenses as well as cash balances, accounts receivable, accounts payable and other asset and liability balances denominated in non-US dollar currencies. Our international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. 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. As of December 31, 2010 we have not hedged exposures in foreign currencies or entered into any other derivative instruments.
For the year ended December 31, 2010, sales denominated in foreign currencies were approximately 22% of total revenue. For the year ended December 31, 2010, our revenue would have decreased by approximately $1.2 million if the U.S. dollar exchange rate used would have strengthened by 10%. For the year ended December 31, 2010, expenses denominated in foreign currencies were approximately 14% of our total expenses. For the year ended December 31, 2010, our operating expenses would have decreased by approximately $0.8 million if the U.S. dollar exchange rate used would have strengthened by 10%. In addition, we have assets and liabilities denominated in foreign currencies. A 10% strengthening of the U.S. dollar exchange rate against all currencies with which we have exposure at December 31, 2010 would have resulted in a $0.4 million decrease in the carrying amounts of those net assets.
52
Table of Contents
Interest Rate Risk
We have exposure to interest rate risk related to our investment portfolio. 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 have exposure to market risk related to any investments we might hold. Market liquidity issues might make it impossible for the Company to liquidate its holdings or require that the Company sell the securities at a substantial loss. As of December 31, 2010, the Company did not hold any investments.
We have exposure to interest rate risk related to our borrowings as the interest rates for certain of our outstanding loans are subject to increase should the interest rate increase above a defined percentage. Because certain of our outstanding debt is subject to minimum interest rates ranging from 5.75% to 7.0%, a hypothetical increase in interest rates of 100 basis points would have resulted in a less than $0.1 million increase in interest expense for the year ended December 31, 2010.
Inflation Risk
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.
53
Table of Contents
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Financial Statements
Index To Financial Statements
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.
54
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Stereotaxis, Inc.
We have audited the accompanying balance sheets of Stereotaxis, Inc. (the Company) as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stereotaxis, Inc. at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, 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, presents fairly in all material respects the information set forth herein.
As discussed in Note 2 to the financial statements, on January 1, 2009, the Company changed its method for accounting for revenue recognition for arrangements with multiple deliverables and its method for accounting for instruments indexed to an entity’s own stock.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Stereotaxis, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 11, 2011
55
Table of Contents
STEREOTAXIS, INC.
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 35,248,819 | $ | 30,546,550 | ||||
| Accounts receivable, net of allowance of $367,536 and $322,463 in 2010 and 2009, respectively |
13,915,569 | 11,152,648 | ||||||
| Current portion of long-term receivables |
30,800 | 66,800 | ||||||
| Inventories |
5,441,475 | 4,403,675 | ||||||
| Prepaid expenses and other current assets |
4,557,718 | 3,872,535 | ||||||
| Total current assets |
59,194,381 | 50,042,208 | ||||||
| Property and equipment, net |
3,840,622 | 4,790,310 | ||||||
| Intangible assets, net |
2,578,986 | 1,144,445 | ||||||
| Long-term receivables |
109,266 | 138,441 | ||||||
| Other assets |
38,537 | 5,112 | ||||||
| Total assets |
$ | 65,761,792 | $ | 56,120,516 | ||||
| Liabilities and stockholders’ equity |
||||||||
| Current liabilities: |
||||||||
| Current maturities of long-term debt |
$ | 20,894,091 | $ | 13,333,333 | ||||
| Accounts payable |
8,796,182 | 3,881,205 | ||||||
| Accrued liabilities |
6,966,571 | 8,615,287 | ||||||
| Deferred contract revenue |
6,600,313 | 7,191,492 | ||||||
| Warrants |
3,541,798 | 4,142,614 | ||||||
| Total current liabilities |
46,798,955 | 37,163,931 | ||||||
| Long-term debt, less current maturities |
8,000,000 | 10,346,655 | ||||||
| Long-term deferred contract revenue |
478,850 | 948,574 | ||||||
| Other liabilities |
8,741 | 20,013 | ||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, par value $0.001; 10,000,000 shares authorized at 2010 and 2009, none outstanding at 2010 and 2009 |
— | — | ||||||
| Common stock, par value $0.001; 100,000,000 shares authorized at 2010 and 2009, 54,746,240 and 50,208,171 shares issued and outstanding at 2010 and 2009, respectively |
54,746 | 50,208 | ||||||
| Additional paid in capital |
354,002,770 | 331,249,918 | ||||||
| Treasury stock, 40,151 shares at 2010 and 2009 |
(205,999 | ) | (205,999 | ) | ||||
| Accumulated deficit |
(343,376,271 | ) | (323,452,784 | ) | ||||
| Total stockholders’ equity |
10,475,246 | 7,641,343 | ||||||
| Total liabilities and stockholders’ equity |
$ | 65,761,792 | $ | 56,120,516 | ||||
See accompanying notes.
56
Table of Contents
STEREOTAXIS, INC.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenue: |
||||||||||||
| Systems |
$ | 31,120,034 | $ | 32,661,573 | $ | 28,375,880 | ||||||
| Disposables, service and accessories |
22,931,203 | 18,487,982 | 11,989,293 | |||||||||
| Total revenue |
54,051,237 | 51,149,555 | 40,365,173 | |||||||||
| Cost of revenue: |
||||||||||||
| Systems |
12,719,200 | 13,240,430 | 12,008,090 | |||||||||
| Disposables, service and accessories |
2,845,487 | 3,781,203 | 2,169,700 | |||||||||
| Total cost of revenue |
15,564,687 | 17,021,633 | 14,177,790 | |||||||||
| Gross margin |
38,486,550 | 34,127,922 | 26,187,383 | |||||||||
| Operating expenses: |
||||||||||||
| Research and development |
12,244,163 | 14,260,854 | 17,422,828 | |||||||||
| Sales and marketing |
30,178,818 | 28,694,540 | 28,660,663 | |||||||||
| General and administrative |
15,022,689 | 15,010,490 | 21,121,164 | |||||||||
| Total operating expenses |
57,445,670 | 57,965,884 | 67,204,655 | |||||||||
| Operating loss |
(18,959,120 | ) | (23,837,962 | ) | (41,017,272 | ) | ||||||
| Other income |
2,060,346 | 911,977 | — | |||||||||
| Interest income |
10,578 | 44,768 | 194,870 | |||||||||
| Interest expense |
(3,035,291 | ) | (4,613,240 | ) | (3,063,572 | ) | ||||||
| Net loss |
$ | (19,923,487 | ) | $ | (27,494,457 | ) | $ | (43,885,974 | ) | |||
| Net loss per common share: |
||||||||||||
| Basic and diluted |
$ | (0.39 | ) | $ | (0.63 | ) | $ | (1.20 | ) | |||
| Weighted average shares used in computing net loss per common share: |
||||||||||||
| Basic and diluted |
50,522,001 | 43,344,324 | 36,585,086 | |||||||||
See accompanying notes.
57
Table of Contents
STEREOTAXIS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock | Additional Paid-In Capital |
Treasury Stock |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders’ Equity |
|||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||
| Balance at December 31, 2007 |
37,132,529 | $ | 37,133 | $ | 276,433,662 | $ | (205,999 | ) | $ | (252,072,353 | ) | $ | 1,964 | $ | 24,194,407 | |||||||||||||
| Issuance common stock |
4,414,137 | 4,414 | 20,563,270 | 20,567,684 | ||||||||||||||||||||||||
| Share-based compensation |
2,994,202 | 2,994,202 | ||||||||||||||||||||||||||
| Issuance of stock under stock purchase plan |
85,525 | 86 | 574,954 | 575,040 | ||||||||||||||||||||||||
| Exercise of stock warrants |
479 | — | 3,741 | 3,741 | ||||||||||||||||||||||||
| Exercise of stock options and stock appreciation rights |
48,193 | 48 | 323,497 | 323,545 | ||||||||||||||||||||||||
| Grant of restricted shares, net of forfeitures |
368,929 | 369 | (369 | ) | — | |||||||||||||||||||||||
| Components of comprehensive loss: |
||||||||||||||||||||||||||||
| Net Loss |
(43,885,974 | ) | (43,885,974 | ) | ||||||||||||||||||||||||
| Unrealized loss on short term investments |
(1,964 | ) | (1,964 | ) | ||||||||||||||||||||||||
| Comprehensive Loss |
(43,887,938 | ) | ||||||||||||||||||||||||||
| Balance at December 31, 2008 |
42,049,792 | $ | 42,050 | $ | 300,892,957 | $ | (205,999 | ) | $ | (295,958,327 | ) | $ | — | $ | 4,770,681 | |||||||||||||
| Balance at December 31, 2008 |
42,049,792 | $ | 42,050 | $ | 300,892,957 | $ | (205,999 | ) | $ | (295,958,327 | ) | $ | — | $ | 4,770,681 | |||||||||||||
| Issuance of common stock and warrants |
7,475,000 | 7,475 | 31,050,602 | 31,058,077 | ||||||||||||||||||||||||
| Share-based compensation |
106,756 | 107 | 4,229,076 | 4,229,183 | ||||||||||||||||||||||||
| Reclass of warrants to liability (1) |
(5,054,591 | ) | (5,054,591 | ) | ||||||||||||||||||||||||
| Issuance of stock under stock purchase plan |
32,142 | 33 | 123,473 | 123,506 | ||||||||||||||||||||||||
| Exercise of stock warrants |
620,582 | 620 | — | 620 | ||||||||||||||||||||||||
| Exercise of stock options |
5,138 | 5 | 8,319 | 8,324 | ||||||||||||||||||||||||
| Grant of restricted shares, net of forfeitures |
(81,239 | ) | (82 | ) | 82 | — | ||||||||||||||||||||||
| Components of comprehensive loss: |
||||||||||||||||||||||||||||
| Net Loss |
(27,494,457 | ) | (27,494,457 | ) | ||||||||||||||||||||||||
| Comprehensive Loss |
(27,494,457 | ) | ||||||||||||||||||||||||||
| Balance at December 31, 2009 |
50,208,171 | $ | 50,208 | $ | 331,249,918 | $ | (205,999 | ) | $ | (323,452,784 | ) | $ | — | $ | 7,641,343 | |||||||||||||
| Balance at December 31, 2009 |
50,208,171 | $ | 50,208 | $ | 331,249,918 | $ | (205,999 | ) | $ | (323,452,784 | ) | $ | — | $ | 7,641,343 | |||||||||||||
| Issuance of common stock and warrants |
4,891,582 | 4,892 | 20,032,614 | 20,037,506 | ||||||||||||||||||||||||
| Share-based compensation |
2,049,606 | 2,049,606 | ||||||||||||||||||||||||||
| Issuance of stock under stock purchase plan |
54,762 | 55 | 209,723 | 209,778 | ||||||||||||||||||||||||
| Exercise of stock options |
130,555 | 131 | 460,369 | 460,500 | ||||||||||||||||||||||||
| Grant of restricted shares, net of forfeitures |
(538,830 | ) | (540 | ) | 540 | — | ||||||||||||||||||||||
| Components of comprehensive loss: |
||||||||||||||||||||||||||||
| Net Loss |
(19,923,487 | ) | (19,923,487 | ) | ||||||||||||||||||||||||
| Comprehensive Loss |
(19,923,487 | ) | ||||||||||||||||||||||||||
| Balance at December 31, 2010 |
54,746,240 | $ | 54,746 | $ | 354,002,770 | $ | (205,999 | ) | $ | (343,376,271 | ) | $ | — | $ | 10,475,246 | |||||||||||||
| (1) | See Note 10 for additional details. |
See accompanying notes.
58
Table of Contents
STEREOTAXIS, INC.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Cash flows from operating activities |
||||||||||||
| Net loss |
$ | (19,923,487 | ) | $ | (27,494,457 | ) | $ | (43,885,974 | ) | |||
| Adjustments to reconcile net loss to cash used in operating activities: |
||||||||||||
| Depreciation |
1,697,694 | 2,050,507 | 2,252,384 | |||||||||
| Amortization |
230,459 | 133,333 | 115,231 | |||||||||
| Amortization of warrants |
1,652,672 | 2,346,027 | 1,653,161 | |||||||||
| Share-based compensation |
2,049,606 | 4,229,183 | 2,994,202 | |||||||||
| Loss on asset disposal |
5,039 | 557,152 | 2,387 | |||||||||
| Asset impairment |
— | 338,821 | 500,000 | |||||||||
| Non-cash expense (royalty income), net |
(3,381,424 | ) | (1,983,414 | ) | 1,467,245 | |||||||
| Warrant adjustment |
(600,816 | ) | (911,977 | ) | — | |||||||
| Changes in operating assets and liabilities: |
||||||||||||
| Accounts receivable |
(2,762,921 | ) | (1,413,640 | ) | 3,454,376 | |||||||
| Other receivables |
65,175 | 290,233 | (86,185 | ) | ||||||||
| Inventories |
(1,075,075 | ) | 3,851,283 | 1,877,504 | ||||||||
| Prepaid expenses and other current assets |
522,924 | 53,238 | 532,575 | |||||||||
| Other assets |
(33,426 | ) | 93,270 | 245,939 | ||||||||
| Accounts payable |
4,937,129 | (680,723 | ) | (221,498 | ) | |||||||
| Accrued liabilities |
(1,221,120 | ) | (866,678 | ) | (570,745 | ) | ||||||
| Deferred revenue |
(1,060,903 | ) | (2,761,929 | ) | 1,184,464 | |||||||
| Other |
(11,271 | ) | (138,892 | ) | (169,569 | ) | ||||||
| Net cash used in operating activities |
(18,909,745 | ) | (22,308,663 | ) | (28,654,503 | ) | ||||||
| Cash flows from investing activities |
||||||||||||
| Purchase of equipment |
(715,770 | ) | (1,484,192 | ) | (1,663,608 | ) | ||||||
| Proceeds from the maturity/sale of available-for-sale investments |
— | — | 6,650,000 | |||||||||
| Net cash provided by (used in) investing activities |
(715,770 | ) | (1,484,192 | ) | 4,986,392 | |||||||
| Cash flows from financing activities |
||||||||||||
| Proceeds from long-term debt |
10,000,000 | — | — | |||||||||
| Proceeds from revolving line of credit |
58,034,809 | 3,000,000 | 24,000,000 | |||||||||
| Payments of revolving line of credit |
(57,836,631 | ) | (6,901,489 | ) | (6,737,398 | ) | ||||||
| Payments under long-term debt |
(2,071,139 | ) | ||||||||||
| Proceeds from issuance of stock and warrants, net of issuance costs |
16,200,745 | 27,885,237 | 19,738,966 | |||||||||
| Net cash provided by financing activities |
24,327,784 | 23,983,748 | 37,001,568 | |||||||||
| Net increase in cash and cash equivalents |
4,702,269 | 190,893 | 13,333,457 | |||||||||
| Cash and cash equivalents at beginning of period |
30,546,550 | 30,355,657 | 17,022,200 | |||||||||
| Cash and cash equivalents at end of period |
$ | 35,248,819 | $ | 30,546,550 | $ | 30,355,657 | ||||||
| Supplemental disclosures of cash flow information: |
||||||||||||
| Interest paid |
$ | 140,253 | $ | 864,279 | $ | 698,245 | ||||||
See accompanying notes.
59
Table of Contents
1. Description of Business
Stereotaxis, Inc. (the Company) designs, manufactures, and markets an advanced cardiology instrument control system for the interventional treatment of arrhythmias and coronary artery disease. The Company also markets and sells various disposable interventional devices, including catheters, guidewires and other delivery devices, for use in conjunction with its system. The Company has received regulatory approval for the core components of its system in the U.S., Europe, Canada and various other countries.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all short-term investments 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. No cash was restricted at December 31, 2010 or 2009.
Investments
In accordance with general accounting principles for 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, 2010, 2009 and 2008. Interest and dividends on securities classified as available-for-sale are included in interest income.
Accounts Receivable and Allowance for Uncollectible Accounts
Accounts receivable primarily include amounts due from hospitals and distributors for acquisition of magnetic systems, associated disposable device sales and service contracts. Credit is granted on a limited basis, with balances due generally within 30 days of billing. The provision for bad debts is based upon management’s assessment of historical and expected net collections considering business and economic conditions and other collection indicators.
Financial Instruments
Financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt. The carrying value of such amounts reported at the applicable balance sheet dates approximates fair value. See Note 8 for disclosure of the fair value of debt.
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including warrants. General accounting principles for fair value measurement established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”).
The Company’s financial assets consist of cash equivalents invested in money market funds in the amount of $12,238,932 and $27,239,083 at December 31, 2010 and 2009, respectively. These assets are classified as Level 1 as described above and total interest income recorded for these investments was approximately $1,900 and $38,000 during the years ended December 31, 2010 and 2009, respectively.
The Company’s financial liabilities consist of warrants in the amount of $3,541,798 and $4,142,614 at December 31, 2010 and 2009, respectively. These liabilities are classified as Level 3 as described above and are
60
Table of Contents
measured using the Black-Scholes valuation model. The mark-to-market adjustment recorded in other income for these warrants was $600,815 and $911,977 during the years ended December 31, 2010 and 2009, respectively. There were no purchases, sales, issuances, or settlements of Level 3 investments during the year. These warrants were transferred in to Level 3 on January 1, 2009 based on the adoption of general accounting principles for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. See Note 10 for additional details.
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.
Property and Equipment
Property and equipment consist primarily of computer, office, and research and demonstration equipment held for lease and leasehold improvements and are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives or life of the base lease term, ranging from three to ten years.
Long-Lived Assets
If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value.
Intangible Assets
Intangible assets consist of purchased technology and intellectual property rights valued at cost on the acquisition date and amortized over their estimated useful lives of 10-15 years.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 adopted Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) in the fourth quarter of 2009, effective as of January 1, 2009. Prior to the adoption of this guidance, the Company followed previously issued guidance for general accounting principles for revenue arrangements with multiple deliverables. Under this previously issued guidance, we were required to continually evaluate whether we had proper evidence to identify separate units of accounting for deliverables within certain contractual arrangements with customers. If we were unable to support the determination of vendor-specific objective evidence (“VSOE”) or third party evidence (“TPE”) of fair value on the undelivered element, we could not recognize revenue for the delivered elements.
ASU 2009-13 permits management to estimate the selling price of undelivered components of a bundled sale for which it is unable to establish VSOE or TPE. This requires management to record revenue for certain elements of a transaction even though it might not have delivered other elements of the transaction, for which it
61
Table of Contents
was unable to meet the requirements for establishing VSOE or TPE. The adoption of the new guidance did not materially impact revenue reported in prior periods. The Company believes that the new guidance significantly improves the reporting of these types of transactions to more closely reflect the underlying economic circumstances. This guidance also prohibits the use of the residual method for allocating revenue to the various elements of a transaction and requires that the revenue be allocated proportionally based on the relative estimated selling prices.
Under our revenue recognition policy before and after the adoption of ASU 2009-13, a portion of revenue for most system sales 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. Beginning in the quarter ended March 31, 2010, revenue for ODYSSEYTM VISION Standard HD systems was recognized upon delivery due to the fact that third parties became qualified to perform installations. However, this change did not have a material impact on revenue recognition for the year ended December 31, 2010. Beginning in the quarter ended June 30, 2010, revenue for ODYSSEY VISION Quad systems was recognized upon delivery due to the fact that third parties became qualified to perform installations. This change resulted in additional revenue of $2.6 million and additional gross margin of $1.3 million during the year ended December 31, 2010. Beginning in the quarter ended December 31, 2010, revenue for ODYSSEY™ ENTERPRISE CINEMA systems was recognized upon delivery due to the fact that third parties became qualified to perform installations. This change resulted in additional revenue of $0.7 million and additional $0.4 million in gross margin. 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. We may deliver systems to a non-hospital site at the customer’s request. We evaluate whether delivery has occurred considering general accounting principles for revenue recognition with respect to “bill and hold” transactions. 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 multi-element 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 are recorded at the time of sale. Cost of revenue from services and license fees are recorded when incurred.
Research and Development Costs
Internal research and development costs are expensed in the period incurred. Amounts receivable from strategic partners under research reimbursement agreements are recorded as a contra-research and development expense in the period reimbursable costs are incurred. Advance receipts or other unearned reimbursements are included in accrued liabilities on the accompanying balance sheet until earned.
Share-Based Compensation
The Company utilizes the Black-Scholes valuation model to determine the fair value of share-based payments at the date of grant with the following inputs: 1) expected dividend rate of 0%; 2) expected volatility of 50-65% based on the Company’s historical volatility; 3) risk-free interest rate based on the Treasury yield on the
62
Table of Contents
date of grant and; 4) expected term for grants using the simplified method which results in an expected term ranging from 3.75 to 6.25 years. The resulting compensation expense is recognized over the requisite service period, generally one to four years. Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated based on the Company’s historical experience and future expectations.
Stock options or stock appreciation rights issued to certain non-employees are recorded at their fair value as determined in accordance with general accounting principles for revenue recognition and 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 non-employees is remeasured on a quarterly basis through the vesting or forfeiture date.
Restricted shares granted to employees are valued at the fair market value at the date of grant. The Company amortizes the amount to expense over the service period on a straight-line basis for those shares with graded vesting. If the shares are subject to performance objectives, the resulting compensation expense is amortized over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives.
Shares purchased by employees under the 2004 Employee Stock Purchase Plan were considered to be compensatory and were accounted for in accordance with general accounting principles for share-based payments.
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. In addition, the application of the two-class method of computing earnings per share under general accounting principles for participating securities is not applicable because the Company’s unearned restricted shares do not contractually participate in its losses.
The Company has excluded all outstanding options, stock appreciation rights, warrants, shares subject to repurchase and unearned restricted shares from the calculation of diluted loss per common share because all such securities are anti-dilutive for all periods presented. As of December 31, 2010, the Company had 4,711,082 shares of common stock issuable upon the exercise of outstanding options and stock appreciation rights at a weighted average exercise price of $5.80 per share and 10,381,613 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $4.20 per share.
Income Taxes
In accordance with general accounting principles 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.
Product Warranty Provisions
The Company’s standard policy is to warrant all systems against defects in material or workmanship for one year following installation. The Company’s estimate of costs to service the warranty obligations is based on historical experience and current product performance trends. A regular review of warranty obligations is performed to determine the adequacy of the reserve and adjustments are made to the estimated warranty liability (included in other accrued liabilities) as appropriate.
63
Table of Contents
The warranty activity for the year ended December 31, 2010 is as follows:
| December 31, 2010 |
||||
| Warranty accrual at December 31, 2009 |
$ | 547,483 | ||
| Warranty expense incurred |
328,820 | |||
| Payments made |
(406,466 | ) | ||
| Warranty accrual at December 31, 2010 |
$ | 469,837 | ||
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 U.S. Deposits in this institution exceed the amount of insurance provided on such deposits.
One customer, Siemens AG, Medical Solutions and its affiliated entities, as our distributor, accounted for $6,074,479, $6,771,693, and $3,022,007, or 11%, 13% and 7% of total net revenue for the years ended December 31, 2010, 2009 and 2008, respectively. No other single customer accounted for more than 10% of total revenue for the year ended December 31, 2010.
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 income (loss) on marketable securities. Comprehensive loss for the year ended December 31, 2010, 2009, and 2008 was $(19,923,487), $(27,494,457), and $(43,887,938), respectively. Accumulated other comprehensive income (loss) at December 31, 2010 and 2009 was not material.
Reclassifications
Costs of revenue in the prior years’ financial statements have been reclassified to disclose components related to systems and disposables, service and accessories to conform to current year presentation with no impact to reported net income.
Recently Adopted Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update 2010-06 (“ASU 2010-06”), which is an amendment to the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification. This amendment requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This amendment is effective for periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements, which will be effective for fiscal years beginning after December 15, 2010. See “Financial Instruments” section of Note 2 for required disclosures.
64
Table of Contents
Effective October 1, 2009, the Company adopted ASU 2009-13. ASU 2009-13 permits management to estimate the selling price of undelivered components of a bundled sale for which it is unable to establish vendor-specific objective evidence (“VSOE”) or third party evidence (“TPE”). This requires management to record revenue for certain elements of a transaction even though it might not have delivered other elements of the transaction, for which it was unable to meet the requirements for establishing VSOE or TPE. This guidance also prohibits the use of the residual method for allocating revenue to the various elements of a transaction and requires that the revenue be allocated proportionally based on the relative estimated selling prices. The Company adopted this standard in the fourth quarter of 2009, with retrospective application to January 1, 2009.
The Company’s adoption of ASU 2009-13 did not have a material impact on any amounts previously reported for the first three quarters of 2009. The fourth quarter of 2009 was the first period during which we sold a Niobe® system with an uninstalled Odyssey Enterprise Cinema system. Due to the fact that we had not established VSOE or TPE for uninstalled Odyssey Enterprise Cinema systems under the previous guidance, we would not have been able to recognize revenue for any portion of these transactions, which amounted to $2.0 million in revenue and $1.3 million in gross margin. Under the new guidance, we were able to use management’s estimate of selling price to establish new elements, including the Odyssey Enterprise Cinema, and recognize revenue for the delivered elements that were included in bundled transactions with these undelivered elements. The Company believes that the new guidance significantly improves the reporting of these types of transactions to more closely reflect the underlying economic circumstances.
In June 2008, the FASB ratified the consensus reached on general accounting principles for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This new guidance clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under general accounting principles for accounting for derivative instruments and hedging activities. The new guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008 and resulted in a reclass from equity to liabilities in the amount of $5.1 million on January 1, 2009. See Note 10 for additional details.
3. Inventory
Inventory consists of the following:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Raw materials |
$ | 1,547,020 | $ | 1,785,908 | ||||
| Work in process |
592,221 | 312,797 | ||||||
| Finished goods |
3,841,752 | 3,117,438 | ||||||
| Reserve for obsolescence |
(539,518 | ) | (812,468 | ) | ||||
| Total inventory |
$ | 5,441,475 | $ | 4,403,675 | ||||
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Prepaid expenses |
$ | 401,789 | $ | 733,966 | ||||
| Deferred cost of revenue |
759,271 | 960,145 | ||||||
| Other assets |
3,396,658 | 2,178,424 | ||||||
| Total prepaid expenses and other current assets |
$ | 4,557,718 | $ | 3,872,535 | ||||
65
Table of Contents
Deferred cost of revenue represents the cost of systems for which title has transferred from the Company but for which revenue has not been recognized.
5. Property and Equipment
Property and equipment consist of the following:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Equipment |
$ | 8,950,043 | $ | 8,541,355 | ||||
| Equipment held for lease |
547,416 | 547,416 | ||||||
| Leasehold improvements |
2,473,880 | 2,317,753 | ||||||
| 11,971,339 | 11,406,524 | |||||||
| Less: Accumulated depreciation |
(8,130,717 | ) | (6,616,214 | ) | ||||
| Net property and equipment |
$ | 3,840,622 | $ | 4,790,310 | ||||
6. Intangible Assets
On June 4, 2010, the Company entered into an agreement to issue 450,000 shares of its common stock to a consultant (the “Purchaser”) in exchange for intellectual property rights related to the Company’s products. The Company issued 200,000 shares upon execution of the agreement and will issue an aggregate of 250,000 shares divided into annual installments on the first three anniversaries of the agreement. The unissued shares meet the criteria for equity classification under Accounting Standards Codification 480 Distinguishing Liabilities from Equity and therefore are recorded in additional paid-in capital. There was no cash consideration paid for the securities. The securities were issued in consideration of the assignment to the Company of the Purchaser’s rights in certain intellectual property, including patent applications, in all inventions and discoveries in the Company’s business field (as defined in the agreement) that had been developed under various other agreements, which were terminated. The securities were sold by the Company in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder. There were no underwriters or placement agents involved in the transaction.
As of December 31, 2010 and 2009, the Company had intangible assets of $3.7 million and $2.0 million, respectively. Accumulated amortization at December 31, 2010 and 2009 is $1,086,014 and $855,555, respectively. Amortization expense was $230,459, $133,333, and $133,333 in 2010, 2009, and 2008 respectively, as determined under the straight-line method. The estimated future amortization of intangible assets is $299,833 annually through July 2018, decreasing thereafter to $166,500 annually through May 2020.
7. Accrued Liabilities
Accrued liabilities consist of the following:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Accrued salaries, bonus, and benefits |
$ | 4,203,551 | $ | 5,160,246 | ||||
| Accrued research and development |
246,119 | 140,284 | ||||||
| Accrued legal and other professional fees |
170,498 | 539,651 | ||||||
| Other |
2,346,403 | 2,775,106 | ||||||
| Total accrued liabilities |
$ | 6,966,571 | $ | 8,615,287 | ||||
66
Table of Contents
8. Long-Term Debt and Credit Facilities
Long-term debt consists of the following:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
|||||||||||||
| Revolving credit agreement, due March 2012 |
$ | 11,000,000 | $ | 11,284,412 | $ | 10,000,000 | $ | 10,261,547 | ||||||||
| Term note, due December 2013 |
10,000,000 | 10,000,000 | — | — | ||||||||||||
| June 2007 term note, due June 2010 |
— | — | 333,334 | 334,243 | ||||||||||||
| Biosense Webster Advance |
7,894,091 | 8,005,365 | 13,346,654 | 13,683,595 | ||||||||||||
| Total debt |
28,894,091 | 29,289,777 | 23,679,988 | 24,279,385 | ||||||||||||
| Less current maturities |
(20,894,091 | ) | (21,289,777 | ) | (13,333,333 | ) | (13,621,002 | ) | ||||||||
| Total long term debt |
$ | 8,000,000 | $ | 8,000,000 | $ | 10,346,655 | $ | 10,658,383 | ||||||||
Contractual principal maturities of debt at December 31, 2010 are as follows:
| 2011 |
$ | 9,894,091 | ||
| 2012 |
15,000,000 | |||
| 2013 |
4,000,000 | |||
| $ | 28,894,091 | |||
Revolving line of credit
In November 2008, we signed an Amendment to the Loan and Warrant Purchase Agreement with the Lenders in which the Lenders committed to extend their February 2008 agreement to loan the Company an aggregate of $20 million on an unsecured basis. As amended, the commitment would expire on the earlier of March 31, 2010 or the date the Company received at least $20 million of third party, non-bank financing. This facility could also be used by the Company to guarantee its loan commitments to the Company’s primary bank lender, through the same extended term. In February 2009, the Company exercised its option to extend the term of this agreement through March 2010. In conjunction with this agreement, the Company issued warrants to purchase 1,582,280 shares of common stock at $3.16 per share. During 2009, the Company expensed $2.1 million related to these warrants.
In December 2008, the Company completed a registered direct offering in which the Lenders purchased $10 million of the Company’s common stock. In connection with and conditioned upon the closing of the registered direct offerings, the Company agreed that the loan obligation would decrease from an aggregate of $20 million to $10 million.
In March 2009, the Company and its primary lending bank entered into an agreement to amend the revolving line of credit to change the total availability under the line to $25 million, to extend the term of the agreement to March 31, 2010, to modify the tangible net worth requirements, and to provide for additional borrowing capacity as it relates to advances against accounts receivable from non-U.S. customers.
In October 2009, the Company received from the Lenders an extension of their commitment to provide $10 million in either direct loans to the Company or loan guarantees to the Company’s primary bank lender through the earlier of March 31, 2011 or the date the Company receives $30 million of third party, non-bank financing, coincidental with the proposed maturity of the bank line of credit, as amended. The Company granted to the Lenders warrants to purchase 664,064 shares of common stock in exchange for their extension. The warrants are exercisable at $4.25 per share, beginning on March 1, 2010 and expiring on February 28, 2015. The fair value of
67
Table of Contents
these warrants of $1,649,070, calculated using the Black Scholes method, will be deferred and amortized to interest expense ratably. As the previous guarantee was no longer in effect, the Company expensed, in 2009, the entire balance on the warrants issued to the Lenders in February 2009.
In December 2009, the Company further amended its agreement with its primary lender to extend the maturity of the current working capital line of credit from March 31, 2010 to March 31, 2011 and to increase the total availability under the line from $25 million to $30 million, retaining the $10 million sublimit for borrowings supported by guarantees from the Lenders. Under the revised facility the Company was required to maintain a minimum “tangible net worth” as defined in the agreement. Interest on the facility accrued at the rate of prime plus 0.5% subject to a floor of 6% for the amount under guarantee and prime plus 1.75% subject to a floor of 7% for the remaining amounts.
In November 2010, the Company received from the Lenders an extension of their commitment to provide $10 million in either direct loans to the Company or loan guarantees to the Company’s primary bank lender through the earlier of March 31, 2012 or the date the Company receives $30 million of third party, non-bank financing, coincidental with the proposed maturity of the bank line of credit, as amended. The Company granted to the Lenders warrants to purchase 800,000 shares in exchange for their extension. The warrants are exercisable at $4.015 per share, beginning on March 1, 2011 and expiring on February 28, 2016. The fair value of these warrants of $1,747,392, calculated using the Black Scholes method, will be deferred and amortized to interest expense ratably. As the previous guarantee was no longer in effect, the Company expensed in 2010 the entire balance on the warrants issued to the Lenders in October 2009.
In December 2010, we further amended our loan agreement with our primary lender to extend the maturity of the current working capital line of credit from March 31, 2011 to March 31, 2012. The amendment retains the $30 million total availability under the line. Under the revised facility, we are required to maintain a minimum “tangible net worth” and liquidity ratio as defined in the agreement.
As of December 31, 2010, the Company had $11 million outstanding under the revolving line of credit and had an unused line of approximately $19 million with current borrowing capacity of $18.5 million, including amounts already drawn. As such, the Company had the ability to borrow an additional $7.5 million under the revolving line of credit at December 31, 2010. As of December 31, 2010, the Company was in compliance with all covenants of the bank loan agreement. As of December 31, 2010 the Company had no remaining availability on its Lender loan and guarantee.
The revolving line of credit is secured by substantially all of the Company’s assets. The Company is also required under the revolving line of credit to maintain its primary operating account and the majority of its cash and investment balances in accounts with the primary lender.
Term note
In June 2007, the Company entered into a term note due in June 2010 with its primary lender for $2,000,000. The Company was required to make equal payments of principal and interest, at prime plus 1%, through June 2010, at which time the term note matured.
Under the 2010 amendment to the loan agreement, the Company entered into a $10 million term loan maturing on December 31, 2013 with $2 million of principal due in 2011 and $4 million of principal due in each of 2012 and 2013. Interest on the term loan accrues at the rate of prime plus 3.5%. Under this agreement, the Company provided its primary lender with warrants to purchase 111,111 shares of common stock. The warrants are exercisable at $3.60 per share, beginning on December 17, 2010 and expiring on December 17, 2015. The fair value of these warrants of $228,332, calculated using the Black Scholes method, will be deferred and amortized to interest expense ratably over the life of the term loan.
68
Table of Contents
Biosense Webster Advance
In July 2008, the Company and Biosense Webster entered into an amendment to their existing agreements relating to the development and sale of catheters. Pursuant to the amendment, Biosense Webster agreed to pay to the Company $10.0 million as an advance on royalty amounts that were owed at the time the amendment was executed or would be owed in the future by Biosense Webster to the Company pursuant to the royalty provisions of one of the existing agreements. The Company and Biosense Webster also agreed that an aggregate of up to $8.0 million of certain agreed upon research and development expenses that were owed at the time the amendment was executed or may be owed in the future by the Company to Biosense Webster pursuant to the existing agreement would be deferred and will be due, together with any unrecouped portion of the $10.0 million royalty advance, on the Final Payment Date (as defined below). Interest on the outstanding and unrecouped amounts of the royalty advance and deferred research and development expenses will accrue at an interest rate of the prime rate plus 0.75%. Outstanding royalty advances and deferred research and development expenses and accrued interest thereon will be recouped by Biosense Webster by deductions from royalty amounts otherwise owed to the Company from Biosense Webster pursuant to the existing agreement. The Company has the right to prepay any amounts due pursuant to the Amendment at any time without penalty. Approximately $18.0 million had been advanced by Biosense Webster to the Company pursuant to the amendment. As of December 31, 2010, $9.9 million of royalty payments owed by Biosense had been used to reduce the advances together with the accrued interest thereon and the remaining approximately $7.9 million of amounts owed to Biosense Webster has been classified as short-term debt in the accompanying balance sheet. The Company recorded research and development expenses of $0.6 million, $1.7 million, and $3.4 million and disposables, service and accessories revenue of $3.9 million, $3.3 million, and $2.0 million for the years ended December 31, 2010, 2009, and 2008, respectively, related to this agreement.
All funds owed by the Company to Biosense Webster must be repaid on the sooner of December 31, 2011 or the date of an Accelerating Recoupment Event as defined below (the “Final Payment Date”). Commencing on May 15, 2010 the Company is required to make quarterly payments (the “Supplemental Payments”) to Biosense Webster equal to the difference between the aggregate royalty payments recouped by Biosense Webster from the Company (other than royalty amounts attributable to Biosense Webster’s sales of irrigated catheters) in such quarter and $1 million, until the earlier of (1) the date all funds owed by the Company to Biosense Webster pursuant to the Amendment are fully repaid or (2) the Final Payment Date. An “Accelerating Recoupment Event” means any of the following: (i) the closing of any equity-based registered public financing transaction or in the event of convertible debt, the conversion of such debt into equity which raises at least $50 million for the Company; (ii) the failure of the Company to make any Supplemental Payment; or (iii) a change of control of the Company (as defined in the amendment).
9. Lease Obligations
The Company leases its facilities under operating leases. For the years ended December 31, 2010, 2009, and 2008 rent expense was $1,548,869, $1,727,375, and $1,559,584, respectively.
In January 2006, the Company moved its primary operations into new facilities. The facility is subject to a lease which expires in 2018. Under the terms of the lease, the Company has options to renew for up to three additional years. The lease contains an escalating rent provision which the Company has straight-lined over the term of the lease.
69
Table of Contents
The future minimum lease payments under non-cancelable leases as of December 31, 2010 are as follows:
| Year |
Operating Lease |
|||
| 2011 |
$ | 1,726,781 | ||
| 2012 |
1,698,514 | |||
| 2013 |
1,690,539 | |||
| 2014 |
1,698,431 | |||
| 2015 |
1,698,431 | |||
| 2016 and Beyond |
6,560,004 | |||
| Total minimum lease payments |
$ | 15,072,700 | ||
10. Stockholders’ Equity
Public Offerings of Common Stock
In December 2008, the Company completed a registered direct offering in which it issued and sold 2,389,877 units (the “Units”) at the negotiated price of $4.18 per Unit, with each Unit consisting of (i) one share of the Company’s common stock (“Common Stock”), (ii) one warrant to purchase 0.75 shares of Common Stock at an exercise price of $5.11 per share (the “Series A Warrant”), (iii) one six-month warrant to purchase 0.90 shares of Common Stock at an exercise price of $4.65 per share (the “Series B Warrant”), for an aggregate of up to 2,148,739 shares of Common Stock, and (iv) two warrants to purchase 0.286 shares of Common Stock at an exercise price of $0.001 per share (the “Series C and D Warrants”), for an aggregate of up to 682,824 shares of Common Stock. The ability of the Investors to exercise the Series C and D Warrants was conditioned upon the trading price of Common Stock during certain periods prior to May 30, 2009, as described further below. The Series B, C and D Warrants all expired prior to June 30, 2009 and represented the right to acquire in the aggregate up to 2,831,563 shares of Common Stock. The Series A Warrants, which were exercisable on or after the date immediately following the six month anniversary of their issuance (the “Initial Exercisability Date”) and had a five year term from the Initial Exercisability Date, represented the right to acquire an aggregate of up to 1,792,408 shares of Common Stock. The Series A Warrants have a provision for full ratchet adjustment of the exercise price for the first two years following the closing, and a provision for weighted average adjustment thereafter, provided that, in any event upon three successive quarters of positive free cash flow (defined as cash flow from operations less non-acquisition related capital expenditures), the full ratchet anti-dilution protection will no longer apply and weighted average anti-dilution will apply thereafter. The exercise price adjustment provisions included in the Series A Warrant only reduce the exercise price, and will not result in any increase in the number of Series A Warrants or shares of Common Stock underlying the Series A Warrants. As discussed below, these provisions were triggered in February 2009. Under certain conditions, holders of Series C Warrants were entitled to purchase up to 341,412 shares of Common Stock until ten trading days after the two month anniversary of the issuance date of such warrants and holders of Series D Warrants were entitled to purchase up to 341,412 shares of Common Stock until ten trading days after the five month anniversary of the issuance date of such warrants. The ability of the holders to exercise the Series C Warrants was conditioned on the simple average of the daily volume weighted average price of the Common Stock for the 30 trading days prior to the two month anniversary of closing, and the ability of the holders to exercise the Series D Warrants was conditioned on the simple average of the daily volume weighted average price of the Company’s Common Stock for the 30 trading days prior to the five month anniversary of closing. If either such simple average was between $4.18 and $3.25, a portion of the Series C and D Warrants would be exercisable; if each such simple average was below $3.25, all of the Series C and D Warrants would be exercisable. The investors in this transaction became entitled to exercise and did exercise Series C and D Warrants to purchase 341,412 and 279,170 shares of common stock in March 2009 and June 2009, respectively.
As described above, this offering contained a provision that required a reduction of the exercise price for Series A Warrants if certain equity events occurred. Such an event occurred in February 2009 and as a result, the
70
Table of Contents
exercise price for the Series A Warrants was reduced to $3.16 per share. Under the provisions of general accounting principles for hedging and new guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, such a reset provision no longer meets the exemptions for equity classification and as such, the Company accounts for these warrants as derivative instruments. The calculated fair value of the warrants is classified as a liability and is periodically remeasured with any changes in value recognized in “Other income (expense)” in the Statement of Operations. This new guidance became effective for the Company as of January 1, 2009. Accordingly, the fair value of the warrants of $5.1 million was reclassified from stockholder’s equity into current liabilities at that date. The Company determined that no change in fair value had occurred between the date of closing and December 31, 2008 and as such, the Company did not record a cumulative effect for the change in accounting principal upon adoption of the new guidance. See Note 2 for fair value as of December 31, 2009 and 2010.
In addition, concurrently with the offering discussed above, the Company completed a second registered direct offering for an aggregate of 2,024,260 shares of Common Stock and warrants to purchase up to 4,859,504 shares of Common Stock to the Lenders, for a purchase price of $4.94 per unit (representing the closing bid price of the Common Stock on the trading day preceding the execution of the agreement, plus an additional $0.125 per warrant share underlying the warrant). The warrants are exercisable at $4.64 per share, are exercisable on or after the date immediately following the six month anniversary of their issuance and have a five year term from that initial exercisability date. In conjunction with the two concurrent offerings, the Company received approximately $18.8 million net of offering expenses.
In August 2009, we filed a universal shelf registration statement for the issuance and sale from time to time to the public of up to $75 million in securities, including debt, preferred stock, common stock, and warrants. The registration statement was declared effective by the SEC in September 2009.
In October 2009, we completed an offering of 7,475,000 shares of our common stock at $4.00 per share, receiving approximately $27.8 million in net proceeds.
In November 2010, we completed a public offering of our common stock in which we issued 4,600,000 shares at $3.65 per share and realized approximately $15.5 million in proceeds, net of fees and expenses.
The holders of common stock are entitled one vote for each share held and to receive dividends whenever funds are legally available and when declared by the Board of Directors subject to the prior rights of holders of all classes of stock having priority rights as dividends and the conditions of the our Revolving Credit Agreement. No dividends have been declared or paid as of December 31, 2010.
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, | ||||||||
| 2010 | 2009 | |||||||
| Warrants |
10,381,613 | 9,623,711 | ||||||
| Stock award plans |
2,785,983 | 5,380,371 | ||||||
| Employee Stock Purchase Plan |
188,636 | 243,398 | ||||||
| 13,356,232 | 15,247,480 | |||||||
Stock Award Plans
The Company has various stock plans that permit the Company to provide incentives to employees and directors of the Company in the form of equity compensation. In 1994, the Board of Directors adopted the 1994
71
Table of Contents
Stock Option Plan. In 2002, the Board of Directors adopted a stock incentive plan (the 2002 Stock Incentive Plan) and a non-employee directors’ stock plan (2002 Director Plan). Each of these plans was subsequently approved by the Company’s stockholders.
The 2002 Stock Incentive Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted shares and restricted share units to employees, directors, 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 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. Stock appreciation rights are rights to acquire a calculated number of shares of the Company’s common stock upon exercise of the rights. The number of shares to be issued is calculated as the difference between the exercise price of the right and the aggregate market value of the underlying shares on the exercise date divided by the market value as of the exercise date. Stock appreciation rights granted under the 2002 Stock Incentive Plan generally vest 25% on the first anniversary of such grant and 1/48 per month over the next three years and expire no later than five years from the date of grant. The Company generally issues new shares upon the exercise of stock options and stock appreciation rights.
Restricted share grants under the 2002 Stock Incentive Plan are either time-based or performance-based. Time-based restricted shares generally vest 25% on each anniversary of such grant. Performance-based restricted shares vest upon the achievement of performance objectives which are determined by the Company’s Board of Directors.
The 2002 Director Plan allows for the grant of non-qualified stock options to the Company’s non-employee directors. Options granted under the 2002 Director Plan expire no later than ten years from the date of grant. The exercise price of options under the 2002 Director Plan shall not be less than 100% of the fair value of the stock subject to the option on the date the option is granted. Initial grants of options to new directors generally vest over a two year period. Annual grants to directors generally vest upon the earlier of one year or the next stockholder meeting.
During the third quarter of 2009, the Company allowed certain option holders to participate in a one-time stock option exchange program. Participants in the program were allowed to cancel certain stock options in exchange for the grant of a lesser amount of stock options with lower exercise prices. The exchange ratios used resulted in a fair value of the replacement options to be granted that was approximately equal to the fair value of the options that were surrendered, and thus no incremental expense was recognized by the Company in conjunction with this option exchange. Of the 975,121 options eligible under the program, 407,832 options were cancelled by the Company in exchange for the granting of 149,976 replacement options. This exchange program was approved by our stockholders on June 10, 2009.
A summary of the options and stock appreciation rights activity for the year ended December 31, 2010 is as follows:
| Number of Options/SARS |
Range of Exercise Price |
Weighted Average Exercise Price per Share |
||||||||||
| Outstanding, December 31, 2009 |
4,675,450 | $ | 0.78-$14.84 | $ | 6.63 | |||||||
| Granted |
1,410,900 | $ | 3.20-$4.86 | $ | 4.15 | |||||||
| Exercised |
(130,555 | ) | $ | 1.62-$4.94 | $ | 3.53 | ||||||
| Forfeited |
(1,244,713 | ) | $ | 0.78-$14.84 | $ | 7.29 | ||||||
| Outstanding, December 31, 2010 |
4,711,082 | $ | 1.37-$12.55 | $ | 5.80 | |||||||
72
Table of Contents
As of December 31, 2010 the weighted average remaining contractual life of the options and stock appreciation rights outstanding was 3.6 years. Of the 4,711,082 options and stock appreciation rights that were outstanding as of December 31, 2010, 2,652,727 were vested and exercisable with a weighted average exercise price of $6.92 per share and a weighted average remaining term of 1.7 years.
A summary of the options and stock appreciation rights outstanding by range of exercise price is as follows:
| Year Ended December 31, 2010 | ||||||||||||||||||||
| Range of Exercise Prices |
Options Outstanding |
Weighted Average Remaining Life |
Weighted Average Exercise Price |
Number of Options Currently Exercisable |
Weighted Average Exercise Price Per Vested Share |
|||||||||||||||
| $1.37 - $5.94 |
3,332,093 | 4.1 years | $ | 4.46 | 1,379,087 | $ | 4.86 | |||||||||||||
| $6.77 - $9.90 |
736,925 | 2.9 years | 7.48 | 649,105 | 7.55 | |||||||||||||||
| $10.06 - $12.55 |
642,064 | 1.9 years | 10.81 | 624,535 | 10.82 | |||||||||||||||
| 4,711,082 | 3.6 years | $ | 5.80 | 2,652,727 | $ | 6.92 | ||||||||||||||
The intrinsic value of options and stock appreciation rights is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the 598,584 options and stock appreciation rights that were in-the-money at December 31, 2010. The intrinsic value of the options and stock appreciation rights outstanding at December 31, 2010 was approximately $0.2 million based on a closing share price of $3.83 on December 31, 2010. The intrinsic value of fully vested options and stock appreciation rights outstanding at December 31, 2010 was approximately $0.1 million based on a closing price of $3.83 on December 31, 2010. During the year ended December 31, 2010, the aggregate intrinsic value of options and stock appreciation rights exercised under the Company’s stock option plans was approximately $0.3 million. The weighted average grant date fair value of options and stock appreciation rights granted during the year ended December 31, 2010 was $4.15 per share.
During the years ended December 31, 2010, 2009 and 2008, the Company realized $0.5 million, less than $0.1 million, and $0.3 million, respectively, from the exercise of stock options and stock appreciation rights.
A summary of the restricted share grant activity for the year ended December 31, 2010 is as follows:
| Number of Shares |
Weighted Average Grant Date Fair Value per Share |
|||||||
| Outstanding, December 31, 2009 |
858,938 | $ | 6.66 | |||||
| Granted |
58,500 | $ | 4.07 | |||||
| Vested |
(286,826 | ) | $ | 5.75 | ||||
| Forfeited |
(597,330 | ) | $ | 6.76 | ||||
| Outstanding, December 31, 2010 |
33,282 | $ | 8.16 | |||||
A summary of the restricted stock outstanding as of December 31, 2010 is as follows:
| Number of Shares |
||||
| Time based restricted shares |
33,282 | |||
| Performance based restricted shares |
— | |||
| Outstanding, December 31, 2010 |
33,282 | |||
The intrinsic value of restricted shares outstanding at December 31, 2010 was approximately $0.1 million based on a closing share price of $3.83 as of December 31, 2010. During the year ended December 31, 2010, the aggregate intrinsic value of restricted shares vested was approximately $1.0 million determined at the date of vesting.
73
Table of Contents
During the years ended December 31, 2009 and December 31, 2008, the Company determined that it was not probable that the performance conditions related to certain of its outstanding restricted share awards would be achieved and accordingly, recorded approximately $(0.5) million and $(3.8) million, respectively, as a cumulative catch-up adjustment resulting in a reduction of share based compensation. During the year ended December 31, 2008, the Company also expensed approximately $1.1 million related to modifications of exercise provision of certain outstanding equity awards and to vesting and exercise provisions in conjunction with the retirement of its CEO.
As of December 31, 2010, the total compensation cost related to options, stock appreciation rights and non-vested stock granted to employees under the Company’s stock award plans but not yet recognized was approximately $4.7 million, net of estimated forfeitures of approximately $0.9 million. This cost will be amortized over a period of up to four years on a straight-line basis over the underlying estimated service periods and will be adjusted for subsequent changes in estimated forfeitures. In March 2010, the Company made an adjustment to its forfeiture rate based on historical information, which resulted in a reduction of share-based compensation of $0.8 million for the year ended December 31, 2010.
2009 Employee Stock Purchase Plan
In 2009, the Company adopted its 2009 Employee Stock Purchase Plan and reserved 250,000 shares of common stock for issuance pursuant to the plan. The Company offered employees the opportunity to participate in the plan beginning July 1, 2009 with an initial purchase date of September 30, 2009. Eligible employees have the opportunity to participate in a new purchase period every 3 months. Under the terms of the plan, employees can purchase up to 15% of their compensation of the Company’s common stock, subject to an annual maximum of $25,000, at 95% of the fair market value of the stock at the end of the purchase period, subject to certain plan limitations. As of December 31, 2010, a total of 61,364 shares had been purchased under this plan. As of December 31, 2010 there were 188,636 remaining shares available for issuance under the Employee Stock Purchase Plan.
2004 Employee Stock Purchase Plan
Upon the effectiveness of the initial public offering in August 2004, the Company adopted its 2004 Employee Stock Purchase Plan and reserved 277,777 shares of common stock for issuance pursuant to the plan. The Company offered employees the opportunity to participate in the plan beginning January 1, 2005 with an initial purchase date of June 30, 2005. Eligible employees had the opportunity to participate in a new purchase period every 6 months. Under the terms of the plan, employees could purchase up to $12,500 of the Company’s common stock at 85% of the fair market value of the stock at the beginning or the end of the purchase period, subject to certain plan limitations. As of December 31, 2009, all 277,777 reserved shares had been purchased under this plan.
Warrants
In February 2008, the Company issued warrants to the Lenders to purchase 572,246 shares of common stock at $6.99 per share exercisable through February 2013 in conjunction with a $20 million loan commitment as described in Note 8. In February 2009, the Company exercised its option to extend the terms of its guarantee with the same stockholders and issued warrants to the Lenders to purchase 1,582,280 shares of common stock at $3.16 per share exercisable through February 2014 as described in Note 8.
In December 2008, the Company issued warrants associated with two direct offerings as discussed above in “Public Offerings of Common Stock.”
In October 2009, the Company issued warrants to purchase 664,064 shares of common stock in conjunction with an extension of the commitment for unsecured borrowing capacity from the Lenders as described in Note 8.
74
Table of Contents
In November 2010, the Company issued warrants to purchase 800,000 shares of common stock in conjunction with the offering as discussed above in “Public Offerings of Common Stock.”
In December 2010, the Company issued warrants to purchase 111,111 shares of common stock in conjunction with the amendment of the loan agreement as described in Note 8.
During 2010, 2009, and 2008, warrants for 0, 620,582, and 479 shares, respectively, were exercised. Certain of these shares were exercised under the cashless exercise provision of the warrant agreements for a net issuance of 0, 620,582, and 479 shares of common stock during 2010, 2009, and 2008, respectively.
11. Income Taxes
The provision for income taxes consists of the following:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Deferred: |
||||||||||||
| Federal |
$ | 5,650,309 | $ | 9,850,636 | $ | 13,322,273 | ||||||
| State and local |
464,169 | 1,299,941 | 781,188 | |||||||||
| 6,114,478 | 11,150,577 | 14,103,461 | ||||||||||
| Valuation allowance |
(6,114,478 | ) | (11,150,577 | ) | (14,103,461 | ) | ||||||
| $ | — | $ | — | $ | — | |||||||
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| U.S. statutory income tax rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
| State and local taxes, net of federal tax benefit |
2.3 | % | 4.6 | % | 1.8 | % | ||||||
| Permanent differences between book and tax and other |
(5.6 | )% | 1.3 | % | (3.7 | )% | ||||||
| Valuation allowance |
(30.7 | )% | (39.9 | )% | (32.1 | )% | ||||||
| Effective income tax rate |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, and projections for future periods over which the deferred tax assets are deductible, the Company determined that a 100% valuation allowance of deferred tax assets was appropriate. The valuation allowance for deferred tax assets includes amounts for which subsequently recognized tax benefits will be applied directly to contributed capital.
75
Table of Contents
The components of the deferred tax asset are as follows:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Current accruals |
$ | 2,026,725 | $ | 1,933,934 | ||||
| Depreciation and amortization |
2,418,332 | 2,120,283 | ||||||
| Deferred compensation |
3,778,527 | 3,946,580 | ||||||
| Net operating loss carryovers |
111,130,672 | 105,266,308 | ||||||
| Deferred tax assets |
119,354,256 | 113,267,105 | ||||||
| Valuation allowance |
(119,354,256 | ) | (113,267,105 | ) | ||||
| Net deferred tax assets |
$ | — | $ | — | ||||
As of December 31, 2010, the Company has federal net operating loss carryforwards of approximately $307.6 million. The net operating loss carryforwards will expire at various dates beginning in 2011, approximately $3.0 million will expire between 2011 and 2012 and approximately $304.6 million will expire between 2018 and 2030, if not utilized. As of December 31, 2010, the Company has state net operating loss carryforwards of approximately $6.8 million, which will expire at various dates between 2011 and 2030, if not utilized.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. As the Company has a federal Net Operating Loss carryforward from the year ended December 31, 1994 forward, all tax years from 1994 forward are subject to examination. As states have varying carryforward periods, and the Company has recently entered into additional states, the states are generally subject to examination for the previous 10 years or less.
The Company recognizes interest accrued, if any, net of tax and penalties, related to unrecognized tax benefits as components of income tax provision as applicable. As of December 31, 2010, accrued interest and penalties were not material.
12. 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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Basic and diluted: |
||||||||||||
| Net loss |
$ | (19,923,487 | ) | $ | (27,494,457 | ) | $ | (43,885,974 | ) | |||
| Weighted average common shares outstanding |
50,522,001 | 43,344,324 | 36,585,086 | |||||||||
| Net loss per share |
$ | (0.39 | ) | $ | (0.63 | ) | $ | (1.20 | ) | |||
76
Table of Contents
The following table sets forth the number of common shares that were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive as follows:
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Shares outstanding |
||||||||||||
| Restricted shares |
33,282 | 858,938 | 1,021,718 | |||||||||
| Shares issuable upon exercise of: |
||||||||||||
| Options to purchase common stock |
4,711,082 | 4,675,450 | 4,480,683 | |||||||||
| Warrants |
10,381,613 | 9,623,711 | 10,413,071 | |||||||||
| 15,125,977 | 15,158,099 | 15,915,472 | ||||||||||
13. Employee Benefit Plan
The Company offers 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, 2010, 2009 and 2008, the Company expensed $414,765, $540,168, and $621,389, respectively, related to the plan.
14. 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.
The Company has entered into letters of credit to support certain commitments in the aggregate amount of $0.3 million. These letters of credit expire in February 2011. In addition, the Company has entered into purchase obligations with vendors in the amount of $1.2 million, which must be fulfilled by 2012.
15. Segment Information
The Company considers reporting segments in accordance with general accounting principles for disclosures about segments of an enterprise and related information. The Company’s system and disposable devices are developed and marketed to a broad base of hospitals in the United States and internationally. The Company considers all such sales to be part of a single operating segment.
Geographic revenue is as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| United States |
$ | 28,840,803 | $ | 22,309,477 | $ | 29,052,328 | ||||||
| International |
25,210,434 | 28,840,078 | 11,312,845 | |||||||||
| Total |
$ | 54,051,237 | $ | 51,149,555 | $ | 40,365,173 | ||||||
All of the Company’s long-lived assets are located in the United States.
77
Table of Contents
16. Quarterly Data (Unaudited)
The following tabulations reflect the unaudited quarterly results of operations for the years ended December 31, 2010 and 2009:
| Net Sales | Gross Profit | Net Loss | Basic and Diluted Loss Per Share |
|||||||||||||
| 2010 |
||||||||||||||||
| First quarter |
$ | 10,616,609 | $ | 7,695,939 | $ | (8,426,557 | ) | $ | (0.17 | ) | ||||||
| Second quarter |
15,018,078 | 10,091,925 | (3,862,187 | ) | (0.08 | ) | ||||||||||
| Third quarter |
13,872,254 | 10,017,172 | (5,143,897 | ) | (0.10 | ) | ||||||||||
| Fourth quarter |
14,544,296 | 10,681,514 | (2,490,846 | ) | (0.05 | ) | ||||||||||
| 2009 |
||||||||||||||||
| First quarter |
$ | 11,133,134 | $ | 7,672,452 | $ | (7,530,087 | ) | $ | (0.18 | ) | ||||||
| Second quarter |
12,644,337 | 7,978,452 | (7,439,777 | ) | (0.18 | ) | ||||||||||
| Third quarter |
13,290,693 | 9,005,112 | (5,813,743 | ) | (0.14 | ) | ||||||||||
| Fourth quarter |
14,081,391 | 9,471,906 | (6,710,850 | ) | (0.14 | ) | ||||||||||
17. Subsequent Events (Unaudited)
On January 3, 2011, the Company entered into a Sixth Amendment and Catheter and Mapping System Extension to the Development Alliance and Supply Agreement with Biosense Webster. Pursuant to the agreement, Biosense Webster and the Company will collaborate to develop a new product based on Biosense Webster’s next generation irrigation catheter. Biosense Webster will pay the Company a portion of the revenues from sales of the new product.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Report on Internal Control Over Financial Reporting
As of December 31, 2010, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, 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) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment, our management has concluded that our internal control over financial reporting is effective as of December 31, 2010.
78
Table of Contents
A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which can be found below.
Based on the evaluation of internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer have concluded that there have been no changes in the Company’s internal controls over financial reporting during the period that is covered by this report that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
79
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Stereotaxis, Inc.
We have audited Stereotaxis, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Stereotaxis, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Stereotaxis, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Stereotaxis, Inc. as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 of Stereotaxis, Inc. and our report dated March 11, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 11, 2011
80
Table of Contents
| 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, 2011, 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 as amended from time to time. Stockholders may request a free copy of our Code of Business Conduct and Ethics from our Chief Financial Officer as follows:
Stereotaxis, Inc.
Attention: Daniel J. Johnston
4320 Forest Park Avenue, Suite 100
St. Louis, MO 63108
314-678-6100
To the extent required by law or the rules of the NASDAQ Global Market, any amendments to, or waivers from, any provision of the Code of Business Conduct and Ethics will be promptly disclosed publicly. To the extent permitted by such requirements, we intend to make such public disclosure by posting the relevant material on our website (www.stereotaxis.com) in accordance with SEC rules.
The following is information with respect to our executive officers:
Michael P. Kaminski
Director, Chief Executive Officer and President
Officer since 2004
Mr. Kaminski, 51, was appointed by the Board of Directors as a Class I director in August 2008. Mr. Kaminski was named Chief Executive Officer in January 2009 and retained the title of President after having previously served as our President and Chief Operating Officer since 2007. Mr. Kaminski previously served as our Chief Operating Officer since he joined the Company in 2002. Prior to joining the Company, Mr. Kaminski spent nearly 20 years with Hill-Rom Company (Hillenbrand Industries). In his last position with Hill-Rom, Mr. Kaminski served as Senior Vice President of North American Sales and Service. Prior to that, he served as General Manager of the Acute Care Hospital Division of Hill-Rom. As our Chief Executive Officer, Mr. Kaminski provides comprehensive insight to the Board of Directors on a broad range of issues, including strategic planning, project implementation, marketing and relationships with investors and the finance community. Mr. Kaminski earned an M.B.A. from Xavier University and a B.S. in Marketing from Indiana University.
81
Table of Contents
Douglas M. Bruce
Chief Technology/Operations Officer
Officer since 2004
Mr. Bruce, 53, has served as our Chief Technology/Operations Officer since 2009. Previously, he served as our Senior Vice President, Research & Development since joining the Company in 2001. Prior to joining the Company, Mr. Bruce was Vice President, Product Development and Marketing, for Intuitive Surgical, a developer and manufacturer of computer-enhanced minimally invasive surgery systems, from 1997 to 2001. Prior to Intuitive Surgical, Mr. Bruce was a Vice President of Engineering at Acuson Corp, a manufacturer of diagnostic ultrasound systems. He has held positions in mechanical, process and manufacturing engineering at Tandon Corp, ISS Sperry Univac and IBM. Mr. Bruce received a M.S. in Mechanical Engineering from the University of Santa Clara and a B.S. in Mechanical Engineering from the University of California at Berkeley.
Frank J. Cheng
Senior Vice President, Marketing and Business Development
Officer since 2010
Mr. Cheng, 43, joined Stereotaxis in April 2010. He has over 15 years of experience in the medical technology industry leading marketing, business development and start-up ventures. Prior to joining Stereotaxis, Mr. Cheng was President and Chief Executive Officer of Perfinity Biosciences, Inc. (previously Quadraspec, Inc.), from 2009 to 2010. He currently serves as a director of Perfinity Biosciences, Inc. From 2005 to 2009, Mr. Cheng was President and Chief Executive Officer of OBS Medical. For four years prior to that, he was Vice President of Business Development for Roche Diagnostics. Earlier in his career, Mr. Cheng held marketing and strategic planning positions at GE Medical Systems for three years and Hillenbrand Industries (including its subsidiary, Hill-Rom Company) for four years. Mr. Cheng has an MBA from Vanderbilt University and a BBA from Wuhan University.
Karen W. Duros
Senior Vice President, General Counsel and Secretary
Officer since 2010
Ms. Duros, 56, joined Stereotaxis in 2010. She has over 25 years of business and corporate legal experience in large and small companies. Prior to joining Stereotaxis, she was Senior Counsel for Monsanto Company from 2005 to 2010. From 1998 to 2005, Ms. Duros held several legal positions of increasing responsibility with Great Lakes Chemical Corporation, including Vice President and Secretary from 2004 to 2005, and General Counsel of Great Lakes’ Industrial Products division from 1999 to 2005. Previously, she was Vice President, General Counsel and Secretary of Tastemaker, a joint venture of Mallinckrodt, Inc. and Hercules, Inc., and prior to that, she held several legal positions with Mallinckrodt, Inc. Ms. Duros began her legal career with the St. Louis law firm, Thompson & Mitchell. She earned a law degree from Washington University School of Law and a B.A., Political Science, from Benedictine College.
David A. Giffin
Vice President, Human Resources
Officer since 2010
Mr. Giffin, 62, joined Stereotaxis in January 2007. He was named an officer in 2010. Mr. Giffin has over 30 years of human resources experience. Prior to joining Stereotaxis, from 2001 to 2006, Mr. Giffin was Vice President, Human Resources and Social Enterprise at Provident, Inc., a St. Louis based social service agency. Prior to that position, he was Vice President, Human Resources at Huttig Building Products from 1991 to 2001. He also has held positions as Vice President, Human Resources at St. Johns Medical Center in St. Louis; and Principle Consultant at The Bannon Consulting Group. He spent the early years of his career with Monsanto Company where he held a variety of human resources positions with increasing responsibility. Mr. Giffin earned his M.B.A. and a B.S. in Psychology from Purdue University.
82
Table of Contents
Daniel J. Johnston
Senior Vice President and Chief Financial Officer
Officer since 2009
Daniel J. Johnston, 53, joined Stereotaxis in September 2009 and was elected Chief Financial Officer effective November 2009. Prior to joining Stereotaxis, Mr. Johnston was the Executive Vice President and Chief Financial Officer and director of United Components, Inc., a Carlyle Group portfolio company, a position he held since 2007. Prior to this, he was Vice President and Chief Financial Officer of Solae, a food science company. Before joining Solae in 2006, Mr. Johnston spent eleven years, including eight as CFO and five as a director, at United Industries Corporation, a marketer of consumer packaged goods, and a Thomas H. Lee Partners portfolio company. The initial eight years of Mr. Johnston’s professional career was with Price Waterhouse. Mr. Johnston has a B.S. degree from the University of Missouri and is a certified public accountant.
| 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.
83
Table of Contents
| 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, 2010.
| Plan Category |
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(1) |
|||||||||
| (a) | (b) | (c ) | ||||||||||
| Equity compensation plans approved by security holders |
4,711,082 | $ | 5.80 | 2,974,619 | ||||||||
| Equity compensation plans not approved by security holders |
— | — | — | |||||||||
| Total |
4,711,082 | 2,974,619 | ||||||||||
| (1) | Includes 188,636 shares reserved for issuance under the 2009 Employee Stock Purchase 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 PERSON TRANSACTIONS AND DIRECTOR INDEPENDENCE |
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 Person Transactions and Director Independence” 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.
84
Table of Contents
PART IV
| ITEM 15: | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a) | The following documents are filed as part of this Annual Report on Form 10-K |
| (1) | Financial Statements—See Index to the Financial Statements at Item 8 of this Report on Form 10-K. |
| (2) | The following financial statement schedule of Stereotaxis, Inc. is filed as part of this Report and should be read in conjunction with the financial statements of Stereotaxis, Inc.: |
| — | Schedule II: Valuation and Qualifying Accounts. |
All other schedules have been omitted because they are not applicable, not required under the instructions, or the information requested is set forth in the consolidated financial statements or related notes thereto.
| (3) | Exhibits |
See Exhibit Index appearing on page 88 herein.
Note: Trademarks used herein are the registered or unregistered trademarks of Stereotaxis, Inc., except that Carto®, Celsius®, NAVISTAR®, THERMOCOOL® are the trademarks of Biosense Webster, Inc.
85
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| STEREOTAXIS, INC. (Registrant) | ||||||
| Date: March 11, 2011 | By: | /s/ MICHAEL P. KAMINSKI | ||||
| Michael P. Kaminski President & Chief Executive Officer | ||||||
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael P. Kaminski and Daniel J. Johnston, 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 Fred A. Middleton |
Chairman of the Board of Directors | March 11, 2011 | ||
| /s/ MICHAEL P. KAMINSKI Michael P. Kaminski |
President & Chief Executive Officer, Director (principal executive officer) |
March 11, 2011 | ||
| /s/ DANIEL J. JOHNSTON Daniel J. Johnston |
Chief Financial Officer (principal financial officer and principal accounting officer) |
March 11, 2011 | ||
| /s/ CHRISTOPHER ALAFI Christopher Alafi |
Director | March 11, 2011 | ||
| /s/ DAVID W. BENFER David W. Benfer |
Director | March 11, 2011 | ||
| /s/ WILLIAM M. KELLEY William M. Kelley |
Director | March 11, 2011 | ||
| /s/ WILLIAM C. MILLS III William C. Mills III |
Director | March 11, 2011 | ||
| /s/ ROBERT J. MESSEY Robert J. Messey |
Director | March 11, 2011 | ||
| /s/ ERIC N. PRYSTOWSKY Eric N. Prystowsky |
Director | March 11, 2011 | ||
86
Table of Contents
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
| Balance at Beginning of Year |
Additions Charged to Cost and Expenses |
Deductions | Balance at the End of Year |
|||||||||||||
| Allowance for doubtful accounts and returns: |
||||||||||||||||
| Year ended December 31, 2010 |
$ | 322,463 | $ | 107,360 | $ | (62,287 | ) | $ | 367,536 | |||||||
| Year ended December 31, 2009 |
328,307 | 353,532 | (359,376 | ) | 322,463 | |||||||||||
| Year ended December 31, 2008 |
189,040 | 207,798 | (68,531 | ) | 328,307 | |||||||||||
| Allowance for inventories valuation: |
||||||||||||||||
| Year ended December 31, 2010 |
$ | 812,468 | $ | 67,252 | $ | (340,202 | ) | $ | 539,518 | |||||||
| Year ended December 31, 2009 |
583,278 | 321,058 | (91,868 | ) | 812,468 | |||||||||||
| Year ended December 31, 2008 |
595,105 | 87,391 | (99,218 | ) | 583,278 | |||||||||||
87
Table of Contents
| Number |
Description | |
| 3.1 | Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended September 30, 2004. | |
| 3.2 | Restated Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended September 30, 2004. | |
| 4.1 | Form of Specimen Stock Certificate, incorporated by reference to the Registration Statement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7, 2004, as amended thereafter, at Exhibit 4.1. | |
| 4.2 | Fourth Amended and Restated Investor Rights Agreement, dated December 17, 2002, by and among Registrant and certain stockholders, incorporated by reference to the Registration Statement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7, 2004, as amended thereafter, at Exhibit 4.3. | |
| 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 4.4. | |
| 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 4.5. | |
| 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 4.6. | |
| 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 4.7. | |
| 4.7a | Form of Warrant issued pursuant to that certain Note and Warrant Purchase Agreement effective February 7, 2008, between the Registrant and certain investors named therein (included in Exhibit 10.21a, which is incorporated by reference to Exhibit 10.31 of the Registrant’s Form 10-K (File 000-50884) for the fiscal year ending December 31, 2007). | |
| 4.7b | Form of Warrant issued pursuant to that certain First Amendment to Note and Warrant Purchase Agreement effective December 29, 2008, between the Registrant and the investors named therein (included in Exhibit 10.21b, which is incorporated by reference to Exhibit 10.32 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2008). | |
| 4.7c | Form of Warrant issued pursuant to that certain Second Amendment to Note and Warrant Purchase Agreement effective October 9, 2009, between the Registrant and certain investors named therein (included in Exhibit 10.21c, which is incorporated by reference to Exhibit 10.31c of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2009). | |
88
Table of Contents
| Number |
Description | |
| 4.7d | Form of Warrant issued pursuant to that certain Third Amendment to Note and Warrant Purchase Agreement effective November 10, 2010, between the Registrant and certain investors named therein (included in Exhibit 10.21d). | |
| 4.8 | Form of Series A Warrant, issued pursuant to that certain Securities Purchase Agreement, dated December 29, 2008, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed December 29, 2008. | |
| 4.9 | Form of Warrant, issued pursuant to that certain Securities Purchase Agreement, dated December 29, 2008, incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed December 29, 2008. | |
| 4.10 | Warrant to Purchase Stock pursuant to that certain Loan and Security Agreement, dated December 17, 2010, between Silicon Valley Bank and the Company (filed herewith). | |
| 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. | |
| 10.2a# | 2002 Stock Incentive Plan, as amended and restated June 10, 2009, incorporated by reference to Exhibit 10.2 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2009. | |
| 10.2b# | Form of Incentive Stock Option Award Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed December 19, 2008. | |
| 10.2c# | Form of Non-Qualified Stock Option Award Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed December 19, 2008. | |
| 10.2d# | Form of Restricted Stock Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.7 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2008. | |
| 10.2e# | Form of Performance Share Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.8 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2008. | |
| 10.2f# | Form of Stock Appreciation Right Award Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed December 19, 2008. | |
| 10.3# | 2009 Employee Stock Purchase Plan, as adopted June 10, 2009, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2009. | |
| 10.4a# | 2002 Non-Employee Directors’ Stock Plan, as amended and restated May 29, 2008, incorporated by reference to Exhibit 10.4 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2008. | |
| 10.4b# | Form of Non-Qualified Stock Option Agreement under the 2002 Non-Employee Directors’ Stock Plan, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2005. | |
| 10.5a# | 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. | |
89
Table of Contents
| Number |
Description | |
| 10.5b# | First Amendment to Employment Agreement dated as of May 29, 2008, by and between the Registrant and Michael P. Kaminski, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed June 3, 2008. | |
| 10.5c# | Corrected Second Amendment to Employment Agreement dated August 6, 2009, by and between Michael P. Kaminski and the Registrant, incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2009. | |
| 10.6# | Employment Agreement dated August 5, 2009, between Daniel J. Johnston and the Registrant, incorporated by reference to Exhibit 10.8 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2009. | |
| 10.7# | Form of Executive Employment Agreement between certain executive officers and the Registrant (filed herewith). | |
| 10.8# | Summary of annual bonus program (filed herewith). | |
| 10.9# | Summary of annual cash compensation of named executive officers (filed herewith). | |
| 10.10# | Summary of Non-Employee Directors’ Compensation, incorporated by reference to Exhibit 10.5 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2008. | |
| 10.11a# | Stereotaxis Advisory Board and Consulting Agreement, dated February 25, 2009, between the Company and Eric N. Prystowsky, MD, incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended March 31, 2009. | |
| 10.11b# | Amendment to Stereotaxis Advisory Board and Consulting Agreement, dated February 15, 2010, between the Company and Eric N. Prystowsky, MD (filed herewith). | |
| 10.12a† | 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. | |
| 10.12b† | 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. | |
| 10.12c† | Amendment to Collaboration Agreement dated May 5, 2006, between the Company and Siemens Aktiengesellschaft, Medical Solutions, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2006. | |
| 10.13a† | 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. | |
| 10.13b† | 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. | |
| 10.13c† | Alliance Expansion Agreement, dated as of May 4, 2007, between Biosense Webster, Inc. and the Registrant, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2007. | |
90
Table of Contents
| Number |
Description | |
| 10.13d† | Second Amendment to Development Alliance and Supply Agreement, dated as of July 18, 2008, between the Registrant and Biosense Webster, Inc., 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, 2008. | |
| 10.13e | Third Amendment to Development Alliance and Supply Agreement with Biosense Webster, Inc. effective as of December 21, 2009, incorporated by reference to Exhibit 10.22 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2009. | |
| 10.13f | Fourth Amendment to Development Alliance and Supply Agreement with Biosense Webster, Inc., effective May 1, 2010, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended March 31, 2010. | |
| 10.13g | Fifth Amendment to Development Alliance and Supply Agreement with Biosense Webster, Inc., dated as of July 30, 2010, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K/A (File No. 000-50884) filed on August 3, 2010. | |
| 10.13h†† | Sixth Amendment and Catheter and Mapping System Extension to Development Alliance and Supply Agreement with Biosense Webster, Inc., dated January 3, 2011, effective as of December 17, 2010 (filed herewith). | |
| 10.14 | 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. | |
| 10.15† | Letter Agreement, effective October 6, 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. | |
| 10.16† | 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. | |
| 10.17a† | Office Lease dated November 15, 2004, between the Registrant and Cortex West Development I, LLC, incorporated by reference to Exhibit 10.39 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2004. | |
| 10.17b | Amendment to Office Lease dated November 30, 2007, between the Registrant and Cortex West Development I, LLC, incorporated by reference to Exhibit 10.22 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2007. | |
| 10.18 | Amended and Restated Loan and Security Agreement, dated March 12, 2009, between the Company and Silicon Valley Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q/A (File No. 000-50884) for the fiscal quarter ended March 31, 2009. | |
| 10.19a | First Loan Modification Agreement (Domestic), between the Company and Silicon Valley Bank, dated December 15, 2009, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (File No. 000-50884) filed on December 21, 2009. | |
| 10.19b | Second Loan Modification Agreement (Domestic), between the Company and Silicon Valley Bank, dated December 17, 2010 (filed herewith). | |
| 10.20a | Export-Import Bank Loan and Security Agreement, dated March 12, 2009, among the Company, Stereotaxis International, Inc., and Silicon Valley Bank, incorporated by reference to Exhibit 10.2 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended March 31, 2009. | |
91
Table of Contents
| Number |
Description | |
| 10.20b | Export-Import Bank First Loan Modification Agreement, dated December 15, 2009, among the Company, Stereotaxis International, Inc., and Silicon Valley Bank, incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (File No. 000-50884) filed on December 21, 2009. | |
| 10.20c | Export-Import Bank Second Loan Modification Agreement, dated December 17, 2010, among the Company, Stereotaxis International, Inc., and Silicon Valley Bank (filed herewith). | |
| 10.21a | Note and Warrant Purchase Agreement, effective February 7, 2008, between the Registrant and the investors named therein, incorporated by reference to Exhibit 10.31 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2007. | |
| 10.21b | First Amendment to Note and Warrant Purchase Agreement, effective December 29, 2008, between the Registrant and the investors named therein, incorporated by reference to Exhibit 10.32 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2008. | |
| 10.21c | Second Amendment to Note and Warrant Purchase Agreement, effective October 9, 2009, between the Registrant and the investors named therein, incorporated by reference to Exhibit 10.31c of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2009. | |
| 10.21d | Third Amendment to Note and Warrant Purchase Agreement, effective November 10, 2010, between the Registrant and the investors named therein (filed herewith). | |
| 21.1 | List of Subsidiaries of the Registrant, incorporated by reference to Exhibit 21.1 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2009. | |
| 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. |
92
Exhibit 4.10
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION.
WARRANT TO PURCHASE STOCK
Company: Stereotaxis, Inc., a Delaware corporation
Number of Shares: 111,111, subject to adjustment
Class of Stock: Common Stock, 0.001 par value per share
Warrant Price: $3.60, subject to adjustment
Issue Date: December 17, 2010
Expiration Date: December 17, 2015
| Credit Facility: |
This Warrant is issued in connection with that certain Loan and Security Agreement of even date herewith between Silicon Valley Bank and the Company. |
THIS WARRANT CERTIFIES THAT, for good and valuable consideration, SILICON VALLEY BANK (Silicon Valley Bank, together with any successor or permitted assignee or transferee of this Warrant or of any shares issued upon exercise hereof, is referred to hereinafter as “Holder”) is entitled to purchase the number of fully paid and non-assessable shares (the “Shares”) of the class of stock (the “Class”) of the above-named company (the “Company”) at the above-stated Warrant Price, all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.
ARTICLE 1. EXERCISE.
1.1 Method of Exercise. Holder may exercise this Warrant by delivering the original of this Warrant together with a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Article 1.2, Holder shall also deliver to the Company a check, wire transfer (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in Article 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Article 1.3.
1.3 Fair Market Value. If the Company’s common stock is traded in a public market, the fair market value of a Share shall be the closing price of a share of common stock reported for the business day immediately before Holder delivers this Warrant together with its Notice of Exercise to the Company. If the Company’s common stock is not traded in a public market, the Board of Directors of the Company shall determine fair market value of a Share in its reasonable good faith judgment.
1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant and, if applicable, the Company receives payment of the aggregate Warrant Price, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired.
1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor.
1.6 Treatment of Warrant Upon Acquisition of Company.
1.6.1 “Acquisition”. For the purpose of this Warrant, “Acquisition” means any sale, exclusive license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, merger, or sale of outstanding equity securities of the Company by the holders thereof, where the holders of the Company’s outstanding voting equity securities as of immediately before the transaction beneficially own less than a majority of the outstanding voting equity securities of the surviving or successor entity as of immediately after the transaction.
1.6.2 Treatment of Warrant at Acquisition.
A) Holder agrees that, in the event of an Acquisition in which the sole consideration is cash and/or Marketable Securities, this Warrant shall terminate on and as of the closing of such Acquisition to the extent not previously exercised. The Company shall provide Holder with written notice of any proposed Acquisition not later than the date on which Holder provides such notice to its other stockholders, and shall provide such information in connection therewith to Holder as and when it provides such information to its other stockholders.
B) Upon the closing of any Acquisition other than as particularly described in subsection (A) above, the surviving or successor entity shall assume this Warrant and the obligations of the Company hereunder, and this Warrant shall, from and after such closing, be exercisable for the same class, number and kind of securities, cash and other property as would have been paid for or in respect of the Shares issuable (as of immediately prior to such closing) upon exercise in full hereof as if such Shares had been issued and outstanding on and as of such closing, at an aggregate Warrant Price equal to the aggregate Warrant Price in effect as of immediately prior to such closing; and subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant.
2
C) As used in this Article 1.6, “Marketable Securities” means securities meeting all of the following requirements: (i) the issuer thereof is then subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is then current in its filing of all required reports and other information under the Act and the Exchange Act; (ii) the class and series of shares or other security of the issuer that would be received by Holder in connection with the Acquisition were Holder to exercise or convert this Warrant on or prior to the closing thereof is then traded on a national securities exchange or over-the-counter market, and (iii) Holder would not be restricted by contract or by applicable federal and state securities laws from publicly re-selling, within six (6) months and one day following the closing of such Acquisition, all of the issuer’s shares and/or other securities that would be received by Holder in such Acquisition were Holder to exercise or convert this Warrant in full on or prior to the closing of such Acquisition.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on the outstanding shares of the Class payable in common stock or other securities, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend occurred. If the Company subdivides the outstanding shares of the Class by reclassification or otherwise into a greater number of shares, the number of Shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares of the Class are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased.
2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event affecting the outstanding shares of the Class, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised in full immediately before such reclassification, exchange, substitution, or other event, at an aggregate Warrant Price not exceeding the aggregate Warrant Price in effect as of immediately prior thereto. The Company or its successor shall promptly issue to Holder a certificate pursuant to Article 2.5 hereof setting forth the number, class and series or other designation of such new securities or other property issuable upon exercise or conversion of this Warrant as a result of such reclassification, exchange, substitution or other event. The provisions of this Article 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events.
2.3 [Intentionally Omitted]
2.4 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder the amount computed by multiplying the fractional interest by the fair market value of a full Share.
3
2.5 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, Class and/or number of Shares, the Company shall promptly notify Holder in writing, and, at the Company’s expense, promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price, Class and number of Shares in effect upon the date thereof and the series of adjustments leading to such Warrant Price, Class and number of Shares.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company represents and warrants to, and agrees with, the Holder as follows:
(a) The Company shall at all times during the term of this Warrant keep reserved out of its authorized and unissued capital stock a sufficient number of shares of the Class to permit exercise in full of this Warrant. All Shares which may be issued upon the exercise or conversion of this Warrant shall, upon issuance, be duly authorized, validly issued, fully paid and non-assessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon the outstanding shares of the Class, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription or sale pro rata to the holders of the outstanding shares of the Class any additional shares of any class or series of the Company’s stock; (c) to effect any reclassification, reorganization or recapitalization of the outstanding shares of the Class; or (d) to effect an Acquisition or to liquidate, dissolve or wind up; then, in connection with each such event, the Company shall provide notice to Holder thereof at the same time and in the same manner as the Company notifies its other stockholders thereof.
3.3 No Shareholder Rights. Except as provided in this Warrant, Holder will not have any rights as a shareholder of the Company until the exercise of this Warrant.
ARTICLE 4. REPRESENTATIONS, WARRANTIES OF THE HOLDER. The Holder represents and warrants to the Company as follows:
4.1 Purchase for Own Account. This Warrant and the securities to be acquired upon exercise of this Warrant by Holder will be acquired for investment for Holder’s account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Act. Holder also represents that it has not been formed for the specific purpose of acquiring this Warrant or the Shares.
4.2 Disclosure of Information. Holder has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to ask questions and receive answers
4
from the Company regarding the terms and conditions of the offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access.
4.3 Investment Experience. Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. Holder has experience as an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of such Holder’s investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons.
4.4 Accredited Investor Status. Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Act.
4.5 The Act. Holder understands that this Warrant and the Shares issuable upon exercise or conversion hereof have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Shares issued upon any exercise or conversion hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available.
ARTICLE 5. MISCELLANEOUS.
5.1 Term: This Warrant is exercisable in whole or in part at any time and from time to time on or before the Expiration Date.
5.2 Legends. Each certificate representing Shares issued upon any exercise or conversion hereof (and the certificates representing the securities issued upon conversion of such Shares, if any) shall be imprinted with a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 OF THAT CERTAIN WARRANT TO PURCHASE STOCK ISSUED BY THE COMPANY TO SILICON VALLEY BANK DATED AS OF DECEMBER 17, 2010 (THE “WARRANT”), MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE
5
SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION.
5.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to SVB Financial Group (Silicon Valley Bank’s parent company) or any other affiliate of Holder, provided that any such transferee is an “accredited investor” as defined in Regulation D promulgated under the Act.
5.4 Transfer Procedure. After receipt by Silicon Valley Bank (“Bank”) of the executed Warrant, Bank will transfer all of this Warrant to SVB Financial Group, Holder’s parent company. Subject to the provisions of Article 5.3 and upon providing the Company with written notice, SVB Financial Group and any subsequent Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant to any transferee, provided, however, in connection with any such transfer, SVB Financial Group or any subsequent Holder will give the Company notice of the portion of the Warrant being transferred with the name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable).
5.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or Holder, as the case may be (or on the first business day after transmission by facsimile), in writing by the Company or such holder from time to time. All notices to Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise:
SVB Financial Group
Attn: Treasury Department
3003 Tasman Drive, HA 200
Santa Clara, CA 95054
Telephone: 408-654-7400
Facsimile: 408-496-2405
Notice to the Company shall be addressed as follows until Holder receives notice of a change in address:
Stereotaxis, Inc.
Attn: Chief Financial Officer
4320 Forest Park Avenue, Suite 100
St. Louis, MO 63108
Telephone: 314-678-6100
Facsimile:
6
5.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.
5.7 Attorney’s Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.
5.8 Automatic Conversion upon Expiration. In the event that, upon the Expiration Date, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Article 1.3 above is greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be converted pursuant to Article 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised or converted, and the Company shall promptly deliver a certificate representing the Shares (or such other securities) issued upon such conversion to Holder.
5.9 Counterparts. This Warrant may be executed in counterparts, all of which together shall constitute one and the same agreement.
[Remainder of page left blank intentionally]
7
5.10 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to its principles regarding conflicts of law.
| “COMPANY” |
| STEREOTAXIS, INC. |
| By: /s/ Daniel J. Johnston |
| Name: Daniel J. Johnston |
| (Print) |
| Title: CFO |
| “HOLDER” |
| SILICON VALLEY BANK |
| By: /s/ Michael Kohnen |
| Name: Michael Kohnen |
| (Print) |
| Title: Senior Relationship Manager |
8
APPENDIX 1
NOTICE OF EXERCISE
1. Holder elects to purchase shares of the Common/Series Preferred [strike one] Stock of pursuant to the terms of the attached Warrant, and tenders payment of the purchase price of the shares in full.
[or]
1. Holder elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised for of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing the Shares in the name specified below:
|
|
| Holders Name |
|
|
|
|
| (Address) |
3. By its execution below and for the benefit of the Company, Holder hereby restates each of the representations and warranties in Article 4 of the Warrant as of the date hereof.
| HOLDER: |
|
|
| By: |
| Name: |
| Title: |
| (Date): |
9
Exhibit 10.7
EXECUTIVE EMPLOYMENT AGREEMENT
Terms and Conditions
| 1) |
Scope. (“Employee”) accepts and agrees to the terms of the Stereotaxis offer letter dated . Both parties agree that Employee’s employment by Stereotaxis, Inc. (the “Company” or “Stereotaxis”) shall be subject to these terms and conditions. The offer letter and these Terms and Conditions together are the “Agreement”. |
| 2) |
Definitions. |
| a) |
“Cause” means : (i) the institution of criminal charges against the Employee, or the admission by Employee of, or any action or omission by Employee that constitutes embezzlement, theft or other intentional misappropriation of any property of Company, (ii) any willful act involving moral turpitude which brings disrepute or disparagement to the Company or substantially impairs its good will and reputation, or results in a conviction for or plea of guilty to a felony involving moral turpitude, fraud or misrepresentation, (iii) material neglect of duties which, if curable, is not cured by the Employee, provided however, the Employee shall receive a reasonable opportunity to cure within at least fifteen (15) days after written notice of such neglect of duties if such material neglect of duties is curable within such period, (iv) material breach of fiduciary obligations to Company after written notice of such breach, or (v) chemical dependence that materially affects the performance of Employee’s duties and responsibilities. |
| b) |
“Change of Control” means (i) an event whereby any natural person, corporation, general partnership, limited partnership, joint venture, proprietorship or other business organization (each, a “Person”), including such Person’s affiliates, or “group” (as such term is defined under Section 13(d) of the Securities Exchange Act of 1934, as amended) acquires beneficial ownership of capital stock of the Company entitling the holder(s) thereof to more than fifty percent (50%) of the voting power of the then outstanding capital stock of the Company with respect to the election of the Company’s directors, or (ii) a sale or transfer of all or substantially all of the assets of the Company to any Person. |
| c) |
“Confidential Information” means any information pertaining to the Stereotaxis Business and/or other information of the Company acquired by Employee during the course of or as a result of employment with the Company, which is not publically known, such as but not limited to, trade secrets, know-how, processes, designs, products, documentation, data, research and development plans and activities, standard operating procedures and validation records, drawings, tools, techniques, software and computer programs and derivative works, inventions (whether patentable or not), improvements, copyrightable material, business and marketing plans, projections, sales data and reports, confidential evaluations, the confidential use, nonuse or compilation by the Company of technical or business information in the public domain, customers and prospects, customer requirements, costs, profitability, sales and marketing strategies, pricing policies, operational methods, strategic plans, training materials, internal financial information, operating and financial data and projections, distribution or sales methods, prices charged by or to Company, inventory lists, sources of supplies, supply lists, lists of current or past employees and information concerning relationships between Company and its employees, collaborators, or customers. |
| d) |
“Restricted Period” means during executive’s employment plus the later of one year following the date of (i) the final day of the Severance Period or (ii) termination of employment for any reason; however the Restricted Period shall not exceed two years beyond the date of termination of employment. |
| e) |
“Severance Period” means the period during which the Employee receives any salary continuation and/or continuation of benefits due to termination without Cause or termination in the event of Change of Control under Section 15. |
1
| f) |
“Stereotaxis Business” means a) the development, manufacture, and sale of (1) equipment, software, devices, and methods in the field of remote, computer-controlled or computer-aided navigation and delivery of interventional medical devices, with or without the use of magnetic devices or systems, and (2) workstations, software, and networks used in or with medical procedures, and b) research and planning and business development that is planned or implemented by Company during the term of employment, with respect to which Employee receives Confidential Information during employment. |
| 3) |
Position; Base Salary; Incentive Compensation. Employee shall serve as or in such other capacity, and shall report to Mike Kaminski or such other person, in each case as the Company may from time to time direct. Employee shall be paid according to the terms of the offer letter, subject to increases, or as provided in the future by Employer from time to time in writing, and all payments shall be subject to applicable withholdings and deductions. |
| 4) |
Company Benefits. While employed by the Company, Employee shall be entitled to receive such benefits of employment as the Company may offer from time to time. Company-paid time off for vacation, sick leave, and other personal needs will be governed by the Employee Handbook and Company policies as modified from time to time by the Company. |
| 5) |
Employment Services; Employee Handbook and Company Policies. Employee agrees that throughout the term of Employee’s employment, as a condition of Employee’s employment, Employee shall (a) diligently, in good faith and to the best of Employee’s abilities render such services as may be delegated to the Employee by the Company and (b) follow and act in accordance with all of Company’s rules, policies and procedures of Company, including, but not limited to this Agreement, the Company rules and policies, and the Employee Handbook, any of which may be revised from time to time at the sole discretion of the Company, with or without prior notice. |
| 6) |
At-Will Employment. The Company is an “at-will” employer. This means that the Company or the Employee may terminate Employee’s employment at any time, for any reason or for no reason and/or with or without cause. Stereotaxis makes no promise that Employee’s employment will continue for a set period of time, nor is there any promise that it will be terminated only under particular circumstances. No raise or bonus or discussion of possible or potential future benefits, if any, or changes to Employee’s capacity, reporting, or compensation shall alter Employee’s status as an “at-will” employee or create any implied or express contract or promise of continued employment. No manager, supervisor or officer of Stereotaxis has the authority to change Employee’s status as an “at-will” employee. |
| 7) |
Inventions and Developments. |
| a) |
Any and all ideas, inventions, discoveries, patents, patent applications, continuation-in-part patent applications, divisional patent applications, technology, copyrights, derivative works, trademarks, service marks, improvements, trade secrets and the like, which are developed, conceived, created, discovered, learned, produced and/or otherwise generated by Employee, whether individually or otherwise, during the term of Employee’s employment whether or not during working hours, that relate to Stereotaxis Business or any work performed by Employee for Company (collectively, “Inventions and Developments”), shall be the sole and exclusive property of Company, and Company shall own any and all right, title and interest to such Inventions and Developments. Employee assigns and agrees to assign to Company any and all right, title and interest in and to any such Inventions and Developments whenever requested to do so by Company, at Company’s expense, and Employee agrees to execute any and all applications, assignments or other instruments which Company deems desirable or necessary to protect such interests, both during and after the term of Employment. |
| b) |
By way of clarification, Paragraph 6(a) shall not apply to any invention for which no equipment, supplies, facilities or Confidential and Trade Secret Information of Company was used and which |
2
| was developed entirely on Employee’s own time, unless (i) the invention relates to Stereotaxis Business or to Company’s actual or demonstrably-anticipated research or development, or (ii) the invention results from any work performed by Employee for Company. |
| 8) |
Confidential Information. Employee agrees to keep secret and confidential, and not to use or disclose to any third parties, except as directly required for Employee to perform Employee’s employment responsibilities for Company, any of Company’s Confidential Information. Excluded from the scope of these restrictions is Confidential Information that becomes generally available to the public in any manner other than by a breach of this Agreement by the Employee. |
| 9) |
Company Materials. All notes, records, correspondence, data, hardware, software, documents or the like obtained by or provided to the Company regarding Stereotaxis Business, or otherwise made, produced, or compiled during the course or as a result of employment with the Company which contain Confidential Information, regardless of the type of medium in which such is preserved, (“Company Materials”), are the sole and exclusive property of the Company, and shall be surrendered to the Company on request or upon Employee termination for any reason. During Employee’s employment, Employee will not copy, reproduce or otherwise duplicate, record, abstract, summarize or otherwise use, any Company Materials except as expressly permitted or required for the proper performance of Employee’s duties on behalf of the Company. |
| 10) |
Attention to Duties; Conflict of Interest. |
| a) |
Employee represents that the execution and delivery of the Agreement and Employee’s employment with Company do not violate any previous employment agreement or other contractual obligation of Employee, and there are no outstanding commitments or agreements inconsistent with any of the terms of this Agreement or the services to be rendered to Stereotaxis. |
| b) |
While employed by the Company, Employee shall devote Employee’s full business time, energy and abilities exclusively to the business and interests of Stereotaxis and shall not, without the Company’s prior written consent, obtain any direct or indirect interests in or relationships with any organization that might affect the objectivity and independence of the Employee’s judgment or conduct in carrying out duties and responsibilities to the Company under this Agreement or that would interfere with the performance of Employee’s duties under this Agreement. However, nothing herein shall preclude employee from pursuing Employee’s personal, financial and legal affairs, or, subject to the prior written consent of the Company, (i) serving on any corporate or governmental board of directors, (ii) serving on the board of, or working for, any charitable, not-for-profit or community organization, or (iii) pursuing any other activity; provided that Employee shall not engage in any other business, profession, occupation or other activity, for compensation or otherwise, which would violate the provisions of this Agreement or would otherwise conflict or interfere with the performance of Employee’s duties and responsibilities hereunder, either directly or indirectly. |
| c) |
If in the course of Employee’s employment, Employee becomes aware of any obligations or commitments under Paragraph (a) or any real or apparent conflicts of commitment or conflicts of interest, Employee shall immediately disclose them to Employee’s supervisor. |
| 11) |
Non-Competition, Non-solicitation. Employee agrees that during the Restricted Period, and regardless of how Employee’s termination occurs and regardless of whether it is with or without Cause, Employee shall not, directly or indirectly (whether individually or as owner, partner, consultant, employee or otherwise): |
| a) |
engage in, assist or have an interest in, enter the employment of, or act as an agent, advisor or consultant for, any person or entity that then is or intends to be in competition with the Company with respect to Stereotaxis Business. A person or entity will be deemed “in competition” if it is involved in research, development, manufacture, supplying or sale of a product, process, apparatus, service or development which is competitive with a product, process, apparatus, |
3
| service or development on which Employee worked, or with respect to which Employee has or had access to Confidential Information during the Employee’s employment. |
| b) |
solicit, divert, or take away, or attempt to solicit, divert or take away from the Company the business of any customers for the purpose of selling or providing to such customer any product or service which is included in the Stereotaxis Business as defined herein; |
| c) |
knowingly to cause or attempt to cause any customer, vendor, or other third party collaborating with the Company to terminate or reduce its existing relationship with the Company; |
| d) |
knowingly solicit, induce, or hire, or attempt to solicit, induce, or hire, any employee, consultant, or distributor of the Company to leave the employ of the Company and/or to work for any competitor of the Company. |
| 12) |
Notification; Non-disparagement. Employee shall notify any prospective employer of the existence and terms of this Agreement, prior to acceptance of employment outside of the Company. Company may inform any person or entity subsequently employing, or evidencing an intention to employ Employee of the nature of the information Company asserts to be Confidential Information, and may inform that person or entity of the existence of this Agreement, the terms hereof, and provide to that person or entity a copy of these terms and conditions. Neither party shall in any way disparage the other, including current or former officers, directors and employees of the Company, and neither party shall make or solicit any comments, statements or the like to the media or to others, including their agents or representatives, that may be considered to be derogatory or detrimental to the good name or business reputation of the other party. |
| 13) |
Acknowledgments Regarding Restrictions. Employee acknowledges, understands, and agrees that: |
| a) |
The provisions relating to confidentiality, conflicts of interest, non-competition, and their post-employment continuation are material consideration for the compensation and other benefits of Employee’s employment by Company, and without Employee’s agreement to these provisions and restrictions, Employee would not be employed by the Company. |
| b) |
Employee agrees that the covenants relating to non-competition, non-solicitation, and disparagement in this Agreement are appropriate and fair and necessary to avoid conflicts of interest and commitment and to protect the Company’s legitimate interests in its Confidential Information, goodwill, and relationships. |
| c) |
The restrictions contained herein are not limited geographically in view of Company’s worldwide operations and the nature of the Confidential Information, customers and /or other business relationships to which Employee will have access. These restrictions may preclude, for a time, Employee’s employment with competitors of Company. Company agrees, however, that if it is commercially reasonable, after the Employee’s employment and within the Restricted Period it may provide written permission for Employee to provide services to or be employed by firms that are engaged in Stereotaxis Business, so long as such services or employment are provided to divisions, departments, or affiliates that are not engaged in Stereotaxis Business within those firms. Such permission shall not be deemed to waive or diminish the prohibitions on disclosure or use of Confidential Information or the covenants of non-competition in this Agreement. |
| d) |
None of these restrictions is intended to prevent the Employee from owning up to one percent (1%) of the publicly traded stock of any company during the Restricted Period. |
| e) |
In the event of a breach or threatened breach of any of Employee’s duties and obligations under Sections 7-12, Company shall be entitled, in addition to any other legal or equitable remedies (including any right to damages), to temporary, preliminary and permanent injunctive relief restraining such breach or threatened breach. Employee expressly acknowledges that the harm |
4
| that might result to Company’s business as a result of any noncompliance by Employee with any of the provisions of these Sections would be largely irreparable, and specifically agrees that if there is a question as to the enforceability of any of the provisions of these Sections, Employee will not engage in conduct alleged to be inconsistent with or contrary to such Sections before the question has been resolved by a final judgment of an arbitrator or court of competent jurisdiction. |
| f) |
To ensure Employee’s understanding of and compliance with the obligations under this Agreement, Employee agrees to engage in an exit interview with the Company at the Company’s expense prior to Employee’s last day of employment, at a time and place or by telephone, as designated by the Company, and that Employee may be required to confirm that Employee will comply with Employee’s post termination obligations. |
| 14) |
Non-Waiver of Rights. Company’s failure at any time to enforce or require performance by Employee of any of the provisions of this Agreement shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement, or any part hereof, or the right of Company thereafter to enforce each and every provision in accordance with the terms of this Agreement. |
| 15) |
Continuation of Salary and Benefits. |
| a) |
Continuation upon Certain Termination Events. If the Employee’s employment is terminated (i) by the Company without Cause; or (ii) within twelve months after a Change of Control of the Company under which the Company is not the surviving entity and the Employee was not offered a position and salary in the surviving entity comparable to the position and salary held immediately prior to the Change of Control, then subject to the conditions below, Employee will receive during the 18 month period immediately following the date of termination under (i) or (ii) a guarantee of salary continuation equal to Employee’s monthly base salary on the date of termination, as well as continuation of medical and dental benefits pursuant to Company policies (including any requirement for employee premium contributions) in effect during the said period. Salary continuation payments shall be made in accordance with the regularly scheduled payroll frequency in effect on the date of Employee’s termination of employment. Each installment payment required under this Section shall be considered a separate payment under Internal Revenue Code Section 409A. |
| b) |
Conditions. The continuation of salary and benefits under this Section 15 is conditioned on Employee’s (i) compliance with the terms and conditions of this Agreement, including any post-termination restrictions and covenants, and (ii) execution of a release of any and all claims against the Company and its officers, directors, and employees arising from or related to the Employee’s employment. Salary continuation payments in the event of termination by the Company without Cause under (a) above will be offset by the amount of any compensation Employee receives during the Severance Period from the Company or another employer or as an independent contractor. Medical and dental benefits continued in the event of termination under (a) or (b) will terminate upon receipt of comparable benefits from another employer. The release required pursuant to subsection (ii) above shall be substantially similar with respect to all material terms and conditions to the form attached hereto as Attachment A, and must be executed and returned to the Company within forty fine (45) days of Employee’s termination of employment to avoid forfeiture by Employee of the salary continuation payments described in Section 15(a) above. |
| c) |
Key Employee Six Month Deferral. Notwithstanding anything to the contrary in this Section 15, if any such payments set forth in paragraph 15(a) are classified as nonqualified deferred compensation, as defined in Internal Revenue Code Section 409A and the regulations thereunder, such payments subject to Section 409A shall be deferred until at least six (6) month after the date of termination. Any payment of nonqualified deferred compensation otherwise due in such six (6) month period shall be suspended and become payable in a lump sum at the end of such six (6) month period, and shall not otherwise be subject to any offset or reduction pursuant to paragraph 15(b) above solely because of said deferral. However, any payments not subject to |
5
| Section 409A shall be immediately payable pursuant to Section 15(a) and will not be suspended or deferred. |
| d) |
Effect on Employment at Will. By way of clarification, Employee is not entitled to salary or benefits continuation if Employee terminates the employment except as specified in this Paragraph 15, and nothing in this Section is intended to affect the rights of either party to terminate the employment at any time with or without Cause. |
| 16) |
Binding Arbitration. |
| a) |
Any dispute, claim or controversy with respect to Employee’s employment or its termination (whether the termination of employment is voluntary or involuntary) shall be settled exclusively (except as set out in Section 13(e) above) by arbitration in accordance with the rules of the American Arbitration Association (“AAA”). Either party may request arbitration in writing after good faith efforts to resolve the matter internally, and the parties shall select an arbitrator under the AAA rules. Employee and Stereotaxis each waive their constitutional rights to have such matters determined by a jury, explicitly and definitely prefer arbitration to recourse to the courts, and have prescribed arbitration as their sole and exclusive method of binding dispute resolution because, among other reasons, it is quicker, less expensive, and less formal than litigation in court. |
| b) |
Except as set out in Section 18 below, the arbitrator shall not have the authority to modify, add to or eliminate any provision of this Agreement. The arbitration shall be held in St. Louis, Missouri. The award of the arbitrator shall be final and binding on the parties. Judgment upon the arbitrator’s award may be entered in any court, state or federal, having jurisdiction over the parties. If a written request for arbitration is not made within one (1) year of the date of the termination of employment or, in the case of disputes not resolved internally, the date of the final decision reached by the Human Resources Department, all remedies regarding such dispute, claim or controversy shall be waived. |
| c) |
In the event of any litigation or arbitration or other proceeding by which one party seeks to enforce its rights or seeks a declaration of any rights or obligations under this Agreement, aparty that is finally determined to have breached this Agreement or the party against which injunctive relief is awarded shall pay the other party its reasonable attorney fees, costs, and expenses incurred. |
| 17) |
Choice of Forum and Governing Law. Employee acknowledges and agrees that substantial and material aspects of the employment under this Agreement take place in St. Louis, Missouri and that the important decisions, training, planning and activities hereunder are focused in St. Louis, Missouri. In light of Company’s substantial contacts with the State of Missouri, the parties’ interests in ensuring that disputes regarding the interpretation, validity and enforceability of this Agreement are resolved on a uniform basis, and Company’s execution of, and the making of this Agreement in Missouri, the parties agree that: (a) any litigation involving any noncompliance with or breach of the Agreement, or regarding the interpretation, validity and/or enforceability of the Agreement, shall be filed and conducted exclusively in the state or federal courts in St. Louis County, Missouri; and (b) the Agreement shall be interpreted in accordance with and governed by the laws of the State of Missouri. |
| 18) |
Severability. If any provision(s) of this Agreement are or become invalid, are ruled illegal or are deemed unenforceable by any tribunal of competent jurisdiction, it shall be modified and enforced to the maximum extent permissible under applicable law. It is the intention of the Parties that the remainder of this Agreement shall not be affected, provided that a Party’s rights under this Agreement are not materially affected, in which case the Parties covenant and agree to revise any such provision or the Agreement in good faith in order to provide a term, covenant, condition or application of this Agreement that most closely complies with the intent of the Parties under the Agreement as originally executed. |
6
| 19) |
Assignment. The Company may assign this Agreement and Employee’s employment to any entity to which the operations it currently manages are transferred, whether through reorganization, merger, sale or any other transfer. As a contract for personal services, neither this Agreement nor any rights hereunder shall be assigned by Employee. |
| 20) |
Construction. The Parties to this Agreement represent and acknowledge that in executing this Agreement they do not rely and have not relied upon any representation or statement made by the other party or the other party’s agents, attorneys or representatives regarding the subject matter, basis, or effect of this Agreement or otherwise, other than those specifically stated in this written Agreement. This Agreement shall be interpreted in accordance with the plain meaning of its terms and not strictly for or against any party. This Agreement shall be construed as if each party was its author and each party hereby adopts the language of this Agreement as if it were his, her or its own. Section headings are provided in this Agreement for convenience only and shall not be deemed to substantively affect the content of such sections. In addition, in light of the post-employment compensation to be paid to Employee under Section 15 of this Agreement if Employee is terminated without Cause, Employee acknowledges and agrees that Employee’s post-employment obligations under Section 11 are reasonable and should be fully enforceable regardless of why or how his employment may end, and regardless of the reason(s) why and/or whether or not such termination of employment is with or without Cause. |
| 21) |
Entire Agreement. This Agreement, including the Offer Letter and these Terms and Conditions and any Exhibits attached hereto, sets forth all the covenants, promises, agreements, representations, conditions and understandings between the Parties hereto with respect to the subject matter hereof and supersedes and terminates all prior agreements and understandings between the Parties. There are no covenants, promises, agreements, representations, conditions or understandings, either oral or written, between the Parties with respect to the subject matter hereof other than as set forth herein and therein. No amendment, change or addition to this Agreement shall be binding upon the Parties unless reduced to writing and signed by the Employee and an authorized representative of the Company. This Agreement cannot be changed orally or by any conduct of either Employee or the Company or any course of dealings between Employee, or another person and the Company. |
7
Employee and the Company have executed this Agreement and agree to enter into and be bound by the provisions hereof as of .
BY SIGNING THIS AGREEMENT, EMPLOYEE IS HEREBY CERTIFYING THAT EMPLOYEE (A) HAS RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW AND STUDY BEFORE EXECUTING IT; (B) HAS READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C) HAS HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THE AGREEMENT TO ASK ANY QUESTIONS EMPLOYEE HAS ABOUT THE AGREEMENT AND HAS RECEIVED SATISFACTORY ANSWERS TO ALL SUCH QUESTIONS AND TO CONFER WITH COUNSEL; AND (D) UNDERSTANDS EMPLOYEE’S RIGHTS AND OBLIGATIONS UNDER THE AGREEMENT.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION.
| Employee |
Stereotaxis, Inc. | |||
|
|
| |||
| David Giffin | ||||
| Vice President, Human Resources | ||||
8
Attachment A
FORM OF SEVERANCE AGREEMENT AND RELEASE
This Severance Agreement and Release (“Agreement”) is made between Stereotaxis, Inc. (“Stereotaxis”), including its divisions, subsidiaries, parent and affiliated corporations, their successors and assigns (individually and collectively “Stereotaxis”) and with Employee’s heirs, executors, administrators, successors and assigns (“Employee”).
WHEREAS, Stereotaxis and Employee entered into an Employment Agreement dated (said agreement and any and all amendments collectively, the “Employment Agreement”), and now desire to terminate their employment relationship and settle all legal rights and obligations resulting from Employee’s employment with Stereotaxis.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises, representations and undertakings of the parties set forth herein, the adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
| 1. |
Separation Date. Employee’s employment with Stereotaxis will terminate effective . |
| 2. |
In consideration for Employee’s execution of, and subject to the terms and conditions of this Severance Agreement and Release, Stereotaxis agrees as follows: |
| (a) |
Severance. Employee will receive weeks of base pay in the amount of $ per week as severance, for a total payment of $ , less deductions required by law. Employee’s severance will payable in accordance with Stereotaxis’ normal payroll dates and will commence once the revocation period set forth in paragraph 6(e) has elapsed without Employee revoking this Release. |
| (b) |
Vacation. Employee will be paid $ , less deductions required by law, as full and complete payment of all remaining vacation hours and personal time earned but not used by Employee’s Separation Date. |
| (c) |
Insurance. Stereotaxis will permit Employee to exercise Employee’s COBRA conversion privileges as provided by law, effective . Stereotaxis will pay the cost under COBRA for continuing Employee’s group medical and dental insurance from through , as set out in the Employment Agreement provided Employee’s regular monthly contribution is made by deduction from the severance payment. Thereafter, Employee shall be responsible to pay the cost to continue group medical insurance under COBRA. |
| 3. |
The parties agree that the compensation and benefits described above provided Employee by Stereotaxis represent additional compensation and benefits to which Employee would not be entitled absent this Agreement, and constitute the total compensation and benefits payable by Stereotaxis to Employee with regard to Employee’s employment by Stereotaxis and its termination, and that no other compensation, commissions, bonuses, benefits or payments of any kind will be paid other than the amounts set forth above. |
| 4. |
Employee hereby waives and releases Stereotaxis, its subsidiaries, related, parent and affiliated corporations and business entities, their successors and assigns, and their past and present officers, directors, shareholders, employees and agents (“the Released Parties”) from any and all claims made, to be made, or which might have been made of whatever nature, whether known or unknown, since the beginning of time through the date of this Agreement, including, but not limited to, any claim Employee may have under any agreements which Employee may have with |
9
| any of the Released Parties, any claims that arose as a consequence of Employee’s employment by Stereotaxis, or arising out of the termination of the employment relationship, or arising out of any acts committed or omitted during or after the existence of the employment relationship through the date of this Agreement. Such release and waiver of claims will include, but shall not be limited to, those claims which were, could have been, or could be the subject of an internal grievance or appeal procedure or an administrative or judicial proceeding filed either by Employee or on Employee’s behalf under any federal, state or local law or regulation, any claim of discrimination under any state or federal statute, regulation or ordinance including, but not limited to Titles 29 and 42 of the United States Code, Title VII of the Civil Rights Act of 1964, as amended, the Employee Retirement Income Security Act of 1974, as amended, the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Civil Rights Act of 1866, the Rehabilitation Act of 1973, as amended, the Family and Medical Leave Act, the Older Worker Benefit Protection Act, the Missouri Human Rights Act, City of St. Louis Ordinance 62710, any other federal, state or local law, ordinance or regulation regarding employment, discrimination in employment or termination of employment, any claims for breach of contract, wrongful termination, promissory estoppel, detrimental reliance, negligent or intentional infliction of emotional distress, or any other actions at common law, in contract or tort, all claims for lost wages, bonuses, commissions, benefits, expenses, severance, service letter, re-employment, compensatory or punitive damages, attorney’s fees, and all claims for any other type of legal or equitable relief. Employee further waives all rights to future employment with Stereotaxis and agrees not to apply for employment with Stereotaxis. |
This Release does not affect any vested rights Employee may have under any retirement plan of Stereotaxis.
| 5. |
Employee covenants not to sue or otherwise make any claims against Stereotaxis or any other party released herein with respect to any claim released pursuant to this Agreement. |
| 6. |
By execution of this document, Employee expressly waives any and all rights to claims under the Age Discrimination in Employment Act of 1967, 29 U.S.C. § 621, et seq. (the “ADEA”). |
| (a) |
Employee acknowledges that Employee’s waiver of rights or claims refers to rights or claims arising under the ADEA is in writing and is understood by Employee. |
| (b) |
Employee expressly understands that by execution of this document, Employee does not waive any rights or claims under the ADEA that may arise after the date the waiver is executed. |
| (c) |
Employee acknowledges that the waiver of Employee’s rights or claims arising under the ADEA is in exchange for the consideration outlined in this Agreement which is above and beyond that to which Employee is entitled. |
| (d) |
Employee acknowledges that Stereotaxis expressly advised Employee to consult an attorney of Employee’s choosing prior to executing this document and that Employee has been given a period of not less than forty-five (45) days within which to consider this Agreement. |
| (e) |
Employee acknowledges that Employee has been advised by Stereotaxis that Employee is entitled to revoke (in the event Employee executes this document) Employee’s waiver of rights or claims arising under the ADEA within seven (7) days after executing this document by notifying Stereotaxis in writing at: Stereotaxis, 4320 Forest Park Avenue, Suite 100, St. Louis, Missouri 63108, Attn: VP of Human Resources that Employee intends to revoke this waiver and that said waiver will not and does not become effective or enforceable until the seven (7) day period has expired. Employee agrees that payment of monies due under this executed and |
10
| unrevoked waiver shall not be payable until the seven (7) day revocation period has expired and Employee has not revoked this waiver. |
| 7. |
Employee agrees that the terms and provisions of this Agreement and the fact and amount of consideration paid pursuant to this Agreement shall at all times remain confidential and not be disclosed to anyone not a party to this Agreement, other than (1) to the extent disclosure is required by law, or (2) to Employee’s spouse, attorneys, accountant and tax advisors who have a need to know in order to render Employee professional advice or service. Employee agrees to ensure said individuals maintain such confidentiality. |
| 8. |
Employee agrees not to a) disclose or use confidential information of Employer required to be kept confidential under the Employment Agreement, b) violate any covenants of non-competition or any other surviving terms or conditions of the Employment Agreement, c) disparage Employer or make or solicit any comments, statements, or the like to the media or to any third party that may be considered to be derogatory or detrimental to the good name and/or business reputation of Employer, including its directors, officers, employees, agents, representatives and customers. |
| 9. |
Employee agrees to promptly return to Stereotaxis any and all electronic media files, company keys, company vehicles, credit cards, equipment, documents, papers, records, notes, memoranda, plans, files, and other records containing information concerning Stereotaxis or its employees, customers, or operations, and any other information or materials required to be returned pursuant to the Employment Agreement. |
| 10. |
Nothing contained in this Agreement shall be construed to require the commission of any act contrary to law or to be contrary to law, and whenever there is any conflict between any provision of this Agreement and any present or future statute, law, government regulation or ordinance contrary to which the parties have no legal right to contract, the latter shall prevail, but in such event the provisions of this Agreement affected shall be curtailed and restricted only to the extent necessary to bring them within legal requirements. |
| 11. |
The existence and execution of this Agreement shall not be considered, and shall not be admissible in any proceeding, as an admission by Stereotaxis or anyone released hereby, of any liability, error, violation or omission. |
| 12. |
This Agreement shall be governed by, and construed and interpreted according to, the laws of the State of Missouri and whenever possible, each provision herein shall be interpreted in such manner as to be effective or valid under applicable law. |
| 13. |
The parties acknowledge this Agreement constitutes the entire agreement between them superseding all prior written and oral agreements or understandings between them, with the exception of any terms and conditions of the Employment Agreement that survive its termination. |
| 14. |
This Agreement may not be modified, altered or changed except by written agreement signed by the parties hereto. |
| 15. |
Employee acknowledges that the only consideration for Employee signing this Agreement are the terms stated above and that no other promise, agreement, statement or representation of any kind has been made to Employee by any person or entity to cause Employee to sign this Agreement, and that Employee a) has read this Agreement, b) has had a reasonable amount of time to consider its terms, c) is competent to execute this Agreement, d) has had an adequate opportunity to discuss this Agreement with an attorney and has done so or has voluntarily elected not to do so, d) fully understands the meaning and intent of this Agreement, and e) is voluntarily executing it of Employee’s own free will. |
11
| AGREED TO AND ACCEPTED: |
| Employee |
| STATE OF ) |
|
) |
| COUNTY OF ) |
COMES NOW , who states to me that he/she has read and understands the foregoing Agreement and agrees to and accepts its terns and conditions as a free act of his/her own volition.
Subscribed and sworn to before me this day of .
| Notary Public |
My Commission Expires:
| STEREOTAXIS: |
| By: |
| Date: |
12
This Company has entered into the foregoing executive employment agreement with each of the following officers effective as of the date shown opposite each individual’s name.
| Douglas M. Bruce |
August 6, 2009 | |
| Frank J. Cheng |
March 22, 2010 | |
| Karen W. Duros |
October 4, 2010 | |
| David A. Giffin |
August 13, 2009 | |
| Melissa C. Walker |
August 7, 2009 |
13
Exhibit 10.8
SUMMARY OF ANNUAL INCENTIVE PLAN
The Stereotaxis Annual Incentive Plan is designed to bring focus to the financial and operating metrics that contribute to sustainable growth in shareholder value. The incentive plan performance measures for any particular year represent key drivers of our business such as orders, revenue, gross margins, utilization, operating expenses, operating profitability, and specific strategic initiatives.
Each year the Compensation Committee of the Board of Directors will determine the objectives and corresponding weighting for the incentive plan based on the priorities of the business for the upcoming performance year. Three levels of performance are established for each objective. The annual business plan, which includes growth rates or improvement levels for each objective, establishes the target level of performance; threshold performance is defined as 50% of the business plan growth or improvement for each objective; and the maximum level of performance is 120% of the business plan. Similar levels of performance are established for specific strategic initiatives.
| LEVEL
|
PERFORMANCE
| |
| Threshold | 50% of Targeted Business Plan Growth or Improvement | |
| Target | 100 % of Business Plan Growth or Improvement | |
| Maximum | 120 % of Business Plan Growth or Improvement | |
Participants in the Stereotaxis Annual Incentive Plan, based on their ability to impact results, will be assigned to one of five target incentive award levels ranging from 15% to 50% of base salary. Each level is assigned an overachievement performance factor ranging from 10% to 100% of the target incentive award.
| LEVEL
|
GROUP
|
TARGET % BASE
|
OVER ACHIEVEMENT
| |||
| V |
Executive Staff | 50 % | +100% Target | |||
| IV |
Balance Exec Staff | 40 % | +50% Target | |||
| III |
Vice Presidents | 30 % | +25% Target | |||
| II |
Directors | 20 % | +25% Target | |||
|
I |
Senior Key Contributors | 15% | +10% Target |
An incentive payout level is associated with each level of performance against each objective. Performance at threshold results in payout of 50% of target award; performance at target will result in a payout of 100% of target award; and performance at maximum results in a payout at the corresponding overachievement level of the participant.
| PERFORMANCE
|
% TARGET AWARD
| |
| Threshold |
50% | |
| Target |
100 % | |
|
Maximum |
200 % (Level V) 150% (Level IV) 125% (Level II – III) 110% (Level I) |
Award Pool Determination
The payout result of each objective will be independently calculated incorporating the actual performance against the objective, the weighting of each objective, and the overachievement factor, if performance against the objective is above plan. The total of each calculation determines the Company’s overall level of performance against its objectives. This total percent, multiplied by the total sum of the target awards for each participant, determines the total award pool. The Compensation Committee approves the award pool and all awards to Section 16 Officers.
Award Pool Distribution
The distribution of the award pool will be allocated by the President & CEO to each function based on their level of contribution toward the achievement of annual objectives. In turn, each functional leader will determine each participant’s award, as follows:
| • | 25% will automatically be awarded to each individual as a participant in the plan. |
| • | The remaining 75% will be adjusted by the functional leader based on performance of each participant against their personal goals. |
Exhibit 10.9
Annual Cash Compensation of Executive Officers
The named executive officers of Stereotaxis, Inc. (the “Company”) have their base salaries determined yearly by the Compensation Committee (the “Committee”) of the Board of Directors. The named executive officers are all “at will” employees, and each has a written employment agreement which is filed, as required, as an exhibit to reports filed by the Company under the Securities Exchange Act of 1934. On February 15, 2011, the Compensation Committee determined the 2011 base salaries for named executive officers of the Company and the payments to be made under the Company’s 2010 bonus program (the “2010 Program”) to the named executive officers, as set forth below. The 2010 Program was designed to reward the accomplishments of these officers on behalf of the Company in 2010 pursuant to and consistent with the objective of the Company’s bonus plan, as determined by the Committee. The 2010 base salaries, 2010 bonuses, and 2011 base salaries are summarized in the following table:
| 2010 Salary | 2010 Bonus | 2011 Salary | ||||||||||
| Douglas M. Bruce Chief Technology/Operations Officer |
$ | 320,000 | $ | 42,000 | $ | 325,000 | ||||||
| Frank J. Cheng Senior Vice President, Marketing and Business Development |
$ | 275,000 | $ | 50,000 | $ | 285,000 | ||||||
| David A. Giffin Vice President, Human Resources |
$ | 187,000 | $ | 25,000 | $ | 200,000 | ||||||
| Daniel J. Johnston Chief Financial Officer |
$ | 320,000 | $ | 45,000 | $ | 325,000 | ||||||
| Michael P. Kaminski President & Chief Executive Officer |
$ | 400,000 | $ | 50,000 | $ | 440,000 | ||||||
The Company intends to provide additional information regarding other compensation awarded to the named executive officers in respect of and during the 2010 fiscal year in the proxy statement for its 2011 annual meeting of stockholders, which is expected to be filed with the Securities and Exchange Commission in April 2011.
As determined by the Committee at the February 15, 2011 meeting, the 2011 annual bonus program will be based on management achieving certain levels of operating profit, new orders, revenue, electrophysiology procedures performed using Stereotaxis equipment, and the performance of the individual employee as it relates to strategic initiatives.
| CONFIDENTIAL | Exhibit 10.11b |
Amendment to Stereotaxis Advisory Board and Consulting Agreement between
Stereotaxis, Inc. and Eric N. Prystowsky, MD
This Amendment is made to the Stereotaxis Advisory Board and Consulting Agreement designated as effective 26 February 2009, by and between Stereotaxis, Inc. (hereinafter “Company”) and Eric N. Prystowsky, MD (hereinafter “Consultant”) (together, “the parties”).
WHEREAS, the Company and Consultant previously entered into that certain Stereotaxis Advisory Board and Consulting Agreement designated as effective 26 February 2009 (hereinafter the “Existing Agreement”; this Amendment and the Existing Agreement from time to time hereinafter referred to as the “Agreements”); and
WHEREAS, Consultant and the Company wish Consultant to provide continued services to the Company, and:
(i) pursuant to Section 3.1 of the Existing Agreement the parties may renew the Term of said Existing Agreement for an additional one (1)-year term up to a cumulative term of two (2) years;
(ii) such renewal shall be the second year of the cumulative term;
(iii) such renewal shall be in writing and executed by the parties prior to the respective anniversary of the effective date; and
(iii) the effective date of the Existing Agreement is 26 February 2009;
the parties agree to enter into this Amendment on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants hereinafter set forth, the Company and Consultant, each intending to be legally bound, do hereby respectively covenant and agree to extend the Term of the Existing Agreement for a period of one (1) year from the anniversary date of the Existing Agreement.
Except as specifically modified by this Amendment, all Terms and Conditions of the Existing Agreement shall remain in full force and effect.
[signature page follows]
Page 1 of 2
| CONFIDENTIAL |
IN WITNESS WHEREOF, the parties have executed this Amendment. This Amendment may be executed in counterparts, each of which shall constitute an original and all of which together shall constitute one instrument, effective as of the last date on which this Agreement is signed by the parties (the “Effective Date”), but shall not be later than February 26, 2010.
| STEREOTAXIS, INC. |
Compliance |
/s/ Peter A. Takes | ||||||||
| BY: |
/s/ Melissa Walker |
Name: Peter A. Takes, Ph.D., RAC | ||||||||
| Name: Melissa Walker, MS, RAC Title: Sr. VP, Regulatory, Quality & Compliance |
Title: Sr. Director, Clinical & Healthcare Compliance and Clinical Compliance Officer | |||||||||
| DATED: |
Feb. 15, 2010 |
DATED: 2/16/10 | ||||||||
| This Agreement is not valid without endorsement by a Stereotaxis Compliance Officer. | ||||||||||
| For Consultant: |
||||||||||
| /s/ Eric N. Prystowsky |
||||||||||
| By: |
Eric N. Prystowsky, MD |
|||||||||
| DATED: |
Feb 7, 2010 |
|||||||||
Page 2 of 2
CONFIDENTIAL
Exhibit 10.13h
CONFIDENTIAL
EXPLANATORY NOTE: [***] INDICATES THE PORTION OF THIS EXHIBIT THAT
HAS BEEN OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT.
SIXTH AMENDMENT AND CATHETER AND MAPPING SYSTEM EXTENSION
TO DEVELOPMENT ALLIANCE AND SUPPLY AGREEMENT
1
12-27-10
CONFIDENTIAL
SIXTH AMENDMENT AND CATHETER AND MAPPING SYSTEM EXTENSION
TO DEVELOPMENT ALLIANCE AND SUPPLY AGREEMENT
This Sixth Amendment and Catheter and Mapping System Extension to Development Alliance and Supply Agreement (this “Amendment”) is made and entered into on 17 December, 2010 (the “Effective Date”) by and between Biosense Webster, Inc., a California corporation, having a place of business at 3333 Diamond Canyon Road, Diamond Bar, California 91765 (“Biosense”) and Stereotaxis, Inc., a Delaware corporation, having a principal place of business at 4320 Forest Park Avenue, St. Louis, Missouri 63108 (“Stereotaxis”).
RECITALS
WHEREAS, Stereotaxis has developed and commercialized instrument control systems that utilize externally applied magnetic fields to enable navigation of, inter alia, associated proprietary, interventional, disposable, electrophysiology devices; and Biosense has developed and commercialized an electrophysiology mapping and localization systems and associated proprietary, interventional, disposable, electrophysiology devices; and
WHEREAS, under the Existing Agreements (as defined below) Stereotaxis and Biosense have jointly developed the Compatible NIOBE System and the Compatible CARTO System and certain associated proprietary, interventional, disposable, electrophysiology devices that Biosense has manufactured, marketed and sold on an exclusive basis, and the Parties wish to expand their relationship and amend their Existing Agreements by this Amendment (the Existing Agreements as amended by this Amendment referred to as the “Amended Agreement”);
NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions herein the Parties agree as follows:
2
12-27-10
CONFIDENTIAL
| I. |
CONSTRUCTION; DEFINITIONS. |
A. Construction. Terms and definitions used in the Existing Agreements will have the same meaning in this Amendment unless otherwise indicated. References to the Amended Agreement or its provisions also include references to the terms of the Existing Agreements, which are incorporated in this Amendment by reference. Except as modified by this Amendment, the terms and provisions of the Existing Agreements shall continue in full force and effect without modification. In the event of conflict between this Amendment and the Existing Agreements, this Amendment will control.
B. Definitions. As used herein:
1. “Amended Agreement” means the Existing Agreements as amended by this Amendment.
2. “Existing Daughter Products” means the Daughter Products and Partnered NL Catheters developed and sold as of the Effective Date of this Amendment, listed on Schedule A (which includes existing Magnetic Irrigation Catheters as defined in the Alliance Expansion Agreement).
3. “Existing Agreements” means and includes: The Development Alliance and Supply Agreement dated May 7, 2002 between Biosense and Stereotaxis (the “Master Collaboration Agreement”), as amended by: (i) the Amendment to Development and Supply Agreement dated November 3, 2003 (the “First Amendment”); (ii) the research and development side letter between the Parties dated November 3, 2003, (the “R&D Side Letter”); (iii) the Alliance Expansion Agreement dated May 4, 2007 (“Expansion Agreement”); (iv) four side letters between the Parties, each dated May 4, 2007, whose subject matter was, respectively, CARTO Pro RMT, Third Party Collaboration Rights, Exclusivity and the Meaning of Customers in the Non-Localized Alliance (collectively, the “2007 Side Letters”); (v) the Second Amendment to Development Alliance and Supply Agreement, dated July 18, 2008 (the “Second Amendment”); (vi) the Third Amendment to Development Alliance and Supply Agreement, dated December 8, 2009 (the “Third Agreement”); (vii) the Fourth Amendment to Development Alliance and Supply Agreement, effective as of May 1, 2010 (“Fourth Amendment”); and (viii) the Fifth Amendment to Development Alliance and Supply Agreement, effective as of August 1, 2010 (“Fifth Amendment”).
| II. |
DISTRIBUTION OF EXISTING DAUGHTER PRODUCTS |
A. Existing Daughter Products. Subject to the terms and conditions of the Amended Agreement, Biosense’s rights to Distribute worldwide the Existing Daughter Products on an exclusive basis are hereby extended through December 31, 2015 and thereafter on a
3
12-27-10
CONFIDENTIAL
nonexclusive basis through December 31, 2018.
B. Japan. Notwithstanding Section IIA above, Biosense’s exclusive rights to Distribute each of the Existing Daughter Products in Japan will be extended to the later of December 31, 2017 or five years after the date of approval of the applicable Existing Daughter Product for sale in Japan, and the non-exclusive rights to Distribute each of the Existing Daughter Products in Japan will be extended to the later of December 31, 2020 or eight years after the date of approval of the applicable Existing Daughter Product for sale in Japan.
C. Technical Solution. No later than twelve (12) months after execution of this Amendment, Stereotaxis will use reasonable commercial efforts to identify and implement an exclusive technical solution that represents added value for use of the Existing Daughter Products and New Daughter Product (for example, automation features that work specifically with the Existing Daughter Products and New Daughter Product).
4
12-27-10
CONFIDENTIAL
D. Ref patch. For the sake of clarity, Biosense’s ref patch products are excluded from and do not form part of the Amended Agreement.
| III. |
NEW DAUGHTER PRODUCT |
A. New Daughter Product. Biosense agrees to develop one Daughter Product based on its next generation irrigated catheter (“New Daughter Product”). The Parties will cooperate and make reasonable efforts to develop the New Daughter Product as soon as possible. To this end, the definition of the New Daughter Product will be determined as soon as is practicable by Biosense and Stereotaxis, taking design and cost inputs from both Parties. Biosense’s design effort on the New Daughter Product will commence no later than three (3) months following the US FDA PMA approval of the Biosense Thermocool Surround Flow catheter. For the sake of clarity, the Parties recognize and agree that Biosense has not agreed to nor is under any obligation to develop any additional catheter other than the New Daughter Product.
B. Development Costs. [***] Biosense shall keep Stereotaxis informed of the progress of development by means of periodic reports no less frequently than once per quarter, and provide Stereotaxis, at least quarterly, with a reasonably detailed written explanation of the reasons for any costs that exceed the estimated budget, and give Stereotaxis ninety (90) days advance written notice of any costs exceeding twenty percent (20%) variance above the agreed-upon budget.
C. New Daughter Product Distribution Rights. Subject to the terms and conditions of the Amended Agreement, Biosense shall have exclusive, world-wide rights to Distribute the New Daughter Product through December 31 of the year in which the fifth anniversary of the US FDA approval for sale of the New Daughter Product occurs and non-exclusive rights to manufacture and Distribute the New Daughter Product pursuant to the Amended Agreement through December 31 of the year in which the eighth anniversary of the US FDA approval for sale of the New Daughter Product occurs. As a means to illustrate the above provisions by way of a non-binding example, if Biosense receives US FDA approval for sale of the New Daughter Product on 30 July 2011, Biosense would then have the exclusive, world-wide rights to Distribute the New Daughter Product until 31 December 2016.
D. Revenue Share. The Revenue Share to be paid by Biosense to Stereotaxis for all sales of the New Daughter Product will be [***].
E. Incorporation in Existing Agreement. Subject to the provisions of this Amendment, upon the mutually agreed to definition of the New Daughter Product (if applicable) and receipt by Biosense of a signed letter agreement and purchase order from Stereotaxis to initiate the development program, the New Daughter Product shall be deemed to be a Daughter Product as such term is used in the Existing Agreements. For
5
12-27-10
[*** Indicates portions of this exhibit that have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.]
CONFIDENTIAL
the sake of clarity, in the event of conflict between the provisions of this Amendment and the Existing Agreements as they relate to the New Daughter Product, this Amendment will control.
| IV. |
REGULATORY MATTERS |
A. Application to the FDA for AF Labeling. Upon execution of this Amendment, Biosense will commence the process of applying for approval of AF labeling of Biosense’s NaviStar Thermocool RMT product in the US and will make commercially reasonable efforts to submit and pursue the application as soon as is commercially reasonable. The cost associated with this application, including any clinical trials required to support the application should it be deemed necessary, [***].
B. U.S. 510K and/or PMA Clearance/Approval. Biosense will be responsible for obtaining US FDA 510(k) Clearance or, where applicable, US FDA PMA approval for mutually agreed modifications to the Compatible CARTO System as well as to the New Daughter Product. [***] The Parties agree to fully cooperate and coordinate their activities in order to achieve the most expeditious regulatory mechanisms reasonably available.
C. Regulatory Matters in Japan. Biosense will evaluate the feasibility of obtaining applicable regulatory approvals for the Existing Daughter Products in Japan without need for additional clinical data. Biosense will seek [***] should additional clinical data not be required, for all Existing Daughter Products unless mutually agreed between the Parties. Biosense will make commercially reasonable efforts to submit and pursue the application for regulatory approval in Japan as soon as is commercially reasonable. In the event Biosense obtains regulatory approval for some or all of the Existing Daughter Products in Japan, Biosense’s distribution rights in Japan will be extended on a product by product basis as set out in Section II (B) above.
If additional clinical data is required for one or more of the Existing Daughter Products, Stereotaxis may recommend that the Parties will pursue regulatory clearance in Japan for those products and the Parties will discuss the feasibility of obtaining such additional clinical data as well as pursuing regulatory clearance in Japan for those products. In the event the Parties agree to obtain additional clinical data and/or pursue regulatory clearance in Japan for one or more of the Existing Daughter Products, Stereotaxis will be responsible for all costs consistent with the terms of the R&D Side Letter. In the event Biosense obtains regulatory approval for some or all of the Existing Daughter Products in Japan, Biosense’s distribution rights in Japan will be extended on a product by product basis as set out in Section II (B) above.
D. New Daughter Product Regulatory approvals. Biosense shall take all reasonable actions necessary to obtain applicable regulatory approvals to sell the New Daughter Product subject to the direction of the Steering Committee [***].
6
12-27-10
[*** Indicates portions of this exhibit that have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.]
CONFIDENTIAL
E. For the sake of clarity, Sections IV A through D above are in addition and shall in no way replace Section 9 of the Master Collaboration Agreement, as amended by the Existing Agreement, if applicable.
| V. |
MANUFACTURING AND SUPPLY; MARKETING AND DISTRIBUTION |
| A. |
Supply of Existing Daughter Products and New Daughter Product. |
Biosense will utilize such inventory control and management policies in respect of Existing Daughter Products and, upon commercialization of the New Daughter Product (if applicable), the New Daughter Product as are used in the rest of its interventional devices business and will accordingly maintain levels of inventory and parts for Existing Daughter Products and, upon commercialization of the New Daughter Product (if applicable), the New Daughter Product relative to forecast demand agreed by the Steering Committee that are no lower than for such other interventional devices.
| VI. |
REVENUE SHARE |
A. Existing Daughter Products. The Revenue Share for Existing Daughter Products will be calculated in the same manner as currently calculated under the Existing Agreements until December 31, 2011. Commencing January 1, 2012 and continuing until the last date of Biosense’s distribution rights pursuant to Section IIA or IIB, as applicable, the Revenue Share to be paid by Biosense to Stereotaxis will be [***].
| VII. |
LICENSE GRANTS |
A. Licenses Granted to Stereotaxis. Subject to the terms and conditions of the Amended Agreement and except as excluded in Section VIIIG, Biosense hereby grants to Stereotaxis a limited, non-exclusive, worldwide, non-transferable, license under Biosense’s Intellectual Property Rights in and to such Biosense IP solely for the purpose of giving effect to the terms of this Amendment.
B. Licenses Granted to Biosense. Subject to the terms and conditions of the Amended Agreement and except as excluded in Section VIIIH, Stereotaxis hereby grants to Biosense a limited, non-exclusive, worldwide, non-transferable, license under Stereotaxis’ Intellectual Property Rights in and to such Stereotaxis IP solely for the purpose of giving effect to the terms of this Amendment.
| VIII. |
EXCLUSIVITY |
This Amendment supersedes and replaces Section 2.3 of the Master Collaboration Agreement, Section 6.1, 6.2 and 6.3 of the First Amendment, Section 5(i) of the Alliance Expansion Agreement, the May 4,
7
12-27-10
[*** Indicates portions of this exhibit that have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.]
CONFIDENTIAL
2007 Side Letter entitled ‘Amendment Regarding Certain Exclusivity’ and notwithstanding any provision in the Existing Agreements to the contrary, the Parties agree as follows:
8
12-27-10
[*** Indicates portions of this exhibit that have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.]
CONFIDENTIAL
A. Exclusive Period. For the purposes of this Section VIII, the ‘Exclusive Period’ means with respect to (i) the Existing Daughter Products (excluding Japan), December 31, 2015, (ii) the Existing Daughter Products in Japan, the later of December 31, 2017 or five years after the date of approval of the applicable Existing Daughter Product for sale in Japan, (iii) the New Daughter Product (provided, for the purposes of this definition only, the New Daughter Product means any magnetic irrigated ablation catheter) defined pursuant to Section IIIA) , December 31 of the year in which the fifth anniversary of the US FDA approval for sale of the New Daughter Product occurs, as applicable.
B. Catheter Exclusivity. During the Exclusive Period applicable to the respective Existing Daughter Products and New Daughter Product pursuant to Section VIIIA, except as provided otherwise in this Section VIIIB and Sections VIIIE (1) (a) and (b), Stereotaxis will not directly or through a third party, commercialize or promote sales of magnetic electrophysiology mapping or ablation catheters (‘Catheter Exclusivity’). This restriction will not apply (i) if Biosense directly or through a third party commercializes, or promotes sales of ablation catheters specifically designed to work with a robotic or magnetic navigation system other than the Stereotaxis NIOBE System, or (ii) if, as a matter of corporate or sales and marketing strategy, Biosense unfavorably presents the Stereotaxis NIOBE System or the Existing Daughter Products or New Daughter Product used with the Stereotaxis NIOBE System.
C. System Exclusivity. Until December 31 of the year in which the fifth anniversary of the US FDA approval for sale of the New Daughter Product occurs, or December 31, 2015, whichever is later, Stereotaxis will not directly or through a third party commercialize, or promote sales of any data exchange interface to another 3D mapping system except Biosense’s CARTO System (‘System Exclusivity’). This restriction will not apply (i) if Biosense directly or through a third party, commercializes or, as a matter of corporate strategy, promotes sales of any interface to a robotic or magnetic navigation system other than Stereotaxis NIOBE System, or (ii) if, as a matter of corporate or sales and marketing strategy, Biosense unfavorably presents the Stereotaxis NIOBE System or the Existing Daughter Products or New Daughter Product used with the Stereotaxis NIOBE System.
D. Catheter and System Exclusivity Independent. Catheter Exclusivity and System Exclusivity are independent from each other such that in the event Stereotaxis is no longer under the obligation of Catheter Exclusivity in accordance with the provisions of this Amendment, this shall in no way relieve Stereotaxis of its obligations of System Exclusivity pursuant to Section VIIIC and vice versa.
E. Exceptions to Catheter Exclusivity.
1. The Parties agree, notwithstanding anything to the contrary in Section VIIIB:
9
12-27-10
[*** Indicates portions of this exhibit that have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.]
CONFIDENTIAL
a. Stereotaxis has the right, itself or with third parties (who are not Restricted Parties) to research, develop, test, manufacture, and seek
10
12-27-10
[*** Indicates portions of this exhibit that have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.]
CONFIDENTIAL
regulatory approval for devices for use with the Stereotaxis NIOBE System, including, without limitation, magnetic irrigated RF ablation catheters; provided however, Stereotaxis may not sell or Distribute any magnetic ablation catheter developed by Stereotaxis as provided in this Section VIIIE (i) (a) (“Stereotaxis Magnetic Ablation Catheter”) until the expiration of Biosense’s exclusive rights to Distribute the Existing Daughter Products or New Daughter Product, respectively, provided the applicable Stereotaxis Magnetic Ablation Catheter either (i) serves an equivalent or substantially similar function to the Existing Daughter Products or New Daughter Product, as applicable or (ii) competes with the Existing Daughter Products or New Daughter Product as applicable.
b. Notwithstanding Section VIIIE (1)(a) above, Stereotaxis will have the right to research, develop, test, manufacture, seek regulatory approval for, conduct Marketing and Promotions activities, sell or Distribute itself or through any third party (whether or not a Restricted Party) an equivalent or substantially similar product or competing product to the applicable Existing Daughter Product, the New Daughter Product or the Additional Magnetic Catheter (as defined below) if (i) Biosense does not develop, manufacture, or Distribute an Existing Daughter Product or the New Daughter Product, as applicable or, fails to pursue regulatory approval for an applicable Existing Daughter Product or New Daughter Product, in a jurisdiction where Stereotaxis is promoting or selling the Stereotaxis NIOBE System (Stereotaxis’ aforementioned rights to conduct Marketing and Promotions activities, sell or Distribute will only extend to such jurisdiction(s)), or (ii) if the distribution of any Existing Daughter Product or the New Daughter Product, as applicable, is terminated or materially interrupted for more than six months (Stereotaxis’ aforementioned rights to conduct Marketing and Promotions activities, sell or Distribute will only extend to an equivalent or substantially similar product or competing product to the Existing Daughter Product or the New Daughter Product of which distribution by Biosense has been terminated or materially interrupted, as applicable) , or (iii) if Biosense does not develop, manufacture, Distribute or fails to pursue regulatory approval for an additional magnetic catheter that has been nominated by Stereotaxis in accordance with the Existing Agreements (the “Additional Magnetic Catheter”) (Stereotaxis’ aforementioned rights to conduct Marketing and Promotions activities, sell or Distribute will only extend to an equivalent or substantially similar product or competing product to the Additional Magnetic Catheter). For the avoidance of doubt, a “material interruption” shall not be deemed to have occurred unless Biosense fails to fill more than fifty percent 50% of the global forecast demand agreed by the Steering Committee for a period of six (6) consecutive months. In the event of a material interruption as per Section VIIIE (1)(b)(ii) above, the Parties will negotiate in good faith the terms and conditions pursuant to which Biosense shall continue to Distribute the Existing Daughter Product or the
11
12-27-10
CONFIDENTIAL
New Daughter Product, as applicable, once the material interruption has been corrected by Biosense.
F. Permitted Activities Regarding System. For the sake of clarity, subject to Section VIIIC, nothing in the Amended Agreement is intended to prevent either Party from engaging in research, development, testing, manufacturing or seeking regulatory approval itself or with any third party with respect to any data exchange interface for any 3D mapping system. Further, nothing in the Amended Agreement is intended to prevent either Party from responding to any customer requests for support.
G. No use of Biosense IP. Notwithstanding any provision in the Amended Agreement to the contrary, the licenses granted to Stereotaxis under Biosense IP do not extend to the activities permitted under Sections VIIIE (1) (a) and (b) as well as Section VIIIF above. Biosense and Stereotaxis each agree that Biosense has a legitimate business interest in maintaining the protection and/or confidentiality of Biosense IP. Accordingly, in the event Stereotaxis breaches this Section VIIIG, in addition and without prejudice to any right or remedy Biosense may have under this Amended Agreement or in law, equity or otherwise, Biosense may suffer irreparable harm and will be entitled to seek injunctive relief to enforce this Section VIIIG.
H. No use of Stereotaxis IP. Notwithstanding any provision in the Amended Agreement to the contrary, the licenses granted to Biosense under Stereotaxis IP do not extend to the activities permitted under Section VIIIF above. Biosense and Stereotaxis each agree that Stereotaxis has a legitimate business interest in maintaining the protection and/or confidentiality of Stereotaxis IP. Accordingly, in the event Biosense breaches this Section VIIIH, in addition and without prejudice to any right or remedy Stereotaxis may have under the Amended Agreement or in law, equity or otherwise, Stereotaxis may suffer irreparable harm and will be entitled to seek injunctive relief to enforce this Section VIIIH.
| IX. |
REPRESENTATIONS AND WARRANTIES |
A. General. Each of the Parties represents and warrants that:
1. it has full power to enter into this Amendment and to perform its obligations hereunder; and
2. it has obtained all necessary corporate approvals to enter into and execute this Amendment;
| X. |
CHANGE OF CONTROL |
A. Change of Control. Section 14.2.2 of the Master Collaboration Agreement is deleted in its entirety and the following is substituted therefor:
12
12-27-10
CONFIDENTIAL
14.2.2(a) Change of Control to Restricted Party. In the event of a Change of Control of Stereotaxis to a Restricted Party, either Party (or in the case of Stereotaxis, its successor) may terminate the Amended Agreement effective upon written notice to the other Party within ninety (90) days of the Change of Control becoming effective, and in such event, the termination shall become effective one year after the Change of Control. In the event that either Party exercises its right under this Section 14.2.2(a), then Stereotaxis (or its successor) will pay a one-time cash termination fee to Biosense of five percent (5%) of the total equity valuation of Stereotaxis in the Change of Control transaction, up to a maximum of Ten Million Dollars (US) ($10,000,000).
14.2.2(b) Change of Control Following AF Labeling. In the event of a Change of Control of Stereotaxis to any third party, if Biosense has received approval from the US FDA for AF labeling of the Navistar Thermocool RMT Daughter Product by the date of such Change of Control, then Stereotaxis (or its successor) will pay Ten Million Dollars (US) ($10,000,000) to Biosense within sixty (60) days of the date of such Change of Control. In the event of a Change of Control as described in this Section 14.2.2(b) to a Restricted Party, either Party or its successor shall have the option to terminate the Amended Agreement effective upon written notice to the other Party within ninety (90) days of the Change of Control becoming effective, and in such event, the termination shall become effective two years after the Change of Control. For the avoidance of doubt, this payment will be in addition to the payment Stereotaxis is obliged to make to Biosense pursuant to Section 14.2.2(a) above, if applicable. For the sake of clarity, if Biosense has applied for and is in the process of seeking approval from the US FDA for AF labeling of the Navistar Thermocool RMT Daughter Product but has not yet received approval from the US FDA by the date of such Change of Control, then Biosense shall have the right, in its absolute discretion, not to pursue approval for AF labeling of the Navistar Thermocool RMT Daughter Product without any liability to Stereotaxis (or its successor).
B. Definition of Change of Control. Section 1.2.16 of the Existing Agreements is deleted in its entirety and the following is substituted therefor:
1.2.16 “Change of Control” of Stereotaxis shall mean (i) the liquidation or dissolution of Stereotaxis or the sale or other transfer by Stereotaxis (excluding transfers to subsidiaries) of all or substantially all of its assets; or (ii) the occurrence of a tender offer, stock purchase, other stock acquisition, merger, consolidation, recapitalization, reverse split, sale or transfer of assets or other transaction, as a result of which any person, entity or group (a) becomes the beneficial owner, directly or indirectly, of securities of Stereotaxis representing more than 50% of the ordinary shares of Stereotaxis or representing more than 50% of the combined voting power with respect to the election of directors (or members of any other governing body) of Stereotaxis’s then outstanding securities, (b) obtains the ability to appoint a majority of the Board of Directors
13
12-27-10
CONFIDENTIAL
(or other governing body) of Stereotaxis, or obtains the ability to direct the operations or management of Stereotaxis or any successor to Stereotaxis’s business; provided, however, that Change in Control shall not include the issuance by Stereotaxis of equity to the public through a public offering or offerings.
| XI. |
ENTIRE AGREEMENT |
This Amended Agreement sets forth the entire agreement and understanding between the Parties as to the subject matter hereof and merges all prior discussions and writings between them, and neither of the Parties will be bound by any conditions, definitions, warranties, understandings or representations with respect to such subject matter other than as expressly provided herein or as duly set forth on or subsequent to the Effective Date in writing and signed by a proper and duly authorized representative of the Party to be bound thereby. No provision appearing on any form originated by either Party will be applicable unless such provision is expressly accepted in writing by the other Party.
| XII. |
TERM |
The Term of the Amended Agreement shall continue until the last date of expiration of Biosense’s non-exclusive distribution rights hereunder or until terminated pursuant to the terms of the Amended Agreement, provided, however, that terms and conditions of the Amended Agreement that are subject to a specific expiration or termination date shall expire or terminate on such date and those terms and conditions of the Amended Agreement that survive expiration or termination, including, but not limited to Section 11 of the First Amendment, shall survive expiration or termination of the Amended Agreement. The Parties agree that Section 5(ii) of the Alliance Expansion Agreement is deleted.
IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be signed by duly authorized officers or representatives.
| STEREOTAXIS, INC. |
BIOSENSE WEBSTER, INC. | |||||||
| By: |
/s/ Michael P. Kaminski |
By: |
/s/ Shlomi Nachman | |||||
| Print Name: |
Michael P. Kaminski |
Print Name: |
Shlomi Nachman | |||||
| Title: |
CEO |
Title: |
Worldwide President | |||||
| Date: |
1-3-11 |
Date: |
12/31/10 | |||||
14
12-27-10
CONFIDENTIAL
SCHEDULE A
Existing Daughter Products
NAVISTAR® RMT THERMOCOOL
CELSIUS® RMT THERMOCOOL
NAVISTAR® RMT
CELSIUS® RMT
NAVISTAR® RMT DS
15
12-27-10
Exhibit 10.19b
SECOND LOAN MODIFICATION AGREEMENT (DOMESTIC)
This Second Loan Modification Agreement (Domestic) (this “Loan Modification Agreement”) is entered into as of December 17, 2010 (the “Second Loan Modification (Domestic) Effective Date”), by and between SILICON VALLEY BANK, a California corporation, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at 380 Interlocken Crescent, Suite 600, Broomfield, Colorado 80021(“Bank”), STEREOTAXIS, INC., a Delaware corporation (“Stereotaxis”), and STEREOTAXIS INTERNATIONAL, INC., a Delaware limited liability company, each with offices located at 4320 Forest Park Avenue, Suite 100, St. Louis, Missouri 63108 (“International”, and together with Stereotaxis, individually and collectively, jointly and severally, “Borrower”).
1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of March 11, 2009, evidenced by, among other documents, a certain Loan and Security Agreement dated as of March 11, 2009, as amended by a certain First Loan Modification Agreement (Domestic), dated as of December 15, 2009 (as may be amended from time to time, the “Loan Agreement”) and a certain Export-Import Bank Loan and Security Agreement, dated as of March 11, 2009, as amended by a certain Export-Import First Loan Modification Agreement, dated as of December 15, 2009 (as may be amended from time to time, the “EXIM Bank Loan and Security Agreement”), in each case between Borrower and Bank. Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.
2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement and the EXIM Bank Loan and Security Agreement (together with any other collateral security granted to Bank, the “Security Documents”).
Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.
3. DESCRIPTION OF CHANGE IN TERMS.
| A. |
Modifications to Loan Agreement. |
| 1 |
The Loan Agreement shall be amended by inserting the following new Section 2.1.7 immediately following Section 2.1.6 thereof: |
| “2.1.7 |
Term Loan 2010. |
(a) Availability. Bank shall make one (1) term loan available to Borrower in an amount up to the Term Loan 2010 Amount on or before December 31, 2010, subject to the satisfaction of the terms and conditions of this Agreement.
(b) Repayment. Commencing on the first day of the month following the month in which the Funding Date of the Term Loan 2010 occurs and thereafter on the first day of each successive calendar month until the Term Loan 2010 is paid in full, Borrower shall make monthly payments of interest in arrears with respect to the Term Loan 2010. Commencing on July 1, 2011 and thereafter on the first day of each successive calendar month until the Term Loan 2010 is paid in full, Borrower shall repay the principal amount of the Term Loan 2010 in thirty (30) equal installments of Three Hundred Thirty Three Thousand, Three Hundred Thirty Three and 34/100 Dollars ($333,333.34) (each payment of principal and/or interest being a “Term Loan Payment”). Each Term Loan 2010 Payment shall be payable on the first day of each month. Borrower’s final Term Loan 2010 Payment, due on the Term Loan 2010 Maturity Date, shall include all outstanding principal and accrued and unpaid interest under the Term Loan 2010. Once repaid, the Term Loan 2010 may not be reborrowed.
1
(c) Prepayment. The Term Loan 2010 may be prepaid, in whole or in part prior to the Term Loan 2010 Maturity Date by Borrower, effective three (3) Business Days after written notice of such prepayment is given to Bank. Notwithstanding any such prepayment, Bank’s lien and security interest in the Collateral shall continue until Borrower fully satisfies all Obligations. If such prepayment is at Borrower’s election or at Bank’s election due to the occurrence and continuance of an Event of Default, Borrower shall pay to Bank, in addition to the payment of any other expenses or fees then-owing, a prepayment premium in an amount equal to (i) if such prepayment occurs on or prior to the date that is three hundred sixty five (365) days after the Second Loan Modification (Domestic) Effective Date (the “First Anniversary”), Three Hundred Thousand Dollars ($300,000) (i.e. three percent (3.00%) of Ten Million Dollars ($10,000,000)); (ii) if such prepayment occurs (X) after the First Anniversary and (Y) on or prior to the date that is three hundred sixty five (365) days after the First Anniversary (the “Second Anniversary”), Two Hundred Thousand Dollars ($200,000) (i.e. two percent (2.00%) of Ten Million Dollars ($10,000,000)); and (iii) if such prepayment occurs (X) after the Second Anniversary and (Y) on or prior to the date that is three hundred sixty five (365) days from the Second Anniversary, One Hundred Thousand Dollars ($100,000) (i.e. one percent (1.00% of Ten Million Dollars ($10,000,000); provided that no prepayment premium shall be charged if the Term Loan 2010 is replaced with a new facility from Bank or another division of Silicon Valley Bank. Upon payment in full of the Obligations and at such time as Bank’s obligation to make Credit Extensions has terminated, Bank shall terminate and release its liens and security interests in the Collateral and all rights therein shall revert to Borrower.”
| 2 |
The Loan Agreement shall be amended by deleting the following text appearing as Section 2.3(a) thereof: |
“(a) Interest Rate.
(i) Advances. Subject to Section 2.3(b), the principal amount outstanding under the Revolving Line (other than Guaranteed Advances) shall accrue interest at a floating per annum rate equal to the greater of (X) the aggregate of the Prime Rate plus one and three-fourths of one percent (1.75%) and (Y) seven percent (7.00%), which interest shall be payable monthly, in arrears, in accordance with Section 2.3(f) below.
(ii) Guaranteed Advances. Subject to Section 2.3(b), the principal amount outstanding under the Guaranteed Line shall accrue interest at a floating per annum rate equal to the greater of (X) the aggregate of the Prime Rate plus one-half of one percent (0.50%) and (Y) six percent (6.00%).
(iii) Equipment Loan. Subject to Section 2.3(b), the principal amount outstanding under the Equipment Loan shall accrue interest at a floating per annum rate equal to the greater of (X) the aggregate of the Prime Rate plus one percent (1.00%) and (Y) seven percent (7.00%), which interest shall be payable monthly in accordance with Section 2.3(f) below.”
and inserting in lieu thereof the following:
| “(a) |
Interest Rate. |
(i) Advances. Subject to Section 2.3(b), the principal amount outstanding under the Revolving Line (other than Guaranteed Advances) shall accrue interest at a floating per annum rate equal to the greater of (X) the aggregate of
2
the Prime Rate plus one and three-fourths of one percent (1.75%) and (Y) seven percent (7.00%), which interest shall be payable monthly, in arrears, in accordance with Section 2.3(f) below.
(ii) Guaranteed Advances. Subject to Section 2.3(b), the principal amount outstanding the Guaranteed Line shall accrue interest at a floating per annum rate equal to the greater of (X) the aggregate of the Prime Rate plus one-half of one percent (0.50%) and (Y) six percent (6.00%).
(iii) [Intentionally omitted.]
(iv) Term Loan 2010. Subject to Section 2.3(b), the principal amount outstanding under the Term Loan 2010 shall accrue interest at a floating per annum rate equal to the Prime Rate plus three and one-half of one percent (3.50%), which interest shall be payable monthly in accordance with Section 2.1.7(b) above.”
| 3 |
The Loan Agreement shall be amended by deleting the following text appearing as Section 2.4(c) thereof: |
“(c) Termination Fee. Subject to the terms of Section 12.1, a termination fee;”
and inserting in lieu thereof the following:
“(c) Termination Fee. Subject to (i) the terms of Section 12.1 with respect to the Revolving Line and (ii) the terms of Section 2.1.7(c) with respect to the Term Loan 2010, a termination/prepayment fee.”
| 4 |
The Loan Agreement shall be amended by deleting the following text appearing as Section 6.6 thereof: |
“6.6 Access to Collateral; Books and Records. At reasonable times, on one (1) Business Day’s notice (provided no notice is required if an Event of Default has occurred and is continuing), Bank, or its agents, shall have the right, on a semi-annual basis (or more frequently as Bank shall determine necessary), to inspect the Collateral and the right to audit and copy Borrower’s Books. The foregoing inspections and audits shall be at Borrower’s expense, and the charge therefor shall be $1,000 per person per day (or such higher amount as shall represent Bank’s then-current standard charge for the same), plus reasonable out-of-pocket expenses. In the event Borrower and Bank schedule an audit more than ten (10) days in advance, and Borrower cancels or seeks to reschedules the audit with less than ten (10) days written notice to Bank, then (without limiting any of Bank’s rights or remedies), Borrower shall pay Bank a fee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensate Bank for the anticipated costs and expenses of the cancellation or rescheduling.”
and inserting in lieu thereof the following:
“6.6 Access to Collateral; Books and Records. At reasonable times, on one (1) Business Day’s notice (provided no notice is required if an Event of Default has occurred and is continuing), Bank, or its agents, shall have the right, on a semi-annual basis (or more frequently as Bank shall determine necessary), to inspect the Collateral and the right to audit and copy Borrower’s Books. The foregoing inspections and audits shall be at Borrower’s expense, and the charge therefor shall be $850 per person per day (or such higher amount as shall
3
represent Bank’s then-current standard charge for the same), plus reasonable out-of-pocket expenses. In the event Borrower and Bank schedule an audit more than ten (10) days in advance, and Borrower cancels or seeks to reschedule the audit with less than ten (10) days written notice to Bank, then (without limiting any of Bank’s rights or remedies), Borrower shall pay Bank a fee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensate Bank for the anticipated costs and expenses of the cancellation or rescheduling.”
| 5 |
The Loan Agreement shall be amended by deleting the following text appearing as Section 6.9 thereof: |
“6.9 Financial Covenant.
Borrower shall maintain at all times, to be tested as of the last day of each month:
(a) Tangible Net Worth. Borrower shall maintain a minimum Tangible Net Worth of no less than (i) $1.00 for the monthly periods ending February 28, 2009 and March 31, 2009; (ii) ($3,000,000) for the monthly periods ending April 30, 2009, May 31, 2009 and June 30, 2009; (iii) ($8,000,000) for the monthly periods ending July 31, 2009 and August 31, 2009; (iv) ($6,500,000) for the monthly period ending September 30, 2009; (v) $3,903,001for the monthly periods ending October 31, 2009 through and including August 31, 2010; (vi) $1,903,000 for the monthly periods ending September 30, 2010 through and including the monthly period ending November 30, 2010; and (vii) ($97,000) for the monthly period ending December 31, 2010 and each monthly period thereafter provided further, that in the event that Guaranteed Advances are no longer available under the Guaranteed Line, the foregoing covenant levels shall be adjusted by Bank, in its good faith business judgment. Such Tangible Net Worth requirements set forth above shall be increased by fifty percent (50%) of the net proceeds from issuances of equity securities of the Borrower and/or Subordinated Debt issued after the First Loan Modification Effective Date (Domestic).”
and inserting in lieu thereof the following:
“6.9 Financial Covenants.
Maintain as of the last day of each month, unless otherwise noted:
(a) Tangible Net Worth. Borrower shall maintain a minimum Tangible Net Worth of no less than the amounts described on Exhibit A to the Second Loan Modification Agreement (Domestic).
(b) Liquidity Ratio. Borrower shall maintain (i) at all times during the months of January, February, April, May, July, August, October and November of each fiscal year, a Liquidity Ratio of not less than 1.50:1.00; and (ii) at all times during the months of March, June, September and December of each fiscal year, a Liquidity Ratio of not less than 1.25:1.00.”
| 6 |
The Loan Agreement shall be amended by deleting the following text appearing as Section 12.1 thereof: |
“12.1 Termination Prior to Maturity Date. This Agreement may be terminated prior to the Revolving Line Maturity Date by Borrower, effective three (3) Business Days after written notice of termination is given to Bank or if Bank’s obligation to fund Credit Extensions terminates pursuant to the terms of Section 2.1.1(b). Notwithstanding any such termination, Bank’s lien and security interest in the Collateral shall continue until Borrower fully satisfies its Obligations. If such termination is at Borrower’s election or at Bank’s election
4
due to the occurrence and continuance of an Event of Default, Borrower shall pay to Bank, in addition to the payment of any other expenses or fees then-owing, a termination fee in an amount equal to one percent (1.00%) of the Revolving Line (i.e. Two Hundred Fifty Thousand Dollars ($250,000); provided, that no termination fee shall be charged if the credit facility hereunder is replaced with a new facility from another division of Silicon Valley Bank. Upon payment in full of the Obligations and at such time as Bank’s obligation to make Credit Extensions has terminated, Bank shall release its liens and security interests in the Collateral and all rights therein shall revert to Borrower.”
and inserting in lieu thereof the following:
“12.1 Termination Prior to Maturity Date. This Agreement may be terminated prior to the Revolving Line Maturity Date by Borrower, effective three (3) Business Days after written notice of termination is given to Bank or if Bank’s obligation to fund Credit Extensions terminates pursuant to the terms of Section 2.1.1(b). Notwithstanding any such termination, Bank’s lien and security interest in the Collateral shall continue until Borrower fully satisfies its Obligations. If such termination is at Borrower’s election or at Bank’s election due to the occurrence and continuance of an Event of Default, Borrower shall pay to Bank, in addition to the payment of any other expenses or fees then-owing, a termination fee in an amount equal to Three Hundred Thousand Dollars ($300,000) (i.e. one percent (1.00%) of Thirty Million Dollars ($30,000,000)); provided, that no termination fee shall be charged if the credit facility hereunder is replaced with a new facility from another division of Silicon Valley Bank. Upon payment in full of the Obligations and at such time as Bank’s obligation to make Credit Extensions has terminated, Bank shall release its liens and security interests in the Collateral and all rights therein shall revert to Borrower.”
| 7 |
The Loan Agreement shall be amended by inserting the following definitions to Section 13.1 thereof, each in its appropriate alphabetical order: |
“Eligible Unbilled Accounts” are Accounts for which the Account Debtor has not been invoiced or where goods or services have not yet been rendered to the Account Debtor but are otherwise Eligible Accounts that are billed and for which goods and services will have been rendered to the applicable Account Debtor within fifteen (15) days of the Funding Date of the applicable Borrowing Base Certificate and which must thereafter satisfy all of the requirements of Eligible Accounts.
“Liquidity Ratio” is, as of any date of measurement, (X) the sum of (i) Borrower’s unrestricted cash at Bank plus (ii) Borrower’s net billed accounts receivable plus (iii) the unused available amount under the Guaranteed Line; divided by (Y) total outstanding Obligations of Borrower owed to Bank.
“Second Loan Modification Agreement” is that certain Second Loan Modification Agreement (Domestic), by and between Borrower and Bank, dated as of the Second Loan Modification (Domestic) Effective Date.
“Second Loan Modification (Domestic) Effective Date” is defined in the preamble to the Second Loan Modification Agreement (Domestic).
“Term Loan 2010” is a loan made by Bank pursuant to the terms of Section 2.1.7 hereof.
“Term Loan 2010 Amount” is an aggregate amount equal to Ten Million Dollars ($10,000,000) outstanding at any time.
“Term Loan 2010 Maturity Date” is the earliest of (a) December 31, 2013 or (b) the occurrence of an Event of Default.
5
“Term Loan 2010 Payment” is defined in Section 2.1.7(b).
| 8 |
The Loan Agreement shall be amended by deleting the following definitions from Section 13.1 thereof, each in its entirety: |
““Borrowing Base” is (a) eighty percent (80%) of Eligible Accounts plus (b) the lesser of (i) forty percent (40%) of the value of Borrower’s Eligible Inventory (valued at the lower of cost or wholesale fair market value) or (ii) One Million Dollars ($1,000,000), as determined by Bank from Borrower’s most recent Borrowing Base Certificate; provided, however, that Bank may decrease the foregoing amounts and/or percentages in its good faith business judgment based on events, conditions, contingencies, or risks which, as determined by Bank, may adversely affect the value of the Collateral.
“Credit Extension” is any Advance, Guaranteed Advance, Letter of Credit, Equipment Loan, EXIM Loan, FX Forward Contract, amount utilized for Cash Management Services, or any other extension of credit by Bank for Borrower’s benefit.
“Revolving Line Maturity Date” is March 31, 2011.
“Streamline Period” is, on and after the Effective Date, the period (i) beginning immediately after the forty-fifth (45th) consecutive day in which the Borrower has, for each such consecutive day, maintained unrestricted cash at Bank, in an amount greater than the aggregate amount of all outstanding Indebtedness, including all Credit Extensions of Borrower owed to Bank, other than any outstanding Guaranteed Advances under the Guaranteed Line that are secured by the Alafi Letter of Credit (the “Streamline Balance”), and (ii) ending on the first day thereafter in which the Borrower does not maintain the Streamline Balance. Borrower shall be required to maintain the Streamline Balance for forty-five (45) consecutive days, in Bank’s reasonable business judgment, prior to entering into a subsequent Streamline Period. Borrower shall provide prior-written notice of its intention to enter into a Streamline Period.”
and inserting in lieu thereof the following:
““Borrowing Base” is (a) without duplication, eighty percent (80%) of Eligible Accounts plus (b) the lesser of (i) forty percent (40%) of the value of Borrower’s Eligible Inventory (valued at the lower of cost or wholesale fair market value) or (ii) One Million Dollars ($1,000,000) plus (c) from the 25th day of the third month of each fiscal quarter of the Borrower through and including the last day of each such fiscal quarter, without duplication, eighty percent (80%) of Borrower’s Eligible Unbilled Accounts, in each case as determined by Bank from Borrower’s most recent Borrowing Base Certificate; provided, however, that Bank may decrease the foregoing amounts and/or percentages in its good faith business judgment based on events, conditions, contingencies, or risks which, as determined by Bank, may adversely affect the value of the Collateral.
“Credit Extension” is any Advance, Guaranteed Advance, Letter of Credit, Term Loan 2010, EXIM Loan, FX Forward Contract, amount utilized for Cash Management Services, or any other extension of credit by Bank for Borrower’s benefit.
“Revolving Line Maturity Date” is March 31, 2012.
“Streamline Period” is, on and after the Second Loan Modification (Domestic) Effective Date, the period (i) beginning immediately after the forty-fifth (45th) consecutive day in which the Borrower has, for each such consecutive day,
6
maintained a Liquidity Ratio in excess of 1.50:1.00 (the “Streamline Threshold”), and (ii) ending on the first day thereafter in which the Borrower does not maintain the Streamline Threshold. Borrower shall be required to maintain the Streamline Threshold for forty-five (45) consecutive days, in Bank’s reasonable business judgment, prior to entering into a subsequent Streamline Period. Borrower shall provide prior-written notice of its intention to enter into a Streamline Period.”
| 9 |
The Compliance Certificate attached as Exhibit B to the Loan Agreement is hereby deleted and replaced with Exhibit A attached hereto. |
4. FEES. Borrower shall pay to Bank (i) a Term Loan 2010 commitment fee equal to Seventy Five Thousand Dollars ($75,000) and (ii) a modification fee equal to Three Hundred Seventy Five Thousand Dollars ($375,000), which fees shall be due on the date hereof and shall be deemed fully earned as of the date hereof. Borrower shall also reimburse Bank for all legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents.
5. CONDITIONS PRECEDENT. Borrower hereby agrees that the following documents shall be delivered to the Bank prior to or concurrently with the First Loan Modification Effective Date (Domestic), each in form and substance satisfactory to the Bank (collectively, the “Conditions Precedent”):
| A. |
copies, certified by a duly authorized officer of the Borrower to be true and complete as of the date hereof, of each of (i) the governing documents of the Borrower as in effect on the date hereof (but only to the extent modified since last delivered to the Bank (ii) the resolutions of the Borrower authorizing the execution and delivery of this Loan Modification Agreement, the other documents executed in connection herewith and the Borrower’s performance of all of the transactions contemplated hereby, and (iii) an incumbency certificate giving the name and bearing a specimen signature of each individual who shall be so authorized; |
| B. |
a certificate from the Secretary of State of the applicable State of organization of a recent date as to the Borrower’s existence and good standing; |
| C. |
the Export-Import Bank Second Loan Modification Agreement, executed by each Borrower, in form and substance acceptable to Bank, in its sole discretion; |
| D. |
the Borrower Agreement (as defined in the EXIM Bank Loan and Security Agreement), executed by each Borrower; |
| E. |
an updated Economic Impact Certificate, executed by each Borrower; |
| F. |
an updated Joint Application Form (EXIM), completed and executed by each Borrower; |
| G. |
a certain Second Amendment to Promissory Note, executed by each Borrower, in form and substance acceptable to Bank, in its sole discretion; |
| H. |
a duly executed Landlord’s Consent from the landlord of the Borrower’s leased premises located at 7351 Kirkwood Road, Maple Grove, Minnesota 55369, in form and substance acceptable to Bank, in its sole discretion; |
| I. |
duly executed Bailee’s Waivers from Pilot (Tiger Logistics) and Healthware Europe BV, in form and substance acceptable to Bank, in its sole discretion; |
| J. |
a duly executed Warrant, in form and substance acceptable to Bank, in its sole discretion; |
| K. |
updated property insurance and liability insurance certificates, in form and substance acceptable to Bank, in its sole discretion; |
7
| L. |
evidence satisfactory to Bank that Borrower has received and deposited at Bank net proceeds from (i) the issuance of additional equity of Borrower or (ii) the issuance of additional Subordinated Debt, in each case in form and substance acceptable to Bank, in its reasonable discretion, of not less than Ten Million Dollars ($10,000,000); |
| M. |
evidence satisfactory to Bank that the Alafi Letter of Credit has not been terminated; and |
| N. |
such other documents as Bank may request, in its reasonable discretion. |
6. ADDITIONAL COVENANTS. Borrower is not a party to, nor is bound by, any license or other agreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with the Bank’s right to sell any Collateral. Borrower shall provide written notice to Bank within ten (10) days of entering or becoming bound by any such license or agreement (other than over-the-counter software that is commercially available to the public). Borrower shall take such steps as Bank requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (x) all such licenses or contract rights to be deemed “Collateral” and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement (such consent or authorization may include a licensor’s agreement to a contingent assignment of the license to Bank if Bank determines that is necessary in its good faith judgment), whether now existing or entered into in the future, and (y) Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Bank’s rights and remedies under the Loan Agreement and the other Loan Documents. In addition, the Borrower hereby certifies that no Collateral is in the possession of any third party bailee (such as at a warehouse). In the event that Borrower, after the date hereof, intends to store or otherwise deliver the Collateral to such a bailee, then Borrower shall first receive, the prior written consent of Bank and such bailee must acknowledge in writing that the bailee is holding such Collateral for the benefit of Bank.
7. AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file UCC financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to further perfect or protect Bank’s interest in the Collateral, including a notice that any disposition of the Collateral, by either the Borrower or any other Person, shall be deemed to violate the rights of the Bank under the Code.
8. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.
9. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.
10. NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liability thereunder.
11. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement.
12. RIGHT OF SET-OFF. In consideration of Bank’s agreement to enter into this Loan Modification Agreement, Borrower hereby reaffirms and hereby grants to Bank, a lien, security interest and right of set off as
8
security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Silicon Valley Bank (including a Bank subsidiary) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
13. CONFIDENTIALITY. Bank may use confidential information for the development of databases, reporting purposes, and market analysis, so long as such confidential information is aggregated and anonymized prior to distribution unless otherwise expressly permitted by Borrower. The provisions of the immediately preceding sentence shall survive the termination of the Loan Agreement.
14. JURISDICTION/VENUE/TRIAL WAIVER. Borrower accepts for itself and in connection with its properties, unconditionally, the exclusive jurisdiction of any state or federal court of competent jurisdiction in the State of Illinois in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement. NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK’S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS LOAN MODIFICATION AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS LOAN MODIFICATION AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
15. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.
[The remainder of this page is intentionally left blank]
9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the State of Illinois as of the Second Loan Modification (Domestic) Effective Date.
BORROWER:
| BORROWER: | ||
| STEREOTAXIS, INC. | ||
| By |
/s/ Daniel J. Johnston | |
| Name: |
Daniel J. Johnston | |
| Title: |
CFO | |
| STEREOTAXIS INTERNATIONAL, INC. | ||
| By |
/s/ Daniel J. Johnston | |
| Name: |
Daniel J. Johnston | |
| Title: |
CFO | |
| BANK: | ||
| SILICON VALLEY BANK | ||
| By |
/s/ Michael Kohnen | |
| Name: |
Michael Kohnen | |
| Title: |
Senior Relationship Manager | |
Second Loan Modification (Domestic) Effective Date: December 17, 2010
Exhibit A
Section 6.9(a) - Tangible Net Worth
Required: Commencing on December 31, 2010 and as of the last day of each quarterly period thereafter, Borrower shall maintain a minimum Tangible Net Worth of no less than $5,870,710; provided, that such minimum Tangible Net Worth requirement shall, effective as of June 30, 2011, provided no Event of Default has occurred and is continuing, be reduced by Five Million Dollars ($5,000,000); provided further, that in the event that Guaranteed Advances are no longer available under the Guaranteed Line, the foregoing covenant levels shall be adjusted by Bank, in its good faith business judgment. Such Tangible Net Worth requirements set forth above shall be increased by fifty percent (50%) of the net proceeds from issuances of equity securities of the Borrower and/or Subordinated Debt issued after the Second Loan Modification (Domestic) Effective Date.
Actual:
| A. |
Consolidated total assets of Borrower and its Subsidiaries |
$ | ||
| B. |
Subordinated Debt |
$ | ||
| C. |
Outstanding Guaranteed Advances |
$ | ||
| D. |
Adjusted Assets [line A plus line B plus line C] |
$ | ||
| E. |
Amounts attributable to Goodwill |
$ | ||
| F. |
Intangible items including unamortized debt discount and expense, patents, trade and service marks and names, copyrights and capitalized research and development expenses (except prepaid expenses) |
$ | ||
| G. |
Notes, accounts receivable and other obligations owing to Borrower from its officers or other Affiliates |
$ | ||
| H. |
Reserves not already deducted from assets |
$ | ||
| I. |
Intangible assets [line E plus line F plus line G plus line H] |
$ | ||
| J. |
Total Liabilities |
$ | ||
| K. |
Up to $4,500,000 mark-to-market expense incurred in accordance with GAAP as a result of mark-to-market adjustments of the value of Warrants of the Borrower |
$ | ||
| L. |
TANGIBLE NET WORTH [line D minus line I minus line J plus line K] |
$ | ||
Is line L equal to or greater than (less than) $ ?
| No, not in compliance |
Yes, in compliance |
1
EXHIBIT B
COMPLIANCE CERTIFICATE
| TO: |
SILICON VALLEY BANK |
Date: | ||
| FROM: |
STEREOTAXIS, INC. and STEREOTAXIS INTERNATIONAL, INC. |
The undersigned authorized officer of Stereotaxis, Inc., a Delaware corporation and Stereotaxis International, Inc. (collectively, jointly and severally, the “Borrower”) certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the “Agreement”), (1) Borrower is in complete compliance for the period ending with all required covenants except as noted below, (2) there are no Events of Default, (3) all representations and warranties in the Agreement are true and correct in all material respects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, (4) Borrower, and each of its Subsidiaries, has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement, and (5) no Liens have been levied or claims made against Borrower or any of its Subsidiaries, if any, relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Bank. Attached are the required documents supporting the certification. The undersigned certifies that these are prepared in accordance with generally GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.
Please indicate compliance status by circling Yes/No under “Complies” column.
| Reporting Covenant | Required | Complies | ||
| Monthly financial statements with Compliance Certificate |
Monthly within 30 days |
Yes No | ||
|
Annual financial statement (CPA Audited) + CC |
FYE within120 days |
Yes No | ||
| 10-Q, 10-K and 8-K |
Within 5 days after filing with SEC |
Yes No | ||
|
A/R & A/P Agings, Deferred Revenue and Inventory Reports |
Monthly within 30 days |
Yes No | ||
| Transaction Reports |
Weekly, within 5 days* |
Yes No | ||
| Projections |
Annually within 30 days prior to FYE |
Yes No | ||
|
* Monthly during a Streamline Period, within 5 days after the end of each month
The following Intellectual Property was registered after the Effective Date (if no registrations, state “None”) | ||||
| Financial Covenant |
Required |
Actual |
Complies | |||
| Maintain as indicated: |
||||||
| Minimum Tangible Net Worth** (tested quarterly) |
$ |
$ |
Yes No | |||
| Liquidity Ratio (at all times) |
*** |
Yes No |
| ** |
See Section 6.9(a) and Exhibit A of the Loan Agreement |
2
| *** |
See Section 6.9(b) of the Loan Agreement |
3
The following financial covenant analyses and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.
The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)
| STEREOTAXIS, INC. |
BANK USE ONLY | |
| STEREOTAXIS INTERNATIONAL, INC. |
Received by: | |
|
AUTHORIZED SIGNER | ||
|
By: |
||
|
Name: |
Date: | |
|
Title: |
Verified: | |
| AUTHORIZED SIGNER | ||
| Date: _________________________ | ||
| Compliance Status: Yes No | ||
4
Schedule 1 to Compliance Certificate
Financial Covenants of Borrower
Dated:
I. Tangible Net Worth (Section 6.9(a)) – See Exhibit A to the Second Loan Modification Agreement (Domestic).
5
| II. |
Liquidity Ratio (Section 6.9(b)) |
Required: Maintain (i) at all times during the months of January, February, April, May, July, August, October and November of each fiscal year, a Liquidity Ratio of not less than 1.50:1.00; and (ii) at all times during the months of March, June, September and December of each fiscal year, a Liquidity Ratio of not less than 1.25:1.00.
Actual:
| A. |
Borrower’s unrestricted cash at Bank |
$ | ||
| B. |
Borrower’s net billed accounts receivable |
$ | ||
| C. |
the unused available amount under the Guaranteed Line |
$ | ||
| D. |
LIQUIDITY [line A plus line B plus line C] |
$ | ||
| E. |
Total outstanding Obligations of Borrower owed to Bank |
$ | ||
| F. |
LIQUIDITY RATIO [line D divided by line E] |
$ | ||
Is line L equal to or greater than [ ]:1.00?
| No, not in compliance |
Yes, in compliance |
1
Exhibit 10.20c
EXPORT-IMPORT BANK SECOND LOAN MODIFICATION AGREEMENT
This Export-Import Bank Second Loan Modification Agreement (this “EXIM Loan Modification Agreement”) is entered into as of the Second Loan Modification Effective Date (EXIM), by and between SILICON VALLEY BANK, a California corporation, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at 380 Interlocken Crescent, Suite 600, Broomfield, Colorado 80021(“Bank”), STEREOTAXIS, INC., a Delaware corporation (“Stereotaxis”), and STEREOTAXIS INTERNATIONAL, INC., a Delaware limited liability company, each with offices located at 4320 Forest Park Avenue, Suite 100, St. Louis, Missouri 63108 (“International”, and together with Stereotaxis, individually and collectively, jointly and severally, “Borrower”).
1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of March 11, 2009, evidenced by, among other documents, a certain Export-Import Bank Loan and Security Agreement dated as of March 11, 2009, as amended by a certain Export-Import Bank First Loan Modification Agreement, dated as of December 15, 2009 (as may be amended from time to time, the “Loan Agreement”) and a certain Loan and Security Agreement (Domestic), dated as of March 11, 2009, as amended by a certain First Loan Modification Agreement (Domestic), dated as of December 15, 2009, and as further amended by a certain Second Loan Modification Agreement (Domestic), dated as of the date hereof (as may be amended from time to time, the “Domestic Agreement”), in each case between Borrower and Bank. Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement and/or the Domestic Agreement, as applicable.
2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Domestic Agreement and the Loan Agreement (together with any other collateral security granted to Bank, the “Security Documents”).
Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.
3. DESCRIPTION OF CHANGE IN TERMS.
| A. | Modifications to Loan Agreement. |
| 1 | The Loan Agreement shall be amended by deleting the following definitions appearing in Section 13.1thereof: |
“Revolving Line Maturity Date” is March 31, 2011.”
and inserting in lieu thereof the following:
“Revolving Line Maturity Date” is March 31, 2012.”
| 2 | The Loan Agreement shall be amended by inserting the following definition in Section 13.1thereof, in its applicable alphabetical order: |
““Second Loan Modification Effective Date (EXIM)” is the date indicated on the signature page to the EXIM Loan Modification Agreement.”
4. FEES. Borrower shall reimburse Bank for all legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents.
5. ADDITIONAL COVENANTS. Borrower is not a party to, nor is bound by, any license or other agreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with the Bank’s right to sell any Collateral. Borrower shall provide written notice to Bank within ten (10) days of entering or becoming bound by any such license or agreement (other than over-the-counter software that is commercially available to the public). Borrower shall take such steps as Bank
1
requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (x) all such licenses or contract rights to be deemed “Collateral” and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement (such consent or authorization may include a licensor’s agreement to a contingent assignment of the license to Bank if Bank determines that is necessary in its good faith judgment), whether now existing or entered into in the future, and (y) Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Bank’s rights and remedies under the Loan Agreement and the other Loan Documents. In addition, the Borrower hereby certifies that no Collateral is in the possession of any third party bailee (such as at a warehouse). In the event that Borrower, after the date hereof, intends to store or otherwise deliver the Collateral to such a bailee, then Borrower shall first receive, the prior written consent of Bank and such bailee must acknowledge in writing that the bailee is holding such Collateral for the benefit of Bank.
6. AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file UCC financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to further perfect or protect Bank’s interest in the Collateral, including a notice that any disposition of the Collateral, by either the Borrower or any other Person, shall be deemed to violate the rights of the Bank under the Code.
7. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.
8. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.
9. NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liability thereunder.
10. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this EXIM Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this EXIM Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this EXIM Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this EXIM Loan Modification Agreement.
11. RIGHT OF SET-OFF. In consideration of Bank’s agreement to enter into this EXIM Loan Modification Agreement, Borrower hereby reaffirms and hereby grants to Bank, a lien, security interest and right of set off as security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Silicon Valley Bank (including a Bank subsidiary) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
12. CONFIDENTIALITY. Bank may use confidential information for the development of databases, reporting purposes, and market analysis, so long as such confidential information is aggregated and anonymized prior to distribution unless otherwise expressly permitted by Borrower. The provisions of the immediately preceding sentence shall survive the termination of the Loan Agreement.
2
13. JURISDICTION/VENUE/TRIAL WAIVER. Borrower accepts for itself and in connection with its properties, unconditionally, the exclusive jurisdiction of any state or federal court of competent jurisdiction in the State of Illinois in any action, suit, or proceeding of any kind against it which arises out of or by reason of this EXIM Loan Modification Agreement. NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK’S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS LOAN MODIFICATION AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS EXIM LOAN MODIFICATION AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
14. COUNTERSIGNATURE. This EXIM Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.
[The remainder of this page is intentionally left blank]
3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the State of Illinois as of the Second Loan Modification Effective Date (EXIM).
| BORROWER: | ||
| STEREOTAXIS, INC. | ||
| By | /s/ Daniel J. Johnston | |
| Name: | Daniel J. Johnston | |
| Title: | CFO | |
| STEREOTAXIS INTERNATIONAL, INC. | ||
| By | /s/ Daniel J. Johnston | |
| Name: | Daniel J. Johnston | |
| Title: | CFO | |
| BANK: | ||
| SILICON VALLEY BANK | ||
| By | /s/ Michael Kohnen | |
| Name: | Michael Kohnen | |
| Title: | Senior Relationship Manager | |
Second Loan Modification Effective Date (EXIM): December 17, 2010
Exhibit 10.21d
THIRD AMENDMENT TO
NOTE AND WARRANT PURCHASE AGREEMENT
This Third Amendment to Note and Warrant Purchase Agreement (this “Third Amendment”) is made as of November 10, 2010, and amends that certain Note And Warrant Purchase Agreement dated February 21, 2008, as amended by that certain First Amendment to Note and Warrant Purchase Agreement, made effective as of December 29, 2008, and that certain Second Amendment to Note and Warrant Purchase Agreement, dated as of October 9, 2009 (as so amended, the “Existing Agreement”) by and among Stereotaxis, Inc., a Delaware corporation (the “Company”), Sanderling Venture Partners VI Co-Investment Fund, L.P., Sanderling VI Beteiligungs GmbH & Co KG, Sanderling VI Limited Partnership and Alafi Capital Company LLC (each, a “Lender” and together, the “Lenders”).
RECITALS
WHEREAS, the Lenders and the Company are parties to the Existing Agreement, pursuant to which the Lenders have extended a $10 million borrowing facility (the “Underlying Facility”) to the Company, $5 million from each Lender on a several (but not joint and several) basis;
WHEREAS, the Company and the Lenders desire to further amend the Existing Agreement, as set forth more specifically in this Third Amendment.
NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Defined Terms. As used in this Third Amendment, the following terms shall have the meanings set forth below:
1.1.1 “2012 Extension Exercise Price” means greater of (1) Closing Bid Price on the Trading Day immediately prior to the date of this Third Amendment (or on the date of this Third Amendment if executed and delivered after 4:00 p.m. Eastern Time on the date hereof) or (2) 110% multiplied by the offering price to the public on a registered public offering of the Company’s Common Stock with gross proceeds of at least $10 million consummated not later than November 30, 2010.
1.1.2 “Qualified Financing” (in lieu of and replacing the definition previously set forth in the Existing Agreement) shall mean additional financing from any third party (other than indebtedness of the Company to banks, commercial finance lenders and similar financial institutions) received by the Company after the date of this Third Amendment in the aggregate amount of not less than Thirty Million Dollars ($30,000,000).
1.2 Undefined Terms. Terms and definitions used in this Third Amendment but not defined in this Section 1 shall have the same meanings given to such terms in the Existing Agreement.
ARTICLE 2
CERTAIN AMENDMENTS
2.1 Extension to March 31, 2012. Notwithstanding anything to the contrary in the Existing Agreement, the Commitment Period under Section 1.2 and the Maturity Date under Section 1.4 is hereby extended to March 31, 2012. Each reference to “March 31, 2011” set forth in Sections 1.2 and 1.4 of the Existing Agreement (as amended by the First and Second Amendment thereto) and in the Form of Note attached as Exhibit A thereto is hereby replaced with “March 31, 2012.”
2.2 Warrant Coverage. In consideration of the extension of the Commitment Period under Section 1.2 and the Maturity Date under Section 1.4 pursuant to Section 2.1 above, additional Warrants (together, the “2012 Extension Warrants”) to purchase an aggregate of 800,000 shares of Common Stock shall be issued to the Lenders, with each Lender entitled to receive a pro rata number of such 2012 Extension Warrants based on the portion of the Committed Funds to be loaned by each such Lender. Such 2012 Extension Warrants shall be in the form attached as Exhibit A hereto and shall have an Exercise Price Equal to the Extension Exercise Price.
2.3 Payment to Company for 2012 Extension Warrants. The Lenders shall make any required payment for the 2012 Extension Warrants under the applicable rules of The NASDAQ Global Market at the time such 2012 Extension Warrants are to be issued. If any such payment is required, each Lender may cause a fewer number of 2012 Extension Warrants to be issued to it in lieu of making such payment upon receipt of such 2012 Extension Warrants.
2.4 Guaranty; Reduction of Guaranty and Committed Funds. (a) The parties acknowledge that Sanderling Venture Partners VI Co-Investment Fund, L.P. and Alafi Capital Company LLC have each entered into an Unconditional Limited Guaranty dated as of March 4, 2009 and March 3, 2009, and in each case, as affirmed by the respective guarantor in December 2009, respectively, in favor of Silicon Valley Bank, guarantying repayment of amounts set forth therein, but each having a maximum liability of $5,000,000 of principal amount under the Amended Revolver. The parties agree that the Company may agree to extend the maturity date of the Amended Revolver to a date no later than March 31, 2012, and that in such event, the Lenders shall each cause their respective Unconditional Limited Guaranty agreements to be extended to such March 31, 2012 maturity date, in such form, and together with such other documents or arrangements supporting, securing or collateralizing such guaranty obligation (including, without limitation, a letter of credit and covenants with respect to providing certain limited financial information), all as may be requested by Silicon Valley Bank in its commercially reasonable discretion; all fees payable to Silicon Valley Bank in connection with such arrangements will be paid by the Company.
(b) In the event that any of the Lenders purchase the Company’s equity securities from the Company prior to March 31, 2012 in a private placement, registered direct offering, or any other offering for which the Company receives the offering proceeds, the amount of such Lender’s obligation under its Unconditional Limited Guaranty in favor of Silicon Valley Bank shall be reduced, on a dollar-for-dollar basis, by the gross proceeds invested by such Lender, up to 100% of such Lender’s maximum liability under such Unconditional Limited Guaranty. In such event, a corresponding reduction shall be made for such Lender in the Schedule of Committed Funds under the Agreement relating to such Lender’s obligation thereunder. The Company acknowledges that any investment by a Lender pursuant to this Section 2.4(b) may be conditioned upon such Lender’s receipt of documentation of Silicon Valley Bank’s acknowledgement of such arrangement, in form
2
satisfactory to such Lender in its sole discretion. This Section replaces and supersedes Section 2.4(b) of the Second Amendment.
2.5 Registration Rights. The Company agrees to file with the SEC a registration statement (or amend a current registration statement) with respect to the maximum number of Warrant Shares issuable upon exercise of the 2012 Extension Warrants (and any other previously unregistered Warrants) on or prior to April 30, 2011, unless the Lenders agree to delay such registration statement.
ARTICLE 3
MISCELLANEOUS
3.1 Agreement Conditions. This Third Amendment is expressly conditioned on each of: (i) the further extension of the maturity date of the Amended Revolver to a date no later than March 31, 2012, and the absence of material amendment to the other terms of such Amended Revolver without the written consent of the Lenders; and (ii) the consummation of a registered public offering of the Company’s Common Stock with gross proceeds of at least $10 million consummated not later than November 30, 2010.
3.2 Original Agreements in Full Force and Effect. Except as expressly modified by this Third Amendment, the terms of the Existing Agreement (including without limitation the First Amendment and Second Amendment thereto) shall continue in full force and effect without modification.
3.3 Titles and Subtitles; Construction. The titles of the Sections and Subsections of this Third Amendment are for convenience of reference only and are not to be considered in construing this Third Amendment. All words used in this Third Amendment will be construed to be of such gender or number as the circumstances require.
3.4 Counterparts. This Third Amendment may be executed by facsimile and in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one instrument.
3.5 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
3.6 Amendment and Waiver. The terms of this Third Amendment may be amended only through a written agreement signed by the Lenders and by the Company. Any term, representation, warranty or covenant hereof may be waived by the party that is entitled to the benefit thereof, but no such waiver in any one or more instances shall be deemed or construed as a waiver of the same or any other term of this Third Amendment on any future occasion.
3.7 Conflict. The Parties acknowledge that the terms of this Third Amendment are intended to amend the terms of the Existing Agreement. Accordingly, in the event of a conflict between the terms of this Third Amendment and the Existing Agreement, the terms contained in this Third Amendment shall control for all purposes.
3
3.9 Severability. In case any provision of this Third Amendment shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
3.10 Governing Law. This Third Amendment shall be governed in all respects by the internal laws of the State of Delaware, without giving effect to principles of conflicts of law.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4
IN WITNESS WHEREOF, the Parties hereto have caused this Third Amendment to be signed by duly authorized officers or representatives, effective as of the date first written above.
| STEREOTAXIS, INC. | ||
| By: |
/s/ Michael P. Kaminski | |
| Name: |
Michael P. Kaminski | |
| Title: |
President and Chief Executive Officer | |
| SANDERLING VENTURE PARTNERS VI CO-INVESTMENT FUND, L.P. | ||
| By: Middleton, McNeil, Mills & Associates VI, LLC | ||
| By: |
/s/ Fred A. Middleton | |
| Fred A. Middleton, Managing Director | ||
| SANDERLING VI LIMITED PARTNERSHIP | ||
| By: Middleton, McNeil, Mills & Associates VI, LLC | ||
| By: |
/s/ Fred A. Middleton | |
| Fred A. Middleton, Managing Director | ||
| SANDERLING VI BETEILIGUNGS GMBH & CO. KG | ||
| By: Middleton, McNeil, Mills & Associates VI, LLC | ||
| By: |
/s/ Fred A. Middleton | |
| Fred A. Middleton, Managing Director | ||
| ALAFI CAPITAL COMPANY LLC | ||
| By: |
/s/ Christopher Alafi | |
| Christopher Alafi, Manager | ||
5
Exhibit A
Form of Warrant
[Attached]
6
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements and the related prospectuses:
| (1) | Registration Statement (Form S-3 No. 333-137006) of Stereotaxis, Inc. pertaining to the registration of up to 1,150,849 shares of its common stock, $0.001 par value; |
| (2) | Registration Statement (Form S-8 No. 333-120135) pertaining to the Stereotaxis, Inc. 2004 Employee Stock Purchase Plan, the Stereotaxis, Inc. 2002 Stock Incentive Plan, the Stereotaxis, Inc. 2002 Non-Employee Directors’ Stock Plan, and the Stereotaxis, Inc. 1994 Stock Plan; |
| (3) | Registration Statement (Form S-3 No. 333-161077) of Stereotaxis, Inc. pertaining to the registration of $75,000,000 of debt securities, common stock, preferred stock, warrants and units; |
| (4) | Registration Statement (Form S-3 No. 333-161078) of Stereotaxis, Inc. pertaining to the registration of 2,154,526 shares of common stock, $.001 par value; and |
| (5) | Registration Statement (Form S-8 No. 333-161079) of Stereotaxis, Inc. pertaining to the Stereotaxis, Inc. 2002 Stock Incentive Plan and the Stereotaxis, Inc. 2009 Employee Stock Purchase Plan |
of our reports dated March 11, 2011, with respect to the financial statements and schedule of Stereotaxis, Inc., and the effectiveness of internal control over financial reporting of Stereotaxis, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2010.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 11, 2011
Exhibit 31.1
Certification of Principal Executive Officer
I, Michael P. Kaminski, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Stereotaxis, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 11, 2011 |
/s/ MICHAEL P. KAMINSKI | |||||
| Michael P. Kaminski President & Chief Executive Officer Stereotaxis, Inc. (Principal Executive Officer) |
Exhibit 31.2
Certification of Principal Financial Officer
I, Daniel J. Johnston, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Stereotaxis, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 11, 2011 |
/s/ DANIEL J. JOHNSTON | |||||
| Daniel J. Johnston Chief Financial Officer Stereotaxis, Inc. (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Stereotaxis, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael P. Kaminski, President & Chief Executive Officer of the Company, certify, pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: March 11, 2011 |
/s/ MICHAEL P. KAMINSKI | |||||
| Michael P. Kaminski President & Chief Executive Officer Stereotaxis, Inc. |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Stereotaxis, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel J. Johnston, Chief Financial Officer of the Company, certify, pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: March 11, 2011 |
/s/ DANIEL J. JOHNSTON | |||||
| Daniel J. Johnston Chief Financial Officer Stereotaxis, Inc. |