STXS

Stereotaxis, Inc. 10-Q Summary: Quarter Ended September 30, 2006

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006, and the nine-month period ended on that date. Stereotaxis, Inc. designs, manufactures, and markets the Stereotaxis System, an advanced cardiology instrument control system that uses magnetic fields to guide catheters and guidewires for treating arrhythmias and coronary artery disease. The company operates primarily in the U.S., Europe, and Asia.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Quarterly revenue surged 353% to $7.64 million from $1.69 million in the prior year quarter, driven by an increase in system deliveries from one to seven units. Nine-month revenue increased slightly by 2% to $13.19 million.
• Expense Increases: Operating expenses rose significantly. Research and Development (R&D) increased 14% quarterly and 37% year-to-date due to new projects and the NIOBE platform. Sales and Marketing expenses increased 47% quarterly and 42% year-to-date due to expanded headcount.
• Stock-Based Compensation: The company adopted SFAS 123(R) effective January 1, 2006, resulting in approximately $3.2 million of share-based compensation expense for the nine months ended September 30, 2006.
• Capital Raise: In February 2006, the company completed a public offering of 5.5 million shares, netting approximately $61.9 million. This significantly improved liquidity compared to the prior year.
• Margin Pressure: While quarterly gross margin remained stable at 52%, the nine-month gross margin declined from 50% to 46% due to unabsorbed overhead costs from reduced production schedules in the first two quarters.

Guidance, Outlook, and Risks

• Outlook: Management expects negative cash flow from operations to continue through 2007. R&D and SG&A expenses are expected to increase to support product commercialization and public company requirements.
• Liquidity: The company believes existing cash, cash equivalents, and investments ($39.8 million combined) are sufficient to fund operations for the next 12 months. A $10 million working capital line of credit is available with $9 million currently unused.
• Backlog: Purchase orders and commitments for the magnetic navigation system were approximately $44 million as of September 30, 2006. Management notes these are subject to contingencies and may be revised or cancelled.
• Risks: Key risks include the need for additional financing, which may be dilutive; currency fluctuations affecting margins (a 10% fluctuation could impact revenue by 2-3%); and the uncertainty of recognizing revenue from the current backlog.
• Unusual Items: There were no royalty settlement expenses in 2006, compared to a $2.9 million expense in the same period in 2005 related to a patent dispute resolution.

Investor Verification Checklist

• Verify the sustainability of the 353% quarterly revenue increase, noting it was driven by a jump from one to seven system deliveries.
• Confirm the status of the $44 million backlog and the likelihood of conversion to recognized revenue given the stated contingencies.
• Monitor the burn rate of cash given the expectation of negative operating cash flow through 2007 and the potential need for future dilutive financing.
• Review the impact of unabsorbed overhead on gross margins and whether production schedules have normalized to improve the 46% nine-month margin.
• Assess the impact of the new SFAS 123(R) accounting standard on future reported net losses and stock-based compensation expenses.