STXS

Stereotaxis, Inc. 10-Q Summary: Quarter Ended March 31, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for Stereotaxis, Inc., a company that designs and markets the NIOBE magnetic navigation system and the ODYSSEY information management system for interventional cardiology. The company is classified as an accelerated filer. As of April 30, 2009, there were 42,378,793 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 58% year-over-year, driven by a 57% increase in system sales (5 NIOBE systems vs. 4 in 2008; 5 ODYSSEY systems vs. 2 in 2008) and a 61% increase in disposables, service, and accessories revenue.
• Expense Reduction: Operating expenses decreased 17% to $14.8 million. Research and Development (R&D) expenses dropped 30% due to project completions, and General and Administrative (G&A) expenses fell 26% due to headcount reductions.
• Improved Loss Profile: The net loss narrowed significantly to $7.53 million from $13.53 million in the prior year, aided by higher gross margins and lower operating costs.
• Liquidity Shift: Working capital decreased from $23.3 million at year-end 2008 to $3.5 million. This was primarily due to the reclassification of $4.8 million of warrants from equity to current liabilities under new accounting rules (EITF 07-05) and the classification of $10 million of debt as short-term.
• Debt Structure: Short-term debt increased by $10 million due to the reclassification of the revolving credit facility and term notes as current maturities.

Guidance, Outlook, and Risks

• Outlook: Management expects negative cash flow from operations to continue throughout 2009 as the company funds product development and commercialization. R&D expenditures are expected to decrease, while selling, general, and administrative expenses are expected to increase.
• Liquidity Position: The company believes existing cash, cash equivalents, and borrowing facilities are sufficient to fund operations for the next 12 months. However, the $25 million working capital facility and the $10 million lender commitment expire on March 31, 2010. There is no assurance these will be renewed or that additional financing will be available.
• Backlog: Purchase orders and commitments for systems totaled approximately $67 million as of March 31, 2009. Management notes that these orders are subject to contingencies and may be revised or cancelled.
• Accounting Changes: The adoption of EITF 07-05 resulted in the reclassification of certain warrants as derivative liabilities, impacting the balance sheet presentation and introducing volatility in "Other income" based on fair value adjustments.
• Risks: Key risks include the need for future financing, foreign exchange exposure (37% of revenue in foreign currencies), and the potential for backlog orders to be cancelled or delayed.

Investor Verification Checklist

• Verify the sustainability of the 58% revenue growth rate given the small sample size of system installations (5 vs 4).
• Confirm the status of the $67 million backlog and the likelihood of conversion to recognized revenue.
• Monitor the company's ability to refinance or renew the $25 million credit facility and $10 million lender commitment expiring in March 2010.
• Review the impact of the $4.8 million warrant liability reclassification on future earnings volatility.
• Assess the timeline for achieving positive cash flow from operations, as the company currently expects continued negative operating cash flow.