In
this report, “Stereotaxis”, the “Company”, “Registrant”, “we”, “us”,
and “our” refer to Stereotaxis, Inc. and its wholly owned subsidiaries. Epoch
®
, Niobe
®
,
Odyssey
®
, Odyssey Cinema
™
, Vdrive
®
, Vdrive Duo
™
, V-CAS
™
,
V-Loop
™
, V-Sono
™
, V-CAS Deflect
™,
QuikCAS
™
, and Cardiodrive
®
are trademarks of Stereotaxis, Inc. All other trademarks that appear in this report are the property of their respective
owners.
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:
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our
business strategy;
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our
value proposition;
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ability to fund operations;
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our
ability to convert backlog to revenue;
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the
ability of physicians to perform certain medical procedures with our products safely, effectively and efficiently;
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the
adoption of our products by hospitals and physicians;
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the
market opportunity for our products, including expected demand for our products;
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the
timing and prospects for regulatory approval of our additional disposable interventional devices;
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the
success of our business partnerships and strategic relationships;
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our
estimates regarding our capital requirements;
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our
plans for hiring additional personnel; and
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any
of our other plans, objectives, expectations and intentions contained in this annual report that are not historical facts.
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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 robotic systems and instruments for use primarily by electrophysiologists for the treatment of
abnormal heart rhythms known as cardiac arrhythmias. We offer our proprietary
Epoch
Solution, an advanced remote robotic
navigation system, for use in a hospital’s interventional surgical suite, or “interventional lab”. We believe
the
Epoch
Solution revolutionizes the treatment of arrhythmias and coronary artery disease by enabling enhanced safety,
efficiency and efficacy for catheter-based, or interventional procedures.
The
Epoch
Solution is comprised of the
Niobe
ES Robotic Magnetic Navigation System (“
Niobe
ES system”),
Odyssey
Information Management Solution (“
Odyssey
Solution”), and the
Vdrive
Robotic Navigation
System (“
Vdrive
system”), and related devices. We consider our technology to be an important advancement in
the ongoing trend toward fully digitized, integrated and automated interventional labs. We believe our technology provides substantial,
clinically important improvements over manual interventional methods, which often result in long and unpredictable procedure times
with suboptimal therapeutic outcomes. We believe our products also support efficient and effective information management and
physician collaboration. The core elements of our technology, especially the robotic magnetic system, are protected by an extensive
patent portfolio, as well as substantial expertise and trade secrets.
We
promote the full
Epoch
Solution in a typical hospital implementation, subject to regulatory approvals or clearances. The
full
Epoch
Solution implementation requires a hospital to agree to an upfront capital payment and recurring payments. The
upfront capital payment typically includes equipment and installation charges. The recurring payments typically include disposable
costs for each procedure and equipment service costs beyond warranty period. In hospitals where the full
Epoch
Solution
has not been implemented, equipment upgrade or expansion can be implemented upon purchasing of the necessary upgrade or expansion.
Not
all products have and/or require regulatory clearance in all of the markets we serve. Please refer to “Regulatory Approval”
in Item 1 for a description of our regulatory clearance, licensing, and/or approvals we currently have or are pursuing.
As
of December 31, 2018, we had approximately $2.8 million of backlog, consisting of outstanding purchase orders and other commitments
for these systems. We had backlog of approximately $1.5 million as of December 31, 2017. Of the December 31, 2018 backlog, we
expect approximately 85.0% to be recognized as revenue over the course of 2019. 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 robotic magnetic system is lengthy
and generally involves construction or renovation activities at customer sites. Consequently, revenues and/or orders resulting
from sales of our robotic magnetic system can vary significantly from one reporting period to the next.
We
have business arrangements with technology leaders in the global interventional market, including manufacturers of fluoroscopy
systems, ablation catheters, and electrophysiology mapping systems. Through these arrangements, we provide compatibility between
our technology and other equipment that is necessary to perform interventional procedures. The catheter arrangement also provides
development and distribution of disposable interventional devices.
We
were incorporated in Delaware in June, 1990 as Stereotaxis, Inc. Our principal executive offices are located at 4320 Forest Park
Avenue, Suite 100, St. Louis, Missouri 63108, and our telephone number is (314) 678-6100.
THE
STEREOTAXIS VALUE PROPOSITION
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.
Our
systems 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 electrophysiology and interventional cardiology procedures, on a cost-justified basis.
We
believe that our systems will:
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Improve
patient outcomes by optimizing therapy
. Difficulty in controlling the working tip of disposable interventional devices
can lead to sub-optimal results in many procedures. Conversely, the precise control of multiple complex diagnostic and therapeutic
devices by a single physician can lead to better outcomes for the patient. 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. Maintaining this precision and contact can be very challenging, especially in the most complex procedures,
such as those for the treatment of ventricular tachycardia. 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 our robotic technology
can enhance procedure results by improving navigation of disposable interventional devices to treatment sites, and by affecting
more precise, safe, treatments once these sites are reached.
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Expand
the market by enhancing the treatment of more complex cases.
Treatment of a number of major diseases, including ventricular
tachycardia, atrial fibrillation, congenital heart diseases, 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 ventricular tachycardia and atrial fibrillation 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 our robotic technology
provides precise, computerized control of the working tip of disposable interventional devices, we believe that it will potentially
enable difficult ventricular tachycardia, atrial fibrillation, and congenital heart diseases to be treated interventionally
on a much broader scale than today.
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Enhance
patient and physician safety.
The clinical value of our robotic magnetic system has been demonstrated in over 350 publications
and in more than 100,000 procedures. A systematic review of all peer-reviewed publications on our technology observed that
robotic magnetic navigation reduced major complication rates by 62%, minor complications by 43% and patient radiation duration
by 31% in comparison to traditional manual intervention. These safety benefits to patients are complemented by improved occupational
safety for the physicians and nursing staff who are performing the procedures. Healthcare professionals face long term orthopedic
and exposure risks which are mitigated by our robotic technology. 49% of professionals performing manual procedures suffer
from orthopedic injury. 85% of brain tumors in interventional physicians present on the left side of the brain which is the
side typically exposed to radiation when performing a manual procedure. Our robotic technology improves physician safety and
reduces physician fatigue 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.
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Improve
clinical workflow and information management.
Complex ablation procedures involve several sources of information, which
conventionally require a physician to mentally integrate and process large quantities of information from different sources
in real time, often from separate user interfaces. Sources of information include real time x-ray and/or ultrasound images,
real time location sensing systems providing the 3-D location of a catheter tip, pre-operative map of the electrical activity
of the heart, real time recording of electrical activity of the heart, and temperature feedback from an ablation catheter.
The
Odyssey
Solution improves 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 and keyboard control.
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Enhance
hospital efficiency by reducing and standardizing procedure times, disposables utilization and staffing needs.
Conventional
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 our
robotic technology can reduce procedure times compared to manual procedures, especially in the most complex procedures such
as the treatment of ventricular tachycardia. We believe the robotic magnetic 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 robotics can result from decreased use
of multiple catheters, high-end deflectable sheaths, and contrast media in procedures compared with manual methods further
enhancing the rate of return to hospitals.
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Improve
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 our robotic technology 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 robotic systems in a relatively short period of time. The robotic
magnetic system can also be programmed to carry out sequences of complex navigation automatically further enhancing ease of
use. We believe the
Odyssey
Solution can allow advanced training online thereby accelerating learning.
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Help
hospitals recruit physicians and attract patients.
Due to the clinical benefits of the our products, we believe hospitals
will realize significant operational benefits when recruiting physicians to work in a more safe procedure environment, while
attracting patients who desire to have safer procedures that lead to better long term outcomes.
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OUR
PRODUCTS
Niobe
®
ES Robotic Magnetic Navigation System
Our
proprietary
Niobe
ES system is the latest generation of the
Niobe
system, which 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 an adjacent room and outside the x-ray fluoroscopy
field or beside the patient table, as in traditional interventional procedures. The robotic magnetic 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 arrangements with fluoroscopy system manufacturers and providers of catheters and electrophysiology mapping systems, we provide
compatibility between the robotic magnetic system and the visualization and information systems used during electrophysiology
procedures in order to provide the physician with a comprehensive information and instrument control system. In addition, we have
integrated the robotic magnetic system with 3D catheter location sensing technology to provide accurate real-time information
as to the 3D location of the working tip of the instrument.
The
components of the robotic magnetic system are identified and described below:
Niobe
®
Robotic Magnetic Navigation System.
Our robotic magnetic system utilizes two permanent magnets mounted on articulating
and pivoting arms that are enclosed within a stationary housing, with one 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 robotic magnetic
system is indicated for use in cardiac, peripheral and neurovascular applications.
Cardiodrive
®
Automated Catheter Advancement System
. As the physician conducts the procedure from the adjacent control room, the
Cardiodrive Automated Catheter Advancement System (“Cardiodrive”)
in conjunction with the
QuikCAS
automated
catheter advancement system is used to remotely advance and retract the electrophysiology catheter in the patient’s heart
while the robotic magnetic system magnets precisely steer the working tip of the device.
Odyssey
®
Solution
The
Odyssey
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 the
Odyssey
Solution enhances the physician workflow in interventional
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, the
Odyssey
Solution allows the user to command
multiple systems in the lab from a single point of control. In addition, the
Odyssey
Solution acquires a real-time, remote
view of the lab capturing synchronized procedure data for review of important events during cases. The
Odyssey
Solution
enables physicians to access recorded cases and create snapshots following procedures for enhanced clinical reporting, auditing
and presentation. The
Odyssey
Solution 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. The
Odyssey
Solution further enables
procedures to be observed remotely around the world with high speed Internet access over a hospital VPN even wirelessly using
a standard laptop or Windows tablet computer. The
Odyssey
Solution may be acquired either as part of the
Epoch
Solution
or on a stand-alone basis for installation in interventional labs and other locations where clinicians desire improved clinical
workflows and related efficiencies.
Vdrive™
Robotic Navigation System
The
Vdrive
system provides navigation and stability for diagnostic and ablation devices designed with key features to assist
in the delivery of better ablations. Important features include complementing the robotic magnetic system control of catheters
with fully remote, single operator workflow; and providing robotic control of diagnostic devices independent of magnetic navigation.
The
Vdrive Duo
system is an optional expansion of the
Vdrive
hardware that allows control of up to two of the four
available disposable options (
V-Loop
,
V-Sono, V-CAS, and V-CAS Deflect
).
Disposables
and Other Accessories
Our
robotic magnetic system is designed to use a toolkit of proprietary disposable interventional devices. The toolkit currently consists
of:
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Our
QuikCAS
automated catheter advancement disposables designed to provide precise remote advancement of proprietary electrophysiology
catheters; and
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Biosense
Webster’s 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 by Biosense Webster and Stereotaxis, as described below, with sales of such magnetically-enabled catheters generating
royalty payable from Biosense Webster to Stereotaxis.
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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.
In
addition to the
Vdrive
and
Vdrive Duo
systems, we also manufacture and market various disposable components which
can be manipulated by these systems. These include:
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our
V-CAS
catheter advancement system (“
V-CAS
system”) that controls both the magnetic catheter body
and a standard fixed-curve sheath;
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our
V-CAS
Deflect fully integrated catheter advancement system (“V-CAS Deflect system”) with a robotic deflectable
sheath for maximum integration and versatility, allowing users to advance and retract the magnetic catheter body at angles
up to 210°;
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our
V-Loop
circular catheter manipulator (“V-Loop device”), which allows the user to control certain circular
mapping catheters, such as Biosense Webster’s LASSO®2515 or LASSO®2515 NAV Circular Mapping Catheter, advance,
retract, rotate, deflect and adjust loop radius, and hold the catheter position against the tissue to optimize electrograms;
and
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our
V-Sono
ICE catheter manipulator (“
V-Sono
device”) that allows a single physician to manipulate BWI
SoundStar™ and AcuNav™ catheters from the control room, store and recall previous positions and automatically
sweep over an area of interest with adjustable speed and angle, and automatically track a 3.5mm NAVISTAR
®
RMT
THERMOCOOL
®
Irrigated Tip Catheter – all without leaving the control room.
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Other
Recurring Revenue
Other
recurring revenue includes revenue from product maintenance plans, other post warranty maintenance, and the implied obligation
to provide software enhancements if and when available for one year following installation. Revenue from services and software
enhancements is deferred and amortized over the service or update period, which is typically one year. Revenue related to services
performed on a time-and-materials basis is recognized when performed. Other recurring revenue represented 52% and 44% of revenue
for the years ended December 31, 2018 and 2017, respectively.
Regulatory
Approval
We
have received regulatory clearance, licensing and/or CE Mark approvals necessary for us to market the
Niobe
system,
Cardiodrive
,
and various disposable devices in the U.S., Canada, Europe, China, Japan, and various other countries.
We
have received regulatory clearance, licensing and/or CE Mark approvals necessary for us to market the
Odyssey
Solution
in the U.S., Canada, Europe, China, Japan and other selected countries and we are in the process of obtaining necessary approvals
for extending our markets in other countries.
We
have received regulatory clearance, licensing and/or CE Mark approvals necessary for us to market the
Vdrive
and
Vdrive
Duo
systems with the
V-CAS, V-Loop
and
V-Sono
devices in the U.S., Canada and Europe.
The V-CAS Deflect
catheter advancement system has been CE Marked for sale in Europe.
Biosense
Webster has received FDA 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. Biosense Webster also received China
CFDA approval and Japan PMDA approval for the CARTO
®
RMT navigation system for use with the
Niobe
system,
and the 3.5mm NAVISTAR
®
RMT THERMOCOOL
®
Irrigated Tip Catheter. Our strategic relationship with
Biosense Webster provides for co-development of 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 “Strategic Relationships”
below for a description of our arrangements with Biosense Webster.
FINANCIAL
INFORMATION ABOUT CUSTOMERS
Revenue
from Biosense Webster Inc. related to royalties and
Odyssey
system sales accounted for $2.9 million and $3.3 million, or
10% and 11%, of total net revenue for the years ended December 31, 2018 and 2017, respectively. No other single customer
accounted for more than 10% of total revenue for the years ended December 31, 2018 and 2017.
CLINICAL
APPLICATIONS
We
have focused our clinical and commercial efforts on applications of our products primarily in electrophysiology procedures for
the treatment of arrhythmias and secondarily in complex interventional cardiology procedures for the treatment of coronary artery
disease. Our system potentially has broad applicability in other areas, such as structural heart repair, interventional neurosurgery,
interventional neuroradiology, peripheral vascular, renal denervation, pulmonology, urology, gynecology and gastrointestinal medicine,
and some of our patents may be applicable in these areas as well.
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.
Over 5.0 million people in the U.S. currently suffer from the resulting abnormal heart rhythms, which are known as arrhythmias.
The prevalence of arrhythmias is expected to continue to rise as the population ages and life expectancy continues to increase.
These conditions are a major physical and economic burden and are 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 arrhythmias
a major economic factor in healthcare. We believe payors are very interested in therapies that may reduce the financial impact
of these diseases.
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 more than 3,000 interventional labs around the world are currently capable of conducting electrophysiology procedures.
Nearly one million electrophysiology procedures are performed annually worldwide, and the procedure growth rate is approximately
10% annually.
We
believe that our robotic 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:
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Ventricular
Tachycardia
. Ventricular tachycardia is a malignant, potentially lethal arrhythmia that is extremely difficult and time
consuming to treat. 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.
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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. This chaotic electrical activity of the top chambers
of the heart is estimated to be present in three million people in the United States and over seven million people worldwide.
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.
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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.
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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, and enables catheter contact to be consistently
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
More
than 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
believe approximately 11,000 interventional labs worldwide are currently capable of conducting interventional cardiology. Over
4 million interventional cardiology procedures are performed annually in the U.S. alone. 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.
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. We believe
the robotic magnetic system also has a range of potential applications in minimally invasive neurosurgery, including biopsies
and the treatment of tumors, treatment of vascular malformations and fetal interventions.
STRATEGIC
RELATIONSHIPS
We
have entered into business arrangements with technology leaders in the global interventional market, including manufacturers of
fluoroscopy systems, ablation catheters, and electrophysiology mapping systems, that we believe aid us in commercializing our
robotic magnetic system. These arrangements are important to us as they provide for the integration of our system with digital
imaging and 3D catheter location sensing technology, as well as catheters compatible with our system.
Imaging
We
have successfully integrated our robotic magnetic system with digital fluoroscopy systems to provide advanced interventional lab
visualization and instrument control through user-friendly computerized interfaces. The maintenance of these arrangements, or
the establishment of equivalent alternatives, is critical to our commercialization efforts. The commercial availability of currently
compatible digital imaging fluoroscopy systems is unlikely to continue and efforts are being made to ensure the availability of
integrated next generation systems and/or equivalent alternatives; however, we cannot provide assurance as to the timeline of
the ongoing availability of such compatible systems or our ability to obtain equivalent alternatives on competitive terms or at
all.
Disposables
Devices
We
have successfully integrated 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 robotic magnetic system.
We have jointly developed associated location and non-location sensing electrophysiology mapping and ablation catheters that are
navigable with our robotic magnetic system. We believe that these integrated products 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.
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
net revenues from sales of the co-developed catheters. Royalty revenue from the co-developed catheters represented 10% of revenue
for the years ended December 31, 2018 and 2017.
Biosense
Webster’s distribution rights for co-developed catheters are nonexclusive until December 31, 2022. Upon the expiration or
termination of the agreement, other than due to a change of control of Stereotaxis, the agreement provides for a continuation
of supply by Biosense Webster of the co-developed catheters to us or our customers for three years. The agreement provides an
opportunity to expand the product offering covered by the agreement to include a next generation irrigated magnetic catheter,
subject to mutually agreeable terms including exclusive distribution rights.
Under
the agreements with Biosense Webster, we granted Biosense Webster certain notice and discussion rights for product development
activities we undertake relating to localization of magnetically enabled interventional disposable devices in fields outside of
electrophysiology and mapping.
Either
party may terminate this agreement 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 either party terminates the agreement under this provision, we must pay a termination fee to Biosense Webster equal
to 5% of our total equity value in the change of control transaction, up to a maximum of $10 million. If a change of control of
Stereotaxis occurs after Biosense Webster has received approval from the U.S. FDA for atrial fibrillation indication for the NAVISTAR
®
RMT THERMOCOOL
®
catheter, we would be required to pay an additional $10 million fee to Biosense Webster,
and termination of the agreement by either 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.
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:
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continuing
to enhance our existing
Niobe
system,
Odyssey
Solution, and
Vdrive
system through ongoing product and
software development; and
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designing
new proprietary disposable interventional devices for use with our system.
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Our
research and development team collaborates with strategic third parties to integrate our robotic magnetic 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 teaching hospitals, which serve to increase our access to world class physicians and to expand our name recognition
in the medical community.
CUSTOMER
SERVICE AND SUPPORT
We
provide worldwide maintenance and support services to our customers for our integrated products directly or with the assistance
of outsourced product and service 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 employ service and support engineers with networking and medical equipment expertise, and outsource a portion
of our installation and support services. We offer 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 customers
worldwide.
MANUFACTURING
Niobe
,
Odysse
y, and
Vdrive
Systems
Our
manufacturing strategy for our
Niobe
system and
Odyssey
Solution is to sub-contract the manufacture of major subassemblies
of our systems to maximize manufacturing flexibility and lower fixed costs. Our current manufacturing strategy for the
Vdrive
system is to build all subassemblies in-house using sub-contract manufactured components. We maintain quality control for
all of our systems by completing final system assembly and inspection in-house.
We
purchase both custom and off-the-shelf components from a large number of suppliers and subject them to quality specifications
and processes. Some of the components necessary for the assembly of our products are currently provided to us by sole-sourced
suppliers (the only recognized supply source available to us) or single-sourced suppliers (the only approved supply source for
us among other sources). We purchase the majority of our components and major assemblies through purchase orders rather than long-term
supply agreements and generally do not maintain large volumes of finished goods.
Disposable
Interventional Devices
Our
manufacturing strategy for disposable interventional devices is to outsource their manufacture through subcontracting and to expand
partnerships for other interventional devices. We work closely with our contract manufacturers and have strong relationships with
component suppliers. We have entered into manufacturing agreements to provide high volume capability for devices other than catheters.
Software
The
software components of the robotic magnetic system, the
Vdrive
system and
Odyssey
Solution, 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 facility operates under processes that meet the FDA’s requirements under the Quality System Regulation (QSR).
Our ISO registrar and European notified British Standard Institution (BSI) has audited our facility annually since 2001 and found
the facility to be in compliance with relevant requirements. The initial ISO 9001 certification was issued in January 2002 and
the most recent ISO 13485 certificate was issued in 2016.
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, Biosense Webster distributes magnetically-enabled electrophysiology mapping and ablation catheters,
co-developed pursuant to our agreement with them.
Our
sales and marketing efforts include two important elements: (1) selling robotic magnetic systems,
Odyssey
Solutions
,
and
Vdrive
systems directly and through distributors; and (2) leveraging our installed base of systems to drive recurring
sales of disposable interventional devices, software and service.
REIMBURSEMENT
We
believe that substantially all of the procedures, whether commercial or in clinical trials, conducted in the U.S. with the
Niobe
system or
Vdrive
system have been reimbursed to date. We expect that third-party payors will reimburse, under existing
billing codes, procedures in which compatible ablation catheters 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 guarantee that reimbursement policies
of third-party payors will not change in the future with respect to some or all of the procedures using the robotic magnetic system.
In
countries outside the United States, reimbursement is obtained from various sources, including governmental authorities, private
health insurance plans, and labor unions. In most foreign countries, private insurance systems may also offer payments for some
therapies. Additionally, health maintenance organizations are emerging in certain European countries. In Europe, we believe that
substantially all of the procedures, whether commercial or in clinical trials, conducted with the
Niobe
system or
Vdrive
system have been reimbursed to date. In Japan, the Ministry of Health, Labor and Welfare (MHLW) has classified the
Niobe
system as a C2 medical device (the highest reimbursement category), and has established a “technical fee” of Japanese
Yen 50,000 per procedure. In other foreign countries, we may need to seek international reimbursement approvals, and we do not
know if these required approvals will be obtained in a timely manner or at all.
See
“Item 1A—Risk Factors” for a discussion of various risks associated with reimbursement from third-party payors.
INTELLECTUAL
PROPERTY
The
proprietary nature of, and protection for, our products, processes and know-how are important to our business. We seek patent
protection in the United States and internationally for our systems and other technology where available and when appropriate.
We
have an extensive patent portfolio that we believe protects the fundamental scope of our technology, including our magnet technology,
navigational methods, procedures, systems, disposable interventional devices and our 3D integration technology. As of December
31, 2018, we had 74 issued U.S. patents, 1 co-owned U.S. patent and no licensed-in U.S. patents. In addition, we had 8 pending
U.S. patent applications and 1 co-owned U.S. patent application. As of December 31, 2018 we had 36 issued foreign patents and
5 owned foreign patent applications. The key patents that protect our
Niobe
system extend until 2022 and beyond. We also
have a number of invention disclosures under consideration and several applications that are being prepared for filing. We cannot
be certain that any patents will be issued from any of our pending patent applications, nor can we be certain that any of our
existing patents or any patents that may be granted in the future will provide us with protection.
It
would be technically difficult and costly to reverse engineer our robotic magnetic system, which contains numerous complex algorithms
that control our disposable devices inside the magnetic fields generated by the robotic magnetic 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 in the U.S. that can be navigated by the robotic magnetic 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 expertise in magnet design, magnet physics and magnetic instrument control that was developed
in connection with the development of the robotic magnetic system, which we maintain as trade secrets. This expertise 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 in a standard interventional lab. Our
Odyssey
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. This proprietary software and hardware, some of which is owned by
Stereotaxis, and some of which is licensed to Stereotaxis, is a material aspect of the ability to design, manufacture and install
a cost-effective and efficient information integration, storage, and delivery platform.
In
addition, we seek to protect our proprietary information by entering into confidentiality, assignment of invention or license
agreements with our employees, consultants, contractors, advisers and other third parties. However, we believe that these measures
afford only limited protection.
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.
In
electrophysiology we consider the primary competition to our robotic magnetic system to be traditional catheter-based electrophysiology
ablation approaches including RF (radiofrequency) ablation and non-RF therapies. To our knowledge, we are the only company that
has commercialized remote, digital and direct control of the working tip of catheters for use in RF ablation procedures. Our success
depends in part on convincing hospitals and physicians to convert traditional interventional procedures to procedures using our
robotic magnetic system
.
We
face competition from companies that are developing and marketing new products for use in electrophysiology. These products include
next generation mapping systems and RF ablation devices with which our robotic magnetic system is not currently compatible, as
well as non-RF ablation devices including single-shot cryoablation devices and other new products for use in other interventional
therapies. Some of these products are marketed by companies that may have an established presence in the field of electrophysiology,
including major imaging, capital equipment and disposables companies that are currently selling products in the interventional
lab. In addition, we face competition from companies that currently market or are developing drugs, gene or cellular therapies
to treat the conditions for which our products are intended.
We
also face competition from companies that are developing remote interventional techniques. We are aware of three companies that
have commercialized endovascular catheter navigation systems which have been cleared by the FDA for mapping and/or ablation procedures.
In addition, we are aware of two companies with an electromagnetic catheter navigation system that have received CE Mark approval
in Europe. However, each of these companies has limited or no commercial activities.
We
face direct competition to certain products in our
Odyssey
Solution, such as the
Odyssey
Vision system. These competitors
include established imaging companies as well as dedicated solution providers. We expect to continue to face competitive pressure
in this market in the future, based on the rapid pace of advancements with this technology.
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
Our
products are medical devices that are subject to extensive regulation in the U.S. and in foreign countries where we do business.
The U.S. FDA regulates the development, testing, manufacturing, labeling, storage, recordkeeping, promotion, marketing, distribution
and service of medical devices in the U.S. to ensure that medical products distributed domestically are safe and effective for
their intended uses. In addition, the FDA regulates the export of medical devices manufactured in the U.S. to international markets
and the importation of medical devices manufactured abroad.
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, our products must meet the requirements of
a large and growing body of international standards which govern the design, manufacture, materials content and sourcing, testing,
certification, packaging, installation, use and disposal of our products. Failure to meet these standards could limit the ability
to market our products in those regions which require compliance to such standards. Examples of groups of such standards are electrical
safety standards such as those of the International Electrotechnical Commission and composition standards such as the Reduction
of Hazardous Substances (“RoHS”) and Waste Electrical and Electronic Equipment (“WEEE”) Directives.
U.S.
Food and Drug Administration
Unless
an exemption applies, each medical device we wish to commercially market in the United States will require 510(k) clearance, de
novo approval, or pre-market approval from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed
to pose lower risks are placed in either Class I or II, which requires the manufacturer to submit to the FDA a pre-market notification
requesting permission to commercially distribute the device, known as 510(k) clearance. Some low risk devices are exempted from
this requirement. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, or life-supporting, or devices
deemed not substantially equivalent to a previously cleared 510(k) device, are placed in Class III, requiring pre-market approval,
or PMA. The majority of our current products are Class II devices requiring 510(k) clearances. Biosense Webster’s compatible
catheters used with our
Niobe
system are Class III therapeutic devices and are subject to the PMA process.
If
U.S. clinical data are needed to support clearance, approval or 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 involved in the study.
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 (i.e. in support of a 510(k), de novo, or PMA).
When
a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed device is substantially
equivalent to a previously cleared and legally marketed 510(k) device, de novo approved device, or a device that was in commercial
distribution before May 28, 1976, for which the FDA has not yet called for the submission of pre-market approval applications.
To establish substantial equivalence, the applicant must show that the new device has the same intended use as the predicate device,
and it either has the same technological characteristics or has been shown to be equally safe and effective and does not raise
different questions of safety and effectiveness as compared to the predicate device. The FDA may require further information,
including clinical trial results or product test data, to make a determination regarding substantial equivalence. The FDA’s
510(k) clearance process usually takes from four to 12 months, but can take longer.
If
a device is not eligible for the 510(k) clearance process, but the product is low or moderate risk, we may be able to obtain de
novo review. The de novo process allows FDA to classify a low- to moderate-risk device not previously classified into Class I
or II. If the device is not eligible for either the 510(k) or de novo processes, a PMA must be submitted to the FDA. A PMA must
be supported by extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing and labeling
to demonstrate reasonable evidence of the device’s safety and efficacy to the FDA’s satisfaction. The PMA process
is much more costly, lengthy and uncertain than the 510(k) clearance process, and it generally takes from one to three years,
but can take longer. We cannot be sure that the FDA will ever grant 510(k) clearance, de novo approval or pre-market approval
for any product we propose to market in the United States.
After
a device receives 510(k) clearance or de novo approval, any modification that could significantly affect its safety or effectiveness,
or that would constitute a significant change in its intended use, will require a new clearance. Modification 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.
After
a device is placed on the market, numerous regulatory requirements apply. These include for example:
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The
Quality System Regulation, or QSR, which requires manufacturers, including third-party manufacturers, to follow stringent
design, testing, documentation and other quality assurance procedures during product design and throughout the manufacturing
process;
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Labeling
requirements and the FDA prohibitions against promoting products for uncleared, unapproved or “off-label” uses;
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Medical
device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed
to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury
if the malfunction were to recur; and
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Reports
of Corrections and Removals regulation, which requires manufacturers to report recalls and field actions to the FDA if initiated
to reduce a risk to health posed by the device or to remedy a violation of the FD&C Act.
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The
FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine
our compliance with the QSR and other regulations. If we fail to comply with the QSR or other regulatory requirements, we may
receive a warning or untitled letter from the FDA or be subject to other enforcement actions, including fines, injunctions, civil
penalties, seizures, operating restrictions, partial suspension or total shutdown of production, refusing requests for 510(k)
clearance, de novo petitions, or PMA approval of new products, withdrawing 510(k) clearance, de novo approvals, or PMA approvals
already granted, and criminal prosecution. The FDA also has the authority to require us to repair, replace or refund the cost
of any medical device that we have manufactured or distributed, if there is a reasonable probability that the device would cause
serious, adverse health consequences or death.
International
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 and can involve additional product testing and additional administrative
review periods. The time required to obtain approval in other countries may differ from that required to obtain FDA clearance
or approval.
The
primary regulatory environment in Europe is that of the European Union, which encompasses most of the major countries in Europe.
The European Union, along with other member countries of the European Economic Area, or EEA, 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 EEA. The CE Mark
is an international symbol of adherence to quality assurance standards and compliance with applicable directives. In order to
obtain the right to affix the CE Mark to products, a manufacturer must obtain certification that its processes meet certain quality
standards. Compliance with the Medical Device Directive, as certified by a recognized European Notified Body, permits the medical
device manufacturer to affix the CE Mark on its products and commercially distribute those products throughout the EEA. We are
subject to annual surveillance audits and periodic re-certification audits in order to maintain our CE Mark permissions.
To
be sold in Japan, most medical devices must undergo thorough safety examinations and demonstrate medical efficacy before they
receive regulatory (“Shonin”) approval. We are subject to additional regulations in other foreign countries, including,
but not limited to, Canada, Taiwan, China, Korea, and Russia, in order to sell our products. We intend that either we or our distributors
will receive any necessary approvals or clearance prior to marketing our products in these international markets.
Please
refer to “Regulatory Approval” in Item 1 of this annual report for a description of the regulatory clearance, licensing
and/or approvals we currently have or are pursuing.
Anti-Kickback
and False Claims Laws
We
are subject to various federal and state laws relating to healthcare fraud and abuse, including anti-kickback and false claims
laws. The U.S. 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, and providing anything of value at less than fair market value. Penalties for violations include criminal
penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare
programs. Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently,
several healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the
expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including
off-label promotion, may also violate false claims laws.
Many
states have adopted laws similar to the federal healthcare program Anti-Kickback Statute and the federal false claims laws. Some
of these state prohibitions apply to healthcare items or services reimbursed by any source, not only the Medicare and Medicaid
programs.
Transparency
Laws
Under
the Physician Payments Sunshine Act, or the Sunshine Act, which was enacted by Congress as part of the Patient Protection and
Affordable Care Act, we are required to track and report to the federal government on an annual basis, subject to certain exceptions,
all payments and other transfers of value to U.S. physicians and teaching hospitals, as well as ownership interests held by physicians.
Such data are made available by the government on a publicly searchable website. In addition, we are subject to similar state
laws related to the tracking and reporting of certain payments and other transfers of value to healthcare professionals.
HIPAA
and Other Privacy Laws
We
are subject to laws and regulations protecting the privacy and integrity of patient medical information, including the Health
Insurance Portability and Accountability Act of 1996, or HIPAA, which 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. HIPAA also prohibits executing a scheme to defraud any
healthcare benefit program or making false statements relating to healthcare matters. 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.
Certificate
of Need Laws
In
a number of states in the U.S., 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 robotic magnetic system. Many of the states in which
we sell robotic magnetic 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.
Employees
As
of December 31, 2018, we had 119 employees, 31 of whom were engaged directly in research and development, including
those related to regulatory and clinical research, 53 in sales and marketing activities, 18 in manufacturing and service,
and 17 in general administrative activities including finance, information systems, legal and general management.
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 Investors section of our website,
http://www.stereotaxis.com
, as soon as reasonably practicable after they are filed with the SEC. 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.
Executive
Officers
See
Part III – Item 10 for information about our Executive Officers.
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.
We
may not generate cash from operations or be able to raise the necessary capital to continue operations.
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 funds on favorable terms or at all. If we cannot raise capital on acceptable
terms, we will not be able to, among other things:
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maintain
customer and vendor relationships;
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hire,
train and retain employees;
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maintain
or expand our operations;
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enhance
our existing products or develop new ones;
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respond
to competitive pressures; or
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service
our debt obligations and meet our financial covenants.
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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.
We
may not be able to continue as a going concern if we do not improve the operating performance of the Company or raise additional
capital.
The
Company has sustained operating losses throughout its corporate history and expects that its 2019 expenses will exceed its 2019
gross margin. The Company expects to continue to incur operating losses and negative cash flows until revenues reach a level sufficient
to support ongoing operations or expense reductions are in place. The Company’s liquidity needs will be largely determined
by the success of clinical adoption within the installed base of our robotic magnetic system as well as by new placements of capital
systems. The Company’s plans for improving the liquidity conditions primarily include its ability to control the timing
and spending of its operating expenses and raising additional funds through debt or equity financing.
There
can be no assurance that any of our plans will be successful or that additional capital will be available to us on reasonable
terms, or at all, when needed. If we are unable to improve the operating performance of the Company or if we are unable to obtain
sufficient additional capital, it may impair our ability to raise new capital, obtain new customers, and hire and retain employees,
which could force us to substantially revise our business plan or cease operations, which may reduce or negate the value of your
investment.
We
may lose key personnel or fail to attract and retain replacement or additional personnel.
We
are highly dependent on the principal members of our management, as well as our scientific and sales staff. 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. In addition,
if we outsource certain employee functions that were formerly handled in-house, our personnel costs could increase.
Hospital
decision-makers may not purchase our
Niobe
,
Odyssey
, or
Vdrive
systems or may think that such systems are
too expensive.
To
achieve and grow sales, hospitals must purchase our products, and in particular, our robotic magnetic system. The robotic magnetic
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 robotic magnetic system based on the disposable
interventional devices that have received regulatory clearance or approval. Moreover, the robotic magnetic 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 robotic magnetic system, the
Odyssey
Solution and
Vdrive
system 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.
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 robotic magnetic system requires only a few weeks,
and can be accomplished by either our staff or by subcontractors, 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 purchasing our products.
Decreases
in our backlog have occurred in the past and could 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 robotic magnetic 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
ES systems and
Odyssey
systems have been
delivered less than one year after the receipt of a purchase order from a hospital, with the timing being dependent 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, a 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.
The
rate of technological innovation of our products might not keep pace with the rest of the market.
The
rate of innovation for the market in which our products compete is fast-paced and requires significant resources and innovation.
If other products and technologies are developed that compete with, or may compete with, the
Niobe
,
Odyssey
and
Vdrive
systems, 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. 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 revenue.
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. Uncertainty
about current global economic conditions and future global economic conditions may cause customers to delay purchasing or installation
decisions or cancel existing orders. The
Niobe
ES system,
Odyssey
Solution and
Vdrive
system 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.
A 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 the United States and global economy
becomes sluggish or deteriorates for a longer period 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
ES system and
Vdrive
system
provide a safe, effective and preferable alternative to interventional methods in general use today. 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 fluoroscopy system manufacturers and providers of catheters and electrophysiology mapping systems or other
parties may fail, or we may not be able to enter into additional collaborations in the future.
We
have collaborated with and are continuing to collaborate with fluoroscopy system manufacturers and providers of catheters and
electrophysiology mapping systems and other parties to make our instrument control technology compatible with their respective
imaging products or disposable interventional devices and to co-develop additional disposable interventional devices for use with
our products. A significant portion of our revenue from system sales is derived from these integrated products. The maintenance
of these collaborations, or the establishment of equivalent alternatives, is critical to our commercialization efforts. The commercial
availability of currently compatible digital imaging fluoroscopy systems is unlikely to continue and efforts are being made to
ensure the availability of integrated next generation systems and/or equivalent alternatives; however, we cannot assure as to
the timeline of the ongoing availability of such compatible systems or our ability to obtain equivalent alternatives on competitive
terms or at all.
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:
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fail to or are unable to maintain adequate compatibility of our products with the most prevalent imaging products or disposable
interventional devices expected by our customers for their clinical practice;
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any
of our collaboration partners delays or fails in the integration of its technology or new products with our robotic magnetic
system;
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any
of our collaboration partners fails to develop or commercialize the integrated products in a timely manner; or
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we
become involved in disputes with one or more of our collaboration partners regarding our collaborations.
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Some
of our 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.
The
complexity associated with selling, marketing, and distributing products 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:
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inability to recruit and retain adequate numbers of qualified sales and marketing personnel;
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our
inability to accurately forecast future product sales and utilize resources accordingly;
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the
inability of sales personnel to obtain access to or persuade adequate numbers of hospitals and physicians to purchase and
use our products; and
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unforeseen
costs associated with maintaining and expanding an independent sales and marketing organization.
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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, physician training assistance,
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, training services, and collaboration or if the reputation or 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.
Physicians
may not commit enough time to sufficiently learn our system.
In
order for physicians to learn to use the robotic magnetic system, they must attend structured training sessions in order to familiarize
themselves with a sophisticated user interface and they must be committed to learning the technology. Further, physicians must
utilize the technology on a regular basis to ensure they maintain the skill set necessary to use the 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 traditional 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 pharmaceuticals or other medical devices
and procedures. Many of these alternative treatments are also widely accepted in the medical community and have a long history
of use.
We
are aware of three companies that have commercialized endovascular catheter navigation systems which have been cleared by the
FDA for mapping and/or ablation procedures. In addition, we are aware of two companies with an electromagnetic catheter navigation
system that has received CE Mark approval in Europe.
We
face competition from companies that are developing drugs, gene or cellular therapies 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. Other companies in the medical device industry continue to
develop new devices and technologies for traditional interventional methods.
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. In addition, the presence of other competitors may cause potential
customers to delay their purchasing decisions, resulting in a longer than expected sales cycle, even if they do not choose our
competitors’ products. 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
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
robotic magnetic 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, and result in significant legal defense costs, significant harm to our reputation
and a decline in revenue.
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
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 losses into the future as we continue the commercialization
of our products. We are still in the process of realizing the full potential of the commercialization of our technology, and will
need to continue to make improvements to that technology. Moreover, the extent of our future losses and the timing of profitability
are highly uncertain. Although we have achieved operating profitability during certain quarters, we may not achieve profitable
operations on an annual basis, and if we achieve profitable operations, we may not sustain or increase profitability on a quarterly
or annual basis. If we require more time than we expect to generate significant revenue and achieve annual profitability, or if
we are unable to sustain profitability once achieved, we may not be able to continue our operations. Our failure to achieve annual
profitability or sustain profitability on an annual or quarterly basis could negatively impact the market price of our common
stock. 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.
Our
current borrowing agreement contains various covenants, including financial covenants under our credit agreement with our primary
lender. If we violate our covenants, it could impact our ability to borrow and we could be required to repay any related outstanding
debt. We could be unable to make these payments, which could lead to insolvency. Even if we are able to make these payments, it
will lead to the lack of availability for additional borrowings under our bank loan agreement due to our borrowing capacity. There
can be no 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 and other borrowed amounts 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
electrophysiology catheter advancement device and disposable devices for our
Vdrive
system. We also depend on various third
party suppliers for the magnets we use in our robotic magnetic system and certain components of our
Odyssey
Solution and
Vdrive
system. 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 robotic magnetic system and certain components of our
Odyssey
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:
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we
may not be able to control the quality and cost of our system or respond to unanticipated changes and increases in customer
orders;
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we
may lose access to critical services, materials, or components, resulting in an interruption in the manufacture, assembly
and shipment of our systems; and
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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.
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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 Biosense Webster and other parties to manufacture a number of disposable interventional devices for use with our
robotic magnetic 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 robotic magnetic system from a manufacturer that uses material produced in Japan, and we
anticipate that certain of the production work for these magnets will be 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 all or part of the manufacture and assembly of components of our
Niobe
ES system
, Odyssey
Solution,
and
Vdrive
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.
Security
breaches and other disruptions to our information technology infrastructure could interfere with our operations, compromise confidential
information, and expose us to liability which could materially adversely impact our business and reputation.
Security
breaches and other disruptions to our information technology infrastructure could interfere with our operations; compromise information
belonging to us, our employees, customers, and suppliers; and expose us to liability which could adversely impact our business
and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are
managed by third parties, to process, transmit, and store electronic information, and to manage or support a variety of business
processes and activities. Additionally, we collect and store certain data, including proprietary business information and customer
and employee data, and may have access to confidential or personal information in certain of our businesses that is subject to
privacy and security laws, regulations, and customer-imposed controls. Despite our cyber security measures (including employee
and third-party training, monitoring of networks and systems, and maintenance of backup and protective systems) which are continuously
reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions,
or shutdowns due to attack by hackers, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication
or utility failures, systems failures, natural disasters, or other catastrophic events. Any such events could result in legal
claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation, which
could materially adversely affect our business. While we have experienced, and expect to continue to experience, these types of
threats to our information technology networks and infrastructure, to date none of these threats has had a material impact on
our business or operations.
We
may be unable to protect our technology from use by third parties.
Our
commercial success depends 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.
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. Our competitors may acquire similar or even the same technology components that are utilized in our current offering
eroding some differentiation in the marketplace. 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 depends 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
Solution, competitors
may enter the market, negatively impacting our ability to develop and commercialize the
Odyssey
Solution.
Our
products and related technologies can be applied in different medical applications, and we may fail to focus on the most profitable
areas.
The
robotic magnetic 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
Solution and
Vdrive
system for interventional labs that have a robotic magnetic system installed as well as those standard
interventional labs that do not have a robotic magnetic 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.
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 the parties in our strategic collaborations 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.
Each medical device that we wish to market in the U.S. must be designated as exempt from premarket approval or notification, or
first receive either a 510(k) clearance, de novo approval, or a pre-market approval, or PMA, from the U.S. FDA pursuant to the
Federal Food, Drug, and Cosmetic Act, or FD&C 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 many of our products, including disposable interventional
devices, and we are able to market these products commercially in the U.S., our business model relies significantly on revenue
from new disposable interventional devices, some of which may not 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, de novo approvals, 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, de novo approvals, 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.
If
our strategic collaborations 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 collaborations or distributors 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 may rely on our
distributors and strategic collaborations, 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 enforcement
action, which may include 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
FD&C Act, and the FDA could modify its regulations promulgated under this law or its policies in a way to make ongoing regulatory
compliance more burdensome and difficult.
Additionally,
any modification to an FDA 510(k) cleared or de novo-approved 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 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 that we determined to not
require clearance or approval in the first instance, 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 Europe,
we expect a changing regulatory environment characterized by a shift from a country-by-country regulatory system to a Europe-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, anti-bribery, 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 or other quality standards.
Our
manufacturing processes must comply with the FDA’s 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 comply with the FDA regulation or EN ISO 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, untitled letter, fines, injunctions, civil penalties,
seizures, operating restrictions, partial suspension or total shutdown of production, refusing requests for 510(k) clearance,
de novo petitions, or PMA approval of new products, withdrawing 510(k) clearance, de novo approvals, or PMA approvals already
granted, and/or criminal prosecution. Furthermore, the European Union recently adopted new EN ISO 13485:2016 standards, with which
we must comply no later than April 2019. We cannot assure you that we will be able to timely comply with EN ISO 13485:2016 standards.
We cannot be certain that our facilities or those of our suppliers or subcontractors will comply with the FDA, EN ISO 13485:2003,
or when applicable, EN ISO 13485:2016 standards in future audits by regulatory authorities. Failure to pass such an inspection
could force a shutdown 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, EN ISO 13485:2003 or when applicable, EN ISO 13485:2016,
by us or our suppliers could significantly harm our available inventory and product sales. Further, any failure to comply with
FDA’s QSR by us or our suppliers could result in FDA refusing requests for and/or delays in 510(k) clearance, de novo approval,
or PMA approval of new products.
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:
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of revenue;
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in market acceptance of our products;
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damage
to our reputation;
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additional
regulatory filings;
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product
recalls;
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increased
service or warranty costs; and/or
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product
liability claims relating to the software defects.
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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 are 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:
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the
federal healthcare program Anti-Kickback Statute, 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;
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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;
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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;
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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;
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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;
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federal
and state Sunshine laws, which require manufacturers of certain medical devices to collect and report information on payments
or transfers of value to physicians and teaching hospitals, as well as investment interests held by physicians and their immediate
family members; and
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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.
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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 as well as the potential repeal or amendment of such legislation, may have
a material adverse effect on us.
In
response to perceived increases in health care costs in recent years, there have been and continues to be proposals by the Trump
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, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA). Among other things, the law
imposed a tax on medical device manufacturers and producers equal to 2.3% of the sales price for all sales beginning January 1,
2013. This excise tax applies to the majority of our products sold within the United States. Although a two-year moratorium on
the excise tax was enacted for 2016 and 2017, and extended for 2018 and 2019, the tax is currently scheduled to resume collection
on January 1, 2020. We expect that the PPACA could have a material adverse effect on our industry generally and our ability to
successfully commercialize our products or could limit or eliminate our spending on certain development projects.
On
August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which created the Joint Select Committee on Deficit
Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee was charged with identifying a
reduction of at least $1.2 trillion for the years 2013 through 2021. The Committee did not achieve this target by the imposed
deadline, triggering the legislation’s automatic reduction to several government programs. Included in the automatic reduction
are aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013.
Changes
to, or repeal of, the PPACA, which the administration and certain members of Congress have affirmatively indicated that they will
pursue, could materially and adversely affect our business and financial position, and results of operations. Even if the PPACA
is not amended or repealed, the administration could propose changes impacting implementation of the PPACA, which could materially
and adversely affect our financial position or operations. However, we cannot currently predict the content, timing or impact
that any such future legislation will have on our business.
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
ES system,
Odyssey
Solution, or
Vdrive
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 systems. Further, our sales and installation cycle
for the
Niobe
ES 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
or
Vdrive
systems, 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 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.
Our
growth may 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:
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currency
fluctuations that could impact the demand for our products or result in currency exchange losses;
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export
restrictions, tariff and trade regulations and foreign tax laws;
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customs
duties, export quotas or other trade restrictions;
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economic
and political instability; and
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shipping
delays.
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In
addition, contracts may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system.
We
are limited by our inability to use a short form registration statement on Form S-3, which may affect our ability to access the
capital markets, if needed.
A
Registration Statement on Form S-3 permits an eligible issuer to incorporate by reference its past and future filings and reports
made under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, Form S-3 enables eligible issuers
to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act of 1933, as amended, or the Securities
Act. The shelf registration process under Form S-3 combined with the ability to incorporate information on a forward basis, allows
issuers to avoid additional delays and interruptions in the offering process and to access the capital markets in a more expeditious
and efficient manner than raising capital in a standard offering on Form S-1.
To
be eligible to use Form S-3 for a registered offering of our securities to investors, either (1) the aggregate market value of
our common stock held by non-affiliates would have to exceed $75 million or (2) our common stock would have to be listed and registered
on a national securities exchange. Currently, we do not meet either of those eligibility requirements and are therefore precluded
from using a Form S-3 in connection with a registered offering of our securities to investors.
Due
to our present inability to use Form S-3, if we wanted to conduct a registered offering of securities to investors, we will be
required to use long form registration and may experience delays. In addition, our ability to undertake certain types of financing
transactions may be limited or unavailable to us without the ability to use Form S-3. Furthermore, because of the delay associated
with long form registration and the limitations on the financing transactions we may undertake, the terms of any financing transaction
we are able to conduct may not be advantageous to us or may cause us not to obtain capital in a timely fashion to execute our
business strategies and continue to operate as a going concern.
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.
Certain
of our directors and individuals or entities affiliated with them as well as other principal stockholders beneficially own or
control a substantial percentage of the outstanding shares of our common stock. Moreover, as a result of the issuance of warrants
to certain institutional investors, certain of our directors and their affiliated funds have the ability to obtain a substantial
portion of our common stock. Accordingly, these stockholders 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.
Future
issuances of our securities could dilute current stockholders’ ownership.
As
of December 31, 2018, we had 41.7 million shares of our common stock issuable upon conversion of our Series A Convertible Preferred
Stock bearing dividends at a rate of six percent (6.0%) per annum, which are cumulative and accrue daily from the date of issuance
on the $1,000 stated value. Such dividends will not be paid in cash, except in connection with any liquidation, dissolution or
winding up of the Company or any redemption of the Series A Convertible Preferred Stock. Instead, the value of the accrued dividends
is added to the liquidation preference of the Series A Convertible Preferred Stock and will increase the number of shares of common
stock issuable upon conversion, which will dilute the ownership of our common stockholders.
In
addition, a significant number of shares of our common stock are subject to warrants, stock options and stock appreciation rights,
and we may request the ability to issue additional such securities. We may also decide to raise additional funds through public
or private debt or equity financing to fund our operations. While we cannot predict the effect, if any, that future exercises
of warrants or 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, it is likely that sales of substantial amounts of our common stock (including shares issued upon the exercise of warrants,
stock options, stock appreciation rights or the conversion of any convertible securities outstanding now or in the future, including
the Series A Convertible Preferred Shares), will dilute the ownership of our existing stockholders and that the perception that
such sales could occur, will adversely affect prevailing market prices for our common stock.
Further,
the Series A Convertible Preferred Shares rank senior to our common stock as to distributions and payments upon the liquidation,
dissolution and winding up of the Company. No such distributions or payments upon the liquidation, dissolution and winding up
of the Company may be made to holders of common stock unless and until the holders of the Series A Convertible Preferred Shares
have received the stated value of $1,000 per share plus any accrued and unpaid dividends. Until all Series A Convertible Preferred
Shares have been converted or redeemed, no dividends may be paid on the common stock without the express written consent of the
holders of a majority of the outstanding Series A Convertible Preferred Shares. In the event that dividends or other distributions
of assets are made or paid by the Company to the holders of the common stock, the holders of Series A Convertible Preferred Shares
are entitled to participate in such dividend or distribution on an as-converted basis. Any such distributions or payments upon
the liquidation, dissolution or winding up of the Company may dilute the ownership interests of our existing stockholders.
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 collaboration 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:
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discourage,
delay or prevent a change in the control of our company or a change in our management;
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adversely
affect the voting power of holders of common stock; and
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limit
the price that investors might be willing to pay in the future for shares of our common stock.
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addition, our collaboration agreement with Biosense Webster contains provisions that may similarly discourage a takeover and negatively
affect our share price as described above.
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 new SEC regulations such
as the Dodd-Frank Wall Street Reform and Consumer Protection Act 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 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:
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demand
for our products;
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the
performance of third-party contract manufacturers and component suppliers;
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our
ability to develop sales and marketing capabilities;
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the
success of our strategic relationships with two multinational fluoroscopy system manufacturers and one provider of catheters
and electrophysiology mapping systems;
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our
ability to develop, introduce and market integrated next generation systems and/or alternatives to our current strategic relationships
with fluoroscopy system manufacturers and the catheter and electrophysiology mapping system provider on a timely basis;
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our
ability to develop, introduce and market new or enhanced versions of our products on a timely basis;
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our
ability to obtain regulatory clearances or approvals for our new products; and
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our
ability to obtain and protect proprietary rights.
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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.
Nasdaq
delisted our common stock from The Nasdaq Capital Market and our common stock began trading on the OTCQX
®
Best
Market in August 2016. Trading of our shares on the over-the-counter markets could negatively impact the liquidity of our common
stock and our ability to access the capital markets and, in turn, could impair the value of your investment.
On
August 4, 2016, trading in our common stock on The Nasdaq Capital Market (“Nasdaq”) was suspended as a result of a
determination from Nasdaq to delist our common stock due to our failure to meet certain applicable requirements. On August 4,
2016, shares of our common stock commenced trading on the OTCQX
®
Best Market under the Company’s existing
ticker symbol of “STXS.” Trading of our shares on the over-the-counter markets could negatively impact the liquidity
of our common stock and our ability to access the capital markets, which could impair the value of your investment.
The
trading of our common stock on the over-the-counter market, including the OTCQX
®
Best Market, may adversely affect
the market liquidity of our common stock, limit our ability to issue additional securities (including pursuant to registration
statements on Form S-3) and adversely affect our ability to obtain financing for the continuation of our operations, which could
harm our business or cause us to cease operations.
Furthermore,
our common stock may not continue to trade on the OTCQX
®
Best Market in the future, broker-dealers may cease to
provide public quotes of our common stock on this market, or the trading volume of our common stock may be insufficient to provide
for an efficient trading market. Any such developments could impair the value of your investment.
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 OTCQX
®
Best 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 2018, our common stock traded
between $0.51 and $1.65 per share, on trading volume ranging from approximately 0 to 0.3 million shares per day. The market price
of our common stock will be affected by a number of factors, including:
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actual
or anticipated variations in our results of operations or those of our competitors;
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the
receipt or denial of regulatory approvals;
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announcements
of new products, technological innovations or product advancements by us or our competitors;
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developments
with respect to patents and other intellectual property rights;
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changes
in earnings estimates or recommendations by securities analysts or our failure to achieve analyst earnings estimates;
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developments
in our industry; and
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participants
in the market for our common stock may take short positions with respect to our common stock.
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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 OTCQX
®
Best 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. In addition, the volatility of our stock price could lead to class action securities litigation
being filed against us, which could result in substantial costs and a diversion of our management resources, which could significantly
harm our business.