Stereotaxis
Annual Report 2012

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (MARK ONE)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 000-50884 STEREOTAXIS, INC.(Exact name of Registrant as Specified in its Charter) DELAWARE 94-3120386(State or Other Jurisdiction ofIncorporation or Organization) (I.R.S. EmployerIdentification Number)4320 Forest Park Avenue, Suite 100St. Louis, MO 63108(Address of Principal Executive Offices including Zip Code)(314) 678-6100(Registrant’s Telephone Number, Including Area Code)Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.001 Par ValueSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment tothis Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x (Do not check if a smaller reportingcompany) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xThe aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on the last business day of the registrant’s mostrecently completed second fiscal quarter (based on the closing sales prices on the NASDAQ Global Market on June 30, 2012) was approximately $8 million.The number of outstanding shares of the registrant’s common stock on February 28, 2013 was 8,063,239.DOCUMENTS INCORPORATED BY REFERENCE Table of ContentsSTEREOTAXIS, INC.INDEX TO ANNUAL REPORT ON FORM 10-K Page PART I. Item 1. Business 1 Item 1A. Risk Factors 22 Item 1B. Unresolved Staff Comments 41 Item 2. Properties 41 Item 3. Legal Proceedings 41 Item 4. Mine Safety Disclosures 42 PART II. Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Registrant Purchases of Equity Securities 43 Item 6. Selected Financial Data 45 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 46 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 57 Item 8. Financial Statements and Supplementary Data 58 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 87 Item 9A. Controls and Procedures 87 Item 9B. Other Information 89 PART III. Item 10. Directors and Executive Officers of the Registrant 89 Item 11. Executive Compensation 94 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 114 Item 13. Certain Relationships and Related Person Transactions and Director Independence 119 Item 14. Principal Accounting Fees and Services 120 PART IV. Item 15. Exhibits and Financial Statement Schedules 121 SIGNATURES 122 SCHEDULE II—Valuation and Qualifying Accounts 123 INDEX TO EXHIBITS 124 iTable of ContentsITEM 1.BUSINESSIn 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-CAS™ Deflect, V-Loop™, V-Sono™, QuikCAS™Cardiodrive, Cronus, Assert, PowerAssert ™, Titan and Pegasus ™ are trademarks of Stereotaxis, Inc. All other trademarks that may appear in thisreport are the property of their respective owners.FORWARD-LOOKING STATEMENTSThis annual report on Form 10-K, including the sections entitled “Business” and “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” contains forward-looking statements. These statements relate to, among other things: • our business strategy; • our value proposition; • our ability to fund operations; • our ability to convert backlog to revenue; • the ability of physicians to perform certain medical procedures with our products safely, effectively and efficiently; • the adoption of our products by hospitals and physicians; • the market opportunity for our products, including expected demand for our products; • the timing and prospects for regulatory approval of our additional disposable interventional devices; • the success of our business partnerships and strategic alliances; • our estimates regarding our capital requirements; • our plans for hiring additional personnel; and • any of our other plans, objectives, expectations and intentions contained in this annual report that are not historical facts.These statements relate to future events or future financial performance, and involve known and unknown risks, uncertainties, and other factors thatmay cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performanceor 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 negativeof such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannotguarantee 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 economicand 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 ofthis annual report, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements. 1®®®®®®Table of ContentsOVERVIEWWe design, manufacture and market robotic systems and instruments for use primarily by electrophysiologists for the treatment of abnormal heartrhythms known as cardiac arrhythmias. We offer our proprietary Epoch Solution, an advanced remote robotic navigation system for use in a hospital’sinterventional surgical suite, or “interventional lab”. We believe the Epoch Solution revolutionizes the treatment of arrhythmias and coronary artery disease byenabling enhanced safety, efficiency and efficacy for catheter-based, or interventional, procedures. The Epoch Solution is comprised of the Niobe ES RoboticMagnetic Navigation System (“Niobe ES system”), Odyssey Information Management Solution (“Odyssey Solution”), and the Vdrive Robotic NavigationSystem (“Vdrive system”). We believe that our technology represents an important advance in the ongoing trend toward fully digitized, integrated andautomated interventional labs and provides substantial, clinically important improvements over manual interventional methods, which often result in long andunpredictable procedure times with suboptimal therapeutic outcomes. We believe that our technology represents an important advance supporting efficient andeffective information management and physician collaboration. The core elements of our technology, especially the Niobe ES system, are protected by anextensive patent portfolio, as well as substantial know-how and trade secrets.Our Niobe ES system is the latest generation of the Niobe Robotic Magnetic Navigation System (“Niobe system”), which allows physicians to moreeffectively navigate proprietary catheters, guidewires and other delivery devices, both our own and those we are co-developing through strategic alliances,through the blood vessels and chambers of the heart to treatment sites in order to effect treatment. This is achieved using computer-controlled, externallyapplied magnetic fields that precisely and directly govern the motion of the internal, or working, tip of the catheter, guidewire or other interventional devices.We believe that our Niobe ES system represents a revolutionary technology in the interventional lab, bringing precise remote digital instrument control andprogrammability to the interventional lab, and has the potential to become the standard of care for a broad range of complex cardiology procedures.The Niobe system is designed primarily for use by interventional electrophysiologists in the treatment of arrhythmias and approximately 1% of usage isby interventional cardiologists in the treatment of coronary artery disease. To date the significant majority of the Stereotaxis installations worldwide areintended for use in electrophysiology. The Niobe system is designed to be installed in both new and replacement interventional labs worldwide. Current andpotential purchasers of our Niobe system include leading research and academic hospitals as well as community and regional medical centers around theworld.The Niobe system has been used in more than 55,000 procedures and is supported by more than 200 peer-reviewed publications in leading medicaljournals such as PACE, Europace, the Journal of the American College of Cardiology and the Journal of Interventional Cardiac Electrophysiology. Niobesystem revenue represented 26%, 19%, and 40% of revenue for the years ended December 31, 2012, 2011, and 2010, respectively.Stereotaxis has also developed the Odyssey Solution which provides an innovative enterprise solution for integrating, recording and networkinginterventional lab information within hospitals. The Odyssey Solution consists of two lab solutions including Odyssey Vision and the Odyssey Cinemasystem. Odyssey Vision consolidates all of the lab information from multiple sources, freeing doctors from managing complex interfaces during patienttherapy for optimal procedural and clinical efficiency. The Odyssey Cinema system is an innovative solution delivering synchronized content targeted toimprove care, enhance performance, increase referrals and market services. This tool includes an archiving capability that allows clinicians to store andreplay entire procedures or segments of procedures. This information can be accessed from locations throughout the hospital local area network and over theInternet from anywhere with sufficient bandwidth. In order to maximize Odyssey Cinema system penetration, in select markets we offer Odyssey Interfacesystems, which connect partner large display solutions to the Odyssey Cinema system. The Odyssey Solution may be acquired either as part of the EpochSolution or on a stand-alone basis for installation in interventional labs and other locations where clinicians desire improved clinical workflows and relatedefficiencies. Odyssey system revenue represented 14%, 18%, and 18% of revenue for the years ended December 31, 2012, 2011, and 2010, respectively. 2Table of ContentsOur Vdrive system provides navigation and stability for diagnostic and therapeutic devices designed to improve interventional procedures. The Vdrivesystem complements the Niobe ES system control of therapeutic catheters for fully remote procedures and enables single-operator workflow and is sold as twooptions, the Vdrive system and the Vdrive Duo system. In addition to the Vdrive system and the Vdrive Duo system, we also manufacture and marketvarious disposable components (V-Loop, V-Sono, V-CAS, and V-CAS Deflect) which can be manipulated by these systems.We promote the full Epoch Solution in a typical hospital implementation, subject to regulatory approvals or clearances. The full Epoch Solutionimplementation requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically includes equipmentand installation charges. The recurring payments typically include disposable costs for each procedure, equipment service costs beyond warranty period, andsoftware licenses. In hospitals where the full Epoch Solution has not been implemented, equipment upgrade or expansion can be implemented upon purchasingof 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 descriptionof our regulatory clearance, licensing, and/or approvals we currently have or are pursuing.As of December 31, 2012, we had approximately $8.9 million of backlog, consisting of outstanding purchase orders and other commitments for thesesystems. We had backlog of approximately $20 million and $43 million as of December 31, 2011 and 2010, respectively, using the same active backlogcriteria. Of the December 31, 2012 backlog, we expect approximately 87% to be recognized as revenue over the course of 2013. There can be no assurance thatwe will recognize such revenue in any particular period or at all because some of our purchase orders and other commitments are subject to contingencies thatare outside our control. These orders and commitments may be revised, modified or canceled, either by their express terms, as a result of negotiations or byproject changes or delays. In addition, the sales cycle for the Epoch Solution is lengthy and generally involves construction or renovation activities at customersites. Consequently, revenues and/or orders resulting from sales of our Epoch Solution can vary significantly from one reporting period to the next.We have alliances with Siemens AG Medical Healthcare, Philips Healthcare and Biosense Webster, a subsidiary of Johnson & Johnson. Through thesealliances, we integrate our Niobe system with Siemens’ and Philips’ market-leading cath lab imaging systems and Biosense Webster’s 3D catheter locationsensing technology. The Biosense alliance also provides development of disposable interventional devices, coordination of marketing and sales efforts in orderto continue to introduce new enhancements around the Niobe system, and non-exclusive commercialization of the Odyssey Solution to Biosense customers inthe electrophysiology field. The Siemens and Philips alliances provide for coordination of our sales and marketing efforts with those of our alliance partners tofacilitate co-placement of integrated systems. Sales to Siemens accounted for 5% of total net revenue for the year ended December 31, 2012.BACKGROUNDWe have focused our clinical and commercial efforts on applications of the Epoch Solution primarily in electrophysiology procedures for the treatmentof arrhythmias and secondarily in complex interventional cardiology procedures for the treatment of coronary artery disease.The rhythmic beating of the heart results from the generation and transmission of electrical impulses. When these electrical impulses are mistimed oruncoordinated, the heart fails to function properly, resulting in complications that can range from fatigue to stroke or death. Over 4.3 million people in the U.S.currently suffer from the resulting abnormal heart rhythms, which are known as arrhythmias. Electrophysiology is a fast-growing clinical specialty focusedon the treatment of cardiac arrhythmias which can occur in any chamber of the heart. Electrophysiologists typically treat patients suffering from cardiacarrhythmias with a combination of drug therapy and/or interventional catheter ablation of cardiac tissue to interrupt aberrant electrical signals. 3Table of ContentsReimbursement for interventional catheter ablation has been stable in most markets with increasing governmental awareness of the impact of the disease stateupon national healthcare programs.Interventional cardiology and electrophysiology procedures have proven to be very effective at treating arrhythmias and coronary artery disease at sitesaccessible through the vasculature without the patient trauma, complications, recovery times and cost generally associated with open-heart surgery. With theadvent of advanced imaging techniques and sophisticated catheter and wire-based devices and techniques, the number of potential patients who can benefitfrom non-surgical interventional procedures has grown. However, we believe major challenges associated with manual approaches to electrophysiology andinterventional cardiology persist. In electrophysiology, challenges include precisely navigating the tip of the mapping and ablation catheter to the treatment siteon the heart wall and maintaining tissue contact throughout the cardiac cycle to effect treatment, and, for atrial fibrillation, performing complex ablationswithin the left atrium of the heart. A major limitation is the manual dexterity required to perform complex ablations. As a result, large numbers of patients arereferred to palliative drug therapy that can have harmful side effects. In interventional cardiology, these challenges include difficulty in navigating thedisposable interventional device through tortuous vasculature and crossing certain types of complex lesions to deliver balloons or stents to effect treatment. As aresult, numerous patients who could be candidates for an interventional approach continue to be referred to bypass surgery.We believe the Epoch Solution represents a revolutionary step compared to manual techniques in the trend toward highly effective, but less invasive,cardiac procedures. As the first technology to permit direct, computerized control of the working tip of a disposable interventional device, the Niobe systemenables physicians to perform cardiac procedures interventionally that historically would have been very difficult or impossible to perform in this way andhas the potential to significantly improve both the efficiency and efficacy of these treatments. We believe that the Odyssey Solution will provide physicians theability to enhance procedure workflow, more effectively manage their interventional procedures, and collaborate with other physicians. We believe the Vdrivesystem will provide physicians with the ability to navigate and control diagnostic catheters and sheaths from the procedure room, which will facilitate theperformance of procedures remotely while further improving efficiency and efficacy of the procedure.CURRENT CHALLENGES IN INTERVENTIONAL MEDICINEAlthough great strides have been made in manual device technology and in related manual interventional techniques, significant challenges remain thatreduce interventional productivity and limit both the number of complex procedures and the types of diseases that can be treated manually. These challengesprimarily involve the inherent mechanical limitations of manual instrument control and the lack of integration of the information systems used by physiciansin the interventional lab as well as a significant amount of training and experience required to ensure proficiency. As a result, many complex cases inelectrophysiology are treated with palliative drug therapy, and many complex procedures in interventional cardiology are still referred to highly invasive bypasssurgery.Limitations of Instrument ControlManually controlled catheters, guidewires and other delivery devices, even in the hands of the most skilled specialist, have inherent instrument controllimitations. In traditional interventional procedures, the device is manually manipulated by the physician who twists and pushes the external end of theinstrument in an iterative process to thread the instrument through often tortuous blood vessels or into the chambers of the heart to the treatment site.Lack of Integration of Information SystemsWhile sophisticated imaging, mapping and location-sensing systems have provided visualization for interventional procedures and allowedinterventional physicians to treat more complex conditions, the substantial 4Table of Contentslack of integration of these information systems requires the physician to mentally integrate and process large quantities of information from different sourcesin real time during an interventional procedure. For example, a physician ablating heart tissue to eliminate an arrhythmia will often be required to mentallyintegrate information from a number of sources, including: • real-time x-ray fluoroscopy and/or ultrasound images; • a real-time location-sensing system providing the 3D location of the catheter tip; • a pre-operative map of the electrical activity or anatomy of the patient’s heart; • real-time recording of electrical activity of the heart; and • temperature feedback from an ablation catheter.Each of these systems displays data differently, requiring physicians to continuously reorient themselves to the different formats and displays as theyshift their focus from one data source to the next while at the same time manually controlling the interventional instrument. Also, each of these informationsystems can require a separate user interface, which further reduces the efficiency of the procedure.THE STEREOTAXIS VALUE PROPOSITIONThe Epoch Solution addresses the current challenges in the interventional lab by providing precise computerized control of the working tip of theinterventional instrument and by integrating this control with the visualization technology and information systems used during interventional cardiology andelectrophysiology procedures, on a cost-justified basis.We believe that our systems will: • Expand the market by enhancing the treatment of more complex cases. Treatment of a number of major diseases, including atrial fibrillation,ventricular tachycardia, cardiac chronic total occlusions, and critical limb ischemia due to chronic total occlusions of peripheral arteries, ishighly problematic using conventional wire and/or catheter-based techniques. Additionally, many patients with multi-vessel disease and certaincomplex arrhythmias, such as atrial fibrillation and ventricular tachycardia, are often referred to other more invasive or less curative therapiesbecause of the difficulty in precisely and safely controlling the working tip of disposable interventional devices used to treat these complex casesinterventionally. Because our robotic technology provides precise, computerized control of the working tip of disposable interventional devices, webelieve that it will potentially enable difficult atrial fibrillation, ventricular tachycardia and cardiac chronic total occlusions to be treatedinterventionally on a much broader scale than today. • Improve outcomes by optimizing therapy. Difficulty in controlling the working tip of disposable interventional devices can lead to sub-optimalresults in many procedures. Additionally, the precise control of multiple complex diagnostic and therapeutic devices by a single physician can leadto better outcomes for the patient. Precise instrument control is necessary for treating a number of cardiac conditions. To treat arrhythmias, preciseplacement of an ablation catheter against a beating inner heart wall is necessary. For coronary artery disease, precise and correct navigation andplacement of expensive stents also have a significant impact on procedure costs and outcomes. We believe our robotic technology can enhanceprocedure results by improving navigation of disposable interventional devices to treatment sites, and by effecting more precise, safe, treatmentsonce these sites are reached. • Enhance patient and physician safety. The Niobe system has been used in more than 55,000 procedures and the incidence of all reported majoradverse cardiac events associated with the use of the system for all procedures is approximately 0.3%. This represents what we believe to be aclinically significant improvement in major complication rates over conventional procedures, which can range as high as 2-6% for complexablations, and significantly higher for new physicians and fellows. Additionally, 5Table of Contents during conventional catheter-based procedures, each of the physicians who stand by the patient table to manually control the catheter, the nursingstaff assisting with the procedure, and the patient are exposed to the potentially harmful x-ray radiation from the fluoroscopy field. This exposurecan be minimized by reducing procedure times. Reducing procedure times is also beneficial to the patient because of the direct correlation betweencomplication rates and procedure length. Our robotic technology can further improve physician safety and reduce physician fatigue by enablingthem to conduct procedures remotely from an adjacent control room, which reduces their exposure to harmful radiation, and the orthopedic burdenof wearing lead. • Improve clinical workflow and information management. Complex ablation procedures involve several sources of information, whichconventionally require a physician to mentally integrate and process large quantities of information from different sources in real time, often fromseparate user interfaces. Sources of information include real time x-ray and/or ultrasound images, real time location sensing systems providing the3-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, andtemperature feedback from an ablation catheter. The Odyssey Solution will improve clinical workflow and information management efficiency byintegrating and synchronizing the multiple sources of diagnostic and imaging information found in the interventional labs into a large-screen userinterface with single mouse control. • Enhance hospital efficiency by reducing and standardizing procedure times, disposables utilization and staffing needs. Conventionalinterventional 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 timeand the time needed to carry out therapy at the target site, we believe that our robotic technology can reduce complex procedure times compared tomanual procedures. We believe the Niobe system can also reduce the variability in procedure times compared to manual methods. Greaterstandardization of procedure times allows for more efficient scheduling of interventional cases including staff requirements. We also believe thatadditional cost savings from robotics result from decreased use of multiple catheters, guidewires and contrast media in procedures compared withmanual methods further enhancing the rate of return to hospitals. • Improve physician skill levels in order to improve the efficacy of complex cardiology procedures. Training required for physicians to safelyand effectively carry out manual interventional procedures typically takes years, over and above the training required to become a specialist incardiology. This has led to a shortage of physicians who are skilled in performing more complex procedures. We believe that our robotictechnology can allow procedures that previously required the highest levels of manual dexterity and skill to be performed effectively by a broaderrange of interventional physicians, with more standardized outcomes. In addition, interventional physicians can learn to use robotic systems in arelatively short period of time. The Niobe system can also be programmed to carry out sequences of complex navigation automatically furtherenhancing ease of use. We believe the Odyssey Solution can allow advanced training online thereby accelerating learning. • Help hospitals recruit physicians and attract patients. Due to the clinical benefits of the Epoch Solution, we believe hospitals will realizesignificant operational benefits when recruiting physicians to work in a more safe procedure environment, while attracting patients who desire tohave safer procedures that lead to better long term outcomes.OUR PRODUCTSNiobe ES Robotic Magnetic Navigation SystemOur proprietary Niobe ES system is the latest generation of the Niobe system, which provides the physician with precise remote digital instrumentcontrol through user friendly “point and click” computer mouse control, in combination with sophisticated image integration and 3D reconstruction. It can beoperated either from beside the patient table, as in traditional interventional procedures, or from an adjacent room and outside the x-ray 6®Table of Contentsfluoroscopy field. The Niobe system allows the operator to navigate disposable interventional devices to the treatment site through complex paths in the bloodvessels and chambers of the heart to deliver treatment by using computer controlled, externally applied magnetic fields to directly govern the motion of theworking tip of these devices, each of which has a magnetically sensitive tip that predictably responds to magnetic fields generated by our system. Because theworking tip of the disposable interventional device is directly controlled by these external magnetic fields, the physician has the same degree of controlregardless 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. Thisresults in highly precise digital control of the working tip of the disposable interventional device while still giving the physician the option to manually advancethe device.Through our alliances with Siemens, Philips and Biosense Webster, this precise digital instrument control has been integrated with the visualization andinformation systems used during electrophysiology procedures in order to provide the physician with a fully-integrated and automated information andinstrument control system. We have integrated our Niobe system with Siemens’ and with Philips’ digital x-ray fluoroscopy systems. In addition, we haveintegrated the Niobe system with Biosense Webster’s 3D catheter location sensing technology to provide accurate real-time information as to the 3D location ofthe working tip of the instrument, and with Biosense Webster’s ablation tip technology. The combination of these technologies was fully launched in 2005.The components of the Niobe system are identified and described below:Niobe Robotic Magnetic Navigation System. Our Niobe system utilizes two permanent magnets mounted on articulating and pivoting arms that areenclosed within a stationary housing, with one magnet on either side of the patient table. These magnets generate magnetic navigation fields that are less than10% of the strength of fields typically generated by MRI equipment and therefore require significantly less shielding, and cause significantly less interference,than MRI equipment. The Niobe system is indicated for use in cardiac, peripheral and neurovascular applications.Cardiodrive Automated Catheter Advancement System. As the physician conducts the procedure from the adjacent control room, the CardiodriveAutomated Catheter Advancement System (“Cardiodrive”) or QuikCAS automated catheter advancement systems are used to remotely advance and retractthe electrophysiology catheter in the patient’s heart while the Niobe magnets precisely steer the working tip of the device.Odyssey SolutionThe Odyssey Solution offers a fully integrated, real-time information solution to manage, control, record and share procedures across networks oraround the world. We believe that the Odyssey Solution enhances the physician workflow in interventional labs through a consolidated user interface ofmultiple 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 andkeyboard, the Odyssey Solution allows the user to command multiple systems in the lab from a single point of control. In addition, the Odyssey Solutionacquires a real-time, remote view of the lab capturing synchronized procedure data for review of important events during cases. The Odyssey Solution enablesphysicians to access recorded cases and create snapshots following procedures for enhanced clinical reporting, auditing and presentation. The OdysseySolution enables physicians to establish a comprehensive master archive of procedures performed in the lab providing an excellent tool for training new staffon the standard practices. The Odyssey Solution further enables procedures to be observed remotely around the world with high speed Internet access over ahospital VPN even wirelessly using a standard laptop or Windows tablet computer.Vdrive™ Robotic Navigation SystemThe Vdrive system reaches further into the evolution of robotic navigation technologies than any platform before it. More than a robotic cathetermanipulator, the Vdrive system and Niobe ES robotic system provide independent remote manipulation of diagnostic catheters and magnetic ablation cathetersin a single interface. 7®®®Table of ContentsThe Vdrive system provides breakthrough navigation and stability for diagnostic and ablation devices designed with key features to assist in the delivery ofbetter ablations. Important features include complementing the Niobe ES control of catheters with fully remote, single operator workflow; and providingrobotic control of diagnostic devices independent of magnetic navigation. The Vdrive Duo system is an optional expansion of the Vdrive hardware that allowscontrol of any two of the four available disposable options (V-Loop, V-Sono, V-CAS, and V-CAS Deflect).Disposables and Other AccessoriesOur Niobe system is designed to use a toolkit of proprietary disposable interventional devices. The toolkit currently consists of: • our Cardiodrive or QuikCAS automated catheter advancement disposables designed to provide precise remote advancement of proprietaryelectrophysiology catheters; • 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; and • our suite of Cronus, Assert, Titan and Pegasus coronary guidewires designed for use in interventional cardiology procedures for the introductionand placement of over-the-wire therapeutic devices, such as stents and angioplasty balloons.We believe that we can adapt many of the applicable disposable interventional devices for use with our system by using our proprietary technology toadd an inexpensive micro-magnet at their working tip. This micro-magnet is activated by an external magnetic field, which allows interventional devices withtip 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 approachto bringing digital control to disposable interventional devices using embedded magnets can simplify the overall design of these devices because mechanicalcontrols 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 bythese systems. These include: • our V-CAS catheter advancement system (“V-CAS system”) that controls both the magnetic catheter body and a standard fixed-curve sheath; • our V-CAS Deflect fully integrated catheter advancement system (“V-CAS Deflect system”) with a robotic deflectable sheath for maximumintegration and versatility, allowing users to advance and retract the magnetic catheter body at angles up to 270°; • our V-Loop circular catheter manipulator (“V-Loop device”), which allows the user to control certain circular mapping catheters, such asBiosense Webster’s LASSO2515 or LASSO2515 NAV Circular Mapping Catheter, advance, retract, rotate, deflect and adjust loop radius,and hold the catheter position against the tissue to optimize electrograms; and • our V-Sono ICE catheter manipulator (“V-Sono device”) that allows a single physician to manipulate the BWI SoundStar™ catheter and CARTO3™ System from the control room, store and recall previous positions and automatically sweep over an area of interest with adjustable speed andangle – all without leaving the control roomRegulatory ApprovalWe began commercial shipments of our Niobe system in 2003, following U.S. and European regulatory clearance of its core components. We havereceived regulatory clearance, licensing and/or CE Mark approvals 8®®®®®®®®®®Table of Contentsnecessary for us to market the Niobe system, the Cardiodrive, and various disposable interventional devices in the U.S., Canada, Europe, China, andvarious 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,European Union and some other countries and we are in the process of obtaining necessary approvals for extending our markets in other countries.We have received the CE Mark that allows us to market the Vdrive, Vdrive Duo, V-CAS, V-CAS Deflect, V-Loop and V-Sono devices in Europe. Inaddition, we have received licensing to market the V-CAS, V-CAS Deflect and V-Loop devices in Canada and have applied for a license of the V-Sono device.We are in the process of obtaining the necessary clearance for the V-Loop and V-Sono devices in the United States.We have received Food and Drug Administration (“FDA”) clearance and the CE Mark necessary for us to market our suite of Titan and Pegasuscoronary and RF PowerAssert peripheral guidewires in the U.S. and Europe. We continue to seek approvals and clearances to market our products asappropriate.Biosense Webster has received FDA approval, Chinese SFDA approval, and CE Mark for the CARTO RMT navigation system for use with the Niobesystem, the 4mm CELSIUS RMT Diagnostic/Ablation Steerable Tip Catheter, the 4mm NAVISTAR RMT Diagnostic/Ablation Steerable Tip Catheter, the8mm Navistar RMT DS Diagnostic/Ablation Steerable Tip Catheter, and the 3.5mm NAVISTAR RMT THERMOCOOL Irrigated Tip Catheter. Inaddition, Biosense Webster has received FDA approval and CE Mark for the 3.5mm CELSIUS RMT THERMOCOOL Irrigated Tip Catheter. We willcontinue to co-develop catheters that can be navigated with our system, both with and without Biosense Webster’s 3D catheter location sensing technology. Inaddition, we can utilize technology which allows our system to recognize specific disposable interventional devices in order to prevent unauthorized use of oursystem. See “Strategic Alliances – Disposable Devices Alliance” below for a description of our arrangements with Biosense Webster.FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREASOur total U.S. revenue was $27.0 million, $23.9 million, and $28.8 million for the years ended December 31, 2012, 2011, and 2010, respectively. Ourtotal international revenue was $19.5 million, $18.0 million and $25.2 million for the years ended December 31, 2012, 2011, and 2010, respectively.CLINICAL APPLICATIONSWe have focused our clinical and commercial efforts on applications of the Epoch Solution primarily in electrophysiology procedures for the treatmentof arrhythmias and secondarily in complex interventional cardiology procedures for the treatment of coronary artery disease. Our system potentially has broadapplicability in other areas, such as structural heart repair, interventional neurosurgery, interventional neuroradiology, peripheral vascular, renal denervation,pulmonology, urology, gynecology and gastrointestinal medicine, and our patent portfolio has been structured to permit expansion into these areas.ElectrophysiologyThe rhythmic beating of the heart results from the transmission of electrical impulses. When these electrical impulses are mistimed or uncoordinated, theheart fails to function properly, resulting in symptoms that can range from fatigue to stroke or death. Over 4.3 million people in the U.S. currently suffer fromthe resulting abnormal heart rhythms, which are known as arrhythmias. The most common arrhythmia in adults is atrial fibrillation. This chaotic electricalactivity of the top chambers of the heart is estimated to be present in three million people in the United States and over six million people worldwide. Theincidence is expected to continue to rise as the population ages and life expectancy continues to increase. Atrial fibrillation is a major physical and economicburden. This arrhythmia is associated with stroke, heart failure, and adverse symptoms causing patients to be 9®®®®®®®Table of Contentsvery motivated to seek treatment. The combination of symptoms, prevalence and co-morbidities make atrial fibrillation a major economic factor in healthcare.We believe payors are very interested in therapies that may reduce the financial impact of this disease.Drug therapies for arrhythmias often fail to adequately control the arrhythmia and may have significant side effects. Consequently, physicians haveincreasingly sought more permanent, non-pharmacological, solutions for arrhythmias. The most common interventional treatment for arrhythmias, and inparticular tachyarrhythmias, where the patient’s heart rate is too high or irregular, is an ablation procedure in which the diseased tissue giving rise to thearrhythmia is isolated or destroyed. Prior to performing an electrophysiology ablation, a physician typically performs a diagnostic procedure in which theelectrical 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 anablation is anticipated, physicians will choose an ablation catheter and perform both the mapping and ablation with the same catheter. In February 2009 theFDA approved the Biosense Webster NAVISTAR THERMOCOOL irrigated catheter to be labeled for the treatment of atrial fibrillation. This is the firstdevice approved by the FDA to be labeled for the interventional treatment of this arrhythmia. We believe this important milestone will accelerate acceptance ofablations for the treatment of atrial fibrillation.We believe more than 3,000 interventional labs around the world are currently capable of conducting electrophysiology procedures. Approximately600,000 electrophysiology procedures are performed annually worldwide, and procedure growth rate is 10% annually.We believe the Epoch Solution is particularly well-suited for those electrophysiology procedures which are time consuming or which can only beperformed by highly experienced physicians. These procedures include: • General Mapping and Ablations. For the more routine mapping and ablation procedures, our system offers the unique benefit of precise cathetermovement and consistent heart wall contact. Additionally, the system can control the procedure and direct catheter movement from the controlroom, saving the physician time and helping to avoid unnecessary exposure to high doses of radiation. • Atrial Fibrillation. The most commonly diagnosed abnormal heart rhythm, atrial fibrillation, is a particular type of arrhythmia characterized byrapid, disorganized contractions of the heart’s upper chambers, the atria, which lead to ineffective heart pumping and blood flow and can be amajor risk factor for stroke. The number of potential patients for manual catheter-based procedures for atrial fibrillation has been limited becausethe procedures are extremely complex and are performed by only the most highly skilled electrophysiologists. They also typically have muchlonger procedure times than general ablation cases and the success rates have been lower and more variable. We believe that our system can allowthese procedures to be performed by a broader range of electrophysiologists and, by automating some of the more complex catheter maneuvers, canstandardize and reduce procedure times and significantly improve outcomes. • Ventricular Tachycardia. Ventricular tachycardia is a malignant, potentially lethal arrhythmia that is extremely difficult and time consuming totreat by catheter ablation because of the mechanical force of a conventional catheter against the heart wall. The magnetic catheter has beencharacterized as the ideal tool for this application. These arrhythmias can often be modified or interrupted by the pressure of a conventionalcatheter making it very difficult to identify the appropriate location for the ablation, whereas magnetic catheters produce fewer extra beats andprovide for easier and more efficient mapping of the diseased tissue. Successful ablation of ventricular tachycardia can extend the useful life of animplantable defibrillator, reduce shocks to the patient, reduce the need for antiarrhythmic drugs or, in some cases, obviate the need for anexpensive implantable device and its associated follow-up.We believe that our system can address the current challenges in electrophysiology by permitting the physician to remotely navigate disposableinterventional devices from a control room outside the x-ray field. 10®®Table of ContentsAdditionally, we believe that our system allows for more predictable and efficient navigation of these devices to the treatment site, including the left atrium foratrial fibrillation procedures, and enables appropriate contact force to be maintained to efficiently apply energy on the wall of the beating heart. We also believethat our system will significantly lower the skill barriers required for physicians to perform complex electrophysiology procedures and, additionally, improveinterventional lab efficiency and reduce disposable interventional device utilization.Interventional CardiologyMore than half a million people die annually from coronary artery disease, a condition in which the formation of plaque in the coronary arteriesobstructs 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 overone million patients undergo interventional procedures in an attempt to open blocked vessels and another one half million patients undergo open heart surgeryto 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 andchronic total occlusions. Lesions are also categorized by the degree of difficulty with which they can be opened as simple or complex. Complex lesions, suchas chronic total occlusions, longer lesions, and lesions located within smaller diameter vessels, are often very difficult or time consuming to open with manualinterventional techniques.We believe well over 10,000 interventional labs worldwide are currently capable of conducting interventional cardiology. Approximately 4 millioninterventional cardiology procedures are performed annually in the U.S. alone. We estimate that approximately 10-15% of these interventional cardiologyprocedures currently being performed are complex and therefore require longer procedure times and may have sub-optimal outcomes. We believe that oursystem can substantially benefit this subset of complex interventional cardiology procedures.Interventional Neuroradiology, Neurosurgery and Other Interventional ApplicationsPhysicians used a predecessor to our Niobe system to conduct a number of procedures for the treatment of brain aneurysms, a condition in which aportion of a blood vessel wall balloons and which can result in debilitating or fatal bleeding and strokes. The Niobe system also has a range of potentialapplications in minimally invasive neurosurgery, including biopsies and the treatment of tumors, treatment of vascular malformations and fetal interventions.STRATEGIC ALLIANCESWe have entered into strategic alliances with technology leaders in the global interventional market, including Siemens, Philips, and Biosense Webster,that we believe aid us in commercializing our Niobe system. We believe our two imaging partners, Siemens and Philips, have a significant percentage of theinstalled base of imaging systems worldwide.We believe that these strategic alliance arrangements are favorable to Stereotaxis because they: • provide for the integration of our system with market leading digital imaging and 3D catheter location sensing technology, as well as disposableinterventional devices; • allow us to leverage the sales, distribution, service and maintenance expertise of our strategic alliances; and • enable operational flexibility by not requiring us to provide any of the parties in our strategic alliances with a right of first refusal in the event thatanother party wants to acquire us or with board representation where a strategic alliance has made a debt or equity investment in us. 11Table of ContentsImaging AlliancesSiemens Alliance. We have successfully integrated our Niobe system with Siemens’ digital fluoroscopy system to provide advanced interventional labvisualization and instrument control through user-friendly computerized interfaces. We also coordinate our sales efforts with Siemens to co-place integratedsystems at leading hospital sites in the U.S., Europe and in Asia. Under this alliance and under a separate services agreement, Siemens provides equipmentmaintenance and support services for certain of our installed sites. We have also entered into a software distribution agreement with Siemens under which wehave the right to sublicense Siemens’ 3D pre-operative image navigation software as part of our advanced user interface for the Niobe ES system.Philips Alliance. We have successfully integrated our Niobe system with Philips’ digital x-ray fluoroscopy system. We also have an agreement underwhich we coordinate our sales and marketing efforts with Philips in order to co-place our integrated systems in addition to collaborating on the development ofnew solutions and sharing engineering and development costs.Disposables Devices AllianceBiosense Webster Alliance. We entered into an alliance in May 2002 pursuant to which we agreed to integrate Biosense Webster’s advanced 3D catheterlocation sensing technology, which we believe has the leading market position in this important field of visualization for electrophysiology procedures, withour instrument control system, and to jointly develop associated location sensing electrophysiology mapping and ablation catheters that are navigable with theNiobe system. We believe that these integrated products will provide physicians with the elements required for effective complex electrophysiology procedures:highly accurate information as to the exact location of the catheter in the body and highly precise control over the working tip of the catheter. We also agreed tocoordinate our sales force efforts with Biosense Webster in order to place Biosense CARTO RMT systems and our Niobe systems that, together with the co-developed catheters, comprise the full integration of our instrument control and 3D location sensing technologies in the interventional lab. We expanded thisalliance in November 2003 to include the parallel integration of our instrument control technology with Biosense Webster’s full line of non-location sensingmapping and ablation catheters that are relevant to our targeted applications in electrophysiology. Under an amendment to this agreement in 2008, BiosenseWebster advanced us $10 million and allowed us to defer up to $8 million of payments due to Biosense Webster for research and development related to jointlydeveloped products. These amounts plus interest accrued thereon had been repaid as of December 31, 2011.The co-developed catheters are manufactured and distributed by Biosense Webster, and both of the parties agreed to contribute to the resources requiredfor their development. We are entitled to royalty payments from Biosense Webster, payable quarterly based on net revenues from sales of the co-developedcatheters. These royalties are used to make payments under the debt agreement with Healthcare Royalty Partners II, L.P. (formerly “Cowen Healthcare RoyaltyPartners II, L.P.”) as discussed in Item 7. Under the alliance with Biosense Webster, we agreed to certain restrictions on our ability to co-develop and distributecatheters competitive with those we are developing with Biosense Webster and we granted Biosense Webster certain notice and discussion rights for productdevelopment activities we undertake relating to localization of magnetically enabled interventional disposable devices in fields outside of electrophysiology andmapping.Either party may terminate this alliance in certain specified “change of control” situations, although the termination would not be effective until one yearafter the change of control and then would be subject to a wind-down period during which Biosense Webster would continue to supply co-developed cathetersto 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 achange of control, if earlier than three years). If either party terminates the agreement under this provision, we must pay a termination fee to Biosense Websterequal 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 12®Table of Contentsafter Biosense Webster has received approval from the U.S. FDA for atrial fibrillation indication for the NAVISTAR RMT THERMOCOOL catheter, wewould 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 twoyears after the change of control. We also agreed to notify Biosense Webster if we reasonably believe that we are engaged in substantive discussions withrespect to the sale of the Company or substantially all of our assets.In January 2011, we executed an amendment, effective December 2010, to our agreement with Biosense Webster to extend the development anddistribution alliance related to certain catheters that have been developed under previous collaboration activities between Biosense Webster and us on anexclusive basis until December 15, 2015 and thereafter on a nonexclusive basis until December 31, 2018. Biosense Webster’s rights to distribute suchproducts in Japan is extended on an exclusive basis to the later of December 31, 2017 or five years after the date of approval of the applicable product for salein Japan and on a nonexclusive basis to the later of December 31, 2020 or eight years after the date of approval of the applicable product for sale in Japan.Additionally, both companies agreed to expand the product offering covered by the agreement to include a next generation irrigated magnetic catheter, which willintegrate technological advancements from both companies.In May 2011, we entered into a new agreement, under which we granted Biosense Webster global, non-exclusive rights to resell Stereotaxis’ Odysseyproducts, including Odyssey Vision and Odyssey Cinema systems.RESEARCH AND DEVELOPMENTWe have assembled an experienced group of engineers and physicists with recognized expertise in magnetics, software, control algorithms, systemsintegration and disposable interventional device modeling and design.Our research and development efforts are focused in the following areas: • continuing to enhance our existing Niobe system, Odyssey Solution, and Vdrive system through ongoing product and software development; and • designing new proprietary disposable interventional devices for use with our system.Our research and development team collaborates with our strategic partners, Siemens, Philips, and Biosense Webster, to integrate our Niobe system’sopen architecture platform with key imaging, location sensing and information systems in the interventional lab. We have also collaborated with a number ofhighly regarded interventional physicians in key clinical areas and have entered into agreements with a number of universities and research institutions, whichserve to increase our access to world class physicians and scientists and to expand our name recognition in the medical community. Our research anddevelopment expenses for the years ending December 31, 2012, 2011, and 2010, were $8.4 million, $12.9 million, and $12.2 million, respectively.CUSTOMER SERVICE AND SUPPORTWe provide worldwide maintenance and support services to our customers for our integrated products with the assistance of certain strategically-basedrepresentatives. By utilizing these relationships, we provide direct, on-site technical support activities, including call center, customer support engineers andservice 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 onproviding installation, training, and back-up technical support.Our back-up technical support includes a combination of on-line, telephone and on-site technical assistance services 24 hours a day, seven days a week.We have also hired service and support engineers with networking and medical equipment expertise, and have outsourced a portion of our installation andsupport services. We offer several different levels of support to our customers, including basic hardware and software maintenance, extended productmaintenance, and rapid response capability for both parts and service. 13®®Table of ContentsWe have established a call center in our St. Louis facilities, which provides real-time clinical and technical support to our customers worldwide.MANUFACTURINGNiobe, Odyssey, and Vdrive SystemsOur manufacturing strategy for our Niobe system and Odyssey Solution is to sub-contract the manufacture of major subassemblies of our system tomaximize manufacturing flexibility and lower fixed costs. Our current manufacturing strategy for Vdrive system is to build all subassemblies in-house. Wemaintain quality control for all of our systems by completing final system assembly and inspection in-house.Disposable Interventional DevicesOur manufacturing strategy for disposable interventional devices is to outsource their manufacture through subcontracting and through our alliance withBiosense Webster and to expand partnerships for other interventional devices. We work closely with our contract manufacturers and have strong relationshipswith component suppliers. We have entered into manufacturing agreements to provide high volume capability for devices other than catheters.SoftwareThe software components of the Niobe system and Odyssey Solution, including control and application software, are developed both internally andwith integrated modules we purchase or license. We perform final testing of software products in-house prior to their commercial release.GeneralOur manufacturing facilities operate under processes that meet the FDA’s requirements under the Quality System Regulation, or QSR. 2011 FDAEstablishment Inspections of our Maple Grove, Minnesota facility noted no observations. Our ISO registrar and European notified body has audited ourfacilities annually since 2001 and found the facilities to be in compliance with requirements. The initial ISO 9001 certification was issued in January 2002and the most recent ISO 13485 certificate in 2009.SALES AND MARKETINGWe market our products in the U.S and internationally through a direct sales force of senior sales specialists, distributors and sales agents, supportedby account managers and clinical specialists who provide training, clinical support, and other services to our customers. In addition, our strategic alliancesform an important part of our sales and marketing strategy. We leverage the sales forces of our imaging partners to co-market integrated systems on aworldwide basis. This approach allows us to maximize our leads and knowledge of the market opportunities while using our resources to sell directly to thecustomer. Under the terms of our agreement, Biosense Webster exclusively distributes magnetically enabled electrophysiology mapping and ablation catheters,co-developed pursuant to our alliance with them.Our sales and marketing efforts include two important elements: (1) selling Niobe system, Odyssey Solution, and Vdrive system directly and throughco-marketing agreements with our imaging partners, Siemens and Philips and through distributors; and (2) leveraging our installed base of systems to driverecurring sales of disposable interventional devices, software and service.REIMBURSEMENTWe believe that substantially all of the procedures, whether commercial or in clinical trials, conducted in the U.S. with the Niobe system have beenreimbursed to date. We expect that third-party payors will reimburse, 14Table of Contentsunder existing billing codes, procedures in which our line of ablation catheters and those on which we are collaborating with Biosense Webster, as well as ourline of guidewires, are used. We expect healthcare facilities in the U.S. to bill various third-party payors, such as Medicare, Medicaid, other governmentprograms and private insurers, for services performed with our products. We believe that procedures performed using our products, or targeted for use byproducts 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 forperforming medically necessary procedures using our products on insured patients. We cannot assure you that reimbursement policies of third-party payorswill not change in the future with respect to some or all of the procedures using the Niobe system.In countries outside the United States, reimbursement is obtained from various sources, including governmental authorities, private health insuranceplans, and labor unions. In most foreign countries, private insurance systems may also offer payments for some therapies. Additionally, health maintenanceorganizations are emerging in certain European countries. In the European Union, we believe that substantially all of the procedures, whether commercial or inclinical trials, conducted with the Niobe system have been reimbursed to date. In other foreign countries, we may need to seek international reimbursementapprovals, 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 PROPERTYOur strategy is to patent the technology, inventions and improvements that we consider important to the development of our business. As a result, wehave 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, 2012, we had 119 issued U.S. patents, 3 co-owned U.S. patents and 4 licensed-in U.S. patents. In addition, we had 31 pending U.S. patent applications and 2 co-owned U.S. patent applications. As ofDecember 31, 2012 we had 36 issued foreign patents, 2 pending Patent Cooperation Treaty application and 13 owned Foreign Patent Applications. We alsohave a number of invention disclosures under consideration and several applications that are being prepared for filing.The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factualquestions. One or more of the above patent applications may be denied. In addition, our issued patents may be challenged, based on prior art circumvented orotherwise not provide protection for the products we develop. Furthermore, we may not be able to obtain patent licenses from third parties required for thedevelopment of new products for use with our system. We also note that U.S. patents and patent applications may be subject to interference proceedings andU.S. patents may be subject to reexamination proceedings in the U.S. Patent and Trademark Office (and foreign patents may be subject to opposition orcomparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent applicationor loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and oppositionproceedings may be costly. In the event that we seek to enforce any of our owned or exclusively licensed patents against an infringing party, it is likely that theparty defending the claim will seek to invalidate the patents we assert, which, if successful could result in the entire loss of our patent or the relevant portion ofour patent and not just with respect to that particular infringer. Any litigation to enforce or defend our patents rights, even if we were to prevail, could be costlyand time-consuming and would divert the attention of our management and key personnel from our business operations.It would be technically difficult and costly to reverse engineer our Niobe system, which contains numerous complex algorithms that control ourdisposable devices inside the magnetic fields generated by the Niobe system. 15Table of ContentsWe 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 marketdisposable devices that can be navigated by the Niobe system. We can also utilize security keys, such as embedded smart chips or associated software thatcould allow our system to recognize specific disposable interventional devices in order to prevent unauthorized use of our system.We have also developed substantial know-how in magnet design, magnet physics and magnetic instrument control that was developed in connectionwith the development of the Niobe system, which we maintain as trade secrets. This know-how centers around our proprietary magnet design, which is acritical aspect of our ability to design, manufacture and install a cost-effective Magnetic Navigation System that is small enough to be installed in a standardinterventional lab. Our Odyssey Solution contains numerous complex algorithms and proprietary software and hardware configurations, and requiressubstantial knowledge to design and assemble, which we maintain as trade secrets. These proprietary software and hardware, some of which is owned byStereotaxis, and some of which is licensed to Stereotaxis, is a material aspect of the ability to design, manufacture and install a cost-effective and efficientinformation integration, storage, and delivery platform.We seek to protect our proprietary information by requiring our employees, consultants, contractors, outside parties and other advisers who are engagedin development work for us to execute nondisclosure and assignment of invention agreements upon commencement of their employment or engagement,through which we seek to protect our intellectual property. These agreements to protect our unpatented technology provide only limited and possibly inadequateprotection of our rights. Third parties may therefore be able to use our unpatented technology, reducing our ability to compete. In addition, employees,consultants and other parties to these agreements may breach them and adequate remedies may not be available to us for their breaches. Many of our employeeswere previously employed at universities or other medical device companies, including potential competitors. We could in the future be subject to claims thatthese employees or we have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defendagainst these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights orpersonnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and divert the attention of management andkey personnel from our business operations. We also generally seek confidentiality agreements from third parties that receive our confidential data or materials.Intellectual property risks and uncertainties are further discussed in “Item 1A—Risk Factors” in this annual report.COMPETITIONThe markets for medical devices are intensely competitive and are characterized by rapid technological advances, frequent new product introductions,evolving industry standards and price erosion.We consider the primary competition to our Niobe system to be existing manual catheter-based interventional techniques and surgical procedures. To ourknowledge, we are the only company that has commercialized remote, digital and direct control of the working tip of both catheters and guidewires forinterventional use. Our success depends in part on convincing hospitals and physicians to convert existing interventional procedures to computer-assistedprocedures.We also face competition from companies that are developing new approaches and products for use in interventional procedures, including roboticapproaches that are directly competitive with our technology. Some of these companies may have an established presence in the field of interventionalcardiology, including the major imaging, capital equipment and disposables companies that are currently selling products in the interventional lab. We areaware of one public company that has commercialized a catheter delivery system which has been cleared by the FDA for mapping procedures only. Inaddition, we are aware of one private company with an electro-magnetic catheter delivery system that has received CE Mark approval in Europe. We 16Table of Contentsalso face competition from companies who currently market or are developing drugs, gene or cellular therapies to treat the conditions for which our productsare intended.We face direct competition to certain products in our Odyssey Solution, such as the Odyssey Vision system. These competitor products primarilycompete with individual components of our Odyssey Solution. We expect to continue to face competitive pressure in this market in the future, based on therapid 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 andeffective sales, support, training and service. The length of time required for products to be developed and to receive regulatory and reimbursement approval isalso an important competitive factor. See “Item 1A—Risk Factors” for a discussion of other competitive risks facing our business.GOVERNMENT REGULATIONThe healthcare industry, and thus our business, is subject to extensive federal, state, local and other national and international regulation. Some of thepertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Inaddition, these laws and their interpretations are subject to change.Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened civil andcriminal enforcement efforts. As indicated by work plans and reports issued by these agencies, the federal government will continue to scrutinize, among otherthings, the billing practices of healthcare providers and the marketing of healthcare products. The federal government also has increased funding in recentyears to fight healthcare fraud, and various agencies, such as the U.S. Department of Justice, the Office of Inspector General of the Department of Health andHuman Services, or OIG, and state Medicaid fraud control units, are coordinating their enforcement efforts.We believe that we have structured our business operations and relationships with our customers, consultants, agents, and distributors to comply withall applicable legal requirements. However, it is possible that governmental entities or other third parties could interpret these laws differently and assertotherwise. We discuss below the statutes and regulations that are most relevant to our business and most frequently cited in enforcement actions.U.S. Food and Drug Administration RegulationThe FDA strictly regulates the medical devices we produce under the authority of the Federal Food, Drug and Cosmetic Act (FD&C Act), the regulationspromulgated under the FD&C Act, and other federal and state statutes and regulations. The FD&C Act governs, among other things, the pre-clinical andclinical testing, design, manufacture, safety, efficacy, labeling, storage, record keeping, post market surveillance, reporting and advertising and promotion ofmedical devices.Our medical devices are categorized under the statutory framework described in the FD&C Act. This framework is a risk-based system whichclassifies medical devices into three classes from lowest risk (Class I) to highest risk (Class III). In general, Class I and II devices are either exempt from theneed for FDA clearance or cleared for marketing through a premarket notification, or 510(k), process. Our Class II devices subject to 510(k) requirementsprovide diagnostic information or are considered to be general tools, such as our Niobe system and our suite of guidewires, which have utility in a variety ofinterventional procedures. Our Class III therapeutic devices are subject to the premarket approval, or PMA, process. If clinical data are needed to supportclearance, 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 coveringeach clinical site involved in the 17Table of Contentsstudy. When all approvals are obtained, we initiate a clinical study to evaluate the device. Following completion of the study, we collect, analyze and presentthe data in an appropriate submission to the FDA (i.e. in support of either a 510(k) or PMA).Under the 510(k) process, the FDA determines whether or not the device is “substantially equivalent” to a previously marketed predicate device. Inmaking this determination, the FDA compares the new device to the predicate device and if the two devices are “substantially equivalent” in intended use,safety, and effectiveness, the device may be cleared for marketing and introduction into domestic commerce. The 510(k) process underwent a significantreview in 2011, including an exhaustive report filed by the Institute of Medicine (IOM). It is anticipated that this review may elicit significant changes in the510(k) process moving forward. In the interim, the uncertainty surrounding the key elements of the 510(k) process has significantly increased the degree ofdifficulty in predicting regulatory pathways and timelines for all medical device companies.Under the PMA process, the FDA examines detailed data relating to the safety and effectiveness of the device. This information includes design,development, manufacture, labeling, advertising, pre-clinical testing, and clinical study data. Prior to approving the PMA, the FDA generally will conduct aninspection of the facilities producing the device and one or more clinical sites where the study was conducted. The Establishment Inspection evaluates theCompany’s readiness to commercially produce and distribute the device, including an evaluation of compliance under the Quality System Regulation (QSR).Under certain circumstances, the FDA may convene an advisory panel meeting to seek review of the data presented in the PMA. If the FDA’s evaluation isfavorable, the PMA is approved, and the device can be marketed in the U.S. The FDA may approve the PMA with conditions, such as post-marketsurveillance requirements.Further, we are subject to, at any time, periodic and routine inspection by FDA to ensure product compliance with the QSR quality standards.Companies deemed non-compliant with the QSR in part or in full may receive a Warning Letter and/or be subject to other enforcement actions.We evaluate changes made to our products following 510(k) clearance or PMA approval for significance and if appropriate, make a subsequentsubmission to the FDA. In the case of a significant change being made to a 510(k) device, we submit a new 510(k). For a PMA device, we will either needapproval through a PMA supplement or will need to notify the FDA.For our 510(k) devices, we design the submission to cover multiple models or variations in order to minimize the number of submissions. For our PMAdevices, we often rely upon the PMA approvals of our strategic partners to utilize the PMA supplement regulatory path rather than pursue an original PMA.Because of the differences in the amount of data and numbers of patients in clinical trials, a PMA supplement process is often much simpler than thatrequired for approval of an original PMA.International RegulationIn order for us to market our products in other countries, we must obtain regulatory approvals and comply with extensive safety and quality regulationsin other countries. These regulations, including the requirements for approvals or clearance and the time required for regulatory review, vary from country tocountry. Failure to obtain regulatory approval in any country in which we plan to market our products may limit our ability to generate revenue and harm ourbusiness.The primary regulatory environment in Europe is that of the European Union, which consists of 27 countries encompassing most of the major countriesin Europe. The European Union requires that manufacturers of medical products obtain the right to affix the CE Mark to their products before selling them inmember countries of the European Union. The CE Mark is an international symbol of adherence to quality assurance standards and compliance withapplicable medical device directives. In order to obtain the right to affix the CE Mark to products, a manufacturer must obtain certification that its processesmeet certain quality standards. Compliance 18Table of Contentswith the Medical Device Directive, as certified by a recognized European Notified Body, permits the manufacturer to affix the CE Mark on its products andcommercially distribute those products throughout the European Union.If we modify existing products or develop new products in the future, including new devices, we will need to apply for permission to affix the CE Markto such products. We will be subject to regulatory audits, currently conducted annually, in order to maintain any CE Mark permissions we have alreadyobtained.Anti-Kickback StatuteThe federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providingremuneration, 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 whichpayment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The definition of “remuneration” has been broadlyinterpreted to include anything of value, including for example gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments ofcash and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involvingremuneration is to induce referrals of federal healthcare covered business, the statute has been violated. Penalties for violations include criminal penalties andcivil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs.Many states have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcareitems or services reimbursed by any source, not only the Medicare and Medicaid programs.Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and recently havebrought cases against sales personnel who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business. Aspart of our compliance program, we have established a formal Clinical Compliance Committee and appointed a Clinical Compliance Officer to help ensurecompliance with the Anti-Kickback Statute and similar state laws and we train our employees on our healthcare compliance policies. However, we cannot ruleout the possibility that the government or other third parties could interpret these laws differently and assert otherwise.Beginning upon issuance of the final regulation under the Physician Payment Sunshine Act, which is expected to occur in early 2013, we must trackand report to the federal government all “transfers of value” between Stereotaxis and US physicians and/or teaching hospitals and other relevant healthcareprofessionals.HIPAA and Other Privacy LawsThe Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two federal crimes: healthcare fraud and false statements relatingto healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, includingprivate payors.A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statementsstatute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulentstatement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in finesor imprisonment.In addition to creating the two new federal healthcare crimes, HIPAA also establishes uniform standards governing the conduct of certain electronichealthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcareproviders, health plans and 19Table of Contentshealthcare clearinghouses. Two standards have been promulgated under HIPAA: the Standards for Privacy of Individually Identifiable Health Information,which restrict the use and disclosure of certain individually identifiable health information, and the Standards for Electronic Transactions, which establishstandards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures. Inaddition, these security standards require covered entities to implement certain security measures to safeguard certain electronic health information. In parallelwith HIPAA, Stereotaxis acknowledges that it is also subject to the Privacy and Security Standards as those Standards are applicable to it under HITECH, theHealth Information Technology for Economic and Clinical Health Act, which is Title XIII of the American Recovery and Reinvestment Act.In addition to federal regulations issued under HIPAA, some states and foreign countries have enacted privacy and security statutes or regulations that,in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our operations and procedures to comply withthe more stringent state and foreign laws, which may entail significant and costly changes for us. We believe that we are in compliance with such state andapplicable foreign laws and regulations. However, if we fail to comply with applicable state or foreign laws and regulations, we could be subject to additionalsanctions.Federal False Claims ActAnother trend affecting the healthcare industry is the increased use of the federal False Claims Act and, in particular, actions under the False ClaimsAct’s “whistleblower” or “qui tam” provisions. Those provisions allow a private individual to bring actions on behalf of the government alleging that thedefendant has defrauded the federal government. The government must decide whether to intervene in the lawsuit and to become the primary prosecutor. If itdeclines to do so, the individual may choose to pursue the case alone, although the government must be kept apprised of the progress of the lawsuit. Whetheror not the federal government intervenes in the case, it will receive the majority of any recovery. If the individual’s litigation is successful, the individual isentitled to no less than 15%, but no more than 30%, of whatever amount the government recovers. In recent years, the number of suits brought againsthealthcare providers by private individuals has increased dramatically. In addition, various states have enacted laws modeled after the federal False ClaimsAct.When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained bythe government, plus civil penalties from $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the federal FalseClaims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federalgovernment. Although simple negligence should not give rise to liability, submitting a claim with reckless disregard or deliberate ignorance of its truth or falsitycould result in substantial civil liability. The False Claims Act has been used to assert liability on the basis of inadequate care, improper referrals, andimproper use of Medicare numbers when detailing the provider of services, in addition to the more predictable allegations as to misrepresentations with respectto the services rendered. We are unable to predict whether we could be subject to actions under the False Claims Act, or the impact of such actions. However,the costs of defending claims under the False Claims Act, as well as sanctions imposed under the Act, could significantly affect our financial performance.Certificate of Need LawsIn approximately two-thirds of the states, a certificate of need or similar regulatory approval is required prior to the acquisition of high-cost capital itemsor various types of advanced medical equipment, such as our Niobe system. At present, many of the states in which we sell Niobe systems have laws thatrequire 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 areconditioned upon our customer’s receipt of necessary certificate of need approval. Certificate of need laws were enacted to contain rising health care costs,prevent the unnecessary duplication of health resources, and increase patient access for health services. In practice, certificate of need laws have 20Table of Contentsprevented hospitals and other providers who have been unable to obtain a certificate of need from acquiring new equipment or offering new services. A furtherincrease in the number of states regulating our business through certificate of need or similar programs could adversely affect us. Moreover, some states mayhave additional requirements. For example, we understand that California’s certificate of need law also incorporates seismic safety requirements which must bemet before a hospital can acquire our Niobe system.EmployeesAs of December 31, 2012, we had 134 employees, 24 of whom were engaged directly in research and development, 55 in sales and marketing activities,25 in manufacturing and service, 4 in regulatory, clinical affairs and quality activities, 5 in training activities and 21 in general administrative andaccounting activities. A significant majority of our employees is not covered by a collective bargaining agreement, and we consider our relationship with ouremployees to be good.Availability of InformationWe make certain filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-K, current reports on Form 8-K, andall amendments and exhibits to those reports, available free of charge in the Investors section of our website, http://www.stereotaxis.com, as soon asreasonably practicable after they are filed with the SEC. The filings are also available through the SEC at the SEC’s Public Reference Room at 100 F Street,N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330. Further, these filings are available on the Internet at http://www.sec.gov. Information containedon our website is not part of this report and such information is not incorporated by reference into this report. 21Table of ContentsITEM 1A.RISK FACTORSThe following uncertainties and factors, among others, could affect future performance and cause actual results to differ materially from those expressedor implied by forward looking statements.We may not generate cash from operations or be able to raise the necessary capital to continue operations.We will require additional funds to meet our operational, working capital and capital expenditure needs in the future. We cannot be certain that we will beable 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: • service our debt obligations and meet our financial covenants; • maintain customer and vendor relationships; • hire, train and retain employees; • maintain or expand our operations; • enhance our existing products or develop new ones; or • respond to competitive pressures.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 mayhave to curtail or cease operations.Our auditors have expressed substantial doubt regarding our ability to continue as a going concern. If we are unable to continue as a goingconcern, we may be required to substantially revise our business plan or cease operations.As of December 31, 2012, we had cash and cash equivalents of $7.8 million and a working capital deficit of $5.7 million. We incurred net losses of$9.2 million, $32.0 million, and $19.9 million in 2012, 2011 and 2010, respectively. As a result, our auditors have expressed substantial doubt about ourability to continue as a going concern. Our auditors included an explanatory paragraph regarding our ability to continue as a going concern in their auditors’report on our 2011 financial statements as well. We cannot assure you that we will be able to obtain sufficient funds from our operating or financing activitiesto support our continued operations. If we cannot continue as a going concern, we may need to substantially revise our business plan or cease operations,which may reduce or negate the value of your investment. In addition, our continued receipt of an opinion from our auditors that expresses doubt about ourability to continue as a going concern may impair our ability to raise new capital, obtain new customers, and hire and retain employees.We have recently received a notice from Nasdaq advising that we do not meet the continued listing standards of the Nasdaq Global Market. If weare unable to maintain a listing on a national securities exchange, it could negatively impact the price and liquidity of our common stock and ourability to access the capital markets, and could cause us to be in default under various loan documents.Our common stock is currently listed on the Nasdaq Global Market. In order to maintain that listing, we must satisfy minimum financial and otherrequirements. On January 20, 2012, we received notice from the Nasdaq Listing Qualifications Department that our common stock had not met the $1.00 pershare minimum bid price requirement for 30 consecutive business days and that, if we were unable to demonstrate compliance with this requirement duringthe applicable grace periods, our common stock would be subject to delisting after that time. Because the closing bid price of our common stock on theNasdaq Global Market had been below $1.00 each trading day since December 6, 2011, through July 10, 2012, we implemented the Reverse Stock Split ofone-for-ten on July 10 following shareholder approval of that action in order to put our stock in compliance with the minimum bid price requirement. OnJuly 25, 2012, we received notice that we regained compliance with the minimum bid price requirement. In addition, on June 25, 2012, Nasdaq notified usthat we did not comply with 22Table of Contentsthe rule regarding market value of publicly held shares. On January 9, 2013, we received notification from Nasdaq that we had regained compliance with theminimum market value of publicly held shares requirement.On March 20, 2013, we received a notification from the Nasdaq Listing Qualifications Department that we are not in compliance with the $50.0 millionin total assets and total revenues requirement for our most recently completed fiscal year or for two of the last three most recently completed fiscal years asrequired by Nasdaq Listing Rule 5450(b)(3)(A). In addition, the Nasdaq letter stated that we do not comply with an alternative requirement of Listing Rule5450(b) for continued listing on the Nasdaq Global Market because our stockholders’ equity is less than $10.0 million and the market value of our listedsecurities is less than $50.0 million. In the notice, Nasdaq stated that we may provide a plan to regain compliance with the continued listing requirements ofthe Nasdaq Global Market by May 6, 2013. If Nasdaq accepts the plan, it can grant an extension of up to 180 calendar days from the date of the letter (thatis, through September 16, 2013) to evidence compliance. We intend to submit a compliance plan with Nasdaq on or before May 6, 2013.There is no assurance that Nasdaq will approve our compliance plan and we are not currently eligible to transfer our listing to the Nasdaq CapitalMarket since we do not satisfy all applicable requirements for continued listing on that market at this time. Even if we are granted additional time to regaincompliance with the Nasdaq Global Market listing standards, there can be no assurance that we will be able to evidence compliance by September 16, 2013. Ifthe Nasdaq Staff does not accept our compliance plan, or if they accept our compliance plan and we are not able to achieve compliance by the establisheddeadline, then the Nasdaq Staff would issue a delisting letter. We would at that point be afforded the right to a hearing before an independent Nasdaq ListingQualifications Panel (the “Panel”). If we requested a hearing, the delisting action would be stayed until the conclusion of the hearing process and the expirationof any extension granted by the Panel. At that hearing, we could seek a further extension on the Nasdaq Global Market or a transfer to the Nasdaq CapitalMarket, pending our achievement of compliance with the applicable requirements for continued listing. If our common stock is delisted from the NasdaqStock Market, we anticipate that our common stock will be immediately eligible for quotation on the OTCQB Market. Any delisting could adversely affect themarket liquidity of our common stock, adversely affect our ability to obtain financing for the continuation of our operations and harm our business.Moreover, if we are not listed on an “eligible market,” under the terms of our convertible debt, we would be in default under the terms of our debenture, andbecause of cross-default provisions, we would be in default under our other principal debt obligations. In addition, receipt of a deficiency notice from Nasdaqwith respect to our ongoing compliance with the Nasdaq Global Market continued listing standards could also result in other negative implications, includingthe potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business developmentopportunities. Any of such developments as a result of the foregoing could impair the value of your investment.We may not be able to comply with debt covenants and may have to repay outstanding indebtedness.We have financed our operations through equity and convertible debt transactions, a financing of our catheter royalty stream under the HealthcareRoyalty Partners II, L.P. (formerly “Cowen Healthcare Royalty Partners II, L.P.”) facility entered into in November 2011, as well as bank and otherborrowings. We recently extended our revolving line of credit, which matures on June 30, 2013, and our Debentures mature on May 7, 2014. In addition, ourcurrent convertible debt and other borrowing agreements contain various covenants, including financial covenants under our credit agreement with our primarylender. The covenants in these various agreements are similar, but are not identical in all respects. If we violate our covenants, we could be required to repay theindebtedness as to which that default relates. In addition, as a result of various cross-default provisions in these agreements, a violation of the covenants underone or more of such agreements could trigger our obligation to repay all of our existing indebtedness. We could be unable to make these payments, which couldlead 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 agreementdue 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 sourceof liquidity if these covenants were to be violated and our loans and other borrowed amounts were forced to be repaid. 23Table of ContentsWe have recently lost key personnel, including our CEO and CFO, and may lose additional key personnel or fail to attract and retainreplacement or additional personnel.In February 2013, Sam Duggan, our Chief Financial Officer, announced his resignation from our company, and in March 2013, Mike Kaminski, ourPresident and Chief Executive Officer, announced his resignation effective April 12, 2013. William C. Mills III, our Board Chairman, will assume the title ofinterim CEO effective April 13, 2013, and Marty Stammer, our Vice President, Controller, is serving as our interim CFO. We are highly dependent on theprincipal members of our management, as well as our scientific and sales staff. Attracting and retaining qualified personnel, including in our CEO and CFOpositions, will be critical to our success, and competition for qualified personnel is intense. We may not be able to attract and retain personnel on acceptableterms given the competition for qualified personnel among technology and healthcare companies and universities. The loss of personnel, in particular seniorexecutives, or our inability to attract and retain other qualified personnel could harm our business and our ability to compete. In addition, the loss of membersof our scientific staff may significantly delay or prevent product development and other business objectives. A loss of key sales personnel could result in areduction 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 Niobe ES system. The Niobe ES 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 orinstallation decision for the Niobe ES system based on the disposable interventional devices that have received regulatory clearance or approval. Moreover, theNiobe ES system is an expensive piece of capital equipment, representing a significant portion of the cost of a new or replacement interventional lab. Althoughpriced significantly below a Niobe ES system, the Odyssey Solution and Vdrive system are still expensive products. If hospitals do not widely adopt oursystems, 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 requirescould 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 futuresales growth.Our backlog, which consists of purchase orders and other commitments, is considered by some investors to be a significant indicator of futureperformance. Consequently, negative changes to this backlog or its failure to grow commensurate with expectations could negatively impact our futureoperating results or our share price. Our backlog includes those outstanding purchase orders and other commitments that management believes will result inrecognition of revenue upon delivery or installation of our systems. We cannot assure you that we will recognize revenue in any particular period or at allbecause some of our purchase orders and other commitments are subject to contingencies that are outside our control. In addition, these orders andcommitments may be revised, modified or cancelled, either by their express terms, as a result of negotiations or by project changes or delays. Systeminstallation is by its nature subject to the interventional lab construction or renovation process which comprises multiple stages, all of which are outside of ourcontrol. Although the actual installation of our Niobe ES 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 delaysin completing the installation of these systems, our reputation would suffer and we may not be able to sell additional systems. We have experienced situationsin which our purchase orders and other commitments did not result in recognizing revenue from placement of a system with a customer. In addition toconstruction 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 thedeparture from the institution of physicians or physician groups who have expressed an interest in the Epoch Solution. 24Table of ContentsIn 2012 and 2011, we experienced significant decreases in our backlog. These, or similar events, have occurred in the past and are likely to occur in thefuture, causing delays in revenue recognition or even removal of orders and other commitments from our backlog. Such events would have a negative effect onour 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 ofoperations.We anticipate that our Niobe ES system will continue to have a lengthy sales cycle because it consists of a relatively expensive piece of capitalequipment, the purchase of which requires the approval of senior management at hospitals, inclusion in the hospitals’ interventional lab budget process forcapital expenditures, and, in some instances, a certificate of need from the state or other regulatory approval. In addition, historically the majority of our NiobeES 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 dependanton the construction cycle for the new or replacement interventional suite in which the equipment will be installed. In some cases, this time frame has beenextended further because the interventional suite construction is part of a larger construction project at the customer site (typically the construction of a newbuilding), which may occur with our existing and future purchase orders. We cannot assure you that the time from purchase order to delivery for systems tobe delivered in the future will be consistent with our historical experience. Moreover, the global economic slowdown may cause our customers to further delayconstruction or significant capital purchases, which could further lengthen our sales cycle. This may contribute to substantial fluctuations in our quarterlyoperating results. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in which event ourstock price would likely decrease.The rate of technological innovation of the Odyssey Solution might not keep pace with the rest of the market.The rate of innovation for the market in which the Odyssey Solution competes is fast-paced and requires significant resources and innovation. If a largercompetitor with significant capital entered the market, it could be difficult for us to maintain our advantages associated with being an early developer of thistechnology. In addition, connectivity with other devices in the electrophysiology lab is a key driver of value for the Odyssey Solution. If the Company is notable to continue to commit sufficient resources to ensure that its products are compatible with other products within the electrophysiology lab, this could havea negative impact on Odyssey Solution 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. The recent economicdownturn or the lack of a robust recovery in the United States and in other countries in which we sell our products may cause customers to delay purchasingor installation decisions or cancel existing orders. The Niobe ES system, Odyssey Solution and Vdrive system are typically purchased as part of a largeroverall capital project and an economic downturn or the lack of a robust recovery might make it more difficult for our customers, including distributors, toobtain adequate financing to support the project or to obtain requisite approvals. Any delay in purchasing decisions or cancellation of purchasingcommitments may result in a decrease in our revenues. Another credit crisis similar to the credit crisis that began in 2008 could further affect our business ifkey suppliers are unable to obtain financing to manufacture our products or become insolvent and we are unable to manufacture product to meet customerdemand. If the United States and global economy continues to be sluggish or deteriorates further for a longer period than we anticipate, we may experience amaterial 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. 25Table of ContentsPhysicians 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 andpreferable alternative to interventional methods in general use today. If longer-term patient studies or clinical experience indicate that treatment with our systemor 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 significantliability. Further, unsatisfactory patient outcomes or patient injury could cause negative publicity for our products, particularly in the early phases of productintroduction. 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 alsopossible that as our products become more widely used, latent defects could be identified, creating negative publicity and liability problems for us andadversely affecting demand for our products. If physicians do not use our products, we likely will not become profitable or generate sufficient cash to surviveas a going concern.Our collaborations with Siemens, Philips, Biosense Webster or other parties may fail, or we may not be able to enter into additional alliances orcollaborations in the future.We have collaborated with and are continuing to collaborate with Siemens, Philips, Biosense Webster and other parties to integrate our instrument controltechnology with their respective imaging products or disposable interventional devices and to co-develop additional disposable interventional devices for usewith our Niobe system. A significant portion of our revenue from system sales is derived from these integrated products.Our product commercialization plans could be disrupted, leading to lower than expected revenue and a material and adverse impact on our results ofoperations and cash flow, if: • any of our collaboration partners delays or fails in the integration of its technology with our Niobe system as planned; • any of our collaboration partners fails to develop or commercialize the integrated products in a timely manner; or • we become involved in disputes with one or more of our collaboration partners regarding our collaborations.Siemens, Philips and Biosense Webster, as well as some of our other collaborators, are large, global organizations with diverse product lines andinterests that may diverge from our interests in commercializing our products. Accordingly, our collaborators may not devote adequate resources to ourproducts, or may experience financial difficulties, change their business strategy or undergo a business combination that may affect their willingness or abilityto 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. Inaddition, if we are unable to enter into additional collaborations in the future, or if these collaborations fail, our ability to develop and commercialize productscould 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 salesagents, supported by account managers and clinical specialists who provide training, clinical support, and other services to our customers. If we are unable toeffectively utilize our existing sales force or increase our existing sales force in the foreseeable future, we may be unable to generate the revenue we haveprojected in our business plan. Factors that may inhibit our sales and marketing efforts include: • our inability to recruit and retain adequate numbers of qualified sales and marketing personnel; 26Table of Contents • our inability to accurately forecast future product sales and utilize resources accordingly; • the inability of sales personnel to obtain access to or persuade adequate numbers of hospitals and physicians to purchase and use our products;and • unforeseen costs associated with maintaining and expanding an independent sales and marketing organization.In addition, if we fail to effectively use distributors or contract sales agents for distribution of our products where appropriate, our revenue andprofitability 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 collaborationfrom highly regarded physicians at leading commercial and research hospitals, particularly in the U.S. and Europe. If we are unable to gain and/or maintainsuch support, training services, and collaboration or if the reputation or standing of these physicians is impaired or otherwise adversely affected, our ability tomarket 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 Niobe system, they must attend structured training sessions in order to familiarize themselves with asophisticated user interface and they must be committed to learning the technology. Further, physicians must utilize the technology on a regular basis to ensurethey maintain the skill set necessary to use the interface. Continued market acceptance could be delayed by lack of physician willingness to attend trainingsessions, by the time required to complete this training, or by state or institutional restrictions on our ability to provide training. An inability to train asufficient number of physicians to generate adequate demand for our products could have a material adverse impact on our financial condition and cash flow.Customers may choose to purchase competing products and not ours.Our products must compete with established manual interventional methods. These methods are widely accepted in the medical community, have a longhistory 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 betreated using our products can also be treated with existing pharmaceuticals or other medical devices and procedures. Many of these alternative treatments arewidely accepted in the medical community and have a long history of use.We also face competition from companies that are developing drugs or other medical devices or procedures to treat the conditions for which our productsare intended. The medical device and pharmaceutical industries make significant investments in research and development, and innovation is rapid andcontinuous. Other companies in the medical device industry continue to develop new devices and technologies for manual intervention methods. We are awareof one public company that has commercialized a catheter delivery system which has been cleared by the FDA for mapping procedures only. In addition, weare aware of one private company with an electro-magnetic catheter delivery system that has received CE Mark approval in Europe. We also face competitionfrom companies who currently market or are developing drugs, gene or cellular therapies to treat the conditions for which our products are intended. If these orother new products or technologies emerge that provide the same or superior benefits as our products at equal or lesser cost, it could render our productsobsolete or unmarketable. In addition, the presence of other competitors may cause potential customers to delay their purchasing decisions, resulting in a longerthan expected sales cycle, even if they do not choose our competitors’ products. We cannot be certain that physicians will use our products to replace orsupplement established treatments or that our products will be competitive with current or future products and technologies. 27Table of ContentsMany of our other competitors also have longer operating histories, significantly greater financial, technical, marketing and other resources, greater namerecognition 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 ourcompetitors 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 Niobe system generates magnetic fields that directly govern the motion of the internal, or working, tip of disposable interventional devices. If otherequipment in the interventional labs or elsewhere in a hospital is incompatible with the magnetic fields generated by our system, or if our system interferes withsuch equipment, we may be required to install additional shielding, which may be expensive and which may not solve the problem. If magnetic interferencebecomes a significant issue at targeted institutions, it would increase our installation costs at those institutions and could limit the number of hospitals thatwould 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 reputationand business.Our business exposes us to significant risks of product liability claims. The medical device industry has historically been litigious, and we could faceproduct 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 beadequate to cover future claims, and we may be unable to maintain product liability insurance in the future at satisfactory rates or adequate amounts. Aproduct liability claim, regardless of its merit or eventual outcome, could divert management’s attention, result in significant legal defense costs, significantharm 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 oursystem. If product returns or warranty claims increase, we could incur unanticipated additional expenditures for parts and service. In addition, our reputationand goodwill in the interventional lab market could be damaged. Unforeseen warranty exposure in excess of our established reserves for liabilities associatedwith 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 net losses into 2013 as we continue the commercialization of ourproducts. We are still in the process of realizing the full potential of the commercialization of our technology, and will need to continue to make improvementsto that technology. Moreover, the extent of our future losses and the timing of profitability are highly uncertain, and we may never achieve profitable operations.If we require more time than we expect to generate significant revenue and achieve profitability, we may not be able to continue our operations. Our failure toachieve profitability could negatively impact the market price of our common stock. Even if we do become profitable, we may not be able to sustain or increaseprofitability on a quarterly or annual basis. Furthermore, even if we achieve significant revenue, we may choose to pursue a strategy of increasing marketpenetration and presence or expand or accelerate new product development or clinical research activities at the expense of profitability. 28Table of ContentsOur reliance on contract manufacturers and on suppliers, and in some cases, a single supplier, could harm our ability to meet demand for ourproducts 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 ourelectrophysiology catheter advancement device and guidewires. We also depend on various third party suppliers for the magnets we use in our Niobe ESsystem and certain components of our Odyssey Solution and Vdrive system. In addition, some of the components necessary for the assembly of our productsare currently provided to us by a single supplier, including the magnets for our Niobe ES system and certain components of our Odyssey Solution, and wegenerally do not maintain large volumes of inventory. Our reliance on these third parties involves a number of risks, including, among other things, the riskthat: • we may not be able to control the quality and cost of our system or respond to unanticipated changes and increases in customer orders; • we may lose access to critical services, materials, or components, resulting in an interruption in the manufacture, assembly and shipment of oursystems; and • we may not be able to find new or alternative components for our use or reconfigure our system and manufacturing processes in a timely mannerif the components necessary for our system become unavailable.If any of these risks materialize, it could significantly increase our costs and impair product delivery.Lead times for materials and components ordered by us and our contract manufacturers vary and depend on factors such as the specific supplier,contract terms and demand for a component at a given time. We and our contract manufacturers acquire materials, complete standard subassemblies andassemble fully configured systems based on sales forecasts. If orders do not match forecasts, our contract manufacturers and we may have excess orinadequate 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 maynot be able to identify alternate sources in a timely fashion. Any transition to alternate manufacturers or suppliers would likely result in operational problemsand 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 intoagreements with new manufacturers or suppliers on commercially reasonable terms or at all. Additionally, obtaining components from a new supplier mayrequire a new or supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume product sales. Anydisruptions in product flow may harm our ability to generate revenue, lead to customer dissatisfaction, damage our reputation and result in additional costs orcancellation 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 Niobe system. If theseparties cannot manufacture sufficient quantities of disposable interventional devices to meet customer demand, or if their manufacturing processes aredisrupted, 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 becausematerials used to manufacture our magnets, one of our key system components, are sourced from overseas.We purchase the permanent magnets for our Niobe ES system from a manufacturer that uses material produced in Japan, and we anticipate that certainof the production work for these magnets will be performed for this manufacturer in China. In addition, our subcontractor purchases magnets for ourdisposable interventional devices directly from a manufacturer in Japan. Any event causing a significant increase in price or a disruption of imports, includingthe imposition of import restrictions, could adversely affect our business. The flow of components from our vendors could also be adversely affected byfinancial or political instability in any of the 29Table of Contentscountries 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 andreduce 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 ofproducts we purchase from overseas vendors.We may encounter problems at our manufacturing facilities or those of our subcontractors or otherwise experience manufacturing delays thatcould result in lost revenue.We subcontract the manufacture and assembly of components of our Niobe ES system, Odyssey Solution, and Vdrive system, and all of ourdisposable devices. The products we design may not satisfy all of the performance requirements of our customers and we may need to improve or modify thedesign 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 toquality problems or other unexpected events, our revenue may be impacted.We may be unable to protect our technology from use by third parties.Our commercial success will depend in part on obtaining patent and other intellectual property right protection for the technologies contained in ourproducts and on successfully defending these rights against third party challenges. The patent positions of medical device companies, including ours, can behighly uncertain and involve complex and evolving legal and factual questions. We cannot assure you that we will obtain the patent protection we seek, thatany protection we do obtain will be found valid and enforceable if challenged or that it will confer any significant commercial advantage. U.S. patents andpatent applications may also be subject to interference proceedings and U.S. patents may be subject to re-examination proceedings in the U.S. Patent andTrademark Office, and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office, which proceedingscould 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 patentapplication. In addition, such interference, re-examination, and opposition proceedings may be costly. Thus, any patents that we own or license from othersmay not provide any protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from thirdparties may not result in patents being issued and certain foreign patent applications for medical related devices and methods may be found unpatentable. Ifissued, 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 intellectualproperty. 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 inpayment of such fees, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, includingcertain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, thepatent owner has failed to “work” the invention in that country, or the third party has patented improvements). In addition, many countries limit theenforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which couldmaterially 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 obtainadequate patent protection for our technology, or if any protection we obtain becomes limited or invalidated, others may be able to make and sell competingproducts, impairing our competitive position.Our trade secrets, nondisclosure agreements and other contractual provisions to protect unpatented technology provide only limited and possiblyinadequate 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 bereduced. In addition, 30Table of Contentsemployees, consultants and others who participate in developing our products or in commercial relationships with us may breach their agreements with usregarding 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 productswithout infringing any of our patent or other intellectual property rights, or may design around our proprietary technologies. Our competitors may acquiresimilar or even the same technology components that are utilized in our current offering eroding some differentiation in the marketplace. In addition, the laws ofsome 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 andprocedures.Third parties may assert that we are infringing their intellectual property rights.Successfully commercializing our products will depend in part on not infringing patents held by third parties. It is possible that one or more of ourproducts, including those that we have developed in conjunction with third parties, infringes existing patents. We may also be liable for patent infringement bythird parties whose products we use or combine with our own and for which we have no right to indemnification. In addition, because patent applications aremaintained under conditions of confidentiality and can take many years to issue, there may be applications now pending of which we are unaware and whichmay later result in issued patents that our products infringe. Determining whether a product infringes a patent involves complex legal and factual issues andmay 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 alicense 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 orprohibit us from using technologies essential to our products covered by third-party patents. An inability to use technologies essential to our products wouldhave a material adverse effect on our financial condition, results of operations and cash flow and could undermine our ability to continue operating as a goingconcern.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 andtime-consuming and would divert management’s attention from our business. We have incurred, and expect to continue to incur, substantial costs in obtainingpatents and may have to incur substantial costs defending our proprietary rights. Incurring such costs could have a material adverse effect on our financialcondition, 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 newand 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 makepayments in exchange for rights from third parties who hold patents covering certain technology. If we cannot obtain or maintain the desired licenses or rightsfor 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 adverselyaffect 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 wouldbe adversely affected. If we do not maintain licenses or exclusivity with suppliers of certain components of our Odyssey Solution, competitors may enter themarket, negatively impacting our ability to develop and commercialize 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 Niobe system is designed to have the potential for expanded applications beyond electrophysiology and interventional cardiology, includingcongestive heart failure, structural heart repair, interventional neurosurgery, 31Table of Contentsinterventional neuroradiology, peripheral vascular, pulmonology, urology, gynecology and gastrointestinal medicine. We continue to develop the OdysseySolution and Vdrive system for interventional labs that have a Niobe system installed as well as those standard interventional labs that do not have a Niobesystem installed. However, we have limited financial and managerial resources and therefore may be required to focus on products in selected industries andsites and to forego efforts with regard to other products and industries. Our decisions may not produce viable commercial products and may divert ourresources from more profitable market opportunities. Moreover, we may devote resources to developing products in these additional areas but may be unable tojustify 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 inthese 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 theirformer employers.Many of our employees were previously employed at hospitals, universities or other medical device companies, including our competitors or potentialcompetitors. 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 theirformer 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 substantialcosts and be a distraction to management. Incurring such costs could have a material adverse effect on our financial condition, results of operations and cashflow.If we or the parties in our strategic alliances fail to obtain or maintain necessary FDA clearances or approvals for our medical device products,or if such clearances or approvals are delayed, we will be unable to continue to commercially distribute and market our products.Our products are medical devices that are subject to extensive regulation in the U.S. and in foreign countries where we do business. Unless an exemptionapplies, each medical device that we wish to market in the U.S. must be designated as Class I, exempt from premarket approval or notification or first receiveeither a 510(k) clearance or a pre-market approval, or PMA, from the U.S. FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The FDA’s 510(k)clearance process usually takes from four to 12 months, but it can take longer. The process of obtaining PMA approval is much more costly, lengthy, anduncertain, generally taking from one to three years or even longer. Although we have 510(k) clearance for many of our products, including disposableinterventional devices, and we are able to market these products commercially in the U.S., our business model relies significantly on revenue from disposableinterventional devices, some of which may not achieve FDA clearance or approval. We cannot assure you that any of our devices will not be required toundergo the lengthier and more burdensome PMA process. We cannot commercially market any disposable interventional devices in the U.S. until thenecessary clearances or approvals from the FDA have been received. In addition, we are working with third parties to co-develop disposable products. In somecases, these companies are responsible for obtaining appropriate regulatory clearance or approval to market these disposable devices. If these clearances orapprovals are not received or are substantially delayed or if we are not able to offer a sufficient array of approved disposable interventional devices, we maynot be able to successfully market our system to as many institutions as we currently expect, which could have a material adverse impact on our financialcondition, results of operations and cash flow.Furthermore, obtaining 510(k) clearances, PMAs or PMA supplement approvals, from the FDA could result in unexpected and significant costs for usand consume management’s time and other resources. The FDA could ask us to supplement our submissions, collect non-clinical data, conduct clinical trialsor engage in other time-consuming actions, or it could simply deny our applications. In addition, even if we obtain a 510(k) clearance or PMA or PMAsupplement approval, the clearance or approval could be revoked or other restrictions imposed if post-market data demonstrates safety issues or lack ofeffectiveness. We cannot predict with certainty how, or 32Table of Contentswhen, the FDA will act on our marketing applications. If we are unable to obtain the necessary regulatory approvals, our financial condition and cash flowmay be adversely affected. Also, a failure to obtain approvals may limit our ability to grow domestically and internationally.In August 2010, the FDA’s Center for Devices and Radiological Health (CDRH) released preliminary reports from the 510(k) Working Group and theTask Force on the Utilization of Science in Regulatory Decision Making. The 510(k) process underwent a significant review in 2011, including an exhaustivereport filed by the Institute of Medicine (IOM). It is anticipated that this review may elicit significant changes in the 510(k) process moving forward. In theinterim, the uncertainty surrounding the key elements of the 510(k) process has significantly increased the degree of difficulty in predicting regulatorypathways and timelines for all medical device companies. The 510(k) reform process has slowed and may continue to impede FDA reviews, which couldhave a negative impact on our business and our ability to bring new products to market.If our strategic alliances elect not to or we fail to obtain regulatory approvals in other countries for products under development, we will not beable to commercialize these products in those countries.In order to market our products outside of the U.S., we and our strategic partners or distributors must establish and comply with numerous andvarying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additionalproduct testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtainFDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the U.S. Regulatoryapproval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negativelyimpact the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could havethe same adverse effects described above regarding FDA approval in the U.S. In addition, we are relying on our strategic alliances in some instances to assistus in this regulatory approval process in countries outside the U.S. and Europe, for example, in Japan.We may fail to comply with continuing regulatory requirements of the FDA and other authorities and become subject to substantial penalties.Even after product clearance or approval, we must comply with continuing regulation by the FDA and other authorities, including the FDA’s QualitySystem Regulation, or QSR, requirements, labeling and promotional requirements and medical device adverse event and other reporting requirements. Anyfailure to comply with continuing regulation by the FDA or other authorities could result in enforcement action that may include suspension or withdrawal ofregulatory approvals, recalling products, ceasing product manufacture and/or marketing, seizure and detention of products, paying significant fines andpenalties, criminal prosecution and similar actions that could limit product sales, delay product shipment and harm our profitability. Congress could amendthe Federal Food, Drug, and Cosmetic Act, and the FDA could modify its regulations promulgated under this law in a way to make ongoing regulatorycompliance more burdensome and difficult.Additionally, any modification to an FDA 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute amajor 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 orPMA supplement approval, which could be a costly and lengthy process. In addition, if we are unable to obtain on-label approval for key applications, wemay face product market adoption barriers that we cannot overcome. In the future, we may modify our products after they have received clearance orapproval, 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 notto seek new clearance or approval. If the FDA requires us to seek clearance or approval for any modification, we could be subject to enforcement sanctions andwe 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. 33Table of ContentsIn many foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards, packagingrequirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of these regulations are similar to those of theFDA or other U.S. regulations. In addition, in many countries the national health or social security organizations require our products to be qualified beforeprocedures performed using our products become eligible for reimbursement. Failure to receive or delays in the receipt of, relevant foreign qualifications couldhave a material adverse effect on our business, financial condition and results of operations. Due to the movement toward harmonization of standards in theEuropean Union, we expect a changing regulatory environment in Europe characterized by a shift from a country-by-country regulatory system to a EuropeanUnion-wide single regulatory system. We cannot predict the timing of this harmonization and its effect on us. Adapting our business to changing regulatorysystems could have a material adverse effect on our business, financial condition, and results of operations. If we fail to comply with applicable foreignregulatory requirements, we may be subject to fines, suspension, or withdrawal of regulatory approvals, product recalls, seizure of products, operatingrestrictions 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 foreigncountries. 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 themarket. 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 auditcould subject us to fines or other penalties, which could adversely affect our business and financial results.Our suppliers, subcontractors, or we may fail to comply with the FDA quality system regulation.Our manufacturing processes must comply with the FDA’s quality system regulation, or QSR, which covers the methods and documentation of thedesign, testing, production, control, quality assurance, labeling, packaging and shipping of our products. The FDA enforces the QSR through inspections.We cannot assure you that we or our suppliers or subcontractors would pass such an inspection. If we or our suppliers or subcontractors fail to remain incompliance with the FDA or EN 13485:2003 standards, we or they may be required to cease all or part of our operations for some period of time until we orthey can demonstrate that appropriate steps have been taken to comply with such standards or face other enforcement action, such as a public warning letter.We cannot be certain that our facilities or those of our suppliers or subcontractors will comply with the FDA or EN 13485:2003 standards in future audits byregulatory authorities. Failure to pass such an inspection could force a shutdown of manufacturing operations, a recall of our products or the imposition ofother enforcement sanctions, which would significantly harm our revenue and profitability. Further, we cannot assure you that our key component suppliersare or will continue to be in compliance with applicable regulatory requirements and quality standards and will not encounter any manufacturing difficulties.Any failure to comply with the FDA’s QSR or EN 13485:2003 by us or our suppliers could significantly harm our available inventory and product sales.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 whenfirst introduced. Because our products are designed to be used to perform complex interventional procedures, we expect that physicians and hospitals will havean increased sensitivity to the potential for software defects. We cannot assure you that our software or other components will not experience errors orperformance problems in the future. If we experience software errors or performance problems, we would likely also experience: • loss of revenue; • delay in market acceptance of our products; • damage to our reputation; 34Table of Contents • additional regulatory filings; • product recalls; • increased service or warranty costs; and/or • product liability claims relating to the software defects.If we fail to comply with health care regulations, we could face substantial penalties and our business, operations and financial condition couldbe 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 andregulations apply to our business. We are subject to health care fraud and patient privacy regulation by the federal government, the states in which we conductour business, and internationally. The regulations that may affect our ability to operate include: • the federal healthcare program Anti-Kickback Law, which prohibits, among other things, persons from soliciting, receiving or providingremuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good orservice, for which payment may be made under federal health care programs such as the Medicare and Medicaid programs; • federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented,claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us ifwe provide coding and billing advice to customers; • the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any healthcare 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, theHealth Information Technology for Economic and Clinical Health Act, which is Title XIII of the American Recovery and Reinvestment Act; • state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or servicesreimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy of health information in certaincircumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating complianceefforts; • federal self-referral laws, such as the Stark Anti-Referral Law, which prohibits a physician from making a referral to a provider of certain healthservices with which the physician or the physician’s family member has a financial interest; and • regulations pertaining to receipt of CE mark for our products marketed outside of the United States and submission to periodic regulatory auditsin order to maintain these regulatory approvals.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 maybe subject to penalties, including civil and criminal penalties, damages, fines, loss of reimbursement for our products under federal or state government healthprograms such as Medicare and Medicaid and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment, or restructuringof 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 isincreased 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 ofinterpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenseand divert our management’s attention from the operation of our business. Moreover, to achieve compliance with applicable federal and state privacy, security, 35Table of Contentsand electronic transaction laws, we may be required to modify our operations with respect to the handling of patient information. Implementing thesemodifications 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 variousfederal and state laws.Healthcare policy changes, including legislation enacted in 2010, may have a material adverse effect on us.In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the Obama administration,members of Congress, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system.In March 2010, the President signed into law the Patient Protection and Affordable Care Act (PPACA). The law imposes a tax on medical devicemanufacturers 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 productssold within the United States. We expect that the PPACA could have a material adverse effect on our industry generally and our ability to successfullycommercialize our products or could limit or eliminate our spending on certain development projects.On August 2, 2011, the President signed into law the Budget Control Act of 2011, which created the Joint Select Committee on Deficit Reduction torecommend proposals in spending reductions to Congress. The Joint Select Committee was charged with identifying a reduction of at least $1.2 trillion for theyears 2013 through 2021. The Committee did not achieve this target by the imposed deadline, triggering the legislation’s automatic reduction to severalgovernment programs. Included in the automatic reduction are aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in2013.The taxes imposed by the PPACA, the expansion in the government’s role in the U.S. healthcare industry, and other healthcare reform measures at thefederal and state level that may be adopted in the future could have a material, negative impact on our results of operations and our cash flows.The application of state certificate of need regulations and compliance by our customers with federal and state licensing or other internationalrequirements 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 itemssuch 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 thislimited availability, hospitals and other health care providers may be unable to obtain a certificate of need for the purchase of our systems. Further, our salesand 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 requiredapprovals. In addition, our customers must meet various federal and state regulatory and/or accreditation requirements in order to receive payments fromgovernment-sponsored health care programs such as Medicare and Medicaid, receive full reimbursement from third party payors, and maintain theircustomers. Our international customers may be required to meet similar or other requirements. Any lapse by our customers in maintaining appropriatelicensure, certification or accreditation, or the failure of our customers to satisfy the other necessary requirements under government-sponsored health careprograms 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, orreimbursement 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 privateinsurance plans, for procedures performed with our products, 36Table of Contentsincluding the costs of the disposable interventional devices used in these procedures. If in the future our disposable interventional devices do not fall withinU.S. reimbursement categories and our procedures are not reimbursed, or if the reimbursement is insufficient to cover the costs of purchasing our system andrelated disposable interventional devices, the adoption of our systems and products would be significantly slowed or halted, and we may be unable to generatesufficient sales to support our business. Our success in international markets also depends upon the eligibility of our products for reimbursement throughgovernment-sponsored health care payment systems and third-party payors. In both the U.S. and foreign markets, health care cost-containment efforts areprevalent 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 ofoperations and cash flow.Our growth will place a significant strain on our resources, and if we fail to manage our growth, our ability to develop, market, and sell ourproducts 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 increasedresponsibilities for management personnel and place significant strain upon our operating and financial systems and resources. To accommodate our growthand compete effectively, we will be required to improve our information systems, create additional procedures and controls and expand, train, motivate andmanage our work force. We cannot be certain that our personnel, systems, procedures, and controls will be adequate to support our future operations. Anyfailure 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 numerousrisks associated with international operations, which could adversely affect our results of operations and financial condition, including the following: • currency fluctuations that could impact the demand for our products or result in currency exchange losses; • export restrictions, tariff and trade regulations and foreign tax laws; • customs duties, export quotas or other trade restrictions; • economic and political instability; and • shipping delays.In addition, contracts may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system.We are no longer eligible to use Form S-3, which could impair our capital raising activities.As of the date of filing this Form 10-K, we are not eligible to use Form S-3 as a result of payment default under our facility with our primary lender in2012. As a result, we cannot use Form S-3 to register resales of our securities for 12 months following our default, which occurred on April 30, 2012. Inaddition, we are limited in our ability to file shelf registration statements on SEC Form S-3. Moreover, our public float is below $75 million and may remainbelow $75 million for the foreseeable future. As a result, we may not be eligible to use Form S-3 for primary offerings even though we otherwise would regainthe ability to use the form for resale registration statements 12 months following our payment default. We have relied significantly on shelf registrationstatements on SEC Form S-3 for most of our financings in recent years, and accordingly any such limitations may harm our ability to raise the capital weneed. Under these circumstances, until we are again eligible to use 37Table of ContentsForm S-3, we will be required to use a registration statement on Form S-1 to register securities with the SEC or issue such securities in a private placement,which could increase the cost of raising capital.Risks Related To Our Common StockOur principal stockholders continue to own a large percentage of our voting stock, and they have the ability to substantially influence mattersrequiring stockholder approval.Our executive officers, directors and individuals or entities affiliated with them beneficially own or control a substantial percentage of the outstandingshares of our common stock. Moreover, as a result of the issuance of warrants to certain institutional investors, certain of our directors and their affiliatedfunds have the ability to obtain a substantial portion of our common stock. Accordingly, these executive officers, directors and their affiliates, acting as agroup, 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 achange of control, even if such a change of control would benefit our other stockholders. This significant concentration of stock ownership may adverselyaffect 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.We recently filed registration statements relating to the resale of up to 4,070,032 shares of our common stock issuable upon conversion of, or otherwiseunderlying, the unsecured, subordinated, convertible debentures issued in May 2012, up to 3,404,121 shares of our common stock issuable upon exercise ofsix-year warrants held by the purchasers of the debentures (“Convertible Debt Warrants”), and up to 2,168,727 shares of stock issuable on exercise of thePIPE Warrants issued to certain institutional investors in May 2012, and an additional 517,422 shares issuable in connection with amendments two throughsix of the Note and Warrant Purchase Agreement issued to Alafi Capital Company and the Sanderling Venture Partners’ affiliates, and we recently increasedthe authorized number of shares of our common stock from 100,000,000 to 300,000,000. The exercise price of most of these securities (including all of theDebentures, the Convertible Debt Warrants and all of the PIPE Warrants) is $3.361. A significant number of shares of our common stock are subject to stockoptions and stock appreciation rights, and we may request the ability to issue additional such securities to our employees. We may also decide to raiseadditional funds through public or private debt or equity financing to fund our operations. While we cannot predict the effect, if any, that future sales of debt,our common stock, other equity securities or securities convertible into our common stock or other equity securities or the availability of any of the foregoingfor 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 sharesissued upon the exercise of stock options, stock appreciation rights or the conversion of any convertible securities outstanding now or in the future), or theperception that such sales could occur, will adversely affect prevailing market prices for our common stock.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 thedevelopment and growth of our business. In addition, the terms of our loan agreement prohibit us from declaring dividends without the prior consent of ourlender. As a result, capital appreciation, if any, of our common stock will be an investor’s sole source of gain for the foreseeable future. 38Table of ContentsOur certificate of incorporation and bylaws, Delaware law and one of our alliance agreements contain provisions that could discourage atakeover.Our certificate of incorporation and bylaws and Delaware law contain provisions that might enable our management to resist a takeover. Theseprovisions may: • discourage, delay or prevent a change in the control of our company or a change in our management; • adversely affect the voting power of holders of common stock; and • limit the price that investors might be willing to pay in the future for shares of our common stock.In addition, our alliance agreement with Biosense Webster and our debt agreement with Healthcare Royalty Partners II, L.P. contain provisions that maysimilarly 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, and Nasdaq Global Market rules have in the past created uncertainty for public companies. Wecontinue to evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional compliancecosts we may incur or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many casesdue 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 andgoverning bodies. This could result in uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure andgovernance practices. Maintaining appropriate standards of corporate governance and public disclosure may result in increased general and administrativeexpense and a diversion of management time and attention from revenue-generating activities to compliance activities. In addition, if we fail to comply with newor 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 growat 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 togenerate sufficient revenue or our costs are higher than we expect, our results of operations will suffer, which in turn could cause our stock price to decline.Our results of operations will depend upon numerous factors, including: • demand for our products; • the performance of third-party contract manufacturers and component suppliers; • our ability to develop sales and marketing capabilities; • the success of our collaborations with Siemens, Philips and Biosense Webster and others; • our ability to develop, introduce and market new or enhanced versions of our products on a timely basis; • our ability to obtain regulatory clearances or approvals for our new products; and • our ability to obtain and protect proprietary rights. 39Table of ContentsOur operating results in any particular period may not be a reliable indication of our future performance. In some future quarters, our operating resultsmay be below the expectations of securities analysts or investors. If this occurs, the price of our common stock will likely decline.We expect that the price of our common stock could fluctuate substantially, possibly resulting in class action securities litigation.Our common stock is traded on the Nasdaq Global Market and trading volume may be limited or sporadic. The market price of our common stock hasexperienced, and may continue to experience, substantial volatility. During 2012, our common stock traded between $1.01 and $9.30 per share, on tradingvolume ranging from approximately 390 to 1.8 million shares per day. The market price of our common stock will be affected by a number of factors,including: • actual or anticipated variations in our results of operations or those of our competitors; • the receipt or denial of regulatory approvals; • announcements of new products, technological innovations or product advancements by us or our competitors; • developments with respect to patents and other intellectual property rights; • changes in earnings estimates or recommendations by securities analysts or our failure to achieve analyst earnings estimates; • developments in our industry; and • participants in the market for our common stock may take short positions with respect to our common stock.These factors, as well as general economic, credit, political and market conditions, may materially adversely affect the market price of our commonstock. As with the stock of many other public companies, the market price of our common stock has been particularly volatile during the recent period ofupheaval in the capital markets and world economy. This excessive volatility may continue for an extended period of time following the filing date of thisreport. Furthermore, the stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated tothe operating performance of these companies. Volatility in the price of our common stock on the Nasdaq Global Market may depress the trading price of ourcommon stock, which could, among other things, allow a potential acquirer of the Company to purchase a significant amount of our common stock at lowprices.We and certain of our current and former executive officers and directors, are defendants in a federal securities class action lawsuit and a federalshareholder derivative lawsuit. These lawsuits are described in Part I Item 3 “Legal Proceedings” in this Annual Report on Form 10-K. Our attention may bediverted from our ordinary business operations by these lawsuits and we may incur significant expenses associated with the defense of these lawsuits(including substantial fees of lawyers and other professional advisors and potential obligations to indemnify officers and directors and our underwriters whomay be parties to such action). Depending on the outcome of these lawsuits, we may be required to pay material damages and fines, consent to injunctions onfuture conduct, or suffer other penalties, remedies or sanctions. The ultimate resolution of these matters could have a material adverse effect on our results ofoperations, financial condition, liquidity, our ability to meet our debt obligations and, consequently, negatively impact the trading price of our common stock.In addition, the volatility of our stock price could lead to similar class action securities litigation being filed against us in the future, which could result insubstantial costs and a diversion of our management resources, which could significantly harm our business. 40Table of ContentsITEM 1B.UNRESOLVED STAFF COMMENTSWe have not received any written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or morepreceding the end of our 2012 fiscal year and that remain unresolved. ITEM 2.PROPERTIESOur primary company facilities are located in St. Louis, Missouri where we lease approximately 65,000 square feet of office and 12,000 square feet ofdemonstration and assembly space. This space is leased under an agreement through 2018. We lease approximately 3,900 square feet of office space in MapleGrove, Minnesota, under a lease agreement through October 31, 2013.In addition, we have leased office space in Senoia, Georgia; Amsterdam, The Netherlands; and in Beijing, China. These locations are leasedthrough February 28, 2015, August 31, 2013, and December 19, 2013, respectively. ITEM 3.LEGAL PROCEEDINGSOn October 7, 2011, a purported securities class action was filed against the Company and two of the Company’s past executive officers in the U.S.District Court for the Eastern District of Missouri by Kevin Pound, a purported shareholder of the Company. On December 29, 2011, the court granted anunopposed motion appointing Local 522 Pension Fund as Lead Plaintiff in the action and granting Lead Plaintiff leave to file an Amended Complaint, whichLead Plaintiff filed on March 19, 2012. The Amended Complaint alleges that, during the period from February 28, 2011 through August 9, 2011, theCompany and certain of its officers made materially false and misleading statements regarding the Company’s financial condition and future businessprospects, in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The Amended Complaint seeks unspecified damages,costs, attorneys’ fees and such other relief as the Court may deem appropriate. On May 18, 2012, the Company filed a motion to dismiss the AmendedComplaint. On July 24, 2012, Lead Plaintiff filed its response to the motion to dismiss, and on August 30, 2012, the Company filed its reply brief in supportof the motion to dismiss. The Company believes the complaint is without merit and intends to vigorously defend against it. However, litigation is inherentlyuncertain and it is too early in this proceeding to predict the outcome of this lawsuit or to reasonably estimate possible losses, if any, related thereto. Inaddition, the Company has obligations, under certain circumstances, to indemnify the individual defendants with respect to claims asserted against them andotherwise to the fullest extent permitted under Delaware law and the Company’s bylaws and certificate of incorporation.On December 2, 2011, a purported shareholder derivative action was filed in the U.S. District Court for the Eastern District of Missouri by Carl Zorn,a purported shareholder of the Company, against the directors of the Company and the Company as a nominal defendant. The Complaint in this action allegesthat the individual defendants breached their fiduciary duties to the Company, engaged in gross mismanagement and caused waste of corporate assets of theCompany by allowing the Company and certain of its officers to make the same allegedly false and misleading statements regarding the Company’s financialcondition and future business prospects that are at issue in the purported class action. The Complaint seeks unspecified damages, restitution and otherequitable relief, as well as costs and attorneys’ fees from the named defendants on behalf of the Company. At the request of all parties, on March 22, 2012,the Court entered an order staying the case pending resolution of the motion to dismiss in the securities class action. The Company believes the complaint iswithout merit and intends to vigorously defend against it. However, litigation is inherently uncertain and it is too early in this proceeding to predict the outcomeof this lawsuit or to reasonably estimate possible losses, if any, related thereto. In addition, the Company has obligations, under certain circumstances, toindemnify the individual defendants with respect to claims asserted against them and otherwise to the fullest extent permitted under Delaware law and theCompany’s bylaws and certificate of incorporation. 41Table of ContentsAdditionally, we are involved from time to time in various lawsuits and claims arising in the normal course of business. Although the outcomes of theselawsuits and claims are uncertain, we do not believe any of them will have a material adverse effect on our business, financial condition or results ofoperations. ITEM 4.MINE SAFETY DISCLOSURESNot applicable. 42Table of ContentsPart II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIESPRICE RANGE OF COMMON STOCKOur common stock has been traded on the Nasdaq Global Market under the symbol “STXS” since August 12, 2004. The following table sets forth thehigh and low sales prices of our common stock for the periods indicated and reported by Nasdaq. High Low Year Ended December 31, 2012 First Quarter $9.30 $6.50 Second Quarter 6.80 2.00 Third Quarter 2.44 1.37 Fourth Quarter 3.39 1.01 Year Ended December 31, 2011 First Quarter $40.50 $32.40 Second Quarter 42.40 28.80 Third Quarter 36.30 8.80 Fourth Quarter 13.20 8.10 As of February 28, 2013, there were approximately 332 stockholders of record of our common stock, although we believe that there is a significantlylarger number of beneficial owners of our common stock.DIVIDEND POLICYWe have never declared or paid any cash dividends. We currently expect to retain earnings for use in the operation and expansion of our business, andtherefore do not anticipate paying any cash dividends for the next several years. In addition, the terms of our loan agreement prohibit us from declaringdividends without the prior consent of our lender.The information required by this item regarding equity compensation is incorporated by reference to the information set forth in Item 12 of this AnnualReport on Form 10-K. 43Table of ContentsSTOCK PRICE PERFORMANCE GRAPHThe following graph shows the total stockholder return from December 31, 2007 through December 31, 2012 for a $100 investment in Stereotaxis, Inc.,the Nasdaq Composite (U.S.) Index and the Nasdaq Medical Device Index. All values assume reinvestment of the full amount of all dividends althoughdividends have never been declared on Stereotaxis’ common stock. The stock price performance shown in the graph below is not necessarily indicative of, noris it intended to forecast, the potential future performance of our common stock.Comparison of Cumulative Total ReturnAmong Stereotaxis, Inc. The NASDAQ Stock Market,and The NASDAQ Medical Device Manufacturer’s Index 44Table of ContentsITEM 6.SELECTED FINANCIAL DATAThe following selected consolidated financial data has been derived from, and should be read in conjunction with our financial statements and theaccompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. Theselected data in this section is not intended to replace the financial statements. Historical results are not indicative of the results to be expected in the future. Year Ended December 31, 2012 2011 2010 2009 2008 Consolidated Statements of OperationsData: Revenue $46,562,434 $41,987,432 $54,051,237 $51,149,555 $40,365,173 Cost of revenue 14,781,055 12,498,081 15,564,687 17,021,633 14,177,790 Gross margin 31,781,379 29,489,351 38,486,550 34,127,922 26,187,383 Operating costs and expenses: Research and development 8,405,086 12,886,488 12,244,163 14,260,854 17,422,828 Sales and marketing 20,607,999 31,635,415 30,178,818 28,694,540 28,660,663 General and administrative 13,394,556 16,908,656 15,022,689 15,010,490 21,121,164 Total operating expenses 42,407,641 61,430,559 57,445,670 57,965,884 67,204,655 Operating loss (10,626,262) (31,941,208) (18,959,120) (23,837,962) (41,017,272) Interest and other income (expense), net 1,387,835 (89,967) (964,367) (3,656,495) (2,868,702) Net loss $(9,238,427) $(32,031,175) $(19,923,487) $(27,494,457) $(43,885,974) Basic and diluted net loss per common share $(1.33) $(5.84) $(3.94) $(6.34) $(12.00) Shares used in computing basic and dilutednet loss per common share 6,944,928 5,482,627 5,052,200 4,334,432 3,658,509 Consolidated Balance Sheet Data: Cash, cash equivalents and short-terminvestments $7,777,718 $13,954,919 $35,248,819 $30,546,550 $30,355,657 Working capital (5,715,760) (6,596,218) 12,395,426 12,878,277 10,097,082 Total assets 32,165,944 39,931,832 65,761,792 56,120,516 59,440,365 Long-term debt, less current maturities 16,824,736 17,290,531 8,000,000 10,346,655 12,036,723 Accumulated deficit (384,645,873) (375,407,446) (343,376,271) (323,452,784) (295,958,327) Total stockholders’ equity (18,790,226) (18,828,895) 10,475,246 7,641,343 4,770,681 (1)Other income recorded in 2010 includes $1.5 million in grants under the Qualifying Therapeutic Discovery Project Program.(2)Other income recorded in 2012, 2011, 2010, and 2009 includes $8.2 million, $3.4 million, $0.6 million, and $0.9 million in warrant and other mark-to-market adjustments, respectively. 45 (1) (2)Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this report onForm 10-K. Operating results are not necessarily indicative of results that may occur in future periods.This report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Ouractual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forthin Item 1A. “Risk Factors.” Forward-looking statements discuss matters that are not historical facts. Forward-looking statements include, but are notlimited to, discussions regarding our operating strategy, sales and marketing strategy, regulatory strategy, industry, economic conditions, financialcondition, liquidity and capital resources and results of operations. Such statements include, but are not limited to, statements preceded by, followed byor that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “can,” “could,” “may,” “will,”“would,” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in thePrivate Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date onwhich they were made. They give our expectations regarding the future but are not guarantees. We undertake no obligation to update publicly or reviseany forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.OverviewStereotaxis designs, manufactures and markets the Epoch Solution, which is an advanced cardiology instrument control system for use in a hospital’sinterventional surgical suite to enhance the treatment of arrhythmias and coronary artery disease. The Epoch Solution is comprised of the Niobe ES roboticsystem, Odyssey Solution, and the Vdrive system. We believe that the Epoch Solution represents a revolutionary technology in the interventional surgicalsuite, or “interventional lab”, and has the potential to become the standard of care for a broad range of complex cardiology procedures. We also believe that ourtechnology represents an important advance in the ongoing trend toward digital instrumentation in the interventional lab and provides substantial, clinicallyimportant improvements and cost efficiencies over manual interventional methods, which require years of physician training and often result in long andunpredictable procedure times and sub-optimal therapeutic outcomes.The Niobe ES robotic system is the latest generation of the Niobe Robotic Magnetic Navigation System (“Niobe system”). This system is designed toenable physicians to complete more complex interventional procedures by providing image guided delivery of catheters and guidewires through the bloodvessels and chambers of the heart to treatment sites. This is achieved using externally applied magnetic fields that govern the motion of the working tip of thecatheter or guidewire, resulting in improved navigation, efficient procedures and reduced x-ray exposure. The core components of the Niobe system havereceived regulatory clearance in the U.S., Canada, Europe, China, and various other countries.Stereotaxis also has developed the Odyssey Solution which consolidates all lab information enabling doctors to focus on the patient for optimalprocedure efficiency. The system also features a remote viewing and recording capability called Odyssey Cinema, which is an innovative solution deliveringsynchronized content for optimized workflow, advanced care and improved productivity. This tool includes an archiving capability that allows clinicians tostore and replay entire procedures or segments of procedures. This information can be accessed from locations throughout the hospital local area network andover the global Odyssey Network providing physicians with a tool for clinical collaboration, remote consultation and training. The Odyssey Solution may beacquired in conjunction with a Niobe system or on a stand-alone basis for installation in interventional labs and other locations where clinicians often desirethe benefits of Odyssey Solution that we believe can improve clinical workflows and related efficiencies. 46Table of ContentsOur Vdrive Robotic Navigation System provides navigation and stability for diagnostic and ablation devices designed with key features to assist in thedelivery of better ablations. The Vdrive Robotic Navigation System complements the Niobe ES robotic system control of catheters for fully remote proceduresand enables fully-remote, single-operator workflow. In addition to the Vdrive and Vdrive Duo systems, we also manufacture and market various disposablecomponents which can be manipulated by these systems. We have received the CE Mark that allows us to market the Vdrive Duo device in Europe.We generate revenue from both the initial capital sales of the Niobe, Odyssey and Vdrive systems as well as recurring revenue from the sale of ourproprietary disposable devices, from ongoing license and service contracts, and from royalties paid to the Company on the sale by Biosense Webster of co-developed catheters. We market our products to a broad base of hospitals in the United States and internationally as detailed in Note 18 to the financialstatements. Recurring revenue increased from 42% of total revenues in 2010 to 63% in 2011 and 58% in 2012 due to an increase in our installed base and asofter market for capital sales.We have alliances with each of Siemens AG Medical Solutions, Philips Medical Systems and Biosense Webster, Inc., through which we integrate ourNiobe system with market leading digital imaging and 3D catheter location sensing technology, as well as disposable interventional devices, in order tocontinue to develop new solutions in the interventional lab. Each of these alliances provides for coordination of our sales and marketing activities with those ofour partners. In addition, Siemens is our product distributor in certain countries and has agreed to provide worldwide service for our integrated systems.Since our inception, we have generated significant losses. As of December 31, 2012, we had incurred cumulative net losses of approximately $385million. In May 2011, the Company introduced the Niobe ES robotic system. Although the Niobe ES robotic system was not available to customers untilDecember 2011, it created a rapid shift away from sales of the Niobe II system, resulting in lower system revenue in 2011 compared to 2010. As ofDecember 31, 2012, the Company had an installed base of 74 Niobe ES systems and has received positive feedback from the physicians at these sites.During the quarter ended September 30, 2011, the Company implemented a wide ranging plan to rebalance and reduce operating expenses by 15% to 20% onan annual run rate basis. As of December 31, 2012, the Company has completed the operating expense declines through headcount reductions anddiscretionary spending cuts. We expect to incur additional losses into 2013 as we continue the development and commercialization of our products, conductour research and development activities and advance new products into clinical development from our existing research programs and fund additional salesand marketing initiatives.The Company’s independent registered public accounting firm’s report issued in this Annual Report on Form 10-K included an explanatory paragraphdescribing the existence of conditions that raise substantial doubt about the Company’s ability to continue as a going concern, including recent losses andworking capital deficiency. The financial statements do not include any adjustments relating to the recoverability and classification of assets carrying amountsor the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern.Critical Accounting Policies and EstimatesOur discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared inaccordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. We review our estimates and judgments on an on-going basis.We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.Actual results may differ from these estimates. We believe the following accounting policies are critical to the judgments and estimates we use in preparing ourfinancial statements. 47Table of ContentsRevenue RecognitionThe Company adopted Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) in the fourth quarterof 2009, effective as of January 1, 2009. Prior to the adoption of this guidance, the Company followed previously issued guidance for general accountingprinciples for revenue arrangements with multiple deliverables. Under this previously issued guidance, we were required to continually evaluate whether wehad proper evidence to identify separate units of accounting for deliverables within certain contractual arrangements with customers. If we were unable tosupport the determination of vendor-specific objective evidence (“VSOE”) or third party evidence (“TPE”) of fair value on the undelivered element, we couldnot recognize revenue for the delivered elements.ASU 2009-13 permits management to estimate the selling price of undelivered components of a bundled sale for which it is unable to establish VSOE orTPE. This requires management to record revenue for certain elements of a transaction even though it might not have delivered other elements of thetransaction, for which it was unable to meet the requirements for establishing VSOE or TPE. The adoption of the new guidance did not materially impactrevenue reported in prior periods. The Company believes that the new guidance significantly improves the reporting of these types of transactions to moreclosely reflect the underlying economic circumstances. This guidance also prohibits the use of the residual method for allocating revenue to the variouselements of a transaction and requires that the revenue be allocated proportionally based on the relative estimated selling prices.Under our revenue recognition policy before and after the adoption of ASU 2009-13, a portion of revenue for most system sales is recognized upondelivery, provided that title has passed, there are no uncertainties regarding acceptance, persuasive evidence of an arrangement exists, the sales price is fixedand determinable, and collection of the related receivable is reasonably assured. Beginning in the quarter ended March 31, 2010, revenue for Odyssey VisionStandard HD systems was recognized upon delivery due to the fact that third parties became qualified to perform installations. However, this change did nothave a material impact on revenue recognition for the year ended December 31, 2010. Beginning in the quarter ended June 30, 2010, revenue for OdysseyVision Quad systems was recognized upon delivery due to the fact that third parties became qualified to perform installations. This change resulted inadditional revenue of $2.6 million and additional gross margin of $1.3 million during the year ended December 31, 2010. Beginning in the quarter endedDecember 31, 2010, revenue for Odyssey Enterprise Cinema systems was recognized upon delivery due to the fact that third parties became qualified toperform installations. This change resulted in additional revenue of $0.7 million and additional $0.4 million in gross margin. Revenue is recognized for othertypes of Odyssey systems upon completion of installation, since there are no qualified third party installers. When installation is the responsibility of thecustomer, revenue from system sales is recognized upon shipment since these arrangements do not include an installation element or right of return privileges.We do not recognize revenue in situations in which inventory remains at a Stereotaxis warehouse or in situations in which title and risk of loss have nottransferred to the customer. However, we may deliver systems to a non-hospital site at the customer’s request as outlined in the terms and conditions of thesales agreement, in which case we evaluate whether the substance of the transaction meets the delivery and performance requirements for revenue recognitionunder “bill and hold” guidance. Amounts collected prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Revenue fromservices and license fees, whether sold individually or as a separate unit of accounting in a multi-element arrangement, is deferred and amortized over theservice or license fee period, which is typically one year. Revenue from services is derived primarily from the sale of annual product maintenance plans. Werecognize revenue from disposable device sales or accessories upon shipment and establish an appropriate reserve for returns. The return reserve, which isapplicable only to disposable devices, is estimated based on historical experience which is periodically reviewed and updated as necessary. In the past, changesin estimate have had only a de minimus effect on revenue recognized in the period. We believe that the estimate is not likely to change significantly in thefuture. 48Table of ContentsStock-based CompensationStock compensation expense, which is a non-cash charge, results from stock option and stock appreciation rights grants made to employees, anddirectors at the fair value of the option granted, and from grants of restricted shares and units to employees and directors. The fair value of options and stockappreciation rights granted was determined using the Black-Scholes valuation method which gives consideration to the estimated value of the underlying stockat the date of grant, the exercise price of the option, the expected dividend yield and volatility of the underlying stock, the expected life of the option and thecorresponding risk-free interest rate. The fair value of the grants of restricted shares and units was determined based on the closing price of our stock on thedate of grant. Stock compensation expense for options, stock appreciation rights and for time-based restricted share grants is amortized on a straight-line basisover the vesting period of the underlying issue, generally over three years except for grants to directors which generally vest over one to two years and restrictedstock units which generally vest over a period of 18 months to four years. Stock compensation expense for performance-based restricted shares is amortizedon a straight-line basis over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives. Compensation expensesrelated to option grants to non-employees are remeasured quarterly through the vesting date. Compensation expense is recognized only for those options expectedto vest, net of estimated forfeitures. Estimates of the expected life of options have been based on the average of the vesting and expiration periods, which is thesimplified method under general accounting principles for share-based payments. Estimates of volatility and forfeiture rates utilized in calculating stock-basedcompensation have been prepared based on historical data and future expectations. Actual experience to date has been consistent with these estimates.The amount of compensation expense to be recorded in future periods may increase if we make additional grants of options, stock appreciation rights orrestricted shares or if we determine that actual forfeiture rates are less than anticipated. The amount of expense to be recorded in future periods may decrease ifwe do not achieve the performance objectives by which certain restricted shares are contingent, if the requisite service periods are not completed or if the actualforfeiture rates are greater than anticipated.Valuation of InventoryWe value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out (FIFO) method, or its current estimatedmarket value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and reserve accordingly. Our reserve estimatefor excess and obsolete is based on expected future use. Our reserve estimates have historically been consistent with our actual experience as evidenced byactual sale or disposal of the goods.Deferred Income TaxesDeferred assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using theenacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary toreduce deferred tax assets to the amounts expected to be realized. We have established a valuation allowance against the entire amount of our deferred tax assetsbecause we are not able to conclude, due to our history of operating losses, that it is more likely than not that we will be able to realize any portion of thedeferred tax assets.In assessing whether and to what extent deferred tax assets are realizable, we consider whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible. We consider projected future taxable income and tax planning strategies in making thisassessment. Based upon the level of historical taxable losses, limitations imposed by Section 382 of the Internal Revenue Code and projections for future lossesover periods which the deferred tax assets are deductible, we determined that a 100% valuation allowance of deferred tax assets was appropriate. 49Table of ContentsResults of OperationsComparison of the Years ended December 31, 2012 and 2011Revenue. Revenue increased to $46.6 million for the year ended December 31, 2012 from $42.0 million for the year ended December 31, 2011, anincrease of approximately 11%. Revenue from sales of systems increased to $19.7 million for the year ended December 31, 2012 from $15.6 million for theyear ended December 31, 2011, an increase of approximately 26%, primarily due to an increase in the number of Niobe systems and Niobe ES upgradessold. The number of units recognized to revenue was 9 Niobe systems and a total of $3.3 million for Niobe ES upgrades and $6.5 million for Odysseysystems during the 2012 reporting period compared to 7 Niobe systems, and a total of $0.5 million for Niobe ES upgrades and $7.4 million for Odysseysystems during the 2011 reporting period. Revenue from sales of disposable interventional devices, service and accessories increased to $26.9 million for theyear ended December 31, 2012 from $26.4 million for the year ended December 31, 2011, an increase of approximately 2%. The increase was attributable toimproved utilization due to Niobe ES upgrades and to a lesser extent the increased base of installed systems, the resulting disposable sales, offset by lowerroyalty income resulting from a reduction in the royalty rate effective January 1, 2012.Cost of Revenue. Cost of revenue increased to $14.8 million for the year ended December 31, 2012 from $12.5 million for the year ended December 31,2011, an increase of approximately 18%. As a percentage of our total revenue, overall gross margin decreased from 70% for the year ended December 31,2011, to 68% for the year ended December 31, 2012, due to a shift in mix from disposable, service, and accessories revenue to systems revenue. Cost ofrevenue for systems sold increased to $9.9 million for the year ended December 31, 2012 from $8.6 million for the year ended December 31, 2011, anincrease of approximately 15%. This increase was primarily due to an increase in the number of Niobe units sold in 2012 compared to 2011. Gross marginfor systems was 50% for the year ended December 31, 2012, compared to 45% for year ended December 31, 2011. The improvement is primarily attributableto higher production volumes and related cost absorption. Cost of revenue for disposable interventional devices, service and accessories increased to $4.9million for the year ended December 31, 2012 from $3.9 million for the year ended December 31, 2011, resulting in a decrease in gross margin to 82% from85% between these periods. The decrease in gross margin is due to a higher mix of lower margin disposables revenue, lower royalties and providing Niobe ESupgrades in exchange for new or extended premium service contractsResearch and Development Expense. Research and development expense decreased to $8.4 million for the year ended December 31, 2012 from $12.9million for the year ended December 31, 2011, a decrease of approximately 35%. The decrease is primarily due to the completion of major development effortsof the Epoch Solution and Odyssey system upgrades in 2011, as well as reduced headcount expenses.Sales and Marketing Expense. Sales and marketing expense decreased to $20.6 million for the year ended December 31, 2012, from $31.6 million forthe year ended December 31, 2011, a decrease of approximately 35%. The decrease was due to primarily due to reduced headcount and related travel andrelocation expenses as well as lower marketing and consulting expenses.General and Administrative Expense. General and administrative expenses include regulatory, clinical, general management and training expenses.General and administrative expense decreased to $13.4 million for the year ended December 31, 2012, from $16.9 million for the year ended December 31,2011, a decrease of approximately 21%. The decrease was primarily due to reduced headcount and related travel and relocation expenses, lower spending onregistrations in Japan as our products approach the end of clinical trials, and decreased bad debt expense and consulting costs.Other Income. Other income increased to $8.3 million for the year ended December 31, 2012 from $3.4 million for the year ended December 31, 2011.Other income represents the change in market value of certain warrants classified as a derivative and recorded as a current liability under general accountingprinciples for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Other income also 50Table of Contentsincludes the adjustment in fair value of the derivative asset and liability related to the conversion features embedded in the subordinated convertible debentures.The primary drivers of fluctuations in this balance are changes in the Company’s stock price from one period to the next.Interest Expense. Interest expense increased to $6.9 million for the year ended December 31, 2012 from $3.5 million for the year ended December 31,2011, due to the Healthcare Royalty Partners II, L.P. (formerly “Cowen Healthcare Royalty Partners II, L.P.”) financing in November 2011 and additional$2.5 million borrowing in August 2012, and the issuance of $8.5 million in Debentures in May 2012. Interest expense also includes the amortization of thedebt discount on the Debentures totaling $1.0 million for the year ended December 31, 2012.Comparison of the Years ended December 31, 2011 and 2010Revenue. Revenue decreased to $42.0 million for the year ended December 31, 2011 from $54.1 million for the year ended December 31, 2010, adecrease of approximately 22%. Revenue from sales of systems decreased to $15.6 million for the year ended December 31, 2011 from $31.1 million for theyear ended December 31, 2010, a decrease of approximately 50%, primarily due to a decrease in the number of Niobe systems sold. The number of unitsrecognized to revenue was 7 Niobe systems and a total of $7.4 million for Odyssey systems during the 2011 reporting period compared to 21 Niobe systems,and $9.2 million for Odyssey systems during the 2010 reporting period. Revenue from sales of disposable interventional devices, service and accessoriesincreased to $26.4 million for the year ended December 31, 2011 from $23.0 million for the year ended December 31, 2010, an increase of approximately15%. This increase was attributable to pricing as well as a larger base of installed systems, which resulted in growth in disposables for procedures andservice contracts.Cost of Revenue. Cost of revenue decreased to $12.5 million for the year ended December 31, 2011 from $15.6 million for the year endedDecember 31, 2010, a decrease of approximately 20%. As a percentage of our total revenue, overall gross margin decreased from 71% for the year endedDecember 31, 2010, to 70% for the year ended December 31, 2011, primarily due to a decrease in the gross margin on system sales. Cost of revenue forsystems sold decreased to $8.6 million for the year ended December 31, 2011 from $12.7 million for the year ended December 31, 2010, a decrease ofapproximately 33%. This decrease was primarily due to fewer Niobe units sold in 2011 compared to 2010. Gross margin for systems was 45% for the yearended December 31, 2011, compared to 59% for year ended December 31, 2010. The decrease was primarily related to a charge related to the absorption ofoverhead costs based on normal production levels. Cost of revenue for disposable interventional devices, service and accessories increased to $3.9 million forthe year ended December 31, 2011 from $2.9 million for the year ended December 31, 2010, resulting in a decrease in gross margin to 85% from 88% betweenthese periods.Research and Development Expense. Research and development expense increased to $12.9 million for the year ended December 31, 2011 from $12.2million for the year ended December 31, 2010, an increase of approximately 5%. The increase is primarily due to increased expenditures related to developmentof the Niobe ES robotic system and Odyssey system upgrades.Sales and Marketing Expense. Sales and marketing expense increased to $31.6 million for the year ended December 31, 2011, from $30.2 million forthe year ended December 31, 2010, an increase of approximately 5%. The increase was primarily due to a rise in headcount to support higher utilization ratesworldwide as well as increased marketing costs related to the launch of the Niobe ES robotic system. Although headcount was reduced during the quarterended September 30, 2011, as part of the Company’s efforts to reduce operating expenses, the full year headcount expense was higher in 2011 than in 2010.General and Administrative Expense. General and administrative expenses include regulatory, clinical, general management and training expenses.General and administrative expense increased to $16.9 million for the year ended December 31, 2011, from $15.0 million for the year ended December 31,2010, an increase of 51Table of Contentsapproximately 13%. This increase was primarily due to increased headcount and customer training programs to drive utilization, increased consulting costs,and higher spending on registrations in Japan as our products approach the end of clinical trials.Other Income. Other income increased to $3.4 million for the year ended December 31, 2011 from $2.1 million for the year ended December 31, 2010.This increase is due to the decrease in market value of certain warrants classified as a derivative and recorded as a current liability under general accountingprinciples for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.Interest Expense. Interest expense increased to $3.5 million for the year ended December 31, 2011 from $3.0 million for the year ended December 31,2010. This increase was primarily due to higher average debt balances.Income TaxesRealization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, net deferred tax assetshave been fully offset by valuation allowances as of December 31, 2012, 2011 and 2010 to reflect these uncertainties. As of December 31, 2012, we hadfederal net operating loss carryforwards of approximately $351.0 which will expire between 2018 and 2032. As of December 31, 2012, we had state netoperating loss carryforwards of approximately $8.4 million which will expire at various dates between 2013 and 2031 if not utilized. We may not be able toutilize all of these loss carryforwards prior to their expiration.Liquidity and Capital ResourcesBorrowing facilitiesAs of December 31, 2012, our borrowing facilities were comprised of subordinated convertible debentures, a revolving line of credit and a term notemaintained with our primary lender, Silicon Valley Bank, as well as a term note maintained with Healthcare Royalty Partners II, L.P. During 2011, we paidoff the remaining amount due on our advance from Biosense Webster, Inc., resulting in a balance of $0 as of December 31, 2011.In July 2008, we amended our existing agreements with Biosense Webster. Pursuant to the amendment, Biosense Webster agreed to advance us $10.0million against royalty amounts that were owed to us from Biosense Webster at the time the amendment was executed or that would be owed in the future. Wealso agreed that an aggregate of up to $8.0 million of certain agreed upon research and development expenses that were owed at the time the amendment wasexecuted or may be owed in the future by us to Biosense Webster would be deferred and will be due, together with any unrecouped portion of the $10.0 millionroyalty advance, on the Final Payment Date, as defined in the amendment, but in no event later than December 31, 2011. See Note 9 for additional descriptionof Final Payment Date. During 2011, we had the right to prepay any amounts due pursuant to the amendment at any time without penalty. Commencing onMay 15, 2010 we were required to make quarterly payments to Biosense Webster equal to the difference between certain aggregate royalty payments recoupedby Biosense Webster from us in such quarter and $1 million, until the earlier of (1) the date all funds owed by us to Biosense Webster pursuant to theamendment are fully repaid or (2) the Final Payment Date. Interest on the outstanding and unrecouped amounts of the royalty advance and deferred researchand development expenses accrued at an interest rate of the prime rate plus 0.75%. Outstanding royalty advances and deferred research and developmentexpenses and accrued interest thereon could be recouped by Biosense Webster from time to time by deductions from royalty amounts otherwise payable to us.As of December 31, 2011, these amounts plus interest accrued thereon had been repaid through royalties and minimum payments, in accordance with theagreement.In November 2010, the Company received from affiliates of two members of our board of directors (“the Lenders”) an extension of their commitment toprovide $10 million in either direct loans to the Company or loan 52Table of Contentsguarantees to the Company’s primary bank lender through the earlier of March 31, 2012 or the date the Company receives $30 million of third party, non-bank financing, coincidental with the proposed maturity of the bank line of credit, as amended. The Company granted to the Lenders warrants to purchase80,000 shares in exchange for their extension. The warrants are exercisable at $40.15 per share, beginning on March 1, 2011 and expiring on February 28,2016. The fair value of these warrants of $1,747,392, calculated using the Black-Scholes method, will be deferred and amortized to interest expense ratably.As the previous guarantee was no longer in effect, the Company expensed in 2010 the entire balance on the warrants issued to the Lenders in October 2009.In December 2010, we further amended our loan agreement with our primary lender to extend the maturity of the current working capital line of creditfrom March 31, 2011 to March 31, 2012. The amendment retains the $30 million total availability under the line. Under the revised facility, we are required tomaintain a minimum “tangible net worth” and liquidity ratio as defined in the agreement. Additionally, the agreement provided the Company with a $10million term loan maturing on December 31, 2013. Under this agreement, the Company provided its primary lender with warrants to purchase 11,111 sharesof common stock. The warrants are exercisable at $36.00 per share, beginning on December 17, 2010 and expiring on December 17, 2015. The fair value ofthese warrants of $228,332, calculated using the Black-Scholes method, will be deferred and amortized to interest expense ratably over the life of the termloan. As of December 31, 2011, the Company is in compliance with all of the requirements of the loan agreement.On September 30, 2011, we entered into a fourth loan modification agreement with our primary lender to reduce the total availability amount of all creditextensions under the Original Agreement, other than the term loan, from $30 million to $20 million. The Agreement also modifies the interest rate applicable tothe term loan under the Original Agreement from the Lender’s prime rate plus 3.50% to the Bank’s prime rate plus 5.50%.On November 30, 2011, the Company entered into a Second Amended and Restated Loan and Security Agreement with Silicon Valley Bank (“AmendedLoan Agreement”). Under the Amended Loan Agreement, the Company agreed to revised tangible net worth and liquidity ratio covenants. Further, certainintellectual property assets of the Company were added to the collateral which secures repayment of the loan.On March 30, 2012, the Company amended its agreement with its primary lender. The amendment extended the maturity date of the working capital lineof credit from March 31, 2012 to April 30, 2012 and reduced the Company’s borrowing availability by $3,333,333. The Company also extended untilApril 30, 2012 the $10 million guarantee provided by the Lenders. As a result of this extension, the Company issued the Lenders warrants to purchase75,735 shares of common stock at $6.60 per share.On May 1, 2012, the Company and its primary lender entered into an agreement in which the lender extended the maturity of the revolving line of creditfrom April 30, 2012 to May 15, 2012. The Company also amended its agreement with the Lenders to extend the $10 million loan guarantee through May 15,2012. The Company granted warrants to purchase an aggregate of 60,976 shares of common stock in exchange for the extension of the guarantee.On May 10, 2012, upon closing of financing transactions for gross proceeds of $18.5 million, the Company entered into the Third Loan ModificationAgreement with its primary lender. The amendment extended the revolving credit facility maturity to March 31, 2013 and revised the financial covenants.Additionally, the revolving line of credit was decreased from $20 million to $13 million. The reduction was as a result of the pay down of $7 million of theguarantees provided by the Lenders.On March 29, 2013, the Company amended its agreement with its primary lender. The amendment extended the maturity date of the working capitalline of credit from March 31, 2013 to June 30, 2013. The company also extended until June 30, 2013 the $3 million guarantee by the Lenders. As a result ofthis extension, the Company issued the Lenders warrants to purchase 113,636 shares of common stock at $1.98 per share. 53Table of ContentsHealthcare Royalty Partners DebtIn November 2011, we entered into a loan agreement with Healthcare Royalty Partners II, L.P. (formerly “Cowen Healthcare Royalty Partners II, L.P.”).Under the agreement the Company borrowed from Healthcare Royalty Partners $15 million. The Company was permitted to borrow up to an additional $5million in the aggregate based on the achievement by the Company of certain milestones related to Niobe system sales in 2012. On August 8, 2012, theCompany borrowed an additional $2.5 million based upon achievement of a milestone related to Niobe system sales for the nine months ended June 30, 2012.On January 31, 2013, the Company borrowed an additional $2.5 million based upon achievement of a milestone related to Niobe system sales for the twelvemonths ended December 31, 2012. The loan will be repaid through, and secured by, royalties payable to the Company under its Development, Alliance andSupply Agreement with Biosense Webster, Inc. (the “Biosense Agreement”). The Biosense Agreement relates to the development and distribution ofmagnetically enabled catheters used with Stereotaxis’ Niobe system in cardiac ablation procedures. Under the terms of the Agreement, Healthcare RoyaltyPartners will be entitled to receive 100% of all royalties due to the Company under the Biosense Agreement until the loan is repaid. The loan is a full recourseloan, matures on December 31, 2018, and bears interest at an annual rate of 16% payable quarterly with royalties received under the Biosense Agreement. Ifthe payments received by the Company under the Biosense Agreement are insufficient to pay all amounts of interest due on the loan, then such deficiency willincrease the outstanding principal amount on the loan. After the loan obligation is repaid, royalties under the Biosense Agreement will again be paid to theCompany. The loan is also secured by certain assets and intellectual property of the Company. The Agreement also contains customary affirmative andnegative covenants. The use of payments due to the Company under the Biosense Agreement was approved by our primary lender under the Amended LoansAgreement described above.Subordinated Convertible DebenturesIn May 2012, the Company entered into a securities purchase agreement with certain institutional investors whereby the Company agreed to sell anaggregate of approximately $8.5 million in aggregate principal amount of unsecured, subordinated, convertible debentures (the “Debentures”), which becameconvertible into shares of the Company’s common stock at a conversion price of $3.361 per share (or approximately 2.5 million shares in the aggregate), onJuly 10, 2012, the date that the Company received shareholder approval for the transaction. The purchasers of the Debentures also received six-year warrantsto purchase an aggregate of approximately 2.5 million shares of the Company’s common stock at an exercise price of $3.361 per share. The Debentures bearinterest at 8% per year and mature on May 7, 2014. In addition, the Company has the ability to issue shares of its common stock in lieu of cash interestpayments under certain circumstances, and intends to do so at such time as the Company has registered the shares for resale.The Company recorded the Debentures on the balance sheet net of the debt discount of $7.5 million. The debt discount is due to warrants issued inconjunction with the Debentures and the debt conversion features. The fair value of the warrants and derivative liability were $4.1 million and $3.5 million,respectively. The debt discount will be amortized over the life of the loan using the effective interest method. Refer to Note 11 for additional discussion of thefair value of the warrants and conversion features.Common StockIn November 2010, we completed a public offering of our common stock in which we issued 460,000 shares at $36.50 per share and realizedapproximately $15.5 million in proceeds, net of fees and expenses.In May 2012, the Company entered into a Stock and Warrant Purchase Agreement with certain institutional investors whereby it agreed to sell anaggregate of approximately 2.17 million shares of the Company’s common stock (the “PIPE Common Stock”) at a price of $3.361 per share, together with six-year warrants at a price of $1.25 per share to purchase an aggregate of approximately 2.17 million shares of common stock having an exercise price of $3.361per share (the “PIPE Warrants”). Each purchaser received a PIPE Warrant to purchase one share of common stock for every share of PIPE Common Stockpurchased. 54Table of ContentsAs described above, on July 10, 2012, the Company effected a one-for-ten Reverse Stock Split of the Company’s common stock. All figures within thisdocument have been adjusted to reflect this reverse stock split.Net proceeds from the sale of the securities were approximately $9.1 million, after placement agent fees and other offering expenses. The Company usedthe funds to repay $7 million of the revolving credit facility guaranteed by the Lenders and plans to use the balance for working capital and general corporatepurposes.The following table summarizes our cash flow by operating, investing and financing activities for each of years ended December 31, 2012, 2011 and2010 (in thousands): 2012 2011 2010 Cash flow used in operating activities $(12,118) $(31,569) $(18,910) Cash flow used in investing activities (131) (1,032) (716) Cash flow provided by financing activities 6,071 11,307 24,328 Net cash used in operating activities. We used approximately $12.1 million, $31.6 million, and $18.9 million of cash in operating activities duringthe years ended December 31, 2012, 2011, and 2010, respectively. The decrease in cash used in operating activities from December 31, 2011, to December 31,2012, is primarily a result of the reduction in operating losses between these two periods. The increase in cash used in operating activities from December 31,2010, to December 31, 2011, is primarily a result of the increase in operating losses between these two periods.Net cash used in investing activities. We used approximately $0.1 million, $1.0 million, and $0.7 million to fund investing activities during the yearsended December 31, 2012, 2011, and 2010, respectively, for the purchase of property and equipment.Net cash provided by financing activities. We realized approximately $6.1 million from financing activities during the year ended December 31, 2012compared to $11.3 million generated for the year ended December 31, 2011. This decrease in cash generated was primarily due to $7.7 million from theissuance of subordinated convertible debentures and warrants, $9.1 million from stock and warrants and $2.5 million in additional borrowing fromHealthcare Royalty Partners partially offset by $8.0 million net payments under our revolving line of credit, $4.0 million related to the term note, and $1.3million for the Healthcare Royalty Partners debt.At December 31, 2012, we had a working capital deficit of approximately $5.7 million, compared to working capital of $6.6 million at December 31,2011.As of December 31, 2012, we had an outstanding balance under our term loan of $4.0 million. In addition, we had $7.3 million outstanding under therevolving line of credit and had an unused line of approximately $5.7 million with current borrowing capacity of $7.7 million, including amounts alreadydrawn. As such, the Company had the ability to borrow an additional $0.4 million under the revolving line of credit at December 31, 2012. Draws on the lineof credit are made based on the borrowing capacity one month in arrears. As of December 31, 2012, the Company was in compliance with all covenants of thebank loan agreement.These credit facilities are secured by substantially all of our assets. The credit agreements include customary affirmative, negative and financialcovenants. For example, we are restricted from incurring additional debt, disposing of or pledging our assets, entering into merger or acquisition agreements,making certain investments, allowing fundamental changes to our business, ownership, management or business locations, and from making certainpayments in respect of stock or other ownership interests, such as dividends and stock repurchases. Under our loan arrangements, as in effect atDecember 31, 2012 and as modified in May 2012, we are required to maintain various levels of “tangible net worth” and liquidity as defined in the loanagreement. We are also required under the credit agreements to maintain our primary operating account and the majority of our cash and investment balances inaccounts with our primary lending bank. As of the amendment date and as of December 31, 2012, we were in compliance with all covenants of this agreement. 55Table of ContentsWe expect to have negative cash flow from operations into 2013. Throughout 2013, we expect to continue the development and commercialization of ourexisting products and, to a lesser extent, our research and development programs and the advancement of new products into clinical development. We expectthat our 2013 sales and marketing, research and development, and general and administrative expenses will remain consistent with 2012.We will be required to raise capital or pursue other financing strategies to continue our operations. Until we can generate significant cash flow from ouroperations, we expect to continue to fund our operations with cash resources primarily generated from the proceeds of our past and future public offerings,private sales of our equity securities and working capital and equipment financing loans. In the future, we may finance future cash needs through the sale ofother equity securities or non-core assets, strategic collaboration agreements, debt financings or through distribution rights. We cannot accurately predict thetiming and amount of our utilization of capital, which will depend on a number of factors outside of our control.Our existing cash, cash equivalents and borrowing facilities will not be sufficient to fund our operating expenses and capital equipment requirementsthrough the next 12 months, which will require us to obtain additional financing before that time. We cannot assure that such additional financing will beavailable on a timely basis on terms acceptable to us or at all, or that such financing will not be dilutive to our stockholders. If adequate funds are notavailable to us, we could be required to delay development or commercialization of new products, to license to third parties the rights to commercializeproducts or technologies that we would otherwise seek to commercialize ourselves or to reduce the sales, marketing, customer support or other resourcesdevoted to our products, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, wecould be required to cease operations.Off-Balance Sheet ArrangementsWe do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referredto as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are notmaterially exposed to any financing, liquidity, market or credit risk that could have arisen if we had engaged in these relationships.Contractual ObligationsThe following table summarizes all significant contractual payment obligations by payment due date: Payments by Period (In thousands) Contractual Obligations Under1 Year 1–3Years 3–5Years Over5 Years Total Long-term debt $12,264 $12,409 $5,888 $5,065 $35,626 Operating leases $1,729 $3,443 $4,384 $2,187 $11,743 Capital leases $2 $— $— $— $2 Total $13,995 $15,852 $10,272 $7,252 $47,371 (1)We have not included interest payable on our revolving credit agreement in these amounts because the interest on this obligation is calculated at a variablerate and the amount of principal outstanding fluctuates.(2)Excludes $6.5 million convertible debt discount related to debt maturing on May 7, 2014.Commercial CommitmentsWe have entered into a letter of credit to support a commitment in the amount of approximately $0.1 million. This letter of credit is valid through 2015. 56(1) (2)Table of ContentsITEM 7A.Quantitative and Qualitative Disclosures About Market RiskForeign Exchange RiskWe operate mainly in the U.S., Europe and Asia and we expect to continue to sell our products both within and outside of the U.S. Although the majorityof our revenue and expenses are transacted in U.S. dollars, a portion of our operations are conducted in Euros and to a lesser extent, in other currencies. Assuch, we have foreign exchange exposure with respect to non-U.S. dollar revenues and expenses as well as cash balances, accounts receivable, accountspayable and other asset and liability balances denominated in non-US dollar currencies. Our international operations are subject to risks typical ofinternational operations, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulationsand restrictions, and foreign exchange rate volatility. Future fluctuations in the value of these currencies may affect the price competitiveness of our products.In addition, because we have a relatively long installation cycle for our systems, we will be subject to risk of currency fluctuations between the time we executea purchase order and the time we deliver the system and collect payments under the order, which could adversely affect our operating margins. As ofDecember 31, 2012 we have not hedged exposures in foreign currencies or entered into any other derivative instruments.For the year ended December 31, 2012, sales denominated in foreign currencies were approximately 17% of total revenue. For the year endedDecember 31, 2012, our revenue would have decreased by approximately $0.8 million if the U.S. dollar exchange rate used would have strengthened by 10%.For the year ended December 31, 2012, expenses denominated in foreign currencies were approximately 15% of our total expenses. For the year endedDecember 31, 2012, our operating expenses would have decreased by approximately $0.6 million if the U.S. dollar exchange rate used would havestrengthened by 10%. In addition, we have assets and liabilities denominated in foreign currencies. A 10% strengthening of the U.S. dollar exchange rateagainst all currencies with which we have exposure at December 31, 2012 would have resulted in a $0.2 million decrease in the carrying amounts of those netassets.Interest Rate RiskWe have exposure to interest rate risk related to our investment portfolio. The primary objective of our investment activities is to preserve principal whileat the same time maximizing the income we receive from our invested cash without significantly increasing the risk of loss. Our interest income is sensitive tochanges in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term debt instruments. We invest our excesscash primarily in U.S. government securities and marketable debt securities of financial institutions and corporations with strong credit ratings. Theseinstruments generally have maturities of two years or less when acquired. We do not utilize derivative financial instruments, derivative commodityinstruments or other market risk sensitive instruments, positions or transactions. Accordingly, we believe that while the instruments we hold are subject tochanges in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreigncurrency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.We have exposure to market risk related to any investments we might hold. Market liquidity issues might make it impossible for the Company toliquidate its holdings or require that the Company sell the securities at a substantial loss. As of December 31, 2012, the Company did not hold anyinvestments.We have exposure to interest rate risk related to our borrowings as the interest rates for certain of our outstanding loans are subject to increase should theinterest rate increase above a defined percentage. Because certain issuances of our outstanding debt are subject to minimum interest rates ranging from 5.75%to 7.0%, a hypothetical increase in interest rates of 100 basis points would have resulted in less than a $0.1 million decrease in interest expense for the yearended December 31, 2012.Inflation RiskWe do not believe that inflation has had a material adverse impact on our business or operating results during the periods covered by this report. 57Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial StatementsIndex To Financial Statements PAGE Report of Ernst & Young LLP, Independent Registered Public Accounting Firm 59 Balance Sheets at December 31, 2012 and 2011 60 Statements of Operations for the years ended December 31, 2012, 2011, and 2010 61 Statements of Stockholders’ Equity for the years ended December 31, 2012, 2011, and 2010 62 Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010 63 Notes to the Financial Statements 64 Schedule II—Valuation and Qualifying Accounts 123 All other schedules have been omitted because they are not applicable or the required information is shown in the Financial Statements or the Notesthereto. 58Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersStereotaxis, Inc.We have audited the accompanying balance sheets of Stereotaxis, Inc. (the Company) as of December 31, 2012 and 2011, and the related statements ofoperations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financialstatement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were notengaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stereotaxis, Inc. at December 31,2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects the information set forth herein.The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described inNote 1, the Company has incurred recurring operating losses and has a working capital deficiency. These conditions raise substantial doubt about theCompany’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The financial statements do notinclude any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilitiesthat may result from the outcome of this uncertainty./s/ Ernst & Young LLPSt. Louis, MissouriApril 1, 2013 59Table of ContentsSTEREOTAXIS, INC.BALANCE SHEETS December 31,2012 December 31,2011 Assets Current assets: Cash and cash equivalents $7,777,718 $13,954,919 Accounts receivable, net of allowance of $640,183 and $667,529 in 2012 and 2011, respectively 11,551,651 11,104,038 Current portion of long-term receivables 18,838 59,679 Inventories 5,098,241 6,036,051 Prepaid expenses and other current assets 3,492,067 3,081,484 Total current assets 27,938,515 34,236,171 Property and equipment, net 2,141,923 3,323,856 Intangible assets, net 1,979,320 2,279,153 Long-term receivables 73,199 51,892 Other assets 32,987 40,760 Total assets $32,165,944 $39,931,832 Liabilities and stockholders’ deficit Current liabilities: Short-term debt and current maturities of long-term debt $12,264,490 $21,173,321 Accounts payable 3,556,688 5,610,181 Accrued liabilities 5,361,810 5,703,166 Deferred revenue 9,502,939 8,220,306 Warrants and debt conversion features 2,968,348 125,415 Total current liabilities 33,654,275 40,832,389 Long-term debt, less current maturities 16,824,736 17,290,531 Long-term deferred revenue 477,159 634,713 Other liabilities — 3,094 Stockholders’ deficit: Preferred stock, par value $0.001; 10,000,000 shares authorized, none outstanding at 2012 and 2011 — — Common stock, par value $0.001; 300,000,000 shares authorized, 8,018,615 and 5,543,157 sharesissued at 2012 and 2011, respectively 8,019 5,543 Additional paid in capital 366,053,627 356,779,007 Treasury stock, 4,015 shares at 2012 and 2011 (205,999) (205,999) Accumulated deficit (384,645,873) (375,407,446) Total stockholders’ deficit (18,790,226) (18,828,895) Total liabilities and stockholders’ deficit $32,165,944 $39,931,832 See accompanying notes. 60Table of ContentsSTEREOTAXIS, INC.STATEMENTS OF OPERATIONS Year Ended December 31, 2012 2011 2010 Revenue: Systems $19,672,983 $15,585,538 $31,120,034 Disposables, service and accessories 26,889,451 26,401,894 22,931,203 Total revenue 46,562,434 41,987,432 54,051,237 Cost of revenue: Systems 9,905,528 8,576,283 12,719,200 Disposables, service and accessories 4,875,527 3,921,798 2,845,487 Total cost of revenue 14,781,055 12,498,081 15,564,687 Gross margin 31,781,379 29,489,351 38,486,550 Operating expenses: Research and development 8,405,086 12,886,488 12,244,163 Sales and marketing 20,607,999 31,635,415 30,178,818 General and administrative 13,394,556 16,908,656 15,022,689 Total operating expenses 42,407,641 61,430,559 57,445,670 Operating loss (10,626,262) (31,941,208) (18,959,120) Other income 8,265,507 3,416,383 2,060,346 Interest income 7,361 9,052 10,578 Interest expense (6,885,033) (3,515,402) (3,035,291) Net loss $(9,238,427) $(32,031,175) $(19,923,487) Net loss per common share: Basic $(1.33) $(5.84) $(3.94) Diluted $(1.33) $(5.84) $(3.94) Weighted average shares used in computing net loss per common share: Basic 6,944,928 5,482,627 5,052,200 Diluted 6,944,928 5,482,627 5,052,200 See accompanying notes. 61Table of ContentsSTEREOTAXIS, INC.STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock AdditionalPaid-In Capital TreasuryStock AccumulatedDeficit TotalStockholders’Equity (Deficit) Shares Amount Balance at December 31, 2009 5,020,817 $5,021 $331,295,105 $(205,999) $(323,452,784) $7,641,343 Issuance of common stock and warrants 489,158 489 20,037,017 20,037,506 Share-based compensation 2,049,606 2,049,606 Issuance of stock under stock purchase plan 5,476 6 209,772 209,778 Exercise of stock options 13,056 13 460,487 460,500 Grant of restricted shares, net of forfeitures (53,883) (54) 54 — Net Loss (19,923,487) (19,923,487) Balance at December 31, 2010 5,474,624 $5,475 $354,052,041 $(205,999) $(343,376,271) $10,475,246 Common Stock AdditionalPaid-InCapital TreasuryStock AccumulatedDeficit TotalStockholders’Equity(Deficit) Shares Amount Balance at December 31, 2010 5,474,624 $5,475 $354,052,041 $(205,999) $(343,376,271) $10,475,246 Issuance of common stock 8,400 8 (8) — Share-based compensation 2,487,441 2,487,441 Issuance of stock under stock purchase plan 8,449 9 232,382 232,391 Exercise of stock options 468 — 7,202 7,202 Grant of restricted shares, net of forfeitures 51,216 51 (51) — Net Loss (32,031,175) (32,031,175) Balance at December 31, 2011 5,543,157 $5,543 $356,779,007 $(205,999) $(375,407,446) $(18,828,895) Common Stock AdditionalPaid-In Capital TreasuryStock AccumulatedDeficit TotalStockholders’Equity (Deficit) Shares Amount Balance at December 31, 2011 5,543,157 $5,543 $356,779,007 $(205,999) $(375,407,446) $(18,828,895) Issuance of common stock and warrants 2,415,339 2,415 10,409,260 10,411,675 Share-based compensation 2,293,731 2,293,731 Issuance of stock under stock purchase plan 10,315 10 73,543 73,553 Grant of restricted shares, net of forfeitures 19,885 20 (20) — Restricted stock vestings 29,919 31 (31) — Reclassification of warrants to liability (3,501,863) (3,501,863) Net Loss (9,238,427) (9,238,427) Balance at December 31, 2012 8,018,615 $8,019 $366,053,627 $(205,999) $(384,645,873) $(18,790,226) See accompanying notes. 62Table of ContentsSTEREOTAXIS, INC.STATEMENTS OF CASH FLOWS Year Ended December 31, 2012 2011 2010 Cash flows from operating activities Net loss $(9,238,427) $(32,031,175) $(19,923,487) Adjustments to reconcile net loss to cash used in operating activities: Depreciation 1,300,188 1,462,238 1,697,694 Amortization 299,833 299,833 230,459 Amortization of deferred finance costs and debt discount 2,977,119 1,331,549 1,652,672 Share-based compensation 2,293,731 2,487,441 2,049,606 Non-cash royalty (income), net — (2,353,718) (3,381,424) Gain/loss on debt conversion (75,612) — — Loss on asset disposal 12,444 86,278 5,039 Adjustment of warrants and convertible debt features (8,189,895) (3,416,383) (600,816) Interest due from issuance of stock 192,128 — — Changes in operating assets and liabilities: Accounts receivable (447,613) 2,811,531 (2,762,921) Other receivables 19,534 28,495 65,175 Inventories 937,810 (594,576) (1,075,075) Prepaid expenses and other current assets (760,474) 827,297 522,924 Other assets 7,773 (2,223) (33,426) Accounts payable (2,053,493) (3,186,001) 4,937,129 Accrued liabilities (514,689) (1,090,072) (1,221,120) Deferred revenue 1,125,079 1,775,856 (1,060,903) Other liabilities (3,094) (5,648) (11,271) Net cash used in operating activities (12,117,658) (31,569,278) (18,909,745) Cash flows from investing activities Purchase of equipment (130,699) (1,031,749) (715,770) Net cash used in investing activities (130,699) (1,031,749) (715,770) Cash flows from financing activities Proceeds from term loan — — 10,000,000 Payments of term loan (4,000,000) (2,000,000) (333,333) Proceeds from revolving line of credit 54,806,154 77,109,376 58,034,809 Payments of revolving line of credit (62,842,934) (72,818,866) (57,503,298) Proceeds from convertible debt 7,738,351 — — Proceeds from Healthcare Royalty Partners debt 2,500,000 14,317,397 — Payments of Healthcare Royalty Partners debt (1,252,647) — — Payments of Biosense debt — (5,540,373) (2,071,139) Proceeds from issuance of stock and warrants, net of issuance costs 9,122,232 239,593 16,200,745 Net cash provided by financing activities 6,071,156 11,307,127 24,327,784 Net decrease in cash and cash equivalents (6,177,201) (21,293,900) 4,702,269 Cash and cash equivalents at beginning of period 13,954,919 35,248,819 30,546,550 Cash and cash equivalents at end of period $7,777,718 $13,954,919 $35,248,819 Supplemental disclosures of cash flow information: Interest paid $3,258,900 $859,494 $140,253 See accompanying notes. 63Table of ContentsSTEREOTAXIS, INC.NOTES TO FINANCIAL STATEMENTSNotes to Financial StatementsIn this report, “Stereotaxis,” the “Company,” “Registrant,” “we,” “us,” and “our” refer to Stereotaxis, Inc. and its wholly-ownedsubsidiaries. Niobe, Epoch™, Odyssey, Odyssey Cinema™, Vdrive™, Vdrive Duo™, V-Loop™, and V-Sono™ are trademarks of Stereotaxis, Inc.1. Description of BusinessStereotaxis designs, manufactures and markets the Epoch Solution, which is an advanced remote robotic navigation system for use in a hospital’sinterventional surgical suite, or “interventional lab”, that we believe revolutionizes the treatment of arrhythmias and coronary artery disease by enablingenhanced safety, efficiency and efficacy for catheter-based, or interventional, procedures. The Epoch Solution is comprised of the Niobe ES Robotic MagneticNavigation System (“Niobe ES system”), Odyssey Information Management Solution (“Odyssey Solution”), and the Vdrive Robotic Navigation System (“Vdrive system”).The Niobe system is designed to enable physicians to complete more complex interventional procedures by providing image guided delivery of cathetersand guidewires through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied magnetic fields that govern themotion of the working tip of the catheter or guidewire, resulting in improved navigation, efficient procedures and reduced x-ray exposure.In addition to the Niobe system and its components, Stereotaxis also has developed the Odyssey Solution, which consolidates all lab informationenabling doctors to focus on the patient for optimal procedure efficiency. The system also features a remote viewing and recording capability called OdysseyCinema, which is an innovative solution delivering synchronized content for optimized workflow, advanced care and improved productivity. This toolincludes an archiving capability that allows clinicians to store and replay entire procedures or segments of procedures. This information can be accessed fromlocations throughout the hospital local area network and over the global Odyssey Network providing physicians with a tool for clinical collaboration, remoteconsultation and training.Our Vdrive system provides navigation and stability for diagnostic and therapeutic devices designed to improve interventional procedures. The Vdrivesystem complements the Niobe ES system control of therapeutic catheters for fully remote procedures and enables single-operator workflow and is sold as twooptions, the Vdrive system and the Vdrive Duo system. In addition to the Vdrive system and the Vdrive Duo system, we also manufacture and marketvarious disposable components which can be manipulated by these systems.We promote the full Epoch Solution in a typical hospital implementation, subject to regulatory approvals or clearances. The full Epoch Solutionimplementation requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically includes equipmentand installation charges. The recurring payments typically include disposable costs for each procedure, equipment service costs beyond warranty period, andsoftware licenses. In hospitals where the full Epoch Solution has not been implemented, equipment upgrade or expansion can be implemented upon purchasingof the necessary upgrade or expansion.The core components of Stereotaxis systems have received regulatory clearance in the U.S., Europe, Canada and elsewhere; the V-Loop circular cathetermanipulator is currently in human clinical trials and the V-Sono ICE Catheter Manipulator is under regulatory review by the U.S. Food and DrugAdministration.Since our inception, we have generated significant losses. As of December 31 2012, we had incurred cumulative net losses of approximately $385million. In May 2011, the Company introduced the Niobe ES 64®®Table of Contentssystem, which is the latest generation of the Niobe Robotic Magnetic Navigation System and will replace the Niobe II system going forward. Due to the factthat the Niobe ES system and upgrades from Niobe II to Niobe ES systems were not available to customers until December 2011, the product change createda rapid shift away from sales of the current Niobe II system, resulting in lower System Revenue in 2011. As of December 31, 2012, the Company had aninstalled base of 74 Niobe ES systems and has received positive feedback from the physicians at these sites. During the third quarter of 2011, the Companyimplemented a wide ranging plan to rebalance and reduce operating expenses by 15% to 20% on an annual run rate basis. During the year ended December 31,2012, the Company reduced operating expenses by approximately $19 million or 31% over the prior year. We expect to incur additional losses into 2013 as wecontinue the development and commercialization of our products, conduct our research and development activities and advance new products into clinicaldevelopment from our existing research programs and fund additional sales and marketing initiatives.2. Summary of Significant Accounting PoliciesCash and Cash EquivalentsThe Company considers all short-term investments purchased with original maturities of three months or less to be cash equivalents. The Companyplaces its cash with high-credit-quality financial institutions and invests primarily in money market accounts. No cash was restricted at December 31, 2012or 2011.Accounts Receivable and Allowance for Uncollectible AccountsAccounts receivable primarily include amounts due from hospitals and distributors for acquisition of magnetic systems, associated disposable devicesales and service contracts. Credit is granted on a limited basis, with balances due generally within 30 days of billing. The provision for bad debts is basedupon management’s assessment of historical and expected net collections considering business and economic conditions and other collection indicators.Financial InstrumentsFinancial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt. The carryingvalue of such amounts reported at the applicable balance sheet dates approximates fair value. See Note 9 for disclosure of the fair value of debt.The Company measures certain financial assets and liabilities at fair value on a recurring basis, including warrants. General accounting principles forfair value measurement established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives thehighest priority to unadjusted quoted prices in active markets for identical assets and liabilities (“Level 1”) and the lowest priority to unobservable inputs(“Level 3”).The Company’s financial assets consist of cash equivalents invested in money market funds and an embedded derivative associated with theconvertible debt. The Company had cash equivalents invested in money market funds in the amount of $256,702 and $55,629 at December 31, 2012 and2011, respectively. The financial assets consisting of cash equivalents invested in money market funds are classified as Level 1 as described above and totalinterest income recorded for these investments was insignificant during the year ended December 31, 2012 and 2011, respectively. The Company’s embeddedderivative asset associated with the convertible debt was $1,736 at December 31, 2012. This asset is classified as Level 3 as described above and is measuredusing the Black-Scholes valuation model. The mark-to-market adjustment recorded in other income for the derivative asset was $16,772 during the yearended December 31, 2012. There were no significant purchases, sales, settlements or issuances of Level 3 investments during the year. The embeddedderivative was transferred into Level 3 in May 2012 at the time of issuance of the convertible debt. 65Table of ContentsThe Company’s financial liabilities consist of warrants and an embedded derivative associated with the convertible debt in the amount of $2,968,348and $125,415 at December 31, 2012 and 2011, respectively. These liabilities are classified as Level 3 as described above and are measured using the Black-Scholes and Monte Carlo valuation models. The mark-to-market adjustment recorded in other income for these liabilities was $8,183,024 and $3,416,383during the years ended December 31, 2012 and 2011, respectively. There was $23,643 of settlements of Level 3 investments during the year endedDecember 31, 2012. There were no purchases, sales, or issuances of Level 3 investments during the year. The warrants and embedded derivative weretransferred into Level 3 at the time of issuance of the convertible debt, equity, and associated warrants. See Note 12 for additional details.InventoryThe Company values its inventory at the lower of cost, as determined using the first-in, first-out (FIFO) method, or market. The Company periodicallyreviews its physical inventory for obsolete items and provides a reserve upon identification of potential obsolete items.Property and EquipmentProperty and equipment consist primarily of computer, office, and research and demonstration equipment held for lease and leasehold improvementsand are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives or life of the base lease term, ranging from three toten years.Long-Lived AssetsIf facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the carrying valueof the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of theasset is reduced to its estimated fair value.Intangible AssetsIntangible assets consist of purchased technology and intellectual property rights valued at cost on the acquisition date and amortized over their estimateduseful lives of 10-15 years.Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of income and loss during the reporting period. Actual results could differ from those estimates.Revenue and Costs of RevenueThe Company adopted Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) in the fourth quarterof 2009, effective as of January 1, 2009. Prior to the adoption of this guidance, the Company followed previously issued guidance for general accountingprinciples for revenue arrangements with multiple deliverables. Under this previously issued guidance, we were required to continually evaluate whether wehad proper evidence to identify separate units of accounting for deliverables within certain contractual arrangements with customers. If we were unable tosupport the determination of vendor-specific objective evidence (“VSOE”) or third party evidence (“TPE”) of fair value on the undelivered element, we couldnot recognize revenue for the delivered elements. 66Table of ContentsASU 2009-13 permits management to estimate the selling price of undelivered components of a bundled sale for which it is unable to establish VSOE orTPE. This requires management to record revenue for certain elements of a transaction even though it might not have delivered other elements of thetransaction, for which it was unable to meet the requirements for establishing VSOE or TPE. The adoption of the new guidance did not materially impactrevenue reported in prior periods. The Company believes that the new guidance significantly improves the reporting of these types of transactions to moreclosely reflect the underlying economic circumstances. This guidance also prohibits the use of the residual method for allocating revenue to the variouselements of a transaction and requires that the revenue be allocated proportionally based on the relative estimated selling prices.Under our revenue recognition policy before and after the adoption of ASU 2009-13, a portion of revenue for the Niobe, Odyssey Vision, OdysseyCinema, and Vdrive systems is recognized upon delivery, provided that title has passed, there are no uncertainties regarding acceptance, persuasive evidenceof an arrangement exists, the sales price is fixed and determinable, and collection of the related receivable is reasonably assured. Beginning in the quarter endedMarch 31, 2010, revenue for Odyssey Vision Standard HD systems was recognized upon delivery due to the fact that third parties became qualified toperform installations. However, this change did not have a material impact on revenue recognition for the year ended December 31, 2010. Beginning in thequarter ended June 30, 2010, revenue for Odyssey Vision Quad systems was recognized upon delivery due to the fact that third parties became qualified toperform installations. This change resulted in additional revenue of $2.6 million and additional gross margin of $1.3 million during the year endedDecember 31, 2010. Beginning in the quarter ended December 31, 2010, revenue for Odyssey Cinema systems was recognized upon delivery due to the factthat third parties became qualified to perform installations. This change resulted in additional revenue of $0.7 million and additional $0.4 million in grossmargin. Revenue is recognized for other types of Odyssey systems upon completion of installation, since there are no qualified third party installers. Wheninstallation is the responsibility of the customer, revenue from system sales is recognized upon shipment since these arrangements do not include aninstallation element or right of return privileges. The Company does not recognize revenue in situations in which inventory remains at a Stereotaxis warehouseor in situations in which title and risk of loss have not transferred to the customer. However, the Company may deliver systems to a non-hospital site at thecustomer’s request as outlined in the terms and conditions of the sales agreement, in which case the Company evaluates whether the substance of thetransaction meets the delivery and performance requirements for revenue recognition under “bill and hold” guidance. Amounts collected prior to satisfying theabove revenue recognition criteria are reflected as deferred revenue. Revenue from services and license fees, whether sold individually or as a separate unit ofaccounting in a multiple-deliverable arrangement, is deferred and amortized over the service or license fee period, which is typically one year. Revenue fromservices is derived primarily from the sale of annual product maintenance plans. We recognize revenue from disposable device sales or accessories uponshipment and establish an appropriate reserve for returns. The return reserve, which is applicable only to disposable devices, is estimated based on historicalexperience which is periodically reviewed and updated as necessary. In the past, changes in estimate have had only a de minimus effect on revenue recognizedin the period. We believe that the estimate is not likely to change significantly in the future.Costs of systems revenue include direct product costs, installation labor and other costs, estimated warranty costs, and initial training and productmaintenance costs. These costs are recorded at the time of sale. Costs of disposable revenue include direct product costs and estimated warranty costs and arerecorded at the time of sale. Cost of revenue from services and license fees are recorded when incurred.Research and Development CostsInternal research and development costs are expensed in the period incurred. Amounts receivable from strategic alliances under research reimbursementagreements are recorded as a contra-research and development expense in the period reimbursable costs are incurred. Advance receipts or other unearnedreimbursements are included in accrued liabilities on the accompanying balance sheet until earned. 67Table of ContentsShare-Based CompensationStock options or stock appreciation rights issued to certain non-employees are recorded at their fair value as determined in accordance with generalaccounting principles for share-based payments and accounting for equity instruments that are issued to other than employees for acquiring, or in conjunctionwith selling, goods or services, and recognized over the service period. Deferred compensation for options granted to non-employees is remeasured on aquarterly basis through the vesting or forfeiture date.The Company utilizes the Black-Scholes valuation model to determine the fair value of share-based payments at the date of grant with the followinginputs: 1) expected dividend rate of 0%; 2) expected volatility of 50-151% based on the Company’s historical volatility; 3) risk-free interest rate based on theTreasury yield on the date of grant and; 4) expected term for grants using the simplified method which results in an expected term ranging from 3.75 to 6.25years. The resulting compensation expense is recognized over the requisite service period, generally one to four years. Compensation expense is recognized onlyfor those awards expected to vest, with forfeitures estimated based on the Company’s historical experience and future expectations.Restricted shares granted to employees are valued at the fair market value at the date of grant. The Company amortizes the amount to expense over theservice period on a straight-line basis for those shares with graded vesting. If the shares are subject to performance objectives, the resulting compensationexpense is amortized over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives.Shares purchased by employees under the 2004 Employee Stock Purchase Plan were considered to be compensatory and were accounted for inaccordance with general accounting principles for share-based payments.Net Loss per Common ShareBasic loss per common share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding duringthe period. Diluted loss per share is computed by dividing the loss for the period by the weighted average number of common and common equivalent sharesoutstanding during the period. In addition, the application of the two-class method of computing earnings per share under general accounting principles forparticipating securities is not applicable because the Company’s unearned restricted shares do not contractually participate in its losses.The Company did not include any portion of unearned restricted shares, outstanding options, stock appreciation rights or warrants in the calculation ofdiluted loss per common share because all such securities are anti-dilutive for all periods presented. The application of the two-class method of computingearnings per share under general accounting principles for participating securities is not applicable during these periods because those securities do notcontractually participate in its losses.On July 10, 2012, the Company effected a one-for-ten reverse stock split of the Company’s common stock. The net loss per common share, sharesoutstanding, and weighted average shares outstanding reported in the financial statements and notes to the financial statements for the periods endingDecember 31, 2012, 2011, and 2010 are presented on a post-split basis. See Note 11 for additional discussion of the reverse stock split.As of December 31, 2012, the Company had 373,899 shares of common stock issuable upon the exercise of outstanding options and stockappreciation rights at a weighted average exercise price of $43.90 per share and 6,099,476 shares of common stock issuable upon the exercise of outstandingwarrants at a weighted average exercise price of $9.98 per share. The Company had a weighted average of 99,087 unearned restricted shares outstanding forthe period ended December 31, 2012. 68Table of ContentsIncome TaxesIn accordance with general accounting principles for income taxes, a deferred income tax asset or liability is determined based on the difference betweenthe financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. TheCompany provides a valuation allowance against net deferred income tax assets unless, based upon available evidence, it is more likely than not the deferredincome tax assets will be realized.Product Warranty ProvisionsThe Company’s standard policy is to warrant all systems against defects in material or workmanship for one year following installation. TheCompany’s estimate of costs to service the warranty obligations is based on historical experience and current product performance trends. A regular review ofwarranty obligations is performed to determine the adequacy of the reserve and adjustments are made to the estimated warranty liability (included in otheraccrued liabilities) as appropriate.Patent CostsCosts related to filing and pursuing patent applications are expensed as incurred, as recoverability of such expenditures is uncertain.Concentrations of RiskThe majority of the Company’s cash, cash equivalents and investments are deposited with one major financial institution in the U.S. Deposits in thisinstitution exceed the amount of insurance provided on such deposits.One customer, Siemens AG, Medical Solutions, and its affiliated entities, as our distributor, accounted for $2,452,034, $1,899,158, and$6,074,479, or 5%, 5%, and 11% of total net revenue for the years ended December 31, 2012, 2011, and 2010, respectively. No single customer accountedfor more than 10% of total revenue for the year ended December 31, 2012.ReclassificationsCommon stock and additional paid-in capital in the prior year’s financial statements have been reclassified to reflect the one-for-ten reverse stock spliteffected on July 10, 2012. Refer to Note 11 for additional discussion of the reverse stock split.Recently Issued Accounting PronouncementsIn February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU” or “Update”) 2013-02,“Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which adds new disclosure requirements foritems reclassified out of accumulated other comprehensive income (“AOCI”). The update requires that the Company present either in a single note orparenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and theincome statement line items affected by the reclassification. The guidance is effective for interim and annual reporting periods beginning on or afterDecember 15, 2012. As the Company has no items of other comprehensive income, the Company is not required to report accumulated other comprehensiveincome.In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-11, “Disclosures aboutOffsetting Assets and Liabilities.” The Update enhances the disclosure of offsetting assets and liabilities by requiring companies to disclose both the gross andnet information about 69Table of Contentsinstruments and transactions eligible for offset as well as those subject to an agreement similar to master netting arrangements. This guidance is effective forthe Company’s interim and annual periods beginning January 1, 2013. The adoption of this pronouncement did not have an impact on the financialstatements.In June 2011, the FASB issued new accounting guidance related to the presentation of comprehensive income that increases comparability between U.S.GAAP and International Financial Reporting Standards (“IFRS”). This guidance eliminates the current option to report other comprehensive income (OCI) andits components in the statement of changes in stockholders’ equity. This guidance was effective for the Company’s interim and annual periods beginningJanuary 1, 2012. As the Company has no items of other comprehensive income, the Company is not required to report comprehensive income or othercomprehensive income.In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair ValueMeasurement and Disclosure Requirements in U.S. GAAP and IFRS.” The Update amends the guidance on fair value measurements to develop commonrequirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS. The Updatedoes not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financialreporting. This guidance was effective during interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have amaterial effect on our financial position or results of operations.In January 2010, the FASB issued Accounting Standards Update 2010-06 (“ASU 2010-06”), which is an amendment to the Fair Value Measurementsand Disclosures topic of the Accounting Standards Codification. This amendment requires disclosures about transfers into and out of Levels 1 and 2 andseparate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures aboutthe level of disaggregation and about inputs and valuation techniques used to measure fair value. This amendment is effective for periods beginning afterDecember 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements, which is effective for fiscalyears beginning after December 15, 2010. See “Financial Instruments” section of Note 2 for required disclosures.Effective October 1, 2009, the Company adopted ASU 2009-13. ASU 2009-13 permits management to estimate the selling price of undeliveredcomponents of a bundled sale for which it is unable to establish vendor-specific objective evidence (“VSOE”) or third party evidence (“TPE”). This requiresmanagement to record revenue for certain elements of a transaction even though it might not have delivered other elements of the transaction, for which it wasunable to meet the requirements for establishing VSOE or TPE. This guidance also prohibits the use of the residual method for allocating revenue to thevarious elements of a transaction and requires that the revenue be allocated proportionally based on the relative estimated selling prices. The Company adoptedthis standard in the fourth quarter of 2009, with retrospective application to January 1, 2009.The Company’s adoption of ASU 2009-13 did not have a material impact on any amounts previously reported for the first three quarters of 2009. Thefourth quarter of 2009 was the first period during which we sold a Niobe system with an uninstalled Odyssey Enterprise Cinema system. Due to the factthat we had not established VSOE or TPE for uninstalled Odyssey Enterprise Cinema systems under the previous guidance, we would not have been able torecognize revenue for any portion of these transactions, which amounted to $2.0 million in revenue and $1.3 million in gross margin. Under the new guidance,we were able to use management’s estimate of selling price to establish new elements, including the Odyssey Enterprise Cinema, and recognize revenue for thedelivered elements that were included in bundled transactions with these undelivered elements. The Company believes that the new guidance significantlyimproves the reporting of these types of transactions to more closely reflect the underlying economic circumstances. 70®Table of Contents3. InventoryInventory consists of the following: December 31,2012 December 31,2011 Raw materials $3,303,053 $2,264,603 Work in process 65,546 131,980 Finished goods 1,802,281 3,790,625 Reserve for obsolescence (72,639) (151,157) Total inventory $5,098,241 $6,036,051 4. Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consist of the following: December 31,2012 December 31,2011 Prepaid expenses $330,756 $460,297 Deferred cost of revenue 527,725 289,312 Derivative asset 1,736 — Deferred Financing 1,590,916 1,647,435 Other assets 1,040,934 684,440 Total prepaid expenses and other current assets $3,492,067 $3,081,484 Deferred cost of revenue represents the cost of systems for which title has transferred from the Company but for which revenue has not been recognized.The derivative asset represents the fair value of a debt conversion feature that is part of the subordinated convertible debentures agreement. Refer to Notes9 and 12 for discussion of the debentures and fair value measurement, respectively.5. Property and EquipmentProperty and equipment consist of the following: December 31,2012 December 31,2011 Equipment $8,762,041 $8,977,623 Equipment held for lease 303,412 547,416 Leasehold improvements 2,328,381 2,473,880 11,393,834 11,998,919 Less: Accumulated depreciation (9,251,911) (8,675,063) Net property and equipment $2,141,923 $3,323,856 6. Intangible AssetsOn June 4, 2010, the Company entered into an agreement to issue 45,000 shares of its common stock to a consultant (the “Purchaser”) in exchange forintellectual property rights related to the Company’s products. The Company issued 20,000 shares upon execution of the agreement and will issue an aggregateof 25,000 shares in annual installments on the first three anniversaries of the agreement. The unissued shares meet the criteria for equity classification underAccounting Standards Codification (ASC) 480 Distinguishing Liabilities from Equity 71Table of Contentsand therefore are recorded in additional paid-in capital. There was no cash consideration paid for the securities. The securities were issued in consideration ofthe assignment to the Company of the Purchaser’s rights in certain intellectual property, including patent applications, in all inventions and discoveries in theCompany’s business field (as defined in the agreement) that had been developed under various other agreements, which were terminated. The securities weresold by the Company in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933 and Regulation D promulgatedthereunder. There were no underwriters or placement agents involved in the transaction.As of December 31, 2012 and 2011, the Company had total intangible assets, including those described above, of $3.7 million. Accumulatedamortization at December 31, 2012 and 2011, was $1,685,681 and 1,385,849. Amortization expense was $299,833, $299,833, and $230,459, in 2012,2011, and 2010, respectively, as determined under the straight-line method. The estimated future amortization of intangible assets is $299,833 annuallythrough July 2018, decreasing thereafter to $166,500 annually through May 20207. Accrued LiabilitiesAccrued liabilities consist of the following: December 31,2012 December 31,2011 Accrued salaries, bonus, and benefits $2,123,167 $3,229,382 Accrued research and development 89,654 27,044 Accrued legal and other professional fees 219,000 25,000 Other 2,929,989 2,421,740 Total accrued liabilities $5,361,810 $5,703,166 8. Deferred RevenueDeferred revenue consists of the following: December 31,2012 December 31,2011 Product shipped, revenue deferred $3,206,641 $2,001,160 Customer deposits 558,227 1,156,900 Deferred service and license fees 6,215,230 5,696,959 9,980,098 8,855,019 Less: Long-term deferred revenue (477,159) (634,713) Total current deferred revenue $9,502,939 $8,220,306 72Table of Contents9. Long-Term Debt and Credit FacilitiesDebt outstanding consists of the following: December 31, 2012 December 31, 2011 CarryingAmount Estimated FairValue CarryingAmount Estimated FairValue Revolving line of credit, due June 2013 $7,253,017 $7,277,084 $15,290,510 $15,371,063 Term note, due December 2013 4,000,000 4,000,000 8,000,000 8,000,000 Healthcare Royalty Partners debt 16,248,075 16,248,075 15,173,342 15,173,342 Subordinated convertible debentures 1,588,134 1,588,134 — — Total debt 29,089,226 29,113,293 38,463,852 38,544,405 Less current maturities (12,264,490) (12,288,557) (21,173,321) (21,253,874) Total long term debt $16,824,736 $16,824,736 $17,290,531 $17,290,531 Contractual principal maturities of debt at December 31, 2012 are as follows: 2013 $12,264,490 2014 10,097,285 2015 2,312,052 2016 2,710,351 2017 3,177,265 2018 and Beyond 5,064,649 $35,626,092 (1)Includes $6.5 million convertible debt discount related to debt maturing on May 7, 2014.(2)Future principal payments of Biosense Webster advance based on estimated future royalties.Revolving line of creditIn November 2010, the Company received from affiliates of two members of our board of directors (“the Lenders”) an extension of their commitment toprovide $10 million in either direct loans to the Company or loan guarantees to the Company’s primary bank lender through the earlier of March 31, 2012 orthe date the Company receives $30 million of third party, non-bank financing, coincidental with the proposed maturity of the bank line of credit, as amended.The Company granted to the Lenders warrants to purchase 80,000 shares in exchange for their extension. The warrants are exercisable at $40.15 per share,beginning on March 1, 2011 and expiring on February 28, 2016. The fair value of these warrants of $1,747,392, calculated using the Black-Scholesmethod, will be deferred and amortized to interest expense ratably. As the previous guarantee was no longer in effect, the Company expensed in 2010 the entirebalance on the warrants issued to the Lenders in October 2009.In December 2010, the Company further amended its agreement with its primary lender to extend the maturity of the current working capital line ofcredit from March 31, 2011 to March 31, 2012, retaining the $30 million total availability under the line per the 2009 amendment. The revised agreementretained the $10 million sublimit for borrowings supported by guarantees from stockholders who at the time were affiliates of two members of its board ofdirectors (“Lenders”) and considered to be related parties. Under the revised facility the Company is required to maintain a minimum “tangible net worth” andliquidity ratio as defined in the agreement. Interest on the facility accrued at the rate of prime plus 0.5% subject to a floor of 6% for the amount under guaranteeand prime plus 1.75% subject to a floor of 7% for the remaining amounts.In September 2011, the Company amended its agreement with its primary lender. The amendment reduced the availability amount of all creditextensions, other than the term loan, from $30 million to $20 million, and 73(1)(2)Table of Contentsmodified the interest rate applicable to the term loan from the lender’s prime rate plus 3.5% to the lender’s prime rate plus 5.5%.On November 30, 2011, the Company entered into a Second Amended and Restated Loan and Security Agreement with its primary lender (“AmendedLoan Agreement”). Under the Amended Loan Agreement, the Company agreed to revised tangible net worth and liquidity ratio covenants. Further, certainintellectual property assets of the Company were added to the collateral which secures repayment of the loan. Finally, the Amended Loan Agreement permits theCompany to repay Healthcare Royalty Partners II, L.P. (formerly “Cowen Healthcare Royalty Partners II, L.P.”) under the Agreement with the royalties due tothe Company under the Biosense Agreement (the "Biosense Agreement"), as described below.On March 30, 2012, the Company amended its agreement with its primary lender. The amendment extended the maturity date of the working capital lineof credit from March 31, 2012 to April 30, 2012 and reduced the Company’s borrowing availability by $3,333,333. The Company also extended untilApril 30, 2012 the $10 million guarantee provided by the Lenders. As a result of this extension, the Company issued the Lenders warrants to purchase75,735 shares of common stock at $6.60 per share.On May 1, 2012, the Company and its primary lender entered into an agreement in which the lender extended the maturity of the revolving line of creditfrom April 30, 2012 to May 15, 2012. The Company also amended its agreement with the Lenders to extend the $10 million loan guarantee through May 15,2012. The Company granted warrants to purchase an aggregate of 60,976 shares of common stock in exchange for the extension of the guarantee.On May 10, 2012, upon closing of financing transactions for gross proceeds of $18.5 million, the Company entered into the Third Loan ModificationAgreement with its primary lender. The amendment extended the revolving credit facility maturity to March 31, 2013 and revised the financial covenants.Additionally, the revolving line of credit was decreased from $20 million to $13 million. The reduction was as result of the pay down of $7 million of theguarantees provided by the Lenders.As of December 31, 2012, the Company had $7.3 million outstanding under the revolving line of credit. Draws on the line of credit are made based onthe borrowing capacity one week in arrears. As of December 31, 2012, the Company had a borrowing capacity of $7.7 million based on the Company’scollateralized assets, including amounts already drawn. As such, the Company had the ability to borrow an additional $0.4 million under the revolving line ofcredit at December 31, 2012. As of December 31, 2012, the Company was in compliance with all covenants of the bank loan agreement and had no remainingavailability on its Lender loan and guarantee.On March 29, 2013, the Company amended its agreement with its primary lender. The amendment extended the maturity date of the working capitalline of credit from March 31, 2013 to June 30, 2013. The company also extended until June 30, 2013 the $3 million guarantee by the Lenders. As a result ofthis extension, the Company issued the Lenders warrants to purchase 113,636 shares of common stock at $1.98 per share.The revolving line of credit and the Company’s term notes (collectively, the “Credit Agreements”) are secured by substantially all of the Company’sassets. The Company is also required under the Credit Agreements to maintain its primary operating account and the majority of its cash and investmentbalances in accounts with the primary lender.Term noteIn June 2007, the Company entered into a term note due in June 2010 with its primary lender for $2,000,000. The Company was required to make equalpayments of principal and interest, at prime plus 1%, through June 2010, at which time the term note matured. 74Table of ContentsUnder the 2010 amendment to the loan agreement, the Company entered into a $10 million term loan maturing on December 31, 2013, with $2 millionof principal due in 2011 and $4 million of principal due in each of 2012 and 2013. Interest on the term loan accrued at the rate of prime plus 3.5%. Under thisagreement, the Company provided its primary lender with warrants to purchase 11,111 shares of common stock. The warrants are exercisable at $36.00 pershare, beginning on December 17, 2010 and expiring on December 17, 2015. The fair value of these warrants of $228,332, calculated using the Black-Scholes method, will be deferred and amortized to interest expense ratably over the life of the term loan.On September 30, 2011, we entered into a fourth loan modification agreement with our primary lender which modifies the interest rate applicable to theterm loan under the Original Agreement from the Lender’s prime rate plus 3.5% to the Bank’s prime rate plus 5.5%.Healthcare Royalty Partners DebtIn November 2011, the Company entered into a loan agreement with Healthcare Royalty Partners II, L.P. (formerly “Healthcare Royalty Partners II,L.P.”). Under the agreement the Company borrowed from Healthcare Royalty Partners $15 million. The Company was permitted to borrow up to an additional$5 million in the aggregate based on the achievement by the Company of certain milestones related to Niobe system sales in 2012. On August 8, 2012, theCompany borrowed an additional $2.5 million based upon achievement of a milestone related to Niobe system sales for the nine months ended June 30, 2012.On January 31, 2013, the Company borrowed an additional $2.5 million based upon achievement of a milestone related to Niobe system sales for the twelvemonths ended December 31, 2012. The loan will be repaid through, and secured by, royalties payable to the Company under its Development, Alliance andSupply Agreement with Biosense Webster, Inc. The Biosense Agreement relates to the development and distribution of magnetically enabled catheters used withStereotaxis' Niobe system in cardiac ablation procedures. Under the terms of the Agreement, Healthcare Royalty Partners will be entitled to receive 100% of allroyalties due to the Company under the Biosense Agreement until the loan is repaid. The loan is a full recourse loan, matures on December 31, 2018, andbears interest at an annual rate of 16% payable quarterly with royalties received under the Biosense Agreement. If the payments received by the Companyunder the Biosense Agreement are insufficient to pay all amounts of interest due on the loan, then such deficiency will increase the outstanding principalamount on the loan. After the loan obligation is repaid, the royalties under the Biosense Agreement will again be paid to the Company. The loan is also securedby certain assets and intellectual property of the Company. The Agreement also contains customary affirmative and negative covenants. The use of paymentsdue to the Company under the Biosense Agreement was approved by our primary lender under the Amended Loans Agreement described above.Subordinated Convertible DebenturesIn May 2012, the Company entered into a securities purchase agreement with certain institutional investors whereby the Company agreed to sell anaggregate of approximately $8.5 million in aggregate principal amount of unsecured, subordinated, convertible debentures (the “Debentures”), which becameconvertible into shares of the Company’s common stock at a conversion price of $3.361 per share (or approximately 2.5 million shares in the aggregate), onJuly 10, 2012, the date that the Company received shareholder approval for the transaction. The purchasers of the Debentures also received six-year warrantsto purchase an aggregate of approximately 2.5 million shares of the Company’s common stock at an exercise price of $3.361 per share. The Debentures bearinterest at 8% per year and mature on May 7, 2014. In addition, the Company has the ability to issue shares of its common stock in lieu of cash interestpayments under certain circumstances, and intends to do so at such time as the Company has registered the shares for resale.The Company recorded the Debentures on the balance sheet net of the debt discount of $7.5 million. The debt discount is due to warrants issued inconjunction with the Debentures and the debt conversion features. Upon issuance of the Debentures, the fair value of the warrants and derivative liability were$4.1 million and $3.5 million, respectively. The debt discount will be amortized over the life of the loan using the effective 75Table of Contentsinterest method and the warrants and derivative liability will be recorded at fair value on each reporting period. Refer to Note 12 for additional discussion of thefair value of the warrants and conversion features.Biosense Webster AdvanceIn July 2008, the Company and Biosense Webster entered into an amendment to their existing agreements relating to the development and sale ofcatheters. Pursuant to the amendment, Biosense Webster agreed to pay to the Company $10.0 million as an advance on royalty amounts that were owed at thetime the amendment was executed or would be owed in the future by Biosense Webster to the Company pursuant to the royalty provisions of one of the existingagreements. The Company and Biosense Webster also agreed that an aggregate of up to $8.0 million of certain agreed upon research and development expensesthat were owed at the time the amendment was executed or may be owed in the future by the Company to Biosense Webster pursuant to the existing agreementwould be deferred and would be due, together with any unrecouped portion of the $10.0 million royalty advance, no later than December 31, 2011. Interest onthe outstanding and unrecouped amounts of the royalty advance and deferred research and development expenses accrued at an interest rate of the prime rateplus 0.75%. Outstanding royalty advances and deferred research and development expenses and accrued interest thereon were recouped by Biosense Websterby deductions from royalty amounts otherwise owed to the Company from Biosense Webster pursuant to the existing agreement. Approximately $18.0 millionhad been advanced by Biosense Webster to the Company pursuant to the amendment. As of December 31, 2011, these amounts plus interest accrued thereonhad been repaid in full, in accordance with the agreement. The Company recorded research and development expenses of $0.4 million, $1.1 million, and $0.6million, and disposables, service and accessories revenue of $3.2 million, $3.6 million, and $3.9 million for the years ended December 31, 2012, 2011, and2010, respectively, related to this agreement.10. Lease ObligationsThe Company leases its facilities under operating leases. For the years ended December 31, 2012, 2011, and 2010 rent expense was $1,697,153,$1,711,647, and $1,548,869, respectively.In January 2006, the Company moved its primary operations into new facilities. The facility is subject to a lease which expires in 2018. Under theterms of the lease, the Company has options to renew for up to three additional years. The lease contains an escalating rent provision which the Company hasstraight-lined over the term of the lease.The future minimum lease payments under non-cancelable leases as of December 31, 2012 are as follows: Year OperatingLease 2013 $1,728,937 2014 1,731,904 2015 1,710,778 2016 2,194,791 2017 2,189,376 2018 and Beyond 2,186,668 Total minimum lease payments 11,742,454 11. Stockholders’ EquityPublic Offerings of Common StockIn November 2010, we completed a public offering of our common stock in which we issued 460,000 shares at $36.50 per share and realizedapproximately $15.5 million in proceeds, net of fees and expenses. 76Table of ContentsIn May 2012, the Company entered into a Stock and Warrant Purchase Agreement with certain institutional investors whereby it agreed to sell anaggregate of approximately 2.17 million shares of the Company's common stock (the “PIPE Common Stock”) at a price of $3.361 per share, together with six-year warrants at a price of $1.25 per share to purchase an aggregate of approximately 2.17 million shares of common stock having an exercise price of $3.361per share (the “PIPE Warrants”). Each purchaser received a PIPE Warrant to purchase one share of common stock for every share of PIPE Common Stockpurchased.As described above, on July 10, 2012, the Company effected a one-for-ten Reverse Stock Split of the Company’s common stock. All figures reportedwithin this document have been adjusted to reflect this reverse stock split.Net proceeds from the sale of the securities were approximately $9.1 million, after placement agent fees and other offering expenses. The Company usedthe funds to repay $7 million of the revolving credit facility guaranteed by the Lenders and plans to use the balance for working capital and general corporatepurposes.The holders of common stock are entitled one vote for each share held and to receive dividends whenever funds are legally available and when declaredby the Board of Directors subject to the prior rights of holders of all classes of stock having priority rights as dividends and the conditions of the ourRevolving Credit Agreement. No dividends have been declared or paid as of December 31, 2012.The Company has reserved shares of common stock for the exercise of warrants, the issuance of options granted under the Company’s stock optionplan and its stock purchase plan as follows: December 31,2012 December 31,2011 Warrants 6,099,476 1,038,161 Stock award plans 131,464 36,469 Employee Stock Purchase Plan 0 10,415 6,230,940 1,085,045 Stock Award PlansThe Company has various stock plans that permit the Company to provide incentives to employees and directors of the Company in the form of equitycompensation. In August 2012, the Board of Directors adopted a stock incentive plan (the 2012 Stock Incentive Plan) which was subsequently approved bythe Company’s stockholders. This plan replaces the 2002 Stock Incentive Plan which expired on March 25, 2012.The 2012 Stock Incentive Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted sharesand restricted share units to employees, directors, and consultants. Options granted under the 2012 Stock Incentive Plan expire no later than ten years from thedate of grant. The exercise price of each incentive stock option shall not be less than 100% of the fair value of the stock subject to the option on the date theoption is granted. The vesting provisions of individual options may vary, but incentive stock options generally vest 25% on the first anniversary of each grantand 1/48 per month over the next three years. Stock appreciation rights are rights to acquire a calculated number of shares of the Company’s common stockupon exercise of the rights. The number of shares to be issued is calculated as the difference between the exercise price of the right and the aggregate marketvalue of the underlying shares on the exercise date divided by the market value as of the exercise date. Stock appreciation rights granted under the 2012 StockIncentive Plan generally vest 25% on the first anniversary of such grant and 1/48 per month over the next three years and expire no later than ten years fromthe date of grant. The Company generally issues new shares upon the exercise of stock options and stock appreciation rights. 77Table of ContentsRestricted share grants are either time-based or performance-based. Time-based restricted shares generally cliff vest three years after grant. Performance-based restricted shares vest upon the achievement of performance objectives which are determined by the Company’s Board of Directors.Restricted stock unit grants are time-based and generally vest over a period of 18 months to four years. Options granted to non-employee directors expireno later than ten years from the date of grant. The exercise price of options to non-employee directors shall not be less than 100% of the fair value of the stocksubject to the option on the date the option is granted. Initial grants of options to new directors generally vest over a two year period. Annual grants to directorsgenerally vest upon the earlier of one year or the next stockholder meeting.A summary of the option and stock appreciation rights activity for the year ended December 31, 2012 is as follows: Number ofOptions/SARs Range ofExercise Price WeightedAverage ExercisePrice per Share Outstanding, December 31, 2011 562,733 $10.00 - $125.50 $48.53 Granted 12,048 $1.63 - $8.10 $4.32 Exercised — $0.00 - $0.00 — Forfeited (200,882) $1.69 - $125.50 $54.51 Outstanding, December 31, 2012 373,899 $1.63 - $116.40 $43.90 As of December 31, 2012, the weighted average remaining contractual life of the options and stock appreciation rights outstanding was 4.7 years. Of the373,899 options and stock appreciation rights that were outstanding as of December 31, 2012, 267,149 were vested and exercisable with a weighted averageexercise price of $49.13 per share and a weighted average remaining term of 4.0 years.A summary of the options and stock appreciation rights outstanding by range of exercise price is as follows: Year Ended December 31, 2012 Range of Exercise Prices OptionsOutstanding WeightedAverageRemaining Life WeightedAverageExercise Price Number ofOptionsCurrentlyExercisable WeightedAverage ExercisePrice Per VestedShare $1.00 - $20.00 30,147 8.87 years $8.33 7,275 $10.39 $20.01 - $50.00 264,239 5.04 years $38.79 180,383 $39.53 $50.01 - $100.00 67,863 2.22 years $68.00 67,841 $68.00 $100.01 - $150.00 11,650 3.78 years $112.05 11,650 $112.05 373,899 4.7 years $43.90 267,149 $49.13 The intrinsic value of options and stock appreciation rights is calculated as the difference between the exercise price of the underlying awards and thequoted price of the Company’s common stock for the options and stock appreciation rights that were in-the-money at December 31, 2012. As of December 31,2012, 6,125 options and stock appreciation rights were in-the-money. The intrinsic value of the options and stock appreciation rights outstanding atDecember 31, 2012 was approximately $5,298 based on a closing share price of $2.55 on December 31, 2012. There were no fully vested options and stockappreciation rights outstanding at December 31, 2012. During the year ended December 31, 2012, no options or stock appreciation rights were exercised underthe Company’s stock option. The weighted average grant date fair value of options and stock appreciation rights granted during the year ended December 31,2012 was $4.32 per share.During the year ended December 31, 2012 the Company realized $0 from the exercise of stock options and stock appreciation rights and less than $0.1million and $0.5 million during 2011 and 2010, respectively. 78Table of ContentsA summary of the restricted share grant activity for the year ended December 31, 2012 is as follows: Number ofShares Weighted AverageGrant Date FairValue per Share Outstanding, December 31, 2011 52,659 $34.17 Granted 85,250 $8.00 Vested (4,001) $37.32 Forfeited (65,365) $14.05 Outstanding, December 31, 2012 68,543 $20.62 A summary of the restricted stock unit activity for the year ended December 31, 2012 is as follows: Number ofRestricted SharesUnits Weighted AverageGrant Date FairValue per Unit Outstanding, December 31, 2011 98,820 $10.89 Granted 509,272 $1.89 Vested (29,919) $10.89 Forfeited (48,861) $6.51 Outstanding, December 31, 2012 529,312 $2.64 A summary of the restricted shares outstanding as of December 31, 2012 is as follows: Number ofShares Time based restricted shares 9,458 Performance based restricted shares 59,085 Outstanding, December 31, 2012 68,543 The intrinsic value of restricted shares and restricted stock units outstanding at December 31, 2012 was approximately $0.1 million and $1.3 million,respectively, based on a closing share price of $2.55 as of December 31, 2012. During the year ended December 31, 2012, the aggregate intrinsic value ofrestricted shares and restricted stock units vested was $0 and approximately $0.1 million, respectively, determined at the date of vesting.During the year ended December 31, 2012, the Company determined that it was not probable that the performance conditions related to certain of itsoutstanding restricted share awards would be achieved and accordingly, recorded approximately $(1.2) million as a cumulative catch-up adjustment resultingin a reduction of share based compensation. During the third quarter of 2011, the Company made an adjustment to its forfeiture rate based on historicalinformation, which resulted in a reduction of share-based compensation of $(0.5) million for the year ended December 31, 2011.As of December 31, 2012, the total compensation cost related to options, stock appreciation rights and non-vested stock granted to employees under theCompany’s stock award plans but not yet recognized was approximately $5.9 million, net of estimated forfeitures of approximately $3.3 million. This costwill be amortized over a period of up to four years on a straight-line basis over the underlying estimated service periods and will be adjusted for subsequentchanges in estimated forfeitures. 79Table of Contents2009 Employee Stock Purchase PlanIn 2009, the Company adopted its 2009 Employee Stock Purchase Plan and reserved 25,000 shares of common stock for issuance pursuant to the plan.The Company offered employees the opportunity to participate in the plan beginning July 1, 2009 with an initial purchase date of September 30, 2009. Eligibleemployees had the opportunity to participate in a new purchase period every 3 months. Under the terms of the plan, employees could purchase up to 15% oftheir compensation of the Company’s common stock, subject to an annual maximum of $25,000, at 95% of the fair market value of the stock at the end ofthe purchase period, subject to certain plan limitations. As of December 31, 2012, a total of 24,901 shares had been purchased under this plan. As ofDecember 31, 2012 there were no remaining shares available for issuance under the Employee Stock Purchase Plan as the plan was suspended in 2012.WarrantsIn November 2010, the Company issued warrants to purchase 80,000 shares of common stock in conjunction with the offering as discussed above in“Public Offerings of Common Stock.”In December 2010, the Company issued warrants to purchase 11,111 shares of common stock in conjunction with the amendment of the loan agreementas described in Note 9.During 2012, 2011, and 2010, warrants for 0, 0, and 0 shares, respectively, were exercised.Reverse Stock SplitOn July 10, 2012, the Company filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation to implement a one-for-tenreverse split of our common stock (the “Reverse Stock Split”). The ratio for the Reverse Stock Split was determined by our Board of Directors pursuant to theapproval of the stockholders at the Company’s special meeting of stockholders held on July 10, 2012, authorizing the Board to effect a reverse stock splitwithin a range of one-for-four to one-for-ten shares of the Company’s common stock. The Reverse Stock Split was effective as of July 10, 2012, and theCompany’s common stock began trading on the Nasdaq Global Market on a post-split basis on July 11, 2012.As a result of the Reverse Stock Split, each ten shares of the Company’s issued and outstanding common stock were automatically combined andconverted into one issued and outstanding share of common stock. The Reverse Stock Split affected all issued and outstanding shares of the Company’scommon stock, as well as common stock underlying stock options, stock appreciation rights, restricted stock, restricted stock units, warrants andconvertible debentures outstanding immediately prior to the effectiveness of the Reverse Stock Split. The Reverse Stock Split reduced the number of shares ofthe Company’s common stock outstanding from approximately 78 million to 7.8 million at the time of the Reverse Stock Split. In addition, the Amendmentincreased the number of authorized shares of the Company’s common stock from 100 million to 300 million. The Reverse Stock Split did not alter the parvalue of common stock, which remained $0.001 per share, or modify any voting rights or other terms of the Company’s common stock. Unless otherwiseindicated, all information set forth herein gives effect to such Reverse Stock Split.12. Fair Value MeasurementsThe Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and warrants. Generalaccounting principles for fair value measurement established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fairvalue. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (“Level 1”) and the lowestpriority to unobservable inputs (“Level 3”). The three levels of the fair value hierarchy are described below: Level 1: Values are based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets orliabilities. 80Table of ContentsLevel 2: Values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets thatare not active, or other model-based valuation techniques for which all significant assumptions are observable in the market.Level 3: Values are generated from model-based techniques that use significant assumptions not observable in the market.The following table sets forth the Company’s assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. Asrequired by the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification, assets and liabilities are classified in their entiretybased on the lowest level of input that is significant to the fair value measurement. Fair Value Measurement Using Total Quoted Prices inActive Marketsfor IdenticalInstruments(Level 1) SignificantOtherObservableInputs (Level 2) SignificantUnobservableInputs(Level 3) Assets at December 31, 2012: Cash equivalents $256,702 256,702 — — Derivative asset 1,736 — — 1,736 Total assets at fair value $258,438 256,702 — 1,736 Liabilities at December 31, 2012: Warrants issued December 29, 2008 $71,581 — — 71,581 Warrants issued May 10, 2012 2,347,902 — — 2,347,902 Derivative liability 548,865 — — 548,865 Total liabilities at fair value: $2,968,348 — — 2,968,348 Assets at December 31, 2011: Cash equivalents $55,629 55,629 — — Total assets at fair value $55,629 55,629 — — Liabilities at December 31, 2011: Warrants issued December 29, 2008 $125,415 — — 125,415 Total liabilities at fair value: $125,415 — — 125,415 Level 1The Company’s financial assets consist of cash equivalents invested in money market funds in the amount of $256,702 and $55,629 atDecember 31, 2012 and December 31, 2011, respectively. These assets are classified as Level 1 as described above and total interest income recorded for theseinvestments was insignificant during both the years ended December 31, 2012 and December 31, 2011. There were no transfers in or out of Level 1 during theyear ended December 31, 2012.Level 2The Company does not have any financial assets or liabilities classified as Level 2.Level 3In conjunction with its December 29, 2008 registered direct offering, the Company issued warrants to purchase 179,241 shares of the Company’scommon stock that contained a provision that required a reduction of 81Table of Contentsthe exercise price if certain equity events occurred. Under the provisions of general accounting principles for derivatives and hedging activities and determiningwhether an instrument (or embedded feature) is indexed to an entity’s own stock, such a reset provision does not meet the exemptions for equity classificationand as such, the Company accounts for these warrants as derivative instruments. The calculated fair value of the warrants is classified as a liability and isperiodically remeasured with any changes in value recognized in “Other income (expense)” in the Statement of Operations. General accounting principles fordetermining whether an instrument (or embedded feature) is indexed to an entity’s own stock became effective for the Company as of January 1, 2009.Accordingly, the fair value of the warrants as of that date was reclassified from stockholders’ equity into current liabilities.In accordance with general accounting principles for fair value measurement, the Company’s warrants in the amount of $71,581 were measured at fairvalue on a recurring basis as of December 31, 2012 and were valued using Level 3 valuation inputs. A Black-Scholes model was used to value the Company’swarrants at December 31, 2012 using the following assumptions: 1) dividend yield of 0%; 2) volatility of 116.49%; 3) risk-free interest rate of 0.36%; and 4)expected life of 1.5 years.In the Company’s May 2012 financing transaction, the Company issued subordinated convertible debentures and warrants. The optional conversionfeature of the subordinated convertible debentures is classified as a derivative liability within “Warrants and derivative liabilities” on the Company’s balancesheet. The warrants issued in conjunction with the Debentures and PIPE are also considered a liability. Due to the provisions included in the warrantagreements, the warrants do not meet the exemptions for equity classification and as such, the Company accounts for these warrants as derivativeinstruments. The warrants and derivative liability are periodically remeasured with any changes in value recognized in “Other income (expense)” in theStatement of Operations.Per the terms of the Debentures agreement, the Company may require each holder to convert up to 50% of the Debentures if the common stock closesabove $15.00, or 100% of the Debentures if the common stock closes above $20.00 (in each case, as adjusted for stock splits, recapitalizations and similarevents) during a 20 consecutive trading day period and the resale registration statement has been declared effective by the SEC and is available for the issuanceof the common stock upon conversion of the Debentures. In the event of any forced conversion by the Company, the minimum amount that the Company canforce the holders to convert shall be $2.5 million of Debentures in the aggregate. This mandatory redemption clause is classified as a derivative asset within“Prepaid and other current assets” on the Company’s balance sheet. The derivative asset is periodically remeasured with any changes in value recognized in“Other income (expense)” in the Statement of Operations.In accordance with general accounting principles for fair value measurement, the Company’s warrants, derivative liability, and derivative asset weremeasured at fair value on a recurring basis as of December 31, 2012 and were valued using Level 3 valuation inputs. A Monte-Carlo simulation was used tovalue the derivative asset and liabilities upon issuance on May 10, 2012 using the following assumptions: 1) volatility of 80%; 2) risk-free interest rate of1.035%; and 3) a closing stock price of $3.413. The derivative asset and liabilities were revalued as of December 31, 2012 using the following assumptions:1) volatility of 85%; 2) risk-free interest rate of 0.802%; and 3) a closing stock price of $2.55. 82Table of ContentsThe following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial asset and liabilities for the year endedDecember 31, 2012: DerivativeAsset TotalAssets WarrantsissuedDecember 29,2008 Warrantsissued May 10, 2012 DerivativeLiability TotalLiabilities Balance at beginning of period $18,508 $18,508 $125,415 $7,573,466 $3,476,134 $11,175,015 Settlements — — — — (23,643) (23,643) Revaluation (16,772) (16,772) (53,834) (5,225,564) (2,903,626) (8,183,024) Balance at end of period $1,736 $1,736 $71,581 $2,347,902 $548,865 $2,968,348 (1)The beginning of the period is December 31, 2011 for warrants issued December 29, 2008. The beginning of the period for the derivative asset,warrants issued May 10, 2012, and derivative liability is May 10, 2012.The Company currently does not have derivative instruments to manage its exposure to currency fluctuations or other business risks. The Companyevaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. Allderivative financial instruments are recognized in the balance sheet at fair value.13. Income TaxesThe provision for income taxes consists of the following: Year Ended December 31, 2012 2011 2010 Deferred: Federal $4,586,506 $11,367,771 $5,650,309 State and local 493,946 1,437,062 464,169 5,080,452 12,804,833 6,114,478 Valuation allowance (5,080,452) (12,804,833) (6,114,478) $— $— $— The provision for income taxes varies from the amount determined by applying the U.S. federal statutory rate to income before income taxes as a resultof the following: Year Ended December 31, 2012 2011 2010 U.S. statutory income tax rate 34.0% 34% 34% State and local taxes, net of federal tax benefit 5.2% 4.5% 2.3% Permanent differences between book and tax and other 14.4% 1.5% (5.6)%Valuation allowance (53.6)% (40.0)% (30.7)%Effective income tax rate 0% 0% 0% In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred taxassets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in whichthose temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making thisassessment. Based upon the level of historical taxable losses, and projections for future 83(1)Table of Contentsperiods over which the deferred tax assets are deductible, the Company determined that a 100% valuation allowance of deferred tax assets was appropriate. Thevaluation allowance for deferred tax assets includes amounts for which subsequently recognized tax benefits will be applied directly to contributed capital.The components of the deferred tax asset are as follows: December 31, 2012 2011 Current accruals $1,753,064 $1,751,515 Depreciation and amortization 2,676,884 2,644,059 Deferred compensation 5,332,415 4,648,719 Net operating loss carryovers 127,477,179 123,114,797 Deferred tax assets 137,239,542 132,159,090 Valuation allowance (137,239,542) (132,159,090) Net deferred tax assets $— $— As of December 31, 2012, we had federal net operating loss carryforwards of approximately $351.0 million. The federal net operating losscarryforwards will expire between 2018 and 2032. As of December 31, 2012, we had state net operating loss carryforwards of approximately $8.4 millionwhich will expire at various dates between 2013 and 2031 if not utilized. Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or theCode, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-changetax attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is acumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may applyunder state tax laws. We currently have a full valuation allowance against the deferred tax asset. Our ability to use these losses to offset future taxable incomewill be limited if we experience an “ownership change” as defined in Section 382 of the Code.The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. As the Company has a federal NetOperating Loss carryforward from the year ended December 31, 1994 forward, all tax years from 1994 forward are subject to examination. As states havevarying carryforward periods, and the Company has recently entered into additional states, the states are generally subject to examination for the previous 10years or less.The Company recognizes interest accrued, if any, net of tax and penalties, related to unrecognized tax benefits as components of income tax provision asapplicable. As of December 31, 2012, accrued interest and penalties were not material. 84Table of Contents14. Net Loss per ShareThe following is a reconciliation of the numerator (net loss) and the denominator (number of shares) used in the basic and diluted earnings per sharecalculations: Year Ended December 31, 2012 2011 2010 Numerator: Numerator for basic EPS $(9,238,427) $(32,031,175) $(19,923,487) Effect of dilutive securities: — — — Numerator for diluted EPS $(9,238,427) $(32,031,175) $(19,923,487) Denominator: Denominator for basic EPS—weighted average shares 6,944,928 5,482,627 5,052,200 Effect of dilutive securities: — — — Denominator for diluted EPS 6,944,928 5,482,627 5,052,200 Basic EPS $(1.33) $(5.84) $(3.94) Diluted EPS $(1.33) $(5.84) $(3.94) The following table sets forth the number of common shares that were excluded from the computation of diluted earnings per share because theirinclusion would have been anti-dilutive as follows: December 31, 2012 2011 2010 Shares outstanding Restricted shares 68,543 52,659 3,328 Shares issuable upon vesting/exercise of: Options to purchase common stock 373,899 562,733 471,108 Restricted stock units 529,312 98,820 — Warrants 6,099,476 1,038,161 1,038,161 7,071,230 1,752,374 1,512,598 15. Employee Benefit PlanThe Company offers employees the opportunity to participate in a 401(k) plan. Through September 30, 2011, the Company matched employeecontributions dollar for dollar up to 3% of the employee’s salary during the employee’s period of participation. Such employer contributions are discretionaryunder the 401(k) plan. As of October 1, 2011, the Company suspended all matching contributions indefinitely. For the years ended December 31, 2012, 2011,and 2010, the Company expensed $8,595, $395,633, and $414,765, respectively, related to the plan.16. Product Warranty ProvisionsThe Company’s standard policy is to warrant all Niobe and Odyssey systems against defects in material or workmanship for one year followinginstallation. The Company’s estimate of costs to service the warranty obligations is based on historical experience and current product performance trends. Aregular review of warranty obligations is performed to determine the adequacy of the reserve and adjustments are made to the estimated warranty liability asappropriate. 85Table of ContentsAccrued warranty, which is included in other accrued liabilities, consists of the following: December 31,2012 December 31,2011 Warranty accrual, beginning of the fiscal year $691,832 $469,837 Warranty expense incurred 650,367 762,872 Payments made (688,726) (540,877) Warranty accrual, end of the fiscal year $653,473 $691,832 17. Commitments and ContingenciesThe Company at times becomes a party to claims in the ordinary course of business. Management believes that the ultimate resolution of pending orthreatened proceedings will not have a material effect on the financial position, results of operations or liquidity of the Company.In 2012, the Company entered into a letter of credit to support a commitment in the amount of approximately $0.1 million. This letter of credit is validthrough 2015.18. Segment InformationThe Company considers reporting segments in accordance with general accounting principles for disclosures about segments of an enterprise and relatedinformation. The Company’s system and disposable devices are developed and marketed to a broad base of hospitals in the United States and internationally.The Company considers all such sales to be part of a single operating segment. Year Ended December 31, 2012 2011 2010 United States $27,034,200 $23,947,048 $28,840,803 International 19,528,234 18,040,384 25,210,434 Total $46,562,434 $41,987,432 $54,051,237 All of the Company’s long-lived assets are located in the United States. Revenues are attributed to countries based on the location of the customer.19. Quarterly Data (Unaudited)The following tabulations reflect the unaudited quarterly results of operations for the years ended December 31, 2012 and 2011: Net Sales Gross Profit Net Loss BasicLoss PerShare DilutedLoss PerShare 2012 First quarter $12,283,228 $8,521,397 $(5,812,912) $(1.06) $(1.06) Second quarter 10,512,898 7,252,820 2,806,427 0.42 0.32 Third quarter 11,561,399 8,074,578 (1,915,281) (0.25) (0.25) Fourth quarter 12,204,910 7,932,584 (4,316,661) (0.55) (0.55) 2011 First quarter $10,224,704 $7,219,725 $(9,549,933) $(1.75) $(1.75) Second quarter 11,602,139 8,085,793 (9,694,685) (1.77) (1.77) Third quarter 8,544,014 5,886,760 (7,273,070) (1.33) (1.33) Fourth quarter 11,616,575 8,297,073 (5,513,487) (1.00) (1.00) 86Table of Contents20. Subsequent EventsNone other than as outlined in Note 9. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. ITEM 9A.CONTROLS AND PROCEDURES 87Table of ContentsReport on Internal Control Over Financial ReportingAs of December 31, 2012, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles in the United States of America. The Company’s management assessed the effectiveness of our internal control over financial reportingas of December 31, 2012. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in Internal Control—Integrated Framework. Based on our assessment, our management has concluded that our internal control overfinancial reporting is effective as of December 31, 2012.A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making canbe faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certainassumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potentialfuture conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or proceduresmay deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.Based on the evaluation of internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer have concluded that therehave been no changes in the Company’s internal controls over financial reporting during the period that is covered by this report that has materially affected oris reasonably likely to materially affect, the Company’s internal control over financial reporting. 88Table of ContentsITEM 9B.OTHER INFORMATIONNone.PART III ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTDirectorsThe following persons currently serve as directors and officers of the Company:David W. BenferDirector since February 2005Mr. Benfer, 66, currently serves as the Chairman of The Benfer Group LLC, which provides advisory services to healthcare providers and suppliers. Inaddition, along with Mr. Kelley, he serves as a partner in Advisors to Healthcare Suppliers, a healthcare and health services consulting firm. Since 2010, hehas served on the advisory board of Investor Growth Capital U.S., a venture capital firm. From 1999 to 2009, Mr. Benfer served as President and ChiefExecutive Officer of Saint Raphael Healthcare System and the Hospital of Saint Raphael, New Haven, Connecticut. Prior to that, he was the President andChief Executive Officer of the Provena-Saint Joseph/Morris Health Network in Joliet, Illinois from 1992 to 1999. Mr. Benfer served as Senior Vice Presidentfor Hospital and Urban Affairs for the Henry Ford Health System in Detroit and Chief Executive Officer of the Henry Ford Hospital from 1985 to 1992. Heserved as the Chairman of the American College of Healthcare Executives (ACHE) from 1998 to 1999 and on its Board of Governors from 1992 to 2000.Mr. Benfer was named a Fellow of ACHE in 1981 and served on the Board of the Catholic Health Association from 2003 until 2008. Mr. Benfer also serves asa director of a private financial institution. He earned his M.B.A. from Xavier University and his B.S.B.A. from Wittenburg University. Mr. Benfer’sextensive experience in the healthcare industry and in hospital management provides the Company with useful industry information related to technologyacquisition, governance, and risk and liability issues.Michael P. KaminskiDirector since August 2008Officer since April 2002Mr. Kaminski, 53, was named Chief Executive Officer effective January 1, 2009, and retained the title of President after having previously served as ourPresident and Chief Operating Officer since February 2007. Mr. Kaminski previously served as our Chief Operating Officer since he joined the Company inApril 2002. Prior to joining the Company, Mr. Kaminski spent nearly 20 years with Hill-Rom Company (Hillenbrand Industries). In his last position withHill-Rom, Mr. Kaminski served as Senior Vice President of North American Sales and Service. Prior to that, he served as General Manager of the Acute CareHospital Division of Hill-Rom. Mr. Kaminski earned an M.B.A. from Xavier University and a B.S. in Marketing from Indiana University. As our ChiefExecutive Officer, Mr. Kaminski provides comprehensive insight to the Board on a broad range of issues, including strategic planning, projectimplementation, marketing and relationships with investors and the finance community. Mr. Kaminski informed the Board of his resignation from theCompany effective April 12, 2013.Joseph D. Keegan, Ph.D.Director since February 2011Dr. Keegan, 59, served as the president, chief executive officer and a director of ForteBio, Inc., a venture capital funded life sciences Company, from 2007until February, 2012. He currently serves as a director of Seahorse Bioscience, Inc., Response Biomedical Corp., as chairman of the board of LabcyteCorporation, and as a director and chairman of the board of the Analytical and Life Science Systems Association. From 1998 to 2007, 89Table of ContentsDr. Keegan was president, chief executive officer and a director of Molecular Devices Corporation. From 1992 to 1998, he held several senior managementpositions with Becton Dickinson and Company, including president of Worldwide Tissue Culture, and vice president and general manager of WorldwideFlow Cytometry. Prior to that, he held a number of positions with Leica, Inc., General Electric Company and Hewlett Packard Company. He previously servedas a director of Alpha Innotech Corp., BioImagene Corporation, Essen Instruments and Upstate Biotechnology. He also serves on the board of directors of theSan Francisco Opera. Dr. Keegan earned a Ph.D. in Physical Chemistry from Stanford University and a B.A. in Chemistry from Boston University.Dr. Keegan’s strong executive experience and knowledge of high growth life sciences businesses provides valuable support for general management matters andcommercial adoption of our products.William M. KelleyDirector since January 2003Mr. Kelley, 77, has served as the Chairman Emeritus of Hill-Rom Company since July 2005. Prior to that time, he held the position of Chairman since 1995.He also currently is a partner, along with Mr. Benfer, of Advisors to Healthcare Suppliers, a healthcare and health services consulting firm and he serves asits president. Mr. Kelley served as President and CEO of Hill-Rom Company from 1992 to 1995, Sr. Vice President, Sales and Operations from 1989 to1992 and Sr. Vice President, Sales and Marketing from 1980 to 1989. He currently serves as the co-chairman on the advisory board of 1-800-DOCTORS.He has been honored numerous times for his contributions to the healthcare industry including as an Honorary Fellow of the American College of Health CareExecutives. He was educated at Hanover College and George Washington University. Mr. Kelley’s experience and leadership at Hill-Rom Company andAdvisors to Healthcare Suppliers provides the Company with important insight on our operational and sales initiatives.Robert J. MesseyDirector since May 2005Mr. Messey, 67, served as the Senior Vice President and Chief Financial Officer of Arch Coal, Inc. from December 2000 until his retirement in April 2008.Prior to joining Arch Coal, he served as the Vice President of Financial Services of Jacobs Engineering Group, Inc. from 1999 to 2000 following thatcompany’s acquisition of Sverdrup Corporation, where he had served as Senior Vice President and Chief Financial Officer from 1992 to 1999. Mr. Messeywas an audit partner at Ernst & Young LLP from 1981 to 1992. He serves as a director and member of the audit and compensation committees of OxfordResources Partners, LP, a publicly traded coal mining company. He previously served as a director and chairman of the audit committee of Baldor ElectricCompany, a publicly traded manufacturer of industrial electrical motors. He also serves as an advisory director, chairman of the audit committee, andmember of the compensation committee of a privately held mining company. Mr. Messey earned his B.S.B.A. from Washington University. Mr. Messey’sexperience in finance provides the Board with a great deal of expertise on the financing, accounting and compliance matters.Fred A. MiddletonDirector since June 1990Mr. Middleton, 63, served as our Chairman of the Board from June 1990 until May 2012. He has been a General Partner in Sanderling Ventures since 1987.Prior to that time, he was an independent investor in the biomedical field. From 1984 to 1986, Mr. Middleton was Managing General Partner of MorganStanley Ventures. He joined Genentech, Inc. in 1978 and was a part of the founding management team, assisting in developing its strategy and holding avariety of roles including Vice Presidencies of Finance, Administration, and Corporate Development, and Chief Financial Officer. Mr. Middleton also servedas President of Genentech Development Corporation. Prior to that time, he served as a consultant with McKinsey & Company and as a Vice President ofChase Manhattan Bank. Mr. Middleton serves on the board of directors of biotechnology companies, Endocyte, Inc. (Nasdaq: ECYT) and PaciraPharmaceuticals, Inc. (Nasdaq: PCRX). He also serves as a member of the board of directors of several privately held biomedical companies. Mr. Middletonholds an M.B.A. from Harvard University and a B.S. degree in Chemistry from the Massachusetts Institute of Technology. Mr. Middleton’s 90Table of Contentsbusiness experience provides a unique perspective on the Company’s strategic initiatives, investor markets and financial outlook. His service on the Board forover 20 years provides valuable insight into the evolution of our products and technology.William C. Mills IIIChairman of the Board since May 2012Director since June 2000Mr. Mills, 57, is an independent venture capitalist with over 32 years of experience in venture capital. He currently serves as Chairman of the Board ofManagers of Ascension Health Ventures III, L.P., a strategic healthcare venture fund focused on the medical device, healthcare information technology, andservice sectors, and he is a member of the board of directors of Interleukin Genetics, Inc., a publicly traded company that develops and markets genetic tests.From 2004 until 2009, Mr. Mills was a managing member of a management company conceived by EGS Healthcare Capital Partners to manage EGS PrivateHealthcare Partnership III. Earlier, Mr. Mills was a Partner in the Boston office of Advent International, a private equity and venture capital firm, for fiveyears. At Advent, he was co-responsible for healthcare venture capital investments and focused on investments in the medical technology andbiopharmaceutical sectors. Before joining Advent, Mr. Mills spent more than 11 years with the Venture Capital Fund of New England where he was a GeneralPartner. Prior to that, he spent seven years at PaineWebber Ventures/Ampersand Ventures as Managing General Partner. Mr. Mills received an S.M. inChemistry from the Massachusetts Institute of Technology, an M.S. in Management from the Massachusetts Institute of Technology Sloan School ofManagement and an A.B. in Chemistry from Princeton University. Mr. Mills has significant experience serving on the boards of growing companies in themedical technology and biotechnology fields. This experience, coupled with his scientific and technical expertise, provides valuable knowledge regarding theCompany’s strategy, intellectual property, regulatory, and compliance activities.Eric N. Prystowsky, M.D.Director since February 2007Dr. Prystowsky, 65, has been the Director of the Clinical Electrophysiology Laboratory at St. Vincent Hospital in Indianapolis, Indiana, since 1988. He alsocurrently is a Consulting Professor of Medicine at Duke University Medical Center. He is the former chairman of the American Board of Internal Medicine’stest writing committee for the Electrophysiology Board Certification Examination and the past president of Heart Rhythm Society. He currently serves asEditor-in-Chief of the Journal of Cardiovascular Electrophysiology. Dr. Prystowsky also serves on the board of directors of CardioNet, Inc., a publicly heldcardiac rhythm services company. From 1986 to 1988, Dr. Prystowsky was Professor of Medicine and Director of Clinical Electrophysiology at DukeUniversity Medical Center. From 1979 to 1986, he served as a full time faculty member at the Indiana University School of Medicine, where he was directorof the electrophysiology laboratory. He earned his M.D. from the Mt. Sinai School of Medicine and a bachelor’s degree from Pennsylvania State University.Dr. Prystowsky completed his internal medicine training at Mt. Sinai Hospital in New York City and his training in cardiology and clinical electrophysiologyat Duke University Medical Center. Dr. Prystowsky has conducted extensive research with respect to cardiac arrhythmias, the treatment of which is one of theCompany’s primary focuses. Dr. Prystowsky is also internationally recognized as an expert in atrial fibrillation and such expertise is important in theCompany’s product development efforts.Euan S. Thomson, Ph.D.Director since October 2012Dr. Thomson, 50, currently serves as the operating partner of Khosla Ventures, a venture capital company. He served as the President and Chief ExecutiveOfficer of Accuray, Incorporated, a publicly held radiation oncology company, from 2002 until 2012. He was the President and Chief Executive Officer ofPhotoelectron Corporation, a x-ray technology company, from 1999 to 2002. Prior to that, for approximately 15 years, he was engaged in research, teaching,clinical practice, and administration within the United Kingdom health care system. During 91Table of Contentsthat time, he also provided consulting advice for companies and hospitals on scientific development, product marketing and management. Dr. Thomson is amember of the Board of Directors of the Hospice of the Valley. He previously served as Chair of the California Division of the American Cancer Society’sCEOs Against Cancer. He has received numerous awards, including the Ernst and Young Entrepreneur of the Year Award. In July 2003, PhotoelectronCorporation filed for bankruptcy. Dr. Thomson did not have any involvement in the business or affairs of Photoelectron Corporation from the time of hisdeparture in February 2002 through the time it filed for bankruptcy. Dr. Thomson earned a B.S. in Physics, an M.S. in Radiation Physics and a Ph.D. inPhysics from the University of London. He is the author of numerous scientific papers and he holds six U.S. patents. Dr. Thomson’s approximately 30 yearsin the medical device industry and his experience as a CEO of public companies in the medical device industry, provide valuable guidance for the Company’sproduct innovation, customer initiatives, and strategic and operational matters.Frank J. ChengSenior Vice President, Marketing and Business DevelopmentOfficer since April 2010Mr. Cheng, 45, joined Stereotaxis in April 2010 as Senior Vice President, Marketing and Business Development. He has over 18 years of experience in themedical technology industry leading marketing, business development, and P&L general management. Prior to joining Stereotaxis, Mr. Cheng was Presidentand Chief Executive Officer of Perfinity Biosciences, Inc. (previously Quadraspec, Inc.), from 2009 to 2010. He served as a director of Perfinity Biosciences,Inc. from 2009 to 2011. From 2005 to 2009, Mr. Cheng was President and Chief Executive Officer of OBS Medical. For four years prior to that, he was VicePresident of Business Development for Roche Diagnostics. Earlier in his career, Mr. Cheng held marketing and strategic planning positions at GE MedicalSystems for three years and Hillenbrand Industries (including its subsidiary, Hill-Rom Company) for four years. Mr. Cheng has an MBA from VanderbiltUniversity and a BBA from Wuhan University.Karen W. DurosSenior Vice President, General Counsel and SecretaryOfficer since October 2010Ms. Duros, 58, joined Stereotaxis in 2010. She has over 25 years of business and corporate legal experience in large and small companies. Prior to joiningStereotaxis, she was Senior Counsel for Monsanto Company from 2005 to 2010. From 1998 to 2005, Ms. Duros held several legal positions of increasingresponsibility with Great Lakes Chemical Corporation, including Vice President and Secretary from 2004 to 2005, and General Counsel of Great Lakes’Industrial Products division from 1999 to 2005. Previously, she was Vice President, General Counsel and Secretary of Tastemaker, a joint venture ofMallinckrodt, Inc. and Hercules, Inc., and prior to that, she held several legal positions with Mallinckrodt, Inc. Ms. Duros began her legal career with the St.Louis law firm, Thompson & Mitchell. She earned a law degree from Washington University School of Law and a B.A., Political Science, from BenedictineCollege.David A. GiffinVice President, Human ResourcesOfficer since May 2010Mr. Giffin, 64, joined Stereotaxis in January 2007. He was named an officer in 2010. Mr. Giffin has over 35 years of human resources experience. Prior tojoining Stereotaxis, from 2001 to 2006, Mr. Giffin was Vice President, Human Resources and Social Enterprise at Provident, Inc., a St. Louis based socialservice agency. Prior to that position, he was Vice President, Human Resources at Huttig Building Products from 1991 to 2001. He also has held positions asVice President, Human Resources at St. Johns Medical Center in St. Louis; and Principle Consultant at The Bannon Consulting Group. He spent the earlyyears of his career with Monsanto Company where he held a variety of human resources positions with increasing responsibility. Mr. Giffin earned hisM.B.A. and a B.S. in Psychology from Purdue University. 92Table of ContentsMartin C. StammerInterim Chief Financial OfficerOfficer since February 2013Mr. Stammer, 32, was appointed as the Interim Chief Financial Officer in February 2013. He previously served as Vice President, Controller since August2012 and as Corporate Controller from July 2011 to August 2012. He joined the Company as Senior Manager, Financial Reporting in October 2009. Prior tojoining the Company, from 2003 to 2009, Mr. Stammer was employed in various roles and capacities at Deloitte & Touche LLP, including most recently asAudit Manager. Mr. Stammer received his M.S. and B.S. in Accountancy from the University of Illinois and is a Certified Public Accountant.The term of office for the directors will continue until the 2013 Annual Meeting of Shareholders for Messrs. Kelley, Middleton and Mills; the 2014 AnnualMeeting of Shareholders for Messrs. Benfer and Kaminski and Dr. Prystowsky; and the 2015 Annual Meeting of Shareholders for Mr. Messey, Dr. Keeganand Dr. Thomson. Each officer is elected for a term continuing until his or her successor is elected and qualified or until his or her earlier death, resignation orremoval from office.Audit CommitteeThe Board has established the Audit Committee as one of three standing committees of the Board. The members of the Audit Committee are Robert J.Messey, Chairman; David W. Benfer; and William C. Mills III. Mr. Mills will resign from the Audit Committee no later than April 13, 2013, the date onwhich he will assume the position of interim CEO following the resignation of our CEO, Michael P. Kaminski.The Board has determined that each member of the Audit Committee is independent and each is financially sophisticated under the NASDAQ GlobalMarket rules. Mr. Messey, who currently serves as the chair of the Audit Committee, qualifies as an Audit Committee Financial Expert under SEC rules andregulations. The Board based its determination in part on Mr. Messey’s experience as the chief financial officer of a publicly-held company, a former auditpartner of Ernst & Young LLP, and as a member of the audit committees of several other publicly-held companies.Nomination of Directors by ShareholdersThere have been no material changes to the procedures by which shareholders may recommend nominees to the Company’s Board of Directorssubsequent to the disclosures of such procedures incorporated in the Company’s previous annual report.Code of Ethics and Business ConductOur Board adopted a Code of Ethics and Business Conduct for all of our directors, officers and employees effective August 1, 2004. Shareholders maydownload a free copy of our Code of Business Conduct and Ethics from our website (www.stereotaxis.com) or by request to our Chief Financial Officer asfollows:Stereotaxis, Inc.Attention: Martin C. Stammer4320 Forest Park Avenue, Suite 100St. Louis, Missouri 63108314-678-6100To the extent required by law or the rules of the NASDAQ Global Market, any amendments to, or waivers from, any provision of the Code of Ethicsand Business Conduct will be promptly disclosed publicly. To the extent permitted by such requirements, we intend to make such public disclosure byposting the relevant material on our website (www.stereotaxis.com) in accordance with SEC rules. Information on our website does not constitute part of thisannual report. 93Table of ContentsSection 16(a) Beneficial Ownership Reporting ComplianceSection 16(a) of the Securities Exchange Act of 1934 requires all Company executive officers, directors and persons owning more than 10% of anyregistered class of our capital stock to file reports of ownership and changes in ownership with the SEC. Based solely on the reports received by us and onwritten representations from reporting persons, we believe that all such persons timely filed such reports during the last fiscal year. ITEM 11.EXECUTIVE COMPENSATIONThe Board has established a Compensation Committee as a standing committee of the Board. The members of the Compensation Committee are Fred A.Middleton, Chairman; William M. Kelley; and Robert J. Messey.Director Compensation PoliciesNon-employee directors receive cash compensation and equity awards for their services as Board members. In August 2012, the CompensationCommittee adopted a revised compensation program for non-employee directors. Under the revised program, as of the date of each annual shareholders’meeting beginning with the 2012 annual shareholders’ meeting, which was held on August 22, 2012, each director receives an annual grant of 10,000restricted share units, or 20,000 in the case of the chairman of the Board. The chairpersons of the Audit, Compensation, and Nominating and CorporateGovernance Committees receive an additional 2,000 restricted share units. However, the number of restricted share units granted to each director on August 22,2012, was reduced by 25% of the number of shares of restricted share units granted on January 3, 2012, in exchange for the reinstitution of each director’sfull cash compensation that had been previously reduced by 50% for 2012. The annual grants of restricted share units vest one year from the date of grant oron the date of the next annual shareholders’ meeting, whichever is earlier.In addition to the annual grants, newly elected directors are entitled to receive a grant of 20,000 restricted share units. Initial grants of restricted sharesunits to new directors vest over a two-year period, with 50% vesting after the first year, and 50% vesting after the second year.Each non-employee director receives a $30,000 annual retainer ($36,000 for the chairman of the Board) for Board membership. Each member of theStrategy and Technology Committee receives an additional annual cash retainer of $10,000. The chairman of the Strategy and Technology Committee receivesan additional cash retainer of $100,000 in connection with additional assistance to be furnished to the Board relating to a number of assignments on behalf ofthe Committee. In October 2012, the Committee changed the annual retainer for the chairman of the Board to $100,000 and eliminated the annual cash retainersfor the chairman and members of the Strategy and Technology Committee. The directors’ annual retainer fees are paid quarterly.For the period from January 1, 2012 through December 31, 2012, the annual cash retainer payable to each non-employee director was reduced by 50%,and each director was granted restricted stock in lieu of the cash payments. In August 2012, the Board reinstated the full cash retainer effective September 1,2012, in exchange for a reduction in the annual grant of restricted share units as described above.We reimburse our directors for reasonable out-of-pocket expenses incurred in connection with attendance and participation in Board and Committeemeetings. 94Table of ContentsThe following table discloses compensation information of members of our Board of Directors for serving as members of the Company’s Board in2012:BOARD OF DIRECTORS COMPENSATIONThe following table discloses compensation information of members of our Board of Directors for serving as members of the Company’s Board in2012. The outstanding awards disclosed in the footnotes below are as of the dates specified. Director Fees Earned orPaid in Cash($) StockAwards$ OptionAwards($) AllOtherCompensation Total($) William C. Mills III 128,500 51,435 — — 179,935 Christopher Alafi, Ph.D. 11,630 15,000 — — 26,630 David W. Benfer 26,875 31,155 — — 58,030 Michael P. Kaminski — — — — — Joseph D. Keegan, Ph.D. 21,875 31,155 — — 53,030 William M. Kelley 23,750 31,155 — — 54,905 Robert J. Messey 28,750 34,535 — — 63,285 Fred A. Middleton 25,250 37,386 — — 62,636 Eric N. Prystowsky, M.D. 18,750 31,155 — 2,400 52,305 Euan S. Thomson, Ph.D. — 38,000 — — 38,000 (1)Amount represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.(2)23,324 time-based restricted share units were outstanding as of December 31, 2012, none of which were vested as of such date. 14,075 options wereoutstanding as of December 31, 2012, all of which were exercisable as of such date.(3)1,765 time-based restricted share units were outstanding as of December 31, 2012, none of which were vested as of such date. 9,225 options wereptions were outstanding as of December 31, 2012, all of which were exercisable as of such date. Dr. Alafi’s term as a director ended on August 22,2012, the date of the 2012 Annual Meeting of Shareholders.(4)11,324 time-based restricted share units were outstanding as of December 31, 2012, none of which were vested as of such date. 11,150 options wereoutstanding as of December 31, 2012, all of which were exercisable as of such date.(5)As a member of the Company’s management, Michael P. Kaminski did not receive compensation for his services as a director in 2012. Thecompensation received by Mr. Kaminski as an employee of the Company is shown in the Summary Compensation Table below.(6)11,324 time-based restricted share units were outstanding as of December 31, 2012, none of which were vested as of such date. 4,050 options wereoutstanding as of December 31, 2011, 3,675 of which were exercisable as of such date.(7)11,324 time-based restricted share units were outstanding as of December 31, 2012, none of which were vested as of such date. 10,150 options wereoutstanding as of December 31, 2012, all of which were exercisable as of such date.(8)13,324 time-based restricted share units were outstanding as of December 31, 2012, none of which were vested as of such date. 13,925 options wereoutstanding as of December 31, 2012, all of which were exercisable as of such date.(9)13,589 time-based restricted share units were outstanding as of December 31, 2012, none of which were vested as of such date. 22,550 options wereoutstanding as of December 31, 2012, all of which were exercisable as of such date.(10)11,324 time-based restricted share units were outstanding as of December 31, 2012, none of which were vested as of such date. 7,800 options wereoutstanding as of December 31, 2012, all of which were exercisable as of such date. All other compensation reflects amounts paid under a consultingagreement between Dr. Prystowsky and the Company, which expired in February 2012. 95(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)Table of Contents(11)Dr. Thomson was appointed to the Board on October 22, 2012. He received an initial grant of 20,000 restricted share units. 20,000 time-based restrictedshare units were outstanding as of December 31, 2012, none of which were vested as of such date.Compensation Discussion and AnalysisExecutive Summary2012 was a challenging year marked by significant operational achievement and notable financial improvement. During 2012, we made significantprogress in converting the excitement around our unique Epoch™ platform into capital orders and customer upgrades, resulting in an 11% increase in totalfull year revenue over 2011. By year-end, we achieved our strategic milestone of upgrading half of our installed base in North America and Europe to the newtechnology. We also reached shipment targets for the Niobe ES system, receiving an additional $2.5 million of funding on January 31, 2013, under ourexisting agreement with Healthcare Royalty Partners (previously “Cowen”).Our significant financial outcomes for 2012 include: • Total revenues were up by 11% to $46.6 million, with the increase attributed to both system and recurring revenues. Utilization in the Niobe ESsites increased 19% from 2011 and overall utilization was up 7%. • Operating loss was $(10.6) million, a 67% reduction from $(31.9) million in the prior year, with the largest improvement occurring in the secondhalf of the year. Operating loss for the last six months of 2012 was $1.8 million. • Capital management efforts resulted in a reduction in operating expenses of 31% and a reduction in cash burn of 68% from 2011. • However, reflective of the challenging environment facing the Company, our stock price has declined from $8.50/share at the beginning of 2012 toapproximately $2.55/share by year-end.Within this business performance context, the compensation outcomes for the 2012 fiscal year, as well as pay program decisions made to-date for 2013,continue to reflect our commitment to aligning executive pay and business performance while providing incentives to retain key talent. Consequently, we notethe following related compensation highlights for 2012: • Throughout 2012, executive base salaries remained at reduced levelsIn October 2011, we converted a component of executive base salary into time-vested equity to control cash expenses, link a greater proportion ofexecutive pay to stock price performance, and align management with the broader non-management employee base that received retention equityawards around the same time. On an annualized basis, base salary reductions approximated 16% for the President & CEO and 10% for othereligible Named Executive Officers. The Chief Financial Officer did not participate in this program. • The 2012 and 2013 Management Bonus Plans instill a sense of urgency and combine performance objectives and a timely delivery ofearned incentives that are critical to the business recovery and retention challenges the company facesThe Management Bonus Plan focuses on achievement of business plan objectives with respect to revenues, capital orders and adjusted earningsbefore interest, taxes, depreciation and amortization (“EBITDA”). To put further emphasis on the importance of a rapid turnaround, performancewas measured and bonuses paid on a semi-annual basis for 2012. For 2013, performance will be measured and bonuses will be paid on aquarterly basis. 96®®Table of Contents • Below target payouts were earned under the 2012 Management Bonus PlanReflecting our below target performance on key corporate-level metrics, our executives received payouts under this incentive program atapproximately 33% of target levels for 2012. This reflects payouts at 36.8% of target under the first-half incentive criteria and 29.5% of targetunder the second-half incentive criteria. • 2012 performance share awards vest only upon the achievement of bottom line milestonesThese awards vest only upon the achievement of positive adjusted EBITDA and adjusted net income criteria over 2012 and 2013. We believe thatthese are significant milestones toward our business being able to operate on a cash flow positive basis and will create significant shareholdervalue. Over the next two fiscal years these shares vest as follows: • 50% upon achievement of one quarter of positive adjusted EBITDA in 2012 (not achieved), • 50% vest upon achieving at least two out of three consecutive quarters with positive adjusted net income by December 31, 2013. • “Realizable” compensation is significantly below grant value for Named Executive OfficersAll outstanding stock appreciation rights (“SARs”) are currently underwater, and the EBITDA and GAAP net income performance criteria for theperformance shares granted in 2011 and 2012 have not yet been achieved as of year-end 2012. Additionally, the service-vested restricted stockawards granted in recognition of base salary reductions have lost approximately 75% of their grant date value. • Stock ownership guidelines were enhanced, converting at a less than 10:1 ratio following the reverse stock split for our executiveofficersIn addition to providing regular grants of equity, we believe that setting ownership standards for our executive team ensures that they are wellaligned with shareholder interests by having a certain amount of their personal wealth invested in the Company. • Stock retention requirements were introduced in 2012The Committee approved a requirement that executives hold 100% of all equity (net of taxes) for two years following the vesting date to furtherenhance the ownership environment among the leadership team.These recent pay outcomes and actions reflect our success in deploying compensation programs that align pay realized by executives and the returns toour shareholders. The Compensation Committee further recognizes the importance of both providing market competitive pay opportunities and also motivatingand retaining key talent in a challenging business environment. Specifically, we continue to be guided by our compensation philosophy, as described in thesection following this Executive Summary, to ensure that compensation programs consistently support our business objectives. As circumstances remaindynamic, the Compensation Committee has taken timely actions, including the provision of special incentive opportunities, to adapt our compensationstrategy to such circumstances as they arise. Ultimately, we believe that the decisions made in 2012 and early 2013 reflect the Committee’s efforts toappropriately incentivize executives, particularly with respect to rewarding management for efficient stewardship of capital and continued focus on growingrevenues through maximizing our current engagements and expanding our market presence.Say-on-Pay ResultsThe Compensation Committee considered the results of the 2012 advisory, non-binding “say-on-pay” proposal and incorporated the results as one of themany factors considered in connection with the discharge of its responsibilities. Because a substantial majority (97%) of our shareholders approved thecompensation programs described in our proxy statement for the 2012 annual meeting of shareholders, the Compensation Committee did not implementchanges to our compensation programs as a direct result of the shareholder advisory vote. However, as outlined in the forthcoming sections of thisCompensation Discussion & Analysis, the Committee did continue to take actions with respect to our fiscal year 2012 and 2013 compensation programsbased on the business conditions facing the Company. 97Table of ContentsCompensation PhilosophyThe objective of our compensation program is to attract, retain and motivate highly qualified executive officers while aligning the interests of theseexecutives with those of shareholders. When designing compensation packages to achieve this objective, the Committee is guided by the following principles: • Align pay and performance: Provide total compensation that is commensurate with stock price performance, the operational and financialsuccess of our business, and the individual performance contributions of executives. • Manage program cost and dilution: Balance other considerations for executive pay programs with their impact on earnings, cash flow andstock dilution. • Provide market competitive pay: Targeted compensation opportunities should generally reflect levels, both in terms of size of pay opportunityand mix of pay elements, observed in the competitive marketplace, as defined by the market median pay levels among companies with which wecompete for talent.We believe that adhering to these principles will create a total compensation program that supports our aim to deliver long-term shareholder value throughbusiness performance. In benchmarking the market competitiveness of total compensation, we utilize a peer group of select companies to represent ourcompetitive labor market. Targeted total compensation opportunities are comprised of base salary, annual incentives and equity-based long-term incentives. Inaddition to the above principles, the Compensation Committee exercises its judgment in setting pay levels with respect to individual competencies andexperience and the internal compensation equity among Named Executive Officers.Role and Independence of the ConsultantFrom time-to-time, when deemed necessary, the Committee engages the services of an independent compensation consultant, Pay Governance, LLC (the“Consultant”). The Consultant provides the Committee with market data and analysis, commentary on incentive design practices, and an external perspectiveon pay trends and legal and regulatory developments.Pay Governance LLC does not provide any services to the Company other than those related to executive compensation consulting. The Committeeconsiders the Consultant to be fully independent and that the Consultant’s work has not raised any conflict of interest.Compensation Determination ProcessThe typical pay review process occurs at the beginning of the fiscal year in January and February at which time the Committee reviews and approvesadjustments in executive compensation, including, base salaries, target annual incentive opportunities, the approval of annual equity awards and theestablishment of performance goals for the annual incentive plan and performance-vested long-term awards. During the review process, the Committeeconsiders a number of factors, including competitive market data, input received from the Company’s management, and an assessment of individualperformance and the operating performance of the Company.Through active discussions with the CEO, human resources personnel and the Consultant, the Committee receives input regarding variousconsiderations relevant to compensation programs, such as business goals, strategic objectives for the Company, appropriate participants for incentiveprograms, market best practices, and any other information, as may be requested by the Committee. The CEO makes recommendations to the Committeeregarding cash compensation for Named Executive Officers and, with respect to equity grants, the appropriate grants for executives and other employee levels.The Committee reviews the appropriateness of the recommendations of the CEO and accepts or adjusts such recommendations in light of the considerationsapplicable to the relevant element of compensation. It is also the Committee’s practice to set total compensation for the CEO during executive session. 98Table of ContentsIn addition to context and recommendations provided by management, and consistent with our compensation philosophy, the Committee has historicallyset targeted total compensation (base salaries, annual incentives, and long-term incentive awards) at the median of the competitive market (reviewing data asdescribed below); this positioning includes additional adjustments for other considerations such as business performance, company size and stock dilution.In addition, incentive programs are designed such that total compensation realized by executives is consistent with performance achievement: • Exceeds targeted incentive levels for performance that exceeds our short and long-term performance expectations; and • Falls below targeted incentive levels for performance that does not meet our short and long-term performance expectations.This approach reflects the Compensation Committee’s philosophy to align executive pay outcomes directly with performance achievement. However,while incentive program designs are intended to be objective and formulaic, the Committee may also use its discretion to adjust compensation components forNamed Executive Officers, as such discretion provides a means of acknowledging non-formulaic considerations such as the context in which certainperformance achievement has occurred, the unique experience an individual brings to a role, and other factors the Committee deems relevant.When reviewing the competitiveness of compensation, the Committee uses both proprietary survey data specific to the technology industry and publiclydisclosed peer group compensation data. Specifically, the Committee uses the Radford Global Technology Database to obtain proprietary survey data and asample of similar companies that make up the Industry Peer Group as listed below: ABIOMED, Inc. DexCom, Inc. NuVasive, Inc.Accuray, Inc. Hansen Medical, Inc. Rockwell Medical Technologies,AtriCure, Inc. LeMaitre Vascular, Inc. The Spectranetics CorporationConceptus, Inc. MAKO Surgical Corp SonoSite, Inc.CryoLife, Inc. Masimo Corporation Volcano Corporation While selected as a peer company in 2011, the following companies are no longer included due to corporate actions (e.g., acquisition or merger): Orthovita,Synovis Life Technologies, Vital Images.The Committee did not conduct a detailed competitive review in 2012 since merit or market adjustments were not being planned for NamedExecutive Officers for 2012. 99Table of ContentsElements of the Compensation ProgramThe various elements of our executive compensation program, established through the process outlined above, are intended to provide competitive totalcompensation while aligning the behavior and action of Named Executive Officers with shareholder interests. For each component of Named Executive Officercompensation, the following table summarizes its purpose with respect to our compensation philosophy, applicable performance measures, and 2012 actionsand outcomes pertaining to the component. Component Purpose Performance Measures 2012 OutcomesBase Salary Fixed pay based on responsibilities ofrole; basic pay for recruiting andretaining top talent Individual performance andcontribution Named Executive Officers otherthan CFO, maintained reducedsalary levels through 2012Annual Incentive Motivates and rewards achievement ofimportant short-term goals that arekey to generating shareholder value Transitioned to a programmeasuring performance twiceannually based on revenue,orders, adjusted EBITDA andstrategic management objectives(MBOs) Business performance resulted inthe following corporate-level payouts(as a % of target):First-Half: 38.6% of targetSecond-Half: 29.5% of targetStock-Settled SARs Leveraged pay opportunity motivatingthe creation of long-term shareholdervalue; stock settlement designed topromote share ownership Stock price appreciation relative tostrike price at grant All outstanding awards arecurrently underwater; No awardswere granted to Named ExecutiveOfficers in 2012Performance-vested restricted stock Equity award linked to key financialprofitability milestones of ourbusiness February, 2012 Grant:* 50% one quarter of positiveEBITDA in FY 2012* 50% two out of three quarters ofpositive GAAP adjusted netincome from Jan 2012 to Dec 2013 Through 2012, the performancevesting criteria have not been metthus no awards have vestedService-vested restricted share units Equity award motivating continuedemployment and stock priceperformance August, 2012 grant vests 25% peryear beginning in 2013 N/ABenefits Standard compensation benefit;Named Executive Officers receivesame benefits as other employees, andno special perquisites N/A N/ABase Salary. In October 2011, as we sought to control cash expenses in response to our business performance, the Committee decided it was appropriateto convert a portion of each Named Executive Officer’s 100Table of Contentsbase salary into an equal value of restricted share units (“RSUs”). The value of the reduction represented a set percentage of each executive’s annual basesalary, with the reduction spread over an 18-month period, offset by RSU awards with a grant date fair value equal to the 18-month reduction. The RSUawards were granted in October 2011 and vest fully at the conclusion of the 18-month period on March 31, 2013.In October 2012 the Committee determined it was appropriate to enhance the retention value associated with the overall compensation package byrestoring base salaries to the pre-reduction levels on January 1, 2013 for the Named Executive Officers impacted by the salary reduction, three months prior tothe originally scheduled reset date. Additionally, Mr. Duggan’s base salary was increased by 10%, effective November 1, 2012 in recognition of his belowmarket competitive positioning. 2012 Base Salary Information Executive 2011 AnnualSalary 2012 AnnualSalary Reduced Salary 11/1/11 to 12/31/12 Effective Salaryat 1/1/13 Michael P. Kaminski President & Chief Executive Officer $420,000 $420,000 $352,000 $420,000 Samuel W. Duggan II Chief Financial Officer $270,000 $297,000(10% increase) N/A $297,000 Frank J. ChengSenior Vice President, Marketing & BusinessDevelopment $285,000 $285,000 $256,500 $285,000 Karen W. DurosSenior Vice President, General Counsel &Secretary $270,000 $270,000 $243,000 $270,000 David A. GiffinVice President, Human Resources $200,000 $200,000 $180,000 $200,000 (1)Mr. Kaminski has announced his resignation as President & CEO effective April 12, 2013.(2)Mr. Duggan resigned from the Company effective February 22, 2013.(3)Mr. Duggan's salary was increased effective November 1, 2012.Annual Incentive Plan. The Company’s annual incentive plan, the Management Bonus Plan, is intended to motivate Named Executive Officers to drivethe financial performance critical to generating shareholder value for the Company. Under this program, each Named Executive Officer receives a target awardopportunity, established each year and denominated as a percentage of each officer’s base salary. For each performance component of the plan, if targetperformance is achieved, each Named Executive Officer’s incentive will be funded at the target level. For performance above or below target, payouts arerespectively increased or decreased, with no payouts made for performance below a threshold performance level and additional payouts not earned beyond amaximum performance level. 101(1)(2)(3)Table of ContentsAwards may also be adjusted up or down based on individual performance considerations. However, all individual adjustments are made such that thecumulative incentives delivered under the program still equal the total funding determined based on actual performance achievement against established plangoals. Such individual adjustments for Named Executive Officers are subject to the review and approval of the Compensation Committee. For fiscal year2012, award opportunities as a percentage of base salary for Named Executive Officers remained unchanged relative to 2011. In addition, target annualopportunities were unaffected by the changes to base salary that occurred in October 2011; specific annual opportunities by Named Executive Officers were asfollows: 2012 Annual Incentive OpportunityExecutive Threshold Target MaximumMichael P. KaminskiPresident & Chief Executive Officer $105,00025% of Base $210,00050% of Base $420,000100% of BaseSamuel W. Duggan II Chief Financial Officer $69,66725% of Base $139,33350% of Base $278,667100% of BaseFrank J. ChengSenior Vice President, Marketing & Business Development $71,25025% of Base $142,50050% of Base $285,000100% of BaseKaren W. DurosSenior Vice President, General Counsel & Secretary $54,00020% of Base $108,00040% of Base $162,00060% of BaseDavid A. GiffinVice President, Human Resources $40,00020% of Base $80,00040% of Base $120,00060% of Base (1)Mr. Kaminski has announced his resignation as President & CEO effective April 12, 2013.(2)Mr. Duggan resigned from the Company effective February 22, 2013.Given our business performance in 2011, the Committee determined that the 2012 Management Bonus Plan should focus on restoring growth inrevenues and capital orders and also making major progress towards being profitable. In addition, the bonus plan was divided into two semi-annualperformance periods in order to reward participants for achieving distinct levels of performance in the first half of the year, as well as in the second half. TheCommittee believes that providing mid-year bonus opportunities creates a sense of urgency in driving performance consistent with the Company’s currentcircumstances.For 2012, the Committee identified four corporate-wide performance measures for the 2012 incentive plan: Robotics/Recurring revenue, Odysseyrevenues, Orders and Adjusted EBITDA. Additionally, individual awards can be adjusted based on strategic management objectives (MBOs) which vary byNamed Executive Officers. The Committee views the ability to reward the achievement of qualitative, non-financial goals as an important piece of creating payfor performance alignment in our Management Bonus Plan.In setting goals for the Management Bonus Plan’s metrics, the Committee seeks to set attainable targets that represent the year-over-year improvement inthe financial performance that drives the value of the business. In particular, our practice is to generally link target performance to our business plan and setthreshold goals such that their achievement would still represent a level of improvement over the prior year. This ensures that no incentive payouts are madeuntil performance improvement has been achieved in a given year.For the first half of 2012 under the Management Bonus Plan, the Committee approved the following goals, weightings and threshold and targetperformance levels. First Half Metrics($000’s) Weighting Threshold90% Plan Target100% PlanRobotics/Recurring Revenue 22.2% $18,714 $20,794Odyssey Revenue 11.1% $5,595 $6,217Orders 33.3% $14,129 $15,699Adjusted EBITDA 33.3% ($5,542) ($5,039) 102(1)(2)Table of ContentsIn order to appropriately emphasize the importance of becoming profitable, an annual overachievement qualifier was introduced which requires both aQ4 adjusted EBITDA of at least $448,000 and a full-year adjusted EBITDA of at least ($2.039M) for payouts above the established target levels to be earned,irrespective of performance on the four aforementioned measures.Actual performance in the first half of 2012 resulted in an overall payout factor of 36.8% for our Named Executive Officers based on actual results of94% of target on the Robotics revenue metric and the 93% of target on the adjusted EBITDA metric. The following table summarizes the actual performanceachievement in the first half of 2012 and corresponding bonus funding per metric: First Half Metrics($000’s) Weighting Threshold90% Plan ActualResult Bonus Fundingas % of Target Robotics/Recurring Revenue 22.2% $18,714 $19,616 15.9% Odyssey Revenue 11.1% $5,595 $3,181 0% Orders 33.3% $14,129 $6,134 0% Adjusted EBITDA 33.3% ($5,542) ($5,415) 20.9% 1st Half Total 36.8% For the second half of 2012, the metrics were the same as the first half with the performance goals as follows: Second Half Metrics($000’s) Weighting Threshold90% Plan Target100% PlanRobotics/Recurring Revenue 22.2% $21,764 $24,182Odyssey Revenue 11.1% $8,062 $8,958Orders 33.3% $18,716 $20,795Adjusted EBITDA 33.3% ($553) ($503)Actual performance in the second half of 2012 resulted in an overall payout factor of 29.5% for our Named Executive Officers based on performanceagainst the adjusted EBITDA goal at 87.5% of target. The following table summarizes the actual performance achievement in the second half of 2012 andcorresponding bonus funding per metric: Second Half Metrics($000’s) Weighting Threshold90% Plan ActualResult Bonus Fundingas % of Target Robotics/Recurring Revenue 22.2% $21,764 $20,459 0% Odyssey Revenue 11.1% $8,062 $3,308 0% Orders 33.3% $18,716 $11,353 0% Adjusted EBITDA 33.3% ($553) ($509) 29.5% 2nd Half Total 29.5% The Committee also retains the ability to exercise its discretion in adjusting both total bonus funding as well as the individual awards received by ourNamed Executive Officers. The Committee did not exercise its discretion with respect to total funding for the first half or second half of 2012 under theManagement Bonus Plan. 103Table of ContentsTarget bonus awards for our Named Executive Officers, versus resulting actual bonuses received (reflecting adjustments at the individual level forresults against their respective MBOs) are summarized in the following table: 2012—FirstHalf Incentive 2012—SecondHalf IncentiveExecutive Target ActualPaid Target Actual PaidMichael P. Kaminski President & Chief Executive Officer $105,000 $38,640 $105,000 $31,306Samuel W. Duggan II Chief Financial Officer $68,750 $30,000 Ineligible due to resignationFrank J. ChengSenior Vice President,Marketing & Business Development $71,250 $18,000 $71,250 $21,244Karen W. DurosSenior Vice President,General Counsel & Secretary $54,000 $23,000 $54,000 $16,100David A. GiffinVice President, Human Resources $40,000 $16,000 $40,000 $11,926 (1)Mr. Kaminski has announced his resignation as President & CEO effective April 12, 2013.(2)Mr. Duggan resigned from the Company effective February 22, 2013.To put further emphasis on the importance of a rapid turnaround, the 2013 Management Bonus Plan will be measured and incentives will be paid on aquarterly basis, further strengthening the line-of-sight between short-term performance and rewards.Long-Term Incentive Compensation. The objective of the Company’s long-term incentive program is to directly align compensation outcomes withreturns received by shareholders, build equity ownership within the management team, and motivate the sustainable financial performance that supports stockprice growth. Long-term incentive awards are made pursuant to the Company’s newly adopted 2012 Stock Incentive Plan, which permits grants of cashawards, stock options, stock appreciation rights or stock awards (e.g., restricted stock and RSUs). The Committee throughout the year may also approveawards in connection with employee promotions, employee retention, an individual newly hired to the Company, or for purposes otherwise deemed to be in thebest interest of the Company. The timing of these equity award grants is not based on the timing of the release of material, non-public information, nor is suchinformation released for the purpose of affecting the value of executive compensation.For 2012, consistent with our efforts to provide competitive incentive opportunities and enhance the retention value in light of multiple years of limitedrealizable value associated with prior equity incentives the Committee made two separate long-term incentive award grants to Named Executive Officers. InFebruary, a grant of performance-vested restricted stock awards (“RSAs”) was made to selected senior executives with vesting contingent on prospectiveperformance objectives. In August, a grant of service-vested RSUs was made with the intention of emphasizing retention and the criticality of shareholderalignment during this key phase in the Company’s life-cycle.Specifically, the details of the awards are as follows: • February grant of performance vested RSUs, which had the following key terms and conditions: • 50% upon achievement of one quarter of positive adjusted EBITDA in 2012, • 50% vest upon achieving at least two out of three consecutive quarters with positive adjusted net income by December 31, 2013. • August grant of service vested RSUs vesting 25% per year beginning in August 2013 104(1)(2)Table of ContentsThe Committee therefore approved the following grants to Named Executive Officers during fiscal year 2012: 2012 Long-Term IncentivesExecutive # Performance-VestedRSAs (February 2012) # Service-VestedRSUs (August 2012)Michael P. Kaminski President & Chief Executive Officer 17,500 80,000Samuel W. Duggan II Chief Financial Officer 7,500 40,000Frank J. ChengSenior Vice President, Marketing & Business Development 6,300 25,000Karen W. DurosSenior Vice President, General Counsel & Secretary 4,200 22,500David A. GiffinVice President, Human Resources 4,200 22,500 (1)Performance-Vested RSAs price on the date of grant was $8.00(2)Service-Vested RSUs price on the date of grant was $1.69.(3)Mr. Kaminski has announced his resignation as President & CEO effective April 12, 2013.(4)Mr. Duggan resigned from the Company effective February 22, 2013.Stock Ownership GuidelinesAt the beginning of fiscal year 2011, consistent with our philosophy to align executives with shareholders and pay for performance, we establishedstock ownership guidelines for our executive officers, including the Named Executive Officers. These guidelines are intended to create a management team ofowners, tying Company stock price performance to executive wealth and motivating sustainable long-term business value generation. The initial ownershiprequirements, which were established prior to the reverse stock split in July 2012 were set at what the Committee considered to be reasonable and appropriate atthe time. Following the 10:1 reverse split the Committee believed that it was appropriate to adjust the guidelines to reflect the impact of the split; however, theydetermined that an enhancement administered through an adjustment to guidelines at less than the 10:1 conversion rate was appropriate to continue to recognizethe importance of developing an ownership culture.Additionally, in 2012, the Committee approved a requirement that executives hold 100% of all equity (net of taxes) for two years following the vestingdate to further enhance the ownership environment among the leadership team.The guidelines, denominated as a fixed number of shares, are displayed below: Executive Pre-Split Guideline Post-Split GuidelinePresident & CEO 300,000 shares 100,000 sharesOther Executive Officers 100,000 shares 50,000 sharesAt the beginning of the 2012 fiscal year, these guidelines represented value that was approximately 2.0x the CEO’s current annual base salary andapproximately 1.5x the current base salary for other executive officers. Given our decline in stock price over the year, these ownership levels now represent alower value, but we believe that requiring these levels of whole share ownership by management provides added incentive to grow 105(1)(2)(3)(4)Table of Contentsour stock price. For purposes of calculating ownership levels against these guidelines, the following types of ownership are counted towards each officer’sguideline: • Restricted stock or RSUs that vest based on service (this includes awards that vest based on service and performance criteria, assuming theperformance criteria have been met); • The in-the-money value of vested, stock-settled SARs, converted into a number of shares at the closing stock price at the time ownership is beingmeasured; and • Common stock owned outright or in any Company deferred compensation plan or other program.Since vested stock-settled SARs could be exercised and converted into shares of stock at any time, we believe it is appropriate that such SARs contributeto executive ownership without requiring executives to reduce the outstanding leverage they have from the Company’s long-term incentive program.As of December 31, 2012, the ownership of all Named Executive Officers was at least 54% of each individual’s respective guideline. Our executiveofficers are expected to achieve the guidelines within three years of either their hire date or February 2011, the time at which the guidelines were established. Thefollowing table provides detail on our Named Executive Officers’ ownership as a percent of guideline at our last fiscal year end: Executive Ownership as % of GuidelineMichael P. Kaminski President & Chief Executive Officer 95Samuel W. Duggan II Chief Financial Officer Not applicable due to resignationFrank J. ChengSenior Vice President, Marketing & Business Development 61Karen W. DurosSenior Vice President, General Counsel & Secretary 54David A. GiffinVice President, Human Resources 56 (1)Mr. Kaminski has announced his resignation as President & CEO effective April 12, 2013.(2)Mr. Duggan resigned from the Company effective February 22, 2013.Other Benefits • Healthcare and Other Insurance Programs: All of our employees, including the Named Executive Officers, are eligible to participate in medical,dental, short and long-term disability and life insurance plans. The terms of such benefits for our Named Executive Officers are the same as thosefor all of our employees. • 401(k): We offer all eligible employees the opportunity to participate in a 401(k) plan to which the Company generally matches employeecontributions dollar for dollar up to 3% of the employee’s salary during the employee’s period of participation. However, we have temporarilysuspended the Company match given ongoing efforts to control our cash operating expenses. For the fiscal year 2012, no matching contributionswere made. • Employee Stock Purchase Plan: The Company offers an employee stock purchase plan, under which all of our employees, including our NamedExecutive Officers, who do not own 5% or more of our outstanding common stock, have the opportunity to buy an aggregate of up to 250,000shares of Company common stock at 95% of market price with up to 15% of their salaries and incentives (subject to certain limits), with theobjective of allowing employees to profit when the value of our stock increases over time. This plan was suspended in 2012. 106(1)(2)Table of ContentsSignificant Q1 2013 EventsFebruary Service Vested RSU GrantThe Company made the following grants of service vested RSUs to Named Executive Officers in March 2013. These awards vest annually at a rate of40% in 2014 and 20% annually each year after. Executive # Service-Vested RSUs (March 2013) Michael P. Kaminski President & Chief Executive Officer 0 Samuel W. Duggan II Chief Financial Officer 0 Frank J. ChengSenior Vice President, Marketing & Business Development 25,000 Karen W. DurosSenior Vice President, General Counsel & Secretary 25,000 David A. GiffinVice President, Human Resources 25,000 (1)Service-Vested RSUs price on the date of grant was $2.49.(2)Mr. Kaminski has announced his resignation as President & CEO effective April 12, 2013.(3)Mr. Duggan resigned from the Company effective February 22, 2013.CEO Separation AgreementThe Company’s President and Chief Executive Officer, Michael Kaminski, has resigned effective April 12, 2013. Mr. Kaminski will continue toreceive his base salary and remain eligible for a payout under the 2013 Management Bonus Plan for first quarter results.The Committee considered the need to arrange a consulting agreement with Mr. Kaminski after his departure from the Company. It was determined thatthe agreement would cover the period from April 13, 2013 through October 13, 2014 to ensure a smooth transition to new leadership occurs. In exchange,Mr. Kaminski’s outstanding equity will continue to vest during the time he continues to provide services. He will not receive any base salary nor will he beeligible for payouts under the Management Bonus Plan during the period covered by the consulting agreement.Policy on Recoupment of Incentive CompensationIn December 2010, the Compensation Committee of the Board approved the following policy on recoupment of incentive compensation.In the event of a material restatement of financial results of the Company (other than a restatement required by a change of GAAP or accountingstandards) due to fraud, gross negligence or willful misconduct on the part of any Senior Executive (as defined below) or any key employee, theIndependent Directors will review all incentive compensation awarded to or earned based on the Company’s financial results, during the three fiscalyears prior to the filing of the restated financial results, by each of the Senior Executives and any key employees involved in the fraud, gross negligenceor willful misconduct. For this purpose, a financial statement or financial performance metric will be treated as materially inaccurate with respect to anySenior Executive or key employee who knowingly engaged in providing inaccurate information or knowingly failed to timely correct information relatingto those financial statements or financial performance metrics. 107(1)(2)(3)Table of ContentsThe incentive compensation to be reviewed will include all incentive compensation based on financial results, including annual cash incentive bonusawards and all forms of equity-based compensation. If, in the view of the Independent Directors, the incentive compensation would have been lower if ithad been based on the restated results, the Independent Directors may, upon consideration of all factors deemed relevant by the Independent Directors,and to the extent permitted by applicable law, seek recoupment from the Senior Executives, and any key employee whose acts or omissions contributedto the fraud, gross negligence or intentional misconduct, of any portion of such incentive compensation as it deems appropriate.Any recoupment under this Policy may be in addition to any other remedies that may be available to the Company under applicable law, includingdisciplinary actions up to and including termination of employment.The Board intends to incorporate the provisions of this Policy in future incentive plan documents, award agreements and employee agreements.For purposes of this Policy, “Senior Executives” means the Company’s executive officers (as defined under the Securities and Exchange Act of 1934, asamended).Federal Income Tax ConsiderationsSection 162(m) of the Internal Revenue Code limits the tax deduction allowable for executive compensation to $1.0 million per year for certain executiveofficers unless such compensation is performance based. As the cash compensation paid to our executive officers is below $1.0 million, and the CompensationCommittee believes that the performance vested restricted stock granted would meet the requirements for performance-based compensation, and the value oftime vested restricted share units is not substantial, the Company believes that these limitations did not impact the Company in 2012.Compensation Committee ReportThe Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on such reviewand discussions, the Compensation Committee recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis beincluded in this annual report on Form 10-K.Submitted by the Compensation Committee of the Board of Directors.Fred A. Middleton, ChairmanWilliam M. KelleyRobert J. MesseyThe Compensation Committee report will not be deemed incorporated by reference by any general statement incorporating by reference this annual reporton Form 10-K or portions thereof into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that wespecifically incorporate by reference the Compensation Committee report, and will not otherwise be deemed filed under such Acts.Compensation Committee Interlocks and Insider ParticipationMr. Middleton served as a member of our Compensation Committee during our last fiscal year and as our president from December 1996 through June1997. Otherwise, none of our Compensation Committee members and none of our executive officers have a relationship that would constitute an interlockingrelationship with executive officers or directors of another entity or insider participation in compensation decisions. 108Table of ContentsSUMMARY COMPENSATION TABLEThe following table summarizes the total compensation paid to the following executive officers (our “Named Executive Officers”) for fiscal years 2010,2011 and 2012. For more information about the components of the total compensation, refer to the “Compensation Discussion and Analysis” section of thisannual report. Name and Principal Position Year Salary($) StockAwards($) OptionAwards($) Non-EquityIncentivePlanCompensation($) All OtherCompensation($) Totals($) Michael P. Kaminski 2012 352,000 275,200 — 69,946 1,980 699,126 President and ChiefExecutive Officer 2011 399,667 339,600 555,713 0 9,330 1,304,310 2010 400,000 — 281,250 52,000 9,330 742,580 Samuel W. Duggan II 2012 274,500 127,600 — 30,000 1,768 433,868 Chief Financial Officer 2011 67,500 26,000 108,325 0 436 202,261 Frank J. Cheng 2012 265,500 92,650 — 39,244 1,682 390,076 Senior Vice President, 2011 276,208 128,286 200,057 0 228,418 832,969 Marketing and Business Development 2010 193,910 — 262,800 50,000 45,348 552,058 Karen W. Duros 2012 243,000 71,805 — 39,100 1,617 355,522 Senior Vice President, 2011 263,250 97,524 133,371 0 5,764 499,909 General Counsel & Secretary 2010 66,635 — 191,800 7,616 254 266,305 David A. Giffin 2012 180,000 71,805 — 27,926 1,280 281,011 Vice President, Human Resources 2011 192,833 87,024 133,371 0 6,465 419,693 2010 187,000 — 112,500 25,000 7,450 331,950 (1)Amounts reported include the aggregate grant date fair value of awards granted during the year computed in accordance with ASC 718, Compensation-Stock Compensation. These awards consist of grants of common stock, restricted shares and RSUs. Restricted shares granted to employees are valuedat the fair market value at the date of grant. See Note 11 of the notes to our consolidated financial statements contained in our 2012 Annual Report onForm 10-K for a discussion of all assumptions made by us in determining the ASC 718, Compensation-Stock Compensation values of our equityawards. These amounts reflect the aggregate grant date fair value for these awards and do not correspond to the actual value that will be recognized by theNamed Executive Officers.(2)These amounts represent the aggregate grant date fair value of stock options and stock appreciation rights granted during the year computed inaccordance with ASC 718, Compensation-Stock Compensation. See Note 11 of the notes to our consolidated financial statements contained in our2012 Annual Report on Form 10-K for a discussion of all assumptions made by us in determining the grant date fair values of our equity awards. Theseamounts reflect the aggregate grant date fair value for these awards and do not correspond to the actual value that will be recognized by the NamedExecutive Officers. All outstanding stock options and stock appreciation rights are currently under water. Please see the “Grants of Plan-Based AwardsTable” for information on restricted share units granted in fiscal year 2012.(3)These amounts represent cash awards earned during the respective fiscal year under the applicable annual incentive programs, which were paid in thefollowing fiscal year. See the “Compensation Discussion and Analysis” section above for a more detailed discussion.(4)All Other Compensation includes non-routine compensatory payments as well as amounts contributed by us to the executive’s 401(k) plan and thepayment of group term life insurance premiums. Included in All Other Compensation for Mr. Cheng includes $219,292 for relocation expenses relatingto the sale of his home in 2011 and relocation allowance in the amount of $42,253 in 2010. No other single amounts exceeded $10,000 for anyindividual.(5)Mr. Kaminski has announced his resignation effective April 12, 2013. 109(1)(2)(3)(4)(5)(6)(7)(8)Table of Contents(6)Mr. Duggan joined the Company on October 1, 2011. He resigned from the Company effective February 22, 2013.(7)Mr. Cheng joined the Company on April 19, 2010.(8)Ms. Duros joined the Company on October 4, 2010.The following table sets forth certain information with respect to plan-based awards granted to each of our Named Executive Officers during the fiscalyear ended December 31, 2012.GRANTS OF PLAN-BASED AWARDS Named ExecutiveOfficer GrantDate Estimated Future Payouts Under Non-EquityIncentive Plan Awards ($) EstimatedFuture PayoutsUnder EquityIncentive PlanAwards(#) All OtherStockAwards:Number ofShare ofStock orUnits(#) Grant DateFair Valueof Stockand OptionAwards($) Threshold ($) Target ($) Maximum ($) Michael P. Kaminski 2/14/12 105,000 210,000 420,000 17,500 35,000 8/22/12 80,000 135,200 Samuel W. Duggan II 2/14/12 69,667 139,333 278,667 7,500 15,000 8/22/12 40,000 67,600 Frank J. Cheng 2/14/12 71,250 142,500 285,000 6,300 12,600 8/22/12 25,000 42,250 Karen W. Duros 2/14/12 54,000 108,000 162,000 4,200 8,400 8/22/12 22,500 38,205 David A. Giffin 2/14/12 40,000 80,000 120,000 4,200 8,400 8/22/12 22,500 38,205 (1)Constitutes awards that could have been earned under the 2012 annual bonus program. Refer to “Compensation Discussion and Analysis” foradditional information regarding cash payouts to Named Executive Officers.(2)Constitutes performance based restricted share units issued in 2012 under the 2002 Stock Incentive Plan. Performance based restricted share units willvest only if certain performance goals are achieved. Those goals have not yet been achieved.(3)All Other Stock constitutes time based restricted share units issued in 2012 under the 2012 Stock Incentive Plan.(4)Includes the full grant date fair value of options, stock appreciation rights, restricted stock awards or restricted share units, computed in accordancewith ASC 718, Compensation-Stock Compensation, applying the same valuation model and assumptions applied for financial reporting purposes.Generally, the full grant date fair value is the amount that the Company would expense in its financial statements over the award vesting schedule. Theseamounts reflect the Company’s accounting expense and do not correspond to the actual value that will be recognized by the Named Executive Officers.(5)Mr. Kaminski has announced his resignation from the Company effective April 12, 2013.(6)Mr. Duggan resigned from the Company effective February 22, 2013. 110 (1) (2) (3) (4) (5) (6)Table of ContentsThe following table discloses information regarding outstanding awards under the Company’s 2002 Stock Incentive Plan, as amended, and 2012 StockIncentive Plan as of December 31, 2012.OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (December 31, 2012) Option Awards Stock Awards NamedExecutiveOfficer Number ofSecuritiesUnderlyingUnexercisedOptions(#) Exercisable Number ofSecuritiesUnderlyingUnexercisedOptions(#) Unexercisable OptionExercisePrice($) OptionExpirationDate Equity Incentive PlanAwards: Number ofUnearned Shares,Units or Other RightsThat Have Not Vested(#) Equity Incentive PlanAwards: Market orPayout Value ofUnearned Shares,Units or Other RightsThat Have Not Vested($) Michael P. Kaminski 1,388 — 59.40 5/27/2013 6,944 — 59.40 1/17/2014 5,000 — 68.60 2/5/2013 10,000 — 49.70 5/28/2013 12,500 — 46.00 12/11/2013 8,854 3,646 46.70 2/17/2015 12,031 14,219 35.20 2/15/2021 6,750 17,213 9,357 23,860 17,500 44,625 80,000 204,000 Samuel W. Duggan II 5,468 12,032 10.04 10/1/2021 2,500 6,375 7,500 19,125 40,000 102,000 Frank J. Cheng 3,000 1,500 48.60 4/20/2015 5,625 3,375 35.50 6/16/2015 4,331 5,119 35.20 2/15/2021 2,430 6,197 3,922 10,001 25,000 63,750 6,300 16,065 Karen W. Duros 5,416 4,584 40.02 10/3/2015 2,887 3,413 35.20 2/15/2021 1,620 4,131 3,715 9,473 22,500 57,375 4,200 10,710 David A. Giffin 3,000 — 68.60 2/5/13 2,500 — 70.30 8/5/13 1,916 84 33.80 2/18/14 3,541 1,459 46.70 2/17/15 2,887 3,413 35.20 2/15/21 1,620 4,131 2,752 7,018 22,500 57,375 4,200 10,710 (1)The amounts appearing in this column represent the total number of options and stock appreciation rights that have not vested as of December 31, 2012. Option grants and SARs vest at the rate of 25% after oneyear of service from the date of grant, and monthly thereafter, over 36 additional months.(2)The amounts appearing in this column represent the total number of time based restricted share units and performance based restricted stock granted under our 2002 Stock Incentive Plan or the 2012 StockIncentive Plan. The performance based restricted stock will vest only if certain performance goals are achieved. Those goals have not yet been achieved.(3)Based on the closing price of $2.55 for the shares of our common stock on December 30, 2012 (the last business day of fiscal year 2012).(4)Mr. Kaminski has announced his resignation from the Company effective April 12, 2013.(5)Mr. Duggan resigned from the Company effective February 22, 2013. 111(1)(2)(3) (4) (5)Table of ContentsOption exercises and stock vestedWith respect to the Named Executive Officers, no options or stock appreciation rights were exercised during the fiscal year ended December 31, 2012.Potential Payments upon Termination or Change of ControlThe award agreements under our 2002 Stock Incentive Plan and 2012 Stock Incentive Plan provide for the acceleration of certain equity awards in theevent of termination of the employee’s employment due to a change of control of the Company. The provisions under the award agreements are generallyapplicable to awards granted to all participants in the Plan, including the Named Executive Officers. We have described those provisions generally below.Additionally, under the stock incentive plans, in the event of a change of control of the Company, the Compensation Committee has discretion to provide fortermination of awards in exchange for cash payments or the issuance of substitute awards. Benefits or payments under other plans and arrangements that aregenerally available to the Company’s employees on similar terms are not described.In addition, we have entered into employment agreements with our Named Executive Officers that provide for a continuation of certain post-employmentbenefits, to the extent permitted under the applicable employment benefit plan(s). Each of the employment agreements provide for payments at, following, or inconnection with a variety of circumstances following the Named Executive Officer’s termination of employment or in the event of a change of control of theCompany.Following the description of each Named Executive Officer’s specific employment agreement, we have quantified, in tabular format, the potentialpayments and benefits upon termination without cause or due to a change of control of the Company for each of the Named Executive Officers, assuming theNamed Executive Officer’s employment terminated on December 31, 2012, and, if applicable, based on our closing stock price of $2.55 on that date. Incalculating the value of acceleration of equity awards, the value of unvested options and SARs equals $2.55 per share minus the exercise price for all suchoptions or SARs and the value of the restricted shares and RSUs equals $2.55 per share multiplied by the number of unvested restricted shares or RSUs, asapplicable.Provisions of awards under the Stock Incentive PlansIf a Named Executive Officer’s employment is terminated on or within one year after a change of control (or in the case of incentive stock options, incontemplation of a change of control, or in the case of restricted stock or SARs, the employee leaves for good reason, as defined in the agreement), the awardagreements for such stock options, restricted stock and SARs under the 2002 Stock Incentive Plan and 2012 Stock Incentive Plan provide as follows: (1) allunvested stock options and SARs will vest immediately and all unexercised options and SARs can be exercised for their remaining terms; and (2) alloutstanding performance based RSUs vest immediately and become non-forfeitable.The awards do not generally accelerate in connection with the retirement, resignation or other termination of employment (i.e., voluntary termination,termination for cause or involuntary termination) of any of the participants. In addition, none of the equity awards under the 2002 Stock Incentive Plan or2012 Stock Incentive Plan accelerate in the event of termination by death or disability, although SARs and options could be exercised for specified periodsfollowing such termination events.Employment Agreements and Quantification of Payments upon Termination or Change of ControlMr. Kaminski. If Mr. Kaminski is terminated without cause, he will be paid his monthly base salary for a period of 24 months, provided that, if he isreemployed by the Company or obtains comparable employment during such 24 month period, his salary continuation payments will be offset by the amountof salary from the 112Table of ContentsCompany or a new employer. In addition, the number of his stock options, stock appreciation rights or other equity awards subject to vesting over the 12month period following any such termination will automatically vest as of the termination date and will be exercisable for a period of one year thereafter or theremaining term of the award, whichever is earlier. In the event of a change of control of the Company, if Mr. Kaminski is not offered a comparable positionand salary in the surviving entity after the change of control, he will be paid his monthly base salary for a period of 24 months after the termination of hisemployment. Additionally, 100% of his unvested options, stock appreciation rights and restricted shares will vest under the terms of the 2002 Stock IncentivePlan and 2012 Stock Incentive Plan. If Mr. Kaminski is terminated without cause or as a result of a change of control during a year in which he has served atleast six months as president and chief executive officer, he is entitled to receive a bonus from any bonus plan in which he is a participant at the same level asthe other management employees on a prorated basis based on the number of days worked. In the event of either a termination without cause or as a result ofchange of control, Mr. Kaminski will be entitled to his medical and dental benefits for a period of 24 months (subject to any requirements for employeecontributions), except that such benefits will end if he obtains full time employment with another employer. Mr. Kaminski has announced his resignation fromthe Company effective April 12, 2012.Other Named Executive Officers. If a Named Executive Officer, other than Mr. Kaminski, is terminated by the Company without cause, the NamedExecutive Officer will receive his or her monthly base salary as of the date of termination for 12 months following the date of termination. The officer also willreceive continuation of medical and dental benefits and life and disability insurance benefits (subject to any requirement for employee premium contributions)for 12 months, except that such benefits will terminate upon receipt of comparable benefits from another employer. In the event of termination by the Companywithout cause, the salary continuation payments will be offset by the amount of any compensation the officer receives during the severance period from theCompany, any other employer or as an independent contractor. In addition, the RSUs granted in October 2011 in connection with the officers’ salaryreductions (other than Mr. Duggan) will vest pro rata based on the number of days from the date of grant to the date of termination.In the event of a termination of a Named Executive Officer, other than Mr. Kaminski, during the period commencing six months prior to a change ofcontrol of the Company and ending two years after a change of control, or if the officer separates from service for good reason, as defined in the employmentagreement, within two years after a change of control of the Company, then the officer will be entitled to a lump sum payment equal to the officer’s annual basesalary at a rate equal to the greater of the rate in effect immediately before the officer’s separation or the rate in effect immediately before the change of control. Inaddition the officer will receive continued medical and dental coverage under the Company’s benefit plans pursuant to COBRA for up to one year following theofficer’s separation from service at the Company’s cost, and continued life and disability insurance benefits, also at the Company’s cost. All awards under the2002 Stock Incentive Plan and the 2012 Stock Incentive Plan will vest in full.Based on a hypothetical termination date of December 31, 2012, the severance benefits for the Named Executive Officers would have been as follows: Named Executive Officer Terminationwithout cause($) Involuntary terminationdue to change ofcontrol ($) Michael P. Kaminski 1,008,489 1,161,489 Samuel W. Duggan II 314,596 447,496 Frank J. Cheng 310,749 403,861 Karen W. Duros 295,286 374,513 David A. Giffin 218,937 295,934 (1)These amounts reflect cash severance payments; the value of extended medical and dental benefits and life and disability insurance (except thatMr. Kaminski will not receive life and disability insurance); and in the case of Mr. Kaminski only, the value of accelerated vesting of performancebased restricted stock and time 113 (1) (2)(3) (4) (5) (6) (7)Table of Contents based restricted share units calculated based on the closing price of $2.55 for shares of our common stock on December 31, 2012. No value is includedbased on accelerated vesting of stock options or SARs for Mr. Kaminski because all of his stock options and SARs are underwater. The value ofextended medical and dental benefits and life and disability insurance (“Benefits”) was determined based on the annual cost of the Company’scontribution for employees’ medical and dental benefits and the full annual cost of life and disability insurance.(2)These amounts reflect cash severance payments; the value of extended medical and dental benefits and life and disability insurance (except thatMr. Kaminski will not receive life and disability insurance); the value of accelerated vesting of performance based restricted stock and time basedrestricted share units calculated based on the closing price of $2.55 for shares of our common stock on December 31, 2012. No value is included basedon accelerated vesting of stock options or SARs because all of the stock options and SARs held by the officers are underwater. The value of extendedBenefits was determined based on the full annual cost of COBRA benefits and live and disability insurance.(3)These amounts include $840,000 of cash severance, $31,789 of extended Benefits, and $136,700 for accelerated vesting of restricted stock and RSUsin the event of a termination without cause; and $840,000 of cash severance, $31,789 of extended Benefits, and $289,700 for accelerated vesting ofrestricted stock and RSUs in the event of a termination due to a change of control. Excludes amount related to a potential bonus available toMr. Kaminski upon termination without cause or due to a change of control as described above. Mr. Kaminski has announced his resignation from theCompany effective April 12, 2013.(4)These amounts include $297,000 of cash severance and $17,596 of extended Benefits in the event of a termination without cause; and $297,000 ofcash severance, $22,996 of extended Benefits, and $127,500 for accelerated vesting of restricted stock and RSUs in the event of a termination due to achange of control. Mr. Duggan resigned from the Company effective February 22, 2013.(5)These amounts include $285,000 of cash severance, $17,448 of extended Benefits, and $8,301 for accelerated vesting of restricted stock and RSUs inthe event of a termination without cause; and $285,000 of cash severance, $22,848 of extended Benefits, and $96,013 for accelerated vesting ofrestricted stock and RSUs in the event of a termination due to a change of control.(6)These amounts include $270,000 of cash severance, $17,421 of extended Benefits, and $7,865 for accelerated vesting of restricted stock and RSUs inthe event of a termination without cause; and $270,000 of cash severance, $22,821 of extended Benefits, and $81,692 for accelerated vesting ofrestricted stock and RSUs in the event of a termination due to a change of control.(7)These amounts include $200,000 of cash severance, $13,112 of extended Benefits, and $5,825 for accelerated vesting of restricted stock and RSUs inthe event of a termination without cause; and $200,000 of cash severance, $16,700 of extended Benefits, and $79,234 for accelerated vesting ofrestricted stock and RSUs in the event of a termination due to a change of control. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe following table sets forth certain information known to us with respect to the beneficial ownership of our common stock as of February 28, 2013by: • each person known by us to own beneficially more than 5% of our outstanding common stock; • each of our directors; • each of our Named Executive Officers; and • all of our directors and executive officers as a group.There were 8,059,224 shares of common stock outstanding as of February 28, 2013. Unless otherwise indicated, the table below includes the numberof shares underlying options, debentures, warrants, and restricted share units (less shares withheld for tax withholdings) that are currently exercisable orexercisable within 60 days of February 28, 2013. Shares of common stock subject to options, debentures and warrants that are currently 114Table of Contentsexercisable or exercisable within 60 days of February 28, 2013 are considered outstanding and beneficially owned by the person holding the options,debentures or warrants for the purposes of computing beneficial ownership of that person but are not treated as outstanding for the purpose of computing thepercentage ownership of any other person. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community propertylaws where applicable, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name.Except as otherwise indicated, the address of each of the persons in this table is as follows: c/o Stereotaxis, Inc., 4320 Forest Park Avenue, Suite 100, St.Louis, Missouri 63108. Name and Address ofBeneficial Owner of Common Stock Number of shares ofCommon Stockbeneficially owned Percentage ofshares of CommonStockbeneficiallyowned Five percent shareholders Alafi Capital Company LLC 9 Commodore Drive, Suite 405Emeryville, CA 94608 2,704,480 28.48% Entities affiliated with Sanderling Ventures 400 S. El Camino Real, Suite 1200San Mateo, CA 94402 2,324,131 24.83% Franklin Resources, Inc. One Franklin ParkwaySan Mateo, CA 94403 1,636,640 18.79% Prescott Group Capital Management, L.L.C.1924 South Utica, Suite 1120Tulsa, OK 74104 860,495 9.99% Tenor Capital Management Company, L.P.1180 Avenue of the Americas, Suite 1940New York, NY 10036 454,299 5.34% Directors and Named Executive Officers Christopher Alafi, Ph.D. 2,752,357 28.95% Fred A. Middleton 2,411,283 25.70% David W. Benfer 18,085 * Joseph D. Keegan, Ph.D. 6,085 * William M. Kelley 16,175 * Robert J. Messey 17,595 * William C. Mills III 18,745 * Eric N. Prystowsky, M.D. 10,835 * Euan S. Thomson, Ph.D. 0 * Michael P. Kaminski 74,022 * Samuel W. Duggan II 7,500 * Frank J. Cheng 27,466 * Karen W. Duros 18,725 * David A. Giffin 25,209 * All directors and executive officers as a group (14 persons) 5,404,082 49.28% *Indicates ownership of less than 1%(1)Includes 1,266,628 shares held by and 1,437,852 shares issuable under warrants held by Alafi Capital Company LLC (“Alafi Capital”). ChristopherAlafi and Moshe Alafi are the managing partners of Alafi Capital and have full voting and investment power with respect to the shares owned by AlafiCapital. All 115(1)(2)(3) (4) (5) (6)(7)(8) (9)(10)(11)(12)(13)(14) (15)(16)(17) (18) (19)Table of Contents information regarding ownership of Alafi Capital and its affiliates is based solely on a Schedule 13D filed by Alafi Capital on March 18, 2009, andForm 4s filed by Dr. Alafi on August 19, 2010, November 12, 2010, September 9, 2011, September 12, 2011, April 3, 2012, May 3, 2012, andMay 14, 2012. Dr. Alafi was a director of the Company. His term as a director expired on August 22, 2012, the date of the 2012 Annual Meeting ofShareholders. (2)Includes: (a) 80 shares held by the Middleton McNeil Retirement Trust; (b) 83 shares held by Sanderling Ventures Management V; (c) 3,060 shares heldby and 10,686 shares issuable under warrants held by Sanderling VI Beteiligungs GmbH & Co. KG; (d) 3,646 shares held by and 12,732 sharesissuable under warrants held by Sanderling VI Limited Partnership; (e) 28,117 shares held by and 99,399 shares issuable under warrants held bySanderling Ventures Management VI; (f) 53,276 shares held by Sanderling IV Biomedical Co-Investment Fund, L.P.; (g) 22,452 shares held bySanderling Venture Partners IV Co-Investment Fund, L.P.; (h) 67,791 shares held by Sanderling Venture Partners V Co-Investment Fund, L.P.;(i) 11,097 shares held by Sanderling V Beteiligungs GmbH & Co. KG; (j) 11,957 shares held by Sanderling V Limited Partnership; (k) 39,716shares held by Sanderling V Biomedical Co-Investment Fund, L.P.; (l) 1,500 shares held by Sanderling Management, LLC 401(k) Plan; and(m) 782,272 shares held by and 1,176,265 shares issuable under warrants held by Sanderling Venture Partners VI Co-Investment Fund, L.P.The Middleton McNeil Retirement Trust has voting and dispositive authority over the shares owned by such trust. The trust's trustees are Fred A.Middleton and Robert G. McNeil, who manage the trust for the benefit of Fred A. Middleton and Robert G. McNeil. Such individuals disclaimbeneficial ownership of all such shares held by the foregoing trust, except to the extent of their proportionate pecuniary interests therein.Middleton-McNeil Associates IV, LLC is the general partner of Sanderling IV Biomedical Co-Investment Fund, L.P. and has voting and dispositiveauthority over the shares owned by Sanderling IV Biomedical Co-Investment Fund, L.P. Middleton-McNeil Associates IV, LLC is managed by itsmembers, Fred A. Middleton and Robert G. McNeil. Such individuals disclaim beneficial ownership of all such shares held by the foregoing funds,except to the extent of their proportionate pecuniary interests therein.Middleton-McNeil Associates IV, L.P. is the general partner of Sanderling Venture Partners IV Co-Investment Fund, L.P. and has voting and dispositivepower over the shares owned by Sanderling Venture Partners IV Co-Investment Fund, L.P. Middleton-McNeil Associates IV, L.P. is managed by itsgeneral partners, Fred A. Middleton and Robert G. McNeil. Such individuals disclaim beneficial ownership of all such shares held by the foregoingfunds, except to the extent of their proportionate pecuniary interests therein.Middleton, McNeil & Mills Associates V, LLC is the Investment General Partner of Sanderling V Limited Partnership and Sanderling V BeteiligungsGmbH & Co. KG and the General Partner of Sanderling V Biomedical Co-Investment Fund, L.P. and Sanderling Venture Partners V Co-InvestmentFund, L.P. and has voting and dispositive authority over the shares owned by such entities. Middleton, McNeil & Mills Associates V, LLC is managedby its managing directors, Fred A. Middleton and Robert G. McNeil, Timothy C. Mills and Timothy J. Wollaeger. Such individuals disclaim beneficialownership of all such shares held by the foregoing funds, except to the extent of their proportionate pecuniary interests therein.Sanderling Ventures Management V is managed by Fred A. Middleton and Robert G. McNeil, Timothy C. Mills and Timothy J. Wollaeger, theindividuals who have invested under the d/b/a Sanderling Ventures Management V, which individuals have voting and dispositive power over the sharesowned by Sanderling Ventures Management V. Such individuals disclaim beneficial ownership of all such shares held by the foregoing funds, except tothe extent of their proportionate pecuniary interests therein. Sanderling Ventures Management VI is managed by Fred A. Middleton, Robert G. McNeil,Timothy C. Mills and Timothy J. Wollaeger, the individuals who have invested under the d/b/a Sanderling Ventures Management VI, whichindividuals have voting and dispositive power over the shares owned by Sanderling Ventures Management VI. Such individuals disclaim beneficialownership of all such shares held by the foregoing funds, except to the extent of their proportionate pecuniary interests therein. 116Table of ContentsMiddleton, McNeil, Mills & Associates, VI, LLC is the Investment General Partner of Sanderling Venture Partners VI Co-Investment Fund, L.P.,Sanderling VI Beteiligungs GmbH & Co. KG and Sanderling VI Limited Partnership and has voting and dispositive power over the shares owned bysuch entity. Sanderling Venture Partners VI Co-Investment Fund, L.P. is managed by its managing directors, Fred A. Middleton, Robert G. McNeil,Timothy C. Mills and Timothy J. Wollaeger. Such individuals disclaim beneficial ownership of all such shares held by the foregoing funds, except tothe extent of their proportionate pecuniary interests therein.All information regarding ownership of Sanderling Ventures and its affiliates is based solely on a Schedule 13D filed by Sanderling Ventures onMarch 18, 2009, and Form 4s filed by Mr. Middleton on August 19, 2010, November 12, 2010, April 3, 2012, May 3, 2012, May 14,2012, August 24, 2012, and December 4, 2012. (3)All information regarding ownership of Franklin Resources, Inc. is based a Schedule 13G filed on February 12, 2013 by Franklin Resources, Inc.,Charles B. Johnson, Rupert H. Johnson, Jr., and Franklin Advisers, Inc. The shares are owned by one or more open- or closed-end investmentcompanies or other managed accounts that are investment management clients of investment managers that are direct and indirect subsidiaries ofFranklin Resources, Inc., including Franklin Advisers, Inc. Charles B. Johnson and Rupert H. Johnson, Jr. each own in excess of 10% of theoutstanding common stock of Franklin Resources, Inc. and are the principal shareholders of Franklin Resources, Inc. Franklin Advisers, Inc. has solevoting and sole dispositive power over 986,022 shares of common stock and 650,618 shares of common stock issuable under warrants.(4)Prescott Group Aggressive Small Cap, L.P. ("Prescott Small Cap") and Prescott Group Aggressive Small Cap II, L.P. ("Prescott Small Cap II" and,together with Prescott Small Cap, the "Small Cap Funds") are the general partners of Prescott Group Aggressive Small Cap Master Fund, G.P. ("PrescottMaster Fund"). Prescott Group Capital Management, L.L.C. ("Prescott Capital") is the general partner of the Small Cap Funds and Mr. Phil Frohlich isthe principal of Prescott Capital, and as a result Mr. Frohlich and Prescott Capital may direct the vote and disposition of these securities on behalf of theSmall Cap Funds.Prescott Capital and Mr. Phil Frohlich are the beneficial owners of 1,494,117 shares of common stock, which consists of (i) 303,995 shares ofcommon stock, (ii) 595,061 shares of common stock issuable upon conversion of presently convertible notes and (iii) warrants exercisable to purchase595,061 shares of common stock; provided, however, that the “blocker provision” applicable to such notes and warrants restricts the conversion ofthe convertible notes and the exercise of the warrants such that Prescott Capital and Mr. Phil Frohlich may only covert such notes and exercise suchwarrants up to a maximum percentage of beneficial ownership of 9.99% of the Company’s outstanding common stock. Therefore, Prescott Capital andMr. Phil Frohlich are restricted in the amount of their beneficial ownership to 860,495 shares of common stock, which amount consists of (i) 303,995shares of common stock and (ii) 556,500 shares of common stock (A) issuable upon conversion of presently convertible notes and/or (B) receivableupon exercise of presently held warrants.All information regarding ownership of Prescott Capital is based on Prescott Master Fund's participation in a convertible debenture transaction withStereotaxis, Inc. on May 7, 2012 and a Schedule 13G/A filed on February 14, 2013 by Prescott Capital, the Small Cap Funds, and Mr. Frohlich. (5)Tenor Capital Management Company, L.P. (“Tenor Capital”) is the investment manager of Tenor Opportunity Master Fund Ltd. (“Tenor Opportunity”)and Aria Opportunity Fund, Ltd. (“Aria”), and has voting and investment power over securities held by Tenor Opportunity and Aria. The totalbeneficial ownership of 454,299 shares of common stock consists of (i) 7,933 shares of common stock; (ii) warrants exercisable to purchase 223,148shares of common stock; and 223,148 shares of common stock issuable upon conversion of presently convertible notes. All information regardingownership of Tenor Capital is determined by our calculations based on the participation of Tenor Opportunity and Aria in a convertible debenturetransaction with Stereotaxis, Inc. on May 7, 2012, our review of a Schedule 13G filed on February 13, 2013 by Tenor Capital, and further informationfurnished by Tenor Capital. 117Table of Contents(6)Includes 1,226,628 shares held by and 1,437,852 additional shares issuable under warrants held by Alafi Capital as described above. Dr. Alafi is ageneral partner of Alafi Capital and disclaims beneficial ownership of the shares and warrants held by Alafi Capital except to the extent of hisproportionate partnership interest therein. Includes 223 shares held by the Alafi Family Foundation, 12,600 shares held by the Christopher Alafi Trust,and 3,000 shares held by Dr. Alafi's mother. Also includes options to purchase 9,225 shares of common stock held by Dr. Alafi. Dr. Alafi’s term asdirector expired on August 22, 2012, the date of the 2012 Annual Meeting of Shareholders.(7)Includes 1,025,049 shares held by and 1,299,082 additional shares issuable under warrants held by Sanderling as described above. Mr. Middletondisclaims beneficial ownership of the shares and warrants held by Sanderling and Middleton-McNeil L.P. except to the extent of his proportionateownership interest therein. Also includes options to purchase 22,550 shares of common stock(8)Includes 11,150 options to purchase shares of common stock. Includes 2,025 shares of common stock held by Mr. Benfer’s spouse.(9)Includes options to purchase 4,050 shares of common stock.(10)Includes options to purchase 10,150 shares of common stock.(11)Includes options to purchase 13,925 shares of common stock. Includes 20 shares of common stock held by trust.(12)Includes options to purchase 14,075 shares of common stock.(13)Includes options to purchase 7,800 shares of common stock.(14)Includes options to purchase 37,948 shares of common stock. Includes 70 shares of common stock held by the Cynthia B. Kaminski Revocable Trust,and 300 shares of common stock held by immediate family members.(15)Includes 5,000 shares of common stock held by the Samuel W. Duggan II Trust.(16)Includes options to purchase 14,869 shares of common stock.(17)Includes options to purchase 9,663 shares of common stock.(18)Includes options to purchase 14,871 shares of common stock.(19)Includes shares beneficially owned by Christopher Alafi as described above. Dr. Alafi’s term as a director expired on August 22, 2012, the date of the2012 Annual Meeting of Shareholders.Securities Authorized for Issuance under Equity Compensation PlansThe following table discloses information regarding securities to be issued upon the exercise of outstanding options, warrants and rights. Plan Category Number of Securities to beIssued Upon Exercise of OutstandingOptions, Warrants and Rights Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights Number of SecuritiesRemaining Availablefor Future IssuanceUnder EquityCompensation Plans(ExcludingSecurities Reflectedin Column (a)) (a) (b) (c) Equity compensation plans approved byshareholders 373,899 $43.90 660,777 Equity compensation plans not approved byshareholders — — — Total 373,899 660,777 (1)Includes 529,312 shares of RSUs which may only be transferred upon vesting. 118 (1)Table of ContentsITEM 13.CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS AND DIRECTOR INDEPENDENCEOur Board has determined that, other than Mr. Kaminski, each of our directors, and each member of the Audit Committee, Compensation Committeeand Nominating and Corporate Governance Committee is independent under the rules of the NASDAQ Global Market. As a result, our Board currently has amajority of independent directors consistent with the rules of the NASDAQ Global Market. Each member of the Audit Committee is independent as defined inRule 10A-3(b)(1) under the Securities Exchange Act of 1934. During 2012, the Company had a consulting agreement with Dr. Prystowsky, which expired inFebruary 2012. The Board determined this agreement did not impair his independent judgment.We review all relationships and transactions in which the Company and our directors, executive officers or their immediate family members participateto determine whether such persons have a direct or indirect material interest in such transactions or relationships. In addition, our Code of Ethics andBusiness Conduct generally prohibits our officers, directors and employees from engaging in activities that involve, or even appear to involve, a conflictbetween their personal interest and the interests of the Company. Our Code of Ethics and Business Conduct encourages our employees to report to us an actualor apparent conflict of interest.Our Board of Directors, with any directors involved in the relevant transaction recused, or the Audit Committee reviews all related party transactionsinvolving the Company and any of the Company’s principal shareholders or members of our board of directors or senior management or any immediatefamily member of any of the foregoing. A general statement of this policy is set forth in our audit committee charter, which is published on our website atwww.stereotaxis.com/investors/governance.html. However, the Board does not have detailed written policies and procedures for reviewing related partytransactions. Rather, all facts and circumstances surrounding each related party transaction may be considered.Note and Warrant Purchase Agreement. Effective November 10, 2010, we executed the Third Amendment to the Note and Warrant PurchaseAgreement with Alafi Capital Company and certain affiliates of Sanderling Venture Partners (the “Lenders”) under which the Lenders committed to extend theirOctober 2009 agreement to loan us an aggregate of $10 million on an unsecured basis through March 31, 2012. This facility may also be used by theCompany to guarantee its loan commitments with Silicon Valley Bank, its primary bank lender, through the same extended term. In conjunction with thisextension, we issued five-year warrants to purchase an aggregate of 80,000 shares of our common stock at an exercise price of $40.15 per share to the Lenders.Such number of warrants was equal to 32% of the $10 million extension with an exercise price equal to 10% above the price of common shares sold in theNovember 2010 public offering.Effective March 30, 2012, we executed the Fourth Amendment to the Note and Warrant Purchase Agreement with the Lenders, in connection with theextension of our loan commitments with Silicon Valley Bank through April 30, 2012. We issued five-year warrants to purchase an aggregate of 75,734 sharesof our common stock at an exercise price of $6.60 per share to the Lenders. The exercise price is equal to the closing bid price on March 29, 2012, the tradingday immediately prior to the date of the amendment.Effective May 1, 2012, we executed the Fifth Amendment to the Note and Warrant Purchase Agreement with the Lenders, in connection with theextension of our loan commitments with Silicon Valley Bank through May 15, 2012. We issued five-year warrants to purchase an aggregate of 60,975 sharesof our common stock, at an exercise price of $4.10 per share to the Lenders. The exercise price is equal to the closing bid price on April 30, 2012, the tradingday immediate prior to the date of the amendment.Effective May 7, 2012, we executed the Sixth Amendment to the Note and Warrant Purchase Agreement (“Sixth Amendment”) with the Lenders, inconnect with the extension of our loan commitments with Silicon Valley Bank through March 31, 2013. The Lenders’ obligation to provide either direct loansto us or guarantee our loan commitments with Silicon Valley Bank was decreased from $10 million in aggregate to $3 million. We 119Table of Contentsissued five-year warrants to purchase an aggregate of 234,305 shares of our common stock, at an exercise price of $3.36 per share to the Lenders. The exerciseprice is equal to the closing bid price on May 4, 2012, the trading day immediately prior to the date of the amendment.Prior to May 7, 2012, the obligations under the $10 million loan or guarantee commitment, and the number of warrants granted under each of theamendments are split evenly between Alafi Capital Company and certain affiliates of Sanderling Venture Partners. Under the Sixth Amendment, the loanobligation or guarantee commitment of Alafi Capital Company is $1.0 million, and that of certain affiliates of Sanderling Ventures Partners is $2.0 million,and the warrants were granted on a proportionate basis. The Lenders are affiliates of Christopher D. Alafi and Fred A. Middleton, respectively. Each of thesetransactions was reviewed and approved by non-interested directors at a meeting of the Board of Directors, at which Mr. Middleton and Mr. Alafi were recusedfrom the discussions and vote, or by the Audit Committee. Neither Mr. Middleton nor Mr. Alafi was a member of the Audit Committee. ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe following fees were charged for professional services rendered by Ernst & Young LLP, our independent registered public accountants, in fiscal year2011 and fiscal year 2012: Description of Professional Service Amount Billed for Fiscal Year 2011 $ 2012 $ Audit Fees—professional services rendered for the audit of our annual financial statements and review of financialstatements included in our Form 10-Q or services that are normally provided by the accountant in connection withstatutory and regulatory filings or engagements for those fiscal years. 350,000 451,000 Audit-Related Fees—assurance and related services by Ernst & Young LLP that are reasonably related to theperformance of the audit or review of financial statements and are not reported as “Audit Fees.” 1,995 1,800 Tax Fees—professional services rendered by Ernst & Young LLP for tax compliance, tax advice and tax planning. — — All Other Fees — — Total Ernst & Young LLP Fees 351,995 452,800 Pre-Approval PolicyAs described in the Audit Committee charter, which was amended and restated in August, 2011, it is the Audit Committee’s policy and procedure toreview and consider and ultimately pre-approve, where appropriate, all audit and non-audit engagement services to be performed by our independent registeredpublic accountants. All of the audit services, audit-related services and tax services provided by Ernst & Young LLP during fiscal year 2012 were pre-approved in accordance with the Audit Committee’s policy. 120Table of ContentsPart IV ITEM 15:EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) The following documents are filed as part of this Annual Report on Form 10-K (1)Financial Statements—See Index to the Financial Statements at Item 8 of this Report on Form 10-K. (2)The following financial statement schedule of Stereotaxis, Inc. is filed as part of this Report and should be read in conjunction with the financialstatements of Stereotaxis, Inc.: —Schedule II: Valuation and Qualifying Accounts.All other schedules have been omitted because they are not applicable, not required under the instructions, or the information requested is set forthin the consolidated financial statements or related notes thereto. (3)ExhibitsSee Exhibit Index appearing on page 124 herein. 121Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized. STEREOTAXIS, INC.(Registrant)Date: April 1, 2013 By: /s/ MICHAEL P. KAMINSKI Michael P. KaminskiPresident & Chief Executive OfficerKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael P. Kaminski andMartin C. Stammer, and each of them, his true and lawful attorneys-in-fact and agents, with full Power of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and any other documents andinstruments incidental thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and ExchangeCommission, granting unto said attorneys-in-fact and agents, and each of them, full Power and authority to do and perform each and every act and thingrequisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying andconfirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtuehereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated. Signature Title Date/s/ WILLIAM C. MILLS IIIWilliam C. Mills III Chairman of the Board of Directors April 1, 2013/s/ MICHAEL P. KAMINSKIMichael P. Kaminski President & Chief Executive Officer, Director(principal executive officer) April 1, 2013/s/ MARTIN C. STAMMERMartin C. Stammer Interim Chief Financial Officer (principal financialofficer and principal accounting officer) April 1, 2013/s/ DAVID W. BENFERDavid W. Benfer Director April 1, 2013/s/ WILLIAM M. KELLEYWilliam M. Kelley Director April 1, 2013/s/ JOSEPH D. KEEGANJoseph D. Keegan Director April 1, 2013/s/ FRED A. MIDDLETONFred A. Middleton Director April 1, 2013/s/ ROBERT J. MESSEYRobert J. Messey Director April 1, 2013/s/ ERIC N. PRYSTOWSKYEric N. Prystowsky Director April 1, 2013/s/ EUAN S. THOMSONEuan S. Thomson Director April 1, 2013 122Table of ContentsSCHEDULE IIVALUATION AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 Balance atBeginning ofYear AdditionsCharged toCost andExpenses Deductions Balance at theEnd of Year Allowance for doubtful accounts and returns: Year ended December 31, 2012 $667,529 $763 $(28,109) $640,183 Year ended December 31, 2011 $367,536 $691,459 $(391,466) $667,529 Year ended December 31, 2010 $322,463 $107,360 $(62,287) $367,536 Allowance for inventories valuation: Year ended December 31, 2012 $151,157 $122,783 $(201,301) $72,639 Year ended December 31, 2011 $539,518 $156,852 $(545,213) $151,157 Year ended December 31, 2010 $812,468 $67,252 $(340,202) $539,518 123Table of ContentsEXHIBIT INDEX Number Description3.1a Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended September 30, 2004.3.1b Certificate of Amendment to Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of the Registrant’sForm 8-K (File No. 000-50884) filed on July 10, 2012.3.2 Restated Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscalquarter ended September 30, 2004.4.1 Form of Specimen Stock Certificate, incorporated by reference to the Registration Statement on Form S-1 (File No. 333-115253) originallyfiled with the Commission on May 7, 2004, as amended thereafter, at Exhibit 4.1.4.2 Form of PIPE Warrant issued pursuant to that certain Stock and Warrant Purchase Agreement dated May 7, 2012, between the Companyand certain purchasers named therein, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on May 8, 2012.4.3 Form of Subordinated Convertible Debenture issued pursuant to that certain Securities Purchase Agreement dated May 7, 2012, between theCompany and each purchaser identified on the signature page thereto, incorporated by reference to Exhibit 4.2 of the Registrant’s CurrentReport on Form 8-K (File No. 000-50884) filed on May 8, 2012.4.4 Form of Convertible Debt Warrant issued pursuant to that certain Securities Purchase Agreement dated May 7, 2012, between the Companyand each purchaser identified on the signature page thereto, incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report onForm 8-K (File No. 000-50884) filed on May 8, 2012.4.5a Form of Warrant issued pursuant to that certain Note and Warrant Purchase Agreement effective February 7, 2008, between the Registrantand certain investors named therein (included in Exhibit 10.21a, which is incorporated by reference to Exhibit 10.31 of the Registrant’s Form10-K (File 000-50884) for the fiscal year ending December 31, 2007).4.5b Form of Warrant issued pursuant to that certain First Amendment to Note and Warrant Purchase Agreement effective December 29, 2008,between the Registrant and the investors named therein (included in Exhibit 10.21b, which is incorporated by reference to Exhibit 10.32 ofthe Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2008).4.5c Form of Warrant issued pursuant to that certain Second Amendment to Note and Warrant Purchase Agreement effective October 9, 2009,between the Registrant and certain investors named therein (included in Exhibit 10.21c, which is incorporated by reference to Exhibit 10.31cof the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2009).4.5d Form of Warrant issued pursuant to that certain Third Amendment to Note and Warrant Purchase Agreement effective November 10, 2010,between the Registrant and certain investors named therein (included in Exhibit 10.21d).4.5e Form of Warrant Issued Pursuant to that Certain Fourth Amendment to Note and Warrant Purchase Agreement dated March 30, 2012,incorporated by reference to Exhibit 4.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended March 31, 2012.4.5f Form of Warrant issued pursuant to that certain Fifth Amendment to Note and Warrant Purchase Agreement, dated May 1, 2012, betweenthe Company and certain investors named therein (included in Exhibit 10.21f). 124Table of ContentsNumber Description 4.5g Form of Warrant issued pursuant to that certain Sixth Amendment to Note and Warrant Purchase Agreement, dated May 7, 2012, between theCompany and certain investors named therein (included in Exhibit 10.21g). 4.5h Amendment to Warrants of Stereotaxis, Inc., dated May 10, 2012, by and between the Company and the Warrant Holders, incorporated byreference to Exhibit 4.7 of the Registrant’s Registration Statement on Form S-1 (File No. 000-50884) filed May 23, 2012. 4.6 Form of Series A Warrant, issued pursuant to that certain Securities Purchase Agreement, dated December 29, 2008, incorporated by referenceto Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed December 29, 2008. 4.7 Form of Warrant, issued pursuant to that certain Securities Purchase Agreement, dated December 29, 2008, incorporated by reference toExhibit 4.3 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed December 29, 2008. 4.8 Warrant to Purchase Stock pursuant to that certain Loan and Security Agreement, datedDecember 17, 2010, between Silicon Valley Bank and the Company incorporated by reference to Exhibit 4.10 of the Registrant’s Form 10-K(File No. 000-50884) for the fiscal year ended December 31, 2010 .).10.1a# Stereotaxis, Inc. 2012 Stock Incentive Plan, incorporated by reference to Exhibit 10.1 of Registrant’s Form 10-Q (File No. 000-50884) for thefiscal quarter ended September 30, 2012.10.1b# Form of Restricted Share Unit Terms of Award under Stereotaxis, Inc. 2012 Stock Incentive Plan, incorporated by reference to Exhibit 10.2 ofRegistrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended September 30, 2012.10.1c# Form of Restricted Share Unit Terms of Award Under Stereotaxis, Inc. 2012 Stock Incentive Plan, Director Award (filed herewith).10.1d# Form of Restricted Share Unit Terms of Award Under Stereotaxis, Inc. 2012 Stock Incentive Plan, March 5, 2013 (filed herewith).10.2a# 2002 Stock Incentive Plan, as amended and restated June 10, 2009, incorporated by reference to Exhibit 10.2 of the Registrant’s Form 10-Q(File No. 000-50884) for the fiscal quarter ended June 30, 2009.10.2b# Form of Incentive Stock Option Award Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.3 of theRegistrant’s Current Report on Form 8-K (File No. 000-50884) filed December 19, 2008.10.2c# Form of Non-Qualified Stock Option Award Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.1 of theRegistrant’s Current Report on Form 8-K (File No. 000-50884) filed December 19, 2008.10.2d# Form of Restricted Stock Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.7 of the Registrant’s Form10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2008.10.2e# Form of Performance Share Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.8 of the Registrant’s Form10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2008.10.2f# Form of Stock Appreciation Right Award Agreement under the 2002 Stock Incentive Plan, incorporated by reference to Exhibit 10.2 of theRegistrant’s Current Report on Form 8-K (File No. 000-50884) filed December 19, 2008. 125Table of ContentsNumber Description10.2g# Form of Restricted Share Unit Terms of Award, October 10, 2012, under 2002 Stock Incentive Plan incorporated by reference to Exhibit 10.2gof the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2011.10.2h# Form of Restricted Performance Share Terms and Conditions Under Stereotaxis, Inc. 2002 Stock Incentive Plan, February 14, 2012 (filedherewith).10.3# 2009 Employee Stock Purchase Plan, as adopted June 10, 2009, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (FileNo. 000-50884) for the fiscal quarter ended June 30, 2009.10.4a# 2002 Non-Employee Directors’ Stock Plan, as amended and restated May 29, 2008, incorporated by reference to Exhibit 10.4 of theRegistrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2008.10.4b# Form of Non-Qualified Stock Option Agreement under the 2002 Non-Employee Directors’ Stock Plan, incorporated by reference to Exhibit10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2005.10.4c# Form of Restricted Share Unit Agreement, Director Award, January 3, 2012, under 2002 Stock Incentive Plan incorporated by reference toExhibit 10.4c of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2011.10.5a# Employment Agreement dated April 17, 2002, between Michael P. Kaminski and the Registrant, incorporated by reference to the RegistrationStatement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7, 2004, as amended thereafter, at Exhibit 10.8.10.5b# First Amendment to Employment Agreement dated as of May 29, 2008, by and between the Registrant and Michael P. Kaminski, incorporatedby reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed June 3, 2008.10.5c# Corrected Second Amendment to Employment Agreement dated August 6, 2009, by and between Michael P. Kaminski and the Registrant,incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2009.10.5d# Amendment to Executive Employment Agreement dated October 1, 2011 by and between the Company and Michael P. Kaminski Kaminskiincorporated by reference to Exhibit 10.5d of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2011.10.6# Form of Amended and Restated Executive Employment Agreement, 2013, between certain executives and executive officers and Registrant (filedherewith).10.7a# Form of Executive Employment Agreement between certain executive officers and the Registrant incorporated by reference to Exhibit 10.7a ofthe Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2011.10.7b# Form of Amendment to Executive Employment Agreement between certain executive officers and the Company incorporated by reference toExhibit 10.7b of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2011.10.8# Summary of management bonus plan (filed herewith).10.9# Summary of annual cash compensation of named executive officers (filed herewith).10.10# Summary of Non-Employee Directors’ Compensation, incorporated by reference to Exhibit 10.3 of Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended September 30, 2012.10.11# Stereotaxis Advisory Board and Consulting Agreement, dated February 25, 2011, between the Company and Eric N. Prystowsky, MDincorporated by reference to Exhibit 10.2 the Registrant’s Form 10-Q (File No. 000-50884) filed for the fiscal quarter ended March 31, 2011. 126Table of ContentsNumber Description10.12a† Collaboration Agreement dated June 8, 2001, between the Registrant and Siemens AG, Medical Solutions, incorporated by reference to theRegistration Statement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7, 2004, as amended thereafter, atExhibit 10.9.10.12b† Extended Collaboration Agreement dated May 27, 2003, between the Registrant and Siemens AG, Medical Solutions, incorporated byreference to the Registration Statement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7, 2004, as amendedthereafter, at Exhibit 10.10.10.12c† Amendment to Collaboration Agreement dated May 5, 2006, between the Company and Siemens Aktiengesellschaft, Medical Solutions,incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2006.10.13a† Development and Supply Agreement dated May 7, 2002, between the Registrant and Biosense Webster, Inc., incorporated by reference to theRegistration Statement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7, 2004, as amended thereafter, atExhibit 10.11.10.13b† Amendment to Development and Supply Agreement dated November 3, 2003, between the Registrant and Biosense Webster, Inc.,incorporated by reference to the Registration Statement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7,2004, as amended thereafter, at Exhibit 10.12.10.13c† Alliance Expansion Agreement, dated as of May 4, 2007, between Biosense Webster, Inc. and the Registrant, incorporated by reference toExhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended June 30, 2007.10.13d† Second Amendment to Development Alliance and Supply Agreement, dated as of July 18, 2008, between the Registrant and BiosenseWebster, Inc., incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter endedSeptember 30, 2008.10.13e Third Amendment to Development Alliance and Supply Agreement with Biosense Webster, Inc. effective as of December 21, 2009,incorporated by reference to Exhibit 10.22 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2009.10.13f Fourth Amendment to Development Alliance and Supply Agreement with Biosense Webster, Inc., effective May 1, 2010, incorporated byreference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter ended March 31, 2010.10.13g Fifth Amendment to Development Alliance and Supply Agreement with Biosense Webster, Inc., dated as of July 30, 2010, incorporated byreference to Exhibit 10.1 of the Registrant’s Form 8-K/A (File No. 000-50884) filed on August 3, 2010.10.13h† Sixth Amendment and Catheter and Mapping System Extension to Development Alliance and Supply Agreement with Biosense Webster,Inc., dated January 3, 2011, effective as of December 17, 2010, incorporated by reference to Exhibit 10.13h of the Registrant’s Form 10-K(File No. 000-50884) filed for the fiscal year ended December 31, 2010).10.13i Seventh Amendment to the Development Alliance and Supply Agreement with Biosense Webster, Inc., effective December 5, 2011,incorporated by reference to Exhibit 10.19f of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2011.10.14 Form of Indemnification Agreement between the Registrant and its directors and executive officers, incorporated by reference to theRegistration Statement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7, 2004, as amended thereafter, atExhibit 10.14. 127Table of ContentsNumber Description10.15† Letter Agreement, effective October 6, 2003, between the Registrant and Philips Medizin Systeme G.m.b.H., incorporated by reference to theRegistration Statement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7, 2004, as amended thereafter, atExhibit 10.16.10.16† Japanese Market Development Agreement dated May 18, 2004, between the Registrant, Siemens Aktiengesellschaft and Siemens AsahiMedical Technologies Ltd., incorporated by reference to the Registration Statement on Form S-1 (File No. 333-115253) originally filed withthe Commission on May 7, 2004, as amended thereafter, at Exhibit 10.32.10.17a† Office Lease dated November 15, 2004, between the Registrant and Cortex West Development I, LLC, incorporated by reference to Exhibit10.39 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2004.10.17b Amendment to Office Lease dated November 30, 2007, between the Registrant and Cortex West Development I, LLC, incorporated byreference to Exhibit 10.22 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2007.10.18a Securities Purchase Agreement, dated May 7, 2012, between the Company and each purchaser identified on the signature page thereto,incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on May 8, 2012.10.18b Form of Convertible Debt Registration Rights Agreement incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form8-K (File No. 000-50884) filed on May 8, 2012.10.18c Form of Subordination Agreement incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on May 8, 2012.10.19a Second Amended and Restated Loan and Security Agreement, effective November 30, 2011, by and among the Company, StereotaxisInternational, Inc. and Silicon Valley Bank incorporated by reference to Exhibit 10.19f of the Registrant’s Form 10-K (File No. 000-50884)for the fiscal year ended December 31, 2011.10.19b Waiver Agreement between the Company, Stereotaxis International, Inc. and Silicon Valley Bank dated February 29, 2012, incorporated byreference to Exhibit 10.1 of the Registrant’s Form 8-K (File No. 000-50884) filed on March 5, 2012.10.19c First Loan Modification Agreement (Domestic), between the Company, Stereotaxis International, Inc. and Silicon Valley Bank, datedMarch 30, 2012, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (File No. 000-50884) filed on April 2, 2012.10.19d Second Amendment to the Amended and Restated Loan and Security Agreement (Domestic) dated May 1, 2012, between the Company,Stereotaxis International, Inc. and Silicon Valley Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form8-K (File No. 000-50884) filed on May 2, 2012.10.19e Third Amendment to Amended and Restated Loan and Security Agreement (Domestic), dated May 7, 2012, between the Company,Stereotaxis International, Inc. and Silicon Valley Bank, incorporated by reference to Exhibit 10.75 of the Registrant’s Registration Statementon Form S-1 (File No. 000-50884) filed May 23, 2012.10.19f Fourth Loan Modification Agreement (Domestic) , dated December 28, 2012, between the Company, Stereotaxis International, Inc. andSilicon Valley Bank (filed herewith).10.20a Amended and Restated Export-Import Bank Loan and Security Agreement effective November 30, 2011, among the Company, StereotaxisInternational, Inc. and Silicon Valley Bank incorporated by reference to Exhibit 10.120e of the Registrant’s Form 10-K (File No. 000-50884)for the fiscal year ended December 31, 2011. 128Table of ContentsNumber Description10.20b Export-Import Bank First Loan Modification Agreement, between the Company, Stereotaxis International, Inc. and Silicon Valley Bank, datedMarch 30, 2012, incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (File No. 000-50884) filed on April 2, 2012.10.20c Export-Import Bank Second Loan Modification and Waiver Agreement, dated May 1, 2012, between the Company, Stereotaxis International,Inc. and Silicon Valley Bank, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No. 000-50884)filed on May 2, 2012.10.20d Export-Import Bank Third Loan Modification and Waiver Agreement, dated May 7, 2012, between the Company, Stereotaxis International,Inc. and Silicon Valley Bank, incorporated by reference to Exhibit 10.76 of the Registrant’s Registration Statement on Form S-1 (File No. 000-50884) filed May 23, 2012.10.21a Note and Warrant Purchase Agreement, effective February 7, 2008, between the Registrant and the investors named therein, incorporated byreference to Exhibit 10.31 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2007.10.21b First Amendment to Note and Warrant Purchase Agreement, effective December 29, 2008, between the Registrant and the investors namedtherein, incorporated by reference to Exhibit 10.32 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31,2008.10.21c Second Amendment to Note and Warrant Purchase Agreement, effective October 9, 2009, between the Registrant and the investors namedtherein, incorporated by reference to Exhibit 10.31c of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31,2009.10.21d Third Amendment to Note and Warrant Purchase Agreement, effective November 10, 2010, between the Registrant and the investors namedtherein incorporated by reference to Exhibit 10.21d of the Registrant’s Form 10-K (File No. 000-50884) filed for the fiscal year endedDecember 31, 2010.10.21e Fourth Amendment to the Note and Warrant Purchase Agreement between the Registrant and the investors named therein, dated March 30,2012, incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K (File No. 000-50884) filed on April 2, 2012.10.21f Fifth Amendment to Note and Warrant Purchase Agreement, dated May 1, 2012, between the Registrant and the investors named therein,incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on May 2, 2012.10.21g Sixth Amendment to Note and Warrant Purchase Agreement, dated May 7, 2012, between the Registrant and the investors named therein,incorporated by reference to Exhibit 10.77 of the Registrant’s Registration Statement on Form S-1 (File No. 000-50884) filed May 23, 2012.10.22a Loan Agreement dated as of November 30, 2011, by and among the Company, Stereotaxis International, Inc. and Healthcare Royalty PartnersII, L.P. f/k/a Cowen Healthcare Royalty Partners II LLC incorporated by reference to Exhibit 10.22a of the Registrant’s Form 10-K (FileNo. 000-50884) for the fiscal year ended December 31, 2011.10.22b Intercreditor Agreement dated as of December 5, 2011, by and among the Company, Stereotaxis International, Inc., Healthcare RoyaltyPartners II, L.P. f/k/a Cowen Healthcare Royalty Partners II LLC and Silicon Valley Bank incorporated by reference to Exhibit 10.22a of theRegistrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2011.10.23a Stock and Warrant Purchase Agreement, effective May 7, 2012, between the Company, and certain purchasers named therein, incorporatedby reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on May 8, 2012.10.23b Form of PIPE Registration Rights Agreement incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No.000-50884) filed on May 8, 2012. 129Table of ContentsNumber Description 10.23c Form of Voting Agreement incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K (File No. 000-50884)filed on May 8, 2012. 21.1 List of Subsidiaries of the Registrant, incorporated by reference to Exhibit 21.1 of the Registrant’s Form 10-K (File No. 000-50884) for thefiscal year ended December 31, 2009. 23.1 Consent of Ernst & Young LLP 31.1 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer). 31.2 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer). 32.1 Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer). 32.2 Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer)101.INS XBRL Instance Document.101.SCH XBRL Taxonomy Extension Schema Document.101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.101.DEF XBRL Taxonomy Extension Definition Linkbase Document.101.LAB XBRL Taxonomy Extension Label Linkbase Document.101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. #Indicates management contract or compensatory plan†Confidential treatment granted as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission.††Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission. 130Exhibit 10.1cRESTRICTED SHARE UNITTERMS OF AWARDUNDERSTEREOTAXIS, INC. 2012 STOCK INCENTIVE PLANDIRECTOR AWARDOn August 22, 2012 (“Grant Date”), the Company granted to Director an Award of restricted share units (“RSUs”) under the Stereotaxis, Inc.2012 Stock Incentive Plan, as amended the (“Plan”). The date of grant and the number of RSUs covered by this Award are set forth in the Award letter youreceived from the Company (“Statement”). The Statement and these Terms of Award collectively constitute the terms and conditions of the Award for the RSUsand describe the conditions applicable to such Awards.1. Award Subject to Plan. This Award is granted under and is expressly subject to, all the terms and provisions of the Plan, which terms areincorporated herein by reference.2. Definitions. All capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan. The following terms shall have thefollowing meanings, except where otherwise noted:(a) “Change of Control” means the occurrence of one or more of the following: (i)The purchase or other acquisition (other than from the Company) by any person, entity or group of persons, within the meaning ofSection 13(d) or 14(d) of the Act (excluding, for this purpose, the Company or its subsidiaries or any employee benefit plan of theCompany or its subsidiaries), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 35% ormore of either the then-outstanding shares of common stock of the Company or the combined power of the Company’s then-outstanding voting securities entitled to vote generally in the election of directors; (ii)Individuals who, as of the date hereof, constitute the Board (as of the date hereof, the “Incumbent Board”) cease for any reason toconstitute at least a majority of the Board, provided that any person who becomes a director subsequent to the date hereof whoseelection, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directorsthen comprising the Incumbent Board (other than an individual whose initial assumption of office is in connection with an actual orthreaten election contest relating to the election of directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14Apromulgated under the Act) shall be, for purposes of this section, considered as though such person were a member of theIncumbent Board; or (iii)The consummation of a reorganization, merger or consolidation, in each case with respect to which persons who were thestockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, ownmore than 50% of, respectively, the common stock and the combined voting power entitled to vote generally in the election ofdirectors of the reorganized, merged or consolidated corporation’s then-outstanding voting securities, or of a liquidation ordissolution of the Company or of the sale of all or substantially all of the assets of the Company.(b) “Company” means Stereotaxis, Inc., a Delaware corporation.3. Grant of RSUs. Each RSU represents the right to receive one share of Common Stock at the time provided under these Terms of Award,provided that such RSU is vested at such time. Until such time (if any) as shares of stock are delivered to the Director, the Director will not have any of therights of a common shareholder of the Company with respect such shares. Director shall have no voting or dividend equivalent rights with respect to theRSUs.4. Vesting. One hundred percent (100%) of the RSUs will become vested on the earlier of August 22, 2013, or the date of the Company’s 2013annual shareholders’ meeting (the “Vesting Date”), if the Director is still a member of the Board of Directors on such date and has been continuously a memberof the Board of Directors since the Grant Date. If the Director terminates service on the Board of Directors for any reason prior to the Vesting Date, includingwithout limitation upon death or disability, the Director shall forfeit the RSUs; provided that, if the Director’s serve on the Board of Directors terminates as aresult of a Change of Control, the RSUs shall vest immediately.5. RSUs Non-Transferable. RSUs awarded hereunder shall not be transferable by the Director. Except as may be required by the federal incometax withholding provisions of the Code or by the tax laws of any State, the interests of the Director under this Agreement are not subject to the claims of his orher creditors and may not be voluntarily or involuntarily sold, transferred, alienated, assigned, pledged, anticipated, or encumbered. Any attempt by theDirector to sell, transfer, alienate, assign, pledge, anticipate, encumber, charge or otherwise dispose of any right to benefits payable hereunder shall be void.6. Delivery of Shares. The Company shall deliver to the Director a number of shares equal to the number of RSUs (if any) that vest pursuant tothis Award. Such delivery shall take place as soon as practicable.7. Committee Administration. These Awards have been granted pursuant to a determination made by the Committee, and such Committee orany successor or substitute committee authorized by the Board of Directors or the Board of Directors itself, subject to the express terms of these Awards, shallhave plenary authority to interpret any provision of this grant and to make any determinations necessary or advisable for the administration of this grant andthe exercise of the rights herein granted, and may waive or amend any provisions hereof in any manner not adversely affecting the rights granted to Director bythe express terms hereof.8. Effect of Award Certificate: Severability. This Award shall be binding upon and shall inure to the benefit of any successor of theCompany. The invalidity or enforceability of any provision of this Award shall not affect the validity of enforceability of any other provision of this Award. 2Exhibit 10.1dRESTRICTED SHARE UNITTERMS OF AWARDUNDERSTEREOTAXIS, INC. 2012 STOCK INCENTIVE PLANOn March 5, 2013 (“Grant Date”), the Company granted to Awardee an Award of restricted share units (“RSUs”) under the Stereotaxis, Inc. 2012Stock Incentive Plan, as amended the (“Plan”). The date of grant and the number of RSUs covered by this Award are set forth in the Award letter Awardeereceived from the Company (“Statement”). The Statement and these Terms of Award collectively constitute the terms and conditions of the Award for the RSUsand describe the conditions applicable to such Awards.1. Award Subject to Plan. This Award is granted under and is expressly subject to, all the terms and provisions of the Plan, which terms areincorporated herein by reference2. Definitions. All capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan. The following terms shall have thefollowing meanings, except where otherwise noted:(a) “Cause” means Awardee’s fraud or willful misconduct as determined by the Committee.(b) “Change of Control” means the occurrence of one or more of the following:(i) The purchase or other acquisition (other than from the Company) by any person, entity or group of persons, within the meaning ofSection 13(d) or 14(d) of the Act (excluding, for this purpose, the Company or its subsidiaries or any employee benefit plan of the Company orits subsidiaries), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 35% or more of either the then-outstanding shares of common stock of the Company or the combined power of the Company’s then-outstanding voting securities entitled tovote generally in the election of directors;(ii) Individuals who, as of the date hereof, constitute the Board (as of the date hereof, the “Incumbent Board”) cease for any reason toconstitute at least a majority of the Board, provided that any person who becomes a director subsequent to the date hereof whose election, ornomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising theIncumbent Board (other than an individual whose initial assumption of office is in connection with an actual or threaten election contestrelating to the election of directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shallbe, for purposes of this section, considered as though such person were a member of the Incumbent Board; or(iii) The consummation of a reorganization, merger or consolidation, in each case with respect to which persons who were the stockholdersof the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of,respectively, the common stock and the combined voting power entitled to vote generally in the election of directors of the reorganized, mergedor consolidated corporation’s then-outstanding voting securities, or of a liquidation or dissolution of the Company or of the sale of all orsubstantially all of the assets of the Company.(c) “Company” means Stereotaxis, Inc., a Delaware corporation.(d) “Disability” or “Disabled” means Awardee is unable to engage in any substantial gainful activity by reason of any medicallydeterminable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for acontinuous period of not less than twelve (12) months. Awardee shall be considered Disabled only if Awardee furnishes such proof of Disabilityas the Committee may require.(e) “Good Reason” means:(i) Requiring Awardee to be based at any office or location more than 50 miles from Awardee’s office or location as of the date of the Changeof Control;(ii) The assignment to Awardee of any duties inconsistent in any respect with Awardee’s position (including status, offices, titles andreporting relationships), authority, duties or responsibilities as of the date of the Change of Control or any action by the Company or any of itssubsidiaries which results in a diminution in such position, authority, duties or responsibilities; or(iii) A material reduction in Awardee’s base compensation below the level in effect as of the date of the Change of Control.Notwithstanding the foregoing, Good Reason shall not be deemed to exist in connection with this Section 2(e) unless: (x) the Awardeenotifies the Company in writing of the condition allegedly giving rise to such Good Reason within 90 days of the initial existence of suchcondition, (y) the Company does not cure such condition within 30 days of such notice, and (z) the Awardee terminates employment with theCompany as a result of such Good Reason within 120 days of the initial existence of such condition.3. Grant of RSUs. Each RSU represents the right to receive one share of Common Stock, in certain circumstances as provided in the Awardee’sStatement and this Terms of Award, following the date such RSU vests. Until such time (if any) as shares of stock are delivered to the Awardee, the Awardeewill not have any of the rights of a common shareholder of the Company with respect such shares. Awardee shall have no voting or dividend equivalent rightswith respect to the RSUs. 24. Vesting. The RSUs shall vest over a four year period as follows: (i) 40% vest on the first anniversary of the Grant Date; and (ii) thereafter, theremaining 60% shall vest in three equal annual installments of 20%, each occurring on the next three anniversaries of the Grant Date, subject to Sections 5 and6 below. In the event of a Change of Control of the Company or within one year following such Change of Control, if the Awardee’s employment isinvoluntarily terminated or Awardee voluntarily terminates employment with the Company for Good Reason, all RSUs that are unvested at the time of suchinvoluntary or Good Reason termination of employment shall vest immediately upon such termination of employment.5. Withholding. The Company shall withhold sufficient shares to satisfy the Company’s obligation to withhold for tax requirements at the timeof vesting of RSUs hereunder, as appropriate, if Awardee is at the time of vesting subject to the Company’s policies regarding restrictions on trading withinspecified trading “windows”, and the Company may, in its sole discretion, so withhold if Awardee is not subject to such restrictions. In the event that theCompany withholds shares as contemplated in this Section, the Awardee shall receive a net number of shares equal to the shares to which the Awardee isotherwise entitled hereunder, less the number of shares withheld by the Company hereunder. In the event that the Company determines not to withhold sharesfor an Awardee who is not subject to the trading restrictions prior to the payment or settlement of the Award, as appropriate, the Awardee must pay, or makearrangements acceptable to the Company for the payment of, any and all tax withholding that in the opinion of the Company is required by law. Sucharrangements for payment of withholding may include, for example, directing an appropriate broker to sell such number of shares as necessary to result in acash amount equal to the withholding requirements.6. Termination of Service.(a) In the event Awardee voluntarily terminates employment with the Company including as a result of Good Reason (other than in the caseof Good Reason termination in connection with a Change of Control as provided in Section 4 hereof), Awardee shall immediately forfeit any RSUsto the extent not vested upon the date of such voluntary termination of employment.(b) In the event Awardee’s employment with the Company is involuntarily terminated by the Company for Cause, Awardee shallimmediately forfeit any RSUs to the extent not vested upon the date of such involuntary termination of employment for Cause.(c) In the event Awardee’s employment with the Company is involuntarily terminated by the Company on or after the first annualanniversary of the Grant Date for reasons other than Cause (other than in the case of a Change of Control as provided in Section 4 hereof) or ifAwardee’s employment with the Company is terminated due to death or Disability on or after the first annual anniversary of the Grant Date, anyunvested RSUs shall vest at the time of such termination of employment on a prorata basis determined by multiplying 2.0833% by the number offull and partial months since the Grant Date or, if later, the most recent annual vesting date, as applicable, during which Awardee furnishedservices to the Company. Any RSUs that are outstanding at the time of such termination that do not vest pursuant to this Section 6(c) shall beforfeited. 3(d) Nothing herein shall confer on Awardee the right to continue as an employee of the Company or any subsidiary or interfere in any waywith the right of the Company or any subsidiary thereof to terminate Awardee’s employment at any time.7. RSUs Non-Transferable. RSUs awarded hereunder shall not be transferable by the Awardee, except upon death by will or the laws of descentand distribution. Except as may be required by the federal income tax withholding provisions of the Code or by the tax laws of any State, the interests of theAwardee under this Agreement are not subject to the claims of their creditors and may not be voluntarily or involuntarily sold, transferred, alienated, assigned,pledged, anticipated, or encumbered. Any attempt by the Awardee to sell, transfer, alienate, assign, pledge, anticipate, encumber, charge or otherwise disposeof any right to benefits payable hereunder shall be void.8. Delivery of Shares. The Company shall deliver to the Awardee a number of shares equal to the number of RSUs (if any) that vest pursuant tothis Award, subject to withholding as provided in Section 5 above. Such delivery shall take place as soon as practicable following vesting of such RSUs, butin no event later than 30 days following such vesting.9. Committee Administration. These Awards have been granted pursuant to a determination made by the Committee, and such Committee orany successor or substitute committee authorized by the Board of Directors or the Board of Directors itself, subject to the express terms of these Awards, shallhave plenary authority to interpret any provision of this grant and to make any determinations necessary or advisable for the administration of this grant andthe exercise of the rights herein granted, and may waive or amend any provisions hereof in any manner not adversely affecting the rights granted to Awardee bythe express terms hereof.10. Effect of Award Certificate: Severability. This Award shall be binding upon and shall inure to the benefit of any successor of theCompany. The invalidity or enforceability of any provision of this Award shall not affect the validity of enforceability of any other provision of this Award.11. Code Section 409A. It is intended that the Award be exempt from the application of Code Section 409A as a “short term deferral”.Notwithstanding any provision in this Terms of Award to the contrary, any references to termination of employment or date of termination herein shall meanand refer to “separation from service” and the date of such “separation from service” as that term is defined in Code Section 409A. 4Exhibit 10.2hRESTRICTED PERFORMANCE SHARE TERMS AND CONDITIONSUNDERSTEREOTAXIS, INC. 2002 STOCK INCENTIVE PLANTHIS AGREEMENT, made effective as of grant date above, by and between Stereotaxis, Inc., a Delaware corporation (the “Company”), and the“Awardee”.WITNESSETH THAT:WHEREAS, the Board of Directors of the Company (the “Board of Directors”) has adopted the Stereotaxis, Inc. 2002 Stock Incentive Plan (asamended and/or restated from time to time, the “Plan”) pursuant to which options, performance share awards, restricted stock and stock appreciation rightswith respect to shares of the common stock of the Company may be granted to employees of the Company and its subsidiaries and certain other individuals;andWHEREAS, the Company desires to grant to Awardee a restricted performance share award as noted above for shares of its stock under theterms hereinafter set forth (“Award”);NOW, THEREFORE, in consideration of the premises, and of the mutual agreements hereinafter set forth, it is covenanted and agreed asfollows:1. Award Subject to Plan. This award is granted under and is expressly subject to, all the terms and provisions of the Plan, which terms areincorporated herein by reference. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisionsthereof. Terms not defined herein shall have the meaning ascribed thereto in the Plan. The Committee referred to in Paragraph 4 of the Plan (“Committee”) hasbeen appointed by the Board of Directors, and designated by it, as the Committee to make grants of Performance Shares.2. Grant and Terms of Award. Pursuant to action of the Committee, which action was taken on the date of the grant, the Company awards toAwardee shares of the Common Stock of the Company, as noted above, of the par value of $.001 per share (“Shares” or “Performance Shares”); provided,however, that the Shares hereby awarded are subject to the risks of forfeiture described below and are nontransferable by the Awardee for a period commencingon the Date of Award and ending upon the three-year anniversary of such date (the “Restricted Period”). During the Restricted Period, the nontransferableShares shall bear a legend indicating their nontransferability. Further, during the Restricted Period, all Shares will be subject to forfeiture and nontransferableby the Awardee. If the Awardee terminates service with the Company for any reason, including without limitation, upon death or Disability, duringthe Restricted Period, Awardee shall forfeit the Shares. Notwithstanding the foregoing, if there is a Change of Control (as hereinafter defined) and Awardee isinvoluntarily terminated for reasons other than Cause or terminates for Good Reason on or within one (1) year after the date of the Change of Control, the totalnumber of Shares to which this grant relates shall vest immediately and become nonforfeitable. Notwithstanding anything herein to the contrary (but subject tothe preceding sentence), in the event that (i) any of the Performance Criteria are not met or (ii) Awardee terminates service with the Company for any reasonprior to the end of the Restricted Period, all Shares will be forfeited by Awardee and returned to the Company. Subject to the terms hereof and of the Plan, to theextent a Share is vested, it shall be transferable.3. Definitions. For purposes of the Award, the following terms shall have the following meanings, except where otherwise noted:(a) The Performance Criteria and the applicable vesting percentages and dates related to achievement of each Performance Criteria are setforth in Exhibit A to this Agreement.(b) “Cause” shall mean Awardee’s fraud or willful misconduct as determined by the Committee.(c) “Change of Control” shall mean:(i) The purchase or other acquisition (other than from the Company) by any person, entity or group of persons, within the meaningof Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (excluding, for this purpose, the Company orits subsidiaries or any employee benefit plan of the Company or its subsidiaries), of beneficial ownership (within the meaning of Rule 13d-3promulgated under the Exchange Act) of 20% or more of either the then-outstanding shares of common stock of the Company or the combinedvoting power of the Company’s then-outstanding voting securities entitled to vote generally in the election of directors; or(ii) Individuals who, as of the date hereof, constitute the Board of Directors of the Company (the “Board” and, as of the date hereof,the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person who becomes a directorsubsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least amajority of the directors then comprising the Incumbent Board (other than an individual whose initial assumption of office is in connection withan actual or threatened election contest relating to the election of directors of the Company, as such terms are used in Rule 14a-11 ofRegulation 14A promulgated under the Exchange Act) shall be, for purposes of this section, considered as though such person were a member ofthe Incumbent Board; or 2(iii) The consummation of a reorganization, merger or consolidation, in each case with respect to which persons who were thestockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than50% of, respectively, the common stock and the combined voting power entitled to vote generally in the election of directors of the reorganized,merged or consolidated corporation’s then-outstanding voting securities, or of a liquidation or dissolution of the Company or of the sale of all orsubstantially all of the assets of the Company.(d) “Company” shall mean Stereotaxis, Inc., a Delaware corporation.(e) “Company Stock” shall mean common stock of the Company.(f) “Disability” or “Disabled” shall mean Awardee is permanently and totally disabled within the meaning of Section 422(c)(6) of theInternal Revenue Code of 1986, as amended, which, as of the date hereof, shall mean that Awardee is unable to engage in any substantial gainfulactivity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can beexpected to last for a continuous period of not less than 12 months. Awardee shall be considered Disabled only if Awardee furnishes such proof ofDisability as the Committee may require.(g) “Good Reason” shall mean:(i) Requiring Awardee to be based at any office or location more than 50 miles from Awardee’s office or location as of the date of theChange of Control;(ii) The assignment to Awardee of any duties inconsistent in any respect with Awardee’s position (including status, offices, titles andreporting requirements), authority, duties or responsibilities as of the date of the Change of Control or any action by the Company or any of itssubsidiaries which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an action taken by theCompany or one of its subsidiaries, to which Optionee objects in writing by notice to the Company within 10 business days after Optioneereceives actual notice of such action, which is remedied by the Company or one of its subsidiaries promptly but in any event no later than 5business days after Optionee provided such notice; or(iii) The reduction in Awardee’s total compensation and benefits below the level in effect as of the date of the Change of Control. 34. Medium of Payment. The Award shall be made in shares of Company Stock. The Company shall withhold sufficient shares to satisfy theCompany’s obligation to withhold for tax requirements at the time of vesting of shares hereunder, as appropriate, if Awardee is at the time of vesting subject tothe Company’s policies regarding restrictions on trading within specified trading “windows”, and the Company may, in its sole discretion, so withhold ifAwardee is not subject to such restrictions upon Awardee’s request. In the event that the Company withholds shares as contemplated in this Section, theAwardee shall receive a net number of shares equal to the shares to which the Awardee is otherwise entitled hereunder, less the number of shares withheld bythe Company hereunder. In the event that the Company determines not to withhold shares for an Awardee who is not subject to the trading restrictions prior tothe payment or settlement of the Award, as appropriate, the Awardee must pay, or make arrangements acceptable to the Company for the payment of, any andall tax withholding that in the opinion of the Company is required by law. Such arrangements for payment of withholding may include, for example, directingan appropriate broker to sell such number of shares as necessary to result in a cash amount equal to the withholding requirements.5. Termination of Service. Awardee shall forfeit the Shares to the extent not vested prior to Awardee’s termination of service. The Shares herebygranted shall not be affected by any change of service so long as Awardee continues to be a service provider to the Company or a subsidiary thereof. Nothingherein shall confer on Awardee the right to continue in the service of the Company or any subsidiary or interfere in any way with the right of the Company orany subsidiary thereof to terminate Awardee’s service at any time.6. Committee Administration. These Awards have been granted pursuant to a determination made by the Committee, and such Committee orany successor or substitute committee authorized by the Board of Directors or the Board of Directors itself, subject to the express terms of these Awards, shallhave plenary authority to interpret any provision of this grant and to make any determinations necessary or advisable for the administration of this grant andthe exercise of the rights herein granted, and may waive or amend any provisions hereof in any manner not adversely affecting the rights granted to Awardee bythe express terms hereof.7. Choice of Law. This Agreement shall be governed by the laws of the State of Delaware, excluding any conflicts or choice of law rule orprinciple that might otherwise refer construction or interpretation of the Agreement to the substantive law of another jurisdiction. Awardee is deemed to submitto the exclusive jurisdiction and venue of the federal or sate courts of Missouri, County of St. Louis, to resolve any and all issues that may arise out of orrelate to this Agreement. 4EXHIBIT APERFORMANCE SHARE AWARDPERFORMANCE CRITERIAThis Exhibit A, Performance Criteria, sets forth the performance measures required to achieve vesting of the Performance Shares awarded under thePerformance Share Agreement on the date of grant, in the percentages described below, between the Company and “Awardee”.With respect to the Performance Shares granted to Awardee, subject to all provisions of the Performance Share Agreement, including this Exhibit A, thefollowing Performance Criteria must be met by the Company in order for the respective portion of Shares to vest and become transferable. Performance Criteria Percentage of AwardSubject toPerformanceCriteria 1. Attaining positive adjusted EBITDA (before stock based compensation) during atleast one quarter during the period commencing January 1, 2012 and endingDecember 31, 2012. 50% 2. Attaining positive Net Income (before taxes, depreciation, amortization and stockbased compensation) during at least two out of three consecutive quarters duringthe period commencing January 1, 2012 and ending December 31, 2013. 50% Determination of VestingFor purposes of determining whether any financial criterion for the Company has been achieved, reference will be made to the financial statements of theCompany for the applicable period. The financial statements will be those prepared by management and forming the basis for the Company’s release of itsearnings to the public markets as of the close of business on the date of such release. If the Performance Criteria for an identified period are not achieved, theShares related to the Performance Criteria shall be forfeited and shall not vest or become transferable. 5Frequently Asked Questions RegardingPerformance Shares – February 2012 GrantWhat are Performance Shares?Performance Shares are normal, tradable, shares of common stock of the Company that are restricted as to transferability until the specified performance goalsrelated to those shares are met.Do I pay for these shares?No. There is no payment required to receive these shares.How do the performance criteria work?The Compensation Committee of the Board of Directors has set two performance goals for the Company for the grants made in February 2012. As theseperformance goals are achieved, the portion of the employee award designated to be governed by that criteria will vest. There are no time limitations on vesting.However, if any of the performance criteria are not met by the end of calendar year 2013, the portion of shares subject to that criteria will be forfeited. Youmust be an employee of Stereotaxis on the vesting date to be eligible to receive the shares.Are the performance criteria the same for all employees receiving Performance Based Restricted Shares?Yes.What are the tax consequences of vesting?In the year in which you vest in these shares, you will be deemed to have earned taxable income equivalent to the fair value of the vesting shares multiplied bythe number of shares vesting on the vesting date. You may either remit cash to the Company to satisfy the required withholding taxes or have a broker sell inthe market the number of shares required to satisfy this requirement.Do I need to do anything to receive the shares?No. Upon vesting, you will receive either the whole number of shares vested, or, if you choose to sell shares to settle the tax withholding, the net number ofshares after the sale.Will I receive these shares as soon as they are awarded?No. Although these shares will be registered in your name, they cannot be sold, transferred, or otherwise disposed of until the vesting conditions have beensatisfied. Therefore, the Company will keep control of the actual share certificates or have the transfer agent, Bank of New York maintain a ledger record ofyour shares, until the vesting requirements are met and the withholding taxes have been satisfied upon vesting. 6What if I am subject to insider trading rules?If you are subject to insider trading restrictions (subject to not trading within the blackout periods established by the company), withholding requirementswhich occur on the vesting date will be satisfied by liquidating a sufficient number of vesting shares to satisfy the withholding requirement. We will haveprocedures in place with our plan administrator to have this occur automatically, without any action on your part.Can I get capital gain treatment for these shares?On the date shares vest, you will be considered to have earned compensation equal to the fair value of the number of shares vesting on that vesting date. Yourholding period for capital gain purposes begins on the date the shares are vested and the amount of compensation income reported becomes your tax basis inthese shares. Any gain/loss after that date is capital gain/loss with a basis equal to the value of the stock on the date of vesting.What will be included on my W-2 at the end of the year?Your W-2 will reflect the compensation realized at the time the restricted shares are vested. Such amount can be recomputed by multiplying the total number ofshares that will vest by the closing price on the date of vesting. Your W-2 will also include the applicable withholding taxes on the transaction.Example: John was granted 1000 restricted shares all vested in 2010. On the date of vesting, the price of the stock was $1.00 per share. John will have $1000(1000 shares multiplied by $1 per share) of compensation income included on his W-2. Assume that John owed withholding taxes of 25% or $250. His W-2will reflect the amount of taxes that he contributed either by providing BNY – Mellon with funds to remit directly to Stereotaxis or by selling shares to coverthe taxes.Will I receive a 1099 at the end of the year and if so, for what?If you choose to sell some or all of your shares at the time of vesting or at any other time of the year through BNY—Mellon, you will receive a Form 1099 toreport the gross proceeds of the sale. The listed payer will be Stereotaxis, Inc. (Troy, Michigan). Box 2 will contain the gross proceeds which can berecomputed by multiplying the number of shares sold by the price realized at the time of sale. In Box 7 you will find the number of shares actually soldHow do I report this on my tax return?You will report ordinary compensation income via your W-2 as indicated above. If you sell any of the shares, the transaction must be reported as a capitaltransaction (Schedule D) and may result in either a gain or loss. 7Example 1 – Shares vest, employee sells shares to cover taxesJohn was granted 1000 restricted shares of which 1000 vested in 2012. On the date of vesting, the price of the stock was $1.00 per share. John will have$1,000 (1000 shares multiplied by $1 per share) of compensation income included on his W-2. Assume that John owed 25% withholding taxes or $250($1,000 multiplied by 25%) and that John elected to pay for his withholding by selling enough shares to cover his taxes. Assume further that share price isstill $1.00 per share at the time the shares were sold. BNY—Mellon will sell the shares on John’s behalf and remit $250 to Stereotaxis for withholding whichwill be reflected on John’s W-2. Because John sold shares, he will also receive a 1099 for $250 (250 shares multiplied by $1 per share). When preparing hisfederal taxes, John will record the $250 in gross proceeds from the sale of the stock (as evidenced by the 1099) on Schedule D and record $250 as the cost ofthe stock (computed 250 shares sold multiplied by $1.00 per share that was recorded in his W-2 income). Thus, although John has a capital transaction hehas no associated gain or loss. The basis in his remaining 750 shares of stock is $750 (750 shares multiplied by $1 per share as recorded in W-2 income).Example 2 – Employee elects to sell all 400 of the vested shares and stock price is not the same at the time of vesting and sale.The amount of compensation income to be included in income on the W-2 is calculated as the number of shares that vest multiplied by the closing price on thedate of vesting. The following day, BNY—Mellon sells the shares into the market and will most likely realize a price that is either higher or lower than theclosing price of the day before. Using the example above, if BNY—Mellon sells the shares for $2.00 per share, the employee realizes a total of $2,000 on thesale of 1000 shares. The W-2 impact is the same as in the previous example. John will receive a 1099 for $1,000 and will realize a capital gain in the amountof $1000 ($2,000 proceeds from sale less $1,000 recorded in W-2) which should be recorded on a Schedule D for federal tax purposes.This should not be considered tax advice. Please consult your tax advisor as to the proper tax treatment specific to your transaction. 8EXHIBIT 10.6AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENTThis Amended and Restated Executive Employment Agreement (this “Agreement”) is entered into as of this day of , 2013, by and betweenStereotaxis, Inc, a Delaware corporation (the “Company”), and (“Employee”). This Agreement amends and restates in its entirety .WHEREAS, Employee desires to continue in the employment of the Company, and the Company desires to continue to employ Employee, subject to theterms and conditions herein;WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancingthe best interests of the Company and its stockholders. In this connection, the Company recognizes that, as is the case with many publicly heldcorporations, the possibility of a change of control exists and that such possibility, and the uncertainty and questions that it may raise amongmanagement, could result in the departure or distraction of key management personnel to the detriment of the Company and its stockholders.Accordingly, the Company’s Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued attentionand dedication of members of the Company’s management, including the Employee, to their assigned duties without distraction and disruption in theevent of a threatened or actual Change of Control; andWHEREAS, this Agreement does not constitute an employment contract, nor does it alter the Employee’s status as an at-will employee of the Company.This Agreement merely sets out the severance benefits that the Company will provide if, but only if, the Employee’s separation from service with theCompany is without Cause or in connection with the occurrence of an actual Change of Control under the circumstances described herein. 1)Definitions. a)“Act” means the Securities Exchange Act of 1934, as in effect on the date of this Agreement. b)“Cause” means i)the institution of criminal charges against the Employee, or the admission by Employee of, or any action or omission by Employee thatconstitutes embezzlement, theft or other intentional misappropriation of any property of Company, ii)any willful act involving moral turpitude which brings disrepute or disparagement to the Company or substantially impairs its good willand reputation, or results in a conviction for or plea of guilty or nolo contendre to a felony involving moral turpitude, fraud ormisrepresentation, iii)material neglect of duties (other than due to Disability) which, if curable, is not cured by the Employee, provided however, the Employeeshall receive a reasonable opportunity to cure within at least fifteen (15) days after written notice of such neglect of duties if such materialneglect of duties is curable within such period, iv)material breach of fiduciary obligations to Company after written notice of such breach, or 1 v)substance or alcohol use that violates Company policy or materially affects the performance of Employee’s duties and responsibilities. c)“Change of Control” means the occurrence of one or more of the following: i)The purchase or other acquisition (other than from the Company) by any person, entity or group of persons, within the meaning ofSection 13(d) or 14(d) of the Act (excluding, for this purpose, the Company or its subsidiaries or any employee benefit plan of theCompany or its subsidiaries), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 35% or more ofeither the then-outstanding shares of common stock of the Company or the combined power of the Company’s then-outstanding votingsecurities entitled to vote generally in the election of directors; ii)Individuals who, as of the date hereof, constitute the Board (as of the date hereof, the “Incumbent Board”) cease for any reason toconstitute at least a majority of the Board, provided that any person who becomes a director subsequent to the date hereof whose election,or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprisingthe Incumbent Board (other than an individual whose initial assumption of office is in connection with an actual or threatened electioncontest relating to the election of directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated underthe Act) shall be, for purposes of this section, considered as though such person were a member of the Incumbent Board; or iii)The consummation of a reorganization, merger or consolidation, in each case with respect to which persons who were the stockholders ofthe Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of,respectively, the common stock and the combined voting power entitled to vote generally in the election of directors of the reorganized,merged or consolidated corporation’s then-outstanding voting securities, or of a liquidation or dissolution of the Company or of the sale ofall or substantially all of the assets of the Company.Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred with respect to any benefit that (i) provides “non-qualified deferred compensation” within the meaning of Code Section 409A; and (ii) settles upon a Change of Control, unless such foregoingevent constitutes a “change in ownership” of the Company, a “change in effective control” of the Company, or a “change in the ownership of asubstantial portion of the assets” of the Company in each case, as defined under Code Section 409A. For purposes of this Agreement, where aChange of Control results from a series of related transactions, the Change of Control shall be deemed to have occurred on the date of theconsummation of the first such transaction. d)“Confidential Information” means any information pertaining to the Stereotaxis Business and/or other information of the Company acquired byEmployee during the course of or as a result of employment with the Company, which is not publicly known, such as but not limited to, tradesecrets, know-how, processes, designs, products, documentation, data, research and development plans and activities, standard operatingprocedures and validation records, drawings, tools, techniques, software and computer programs and derivative works, inventions (whetherpatentable or not), improvements, copyrightable material, business and marketing plans, projections, sales data and reports, confidentialevaluations, the confidential use, nonuse or compilation by the Company of technical or business information in the public domain, customersand prospects, customer requirements, costs, profitability, sales and marketing strategies, pricing policies, operational methods, strategic plans,training materials, internal financial information, operating and financial data and projections, distribution or sales methods, prices charged by orto Company, inventory lists, sources of supplies, supply lists, lists of current or past employees and information concerning relationshipsbetween Company and its employees, collaborators, or customers. 2 e)“Disability” means the Employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical ormental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less thantwelve (12) months. f)“Good Reason” means any of the following occurrences without the Employee’s written consent: i)a material diminution in the Employee’s duties, responsibilities, or status with the Company as in effect immediately before the Change ofControl, or a change in the Employee’s titles or offices (to a lesser title or office) as in effect immediately before a Change of Control, or theremoval of the Employee from or any failure to reelect or reappoint the Employee to any of his/her other positions, except in connectionwith the termination of employment by the Company for Cause or by the Employee for other than Good Reason; ii)a material diminution by the Company in the Employee’s base salary or perquisites as in effect on the date hereof , as the same may beincreased from time to time; iii)a material reduction by the Company of the benefits provided to the Employee under any incentive (cash or equity), or compensation plan,or any pension, life insurance, health and accident, or disability plan in which the Employee is participating at the time of a Change ofControl (or plans providing the Employee with substantially similar benefits), or the taking of any action by the Company that wouldadversely affect the Employee’s participation in or materially reduce the Employee’s benefits under any of such plans or deprive theEmployee of any material fringe benefit enjoyed by the Employee at the time of the Change of Control, unless such reduction or action isgenerally applicable to all employees of the Company or relevant subsidiary; or iv)the Company requires the Employee to perform the duties of his/her employment beyond the 50 mile radius from the location of theEmployee’s employment immediately before the Change of Control;provided, however, that (i) any separation from service by the Employee shall not be considered a separation for Good Reason for purposes of thisAgreement if such separation occurs after the Employee has been absent from his/her work for a continuous period of at least six months as aresult of his/her Disability (“Disability Period”) and occurs while the Employee is receiving benefits under the Company’s (or any subsidiary’s)long-term disability plan(s) in effect immediately before the Change of Control; and (ii) if the Employee returns to work following a DisabilityPeriod, clause (i) of this section shall not apply in determining whether Good Reason exists following such return. g)“Restricted Period” means during Employee’s employment plus the later of one year following the date of (i) the final day of the Severance Period,or (ii) separation from service for any reason; however the Restricted Period shall not exceed two years beyond the date of separation from service. h)“Severance Period” means the period during which the Employee receives any salary continuation and/or continuation of benefits due to aseparation from service without Cause or in the connection with a Change of Control. i)“Stereotaxis Business” means: (i) the development, manufacture, and sale of (A) equipment, software, devices, and methods in the field ofremote, computer-controlled or computer-aided navigation and delivery of interventional medical devices, with or without the use of magneticdevices or systems, and (B) workstations, software, and networks used in or with medical procedures, and (ii) research and planning andbusiness development that is planned or implemented by Company during the term of employment, with respect to which Employee receivesConfidential Information during employment. 32)Position; Base Salary; Incentive Compensation. Employee shall serve as or in such other capacity, and shall report to the Chief ExecutiveOfficer of the Company or such other person, in each case as the Company may from time to time direct. Employee shall be paid an annual base salaryof $ subject to increases as provided by the Company from time to time in writing, and all payments shall be subject to applicable withholdingsand deductions. 3)Company Benefits. While employed by the Company, Employee shall be entitled to receive such benefits of employment as the Company may offerfrom time to time. Company-paid time off for vacation, sick leave, and other personal needs will be governed by the Employee Handbook and Companypolicies as modified from time to time by the Company. 4)Employment Services; Employee Handbook and Company Policies. Employee agrees that throughout the term of Employee’s employment, as acondition of Employee’s employment, Employee shall (a) diligently, in good faith and to the best of Employee’s abilities render such services as may bedelegated to the Employee by the Company; and (b) follow and act in accordance with all of Company’s rules, policies and procedures of Company,including, but not limited to this Agreement, the Company rules and policies, and the Employee Handbook, any of which may be revised from time totime at the sole discretion of the Company, with or without prior notice. 5)At-Will Employment. The Company is an “at-will” employer. This means that the Company or the Employee may terminate Employee’s employment atany time, for any reason or for no reason and/or with or without cause. Company makes no promise that Employee’s employment will continue for a setperiod of time, nor is there any promise that it will be terminated only under particular circumstances. No raise or bonus or discussion of possible orpotential future benefits, if any, or changes to Employee’s capacity, reporting, or compensation shall alter Employee’s status as an “at-will” employee orcreate any implied or express contract or promise of continued employment. No manager, supervisor or officer of Company has the authority to changeEmployee’s status as an “at-will” employee. 6)Inventions and Developments. a)Any and all ideas, inventions, discoveries, patents, patent applications, continuation-in-part patent applications, divisional patent applications,technology, copyrights, derivative works, trademarks, service marks, improvements, trade secrets and the like, which are developed, conceived,created, discovered, learned, produced and/or otherwise generated by Employee, whether individually or otherwise, during the term of Employee’semployment whether or not during working hours, that relate to Stereotaxis Business or any work performed by Employee for Company(collectively, “Inventions and Developments”), shall be the sole and exclusive property of Company, and Company shall own any and all right,title and interest to such Inventions and Developments. Employee assigns and agrees to assign to Company any and all right, title and interest inand to any such Inventions and Developments whenever requested to do so by Company, at Company’s expense, and Employee agrees to executeany and all applications, assignments or other instruments which Company deems desirable or necessary to protect such interests, both duringand after the term of Employment. b)By way of clarification, Section 6(a) shall not apply to any invention for which no equipment, supplies, facilities or Confidential and TradeSecret Information of Company was used and which was developed entirely on Employee’s own time, unless (i) the invention relates to StereotaxisBusiness or to Company’s actual or demonstrably-anticipated research or development; or (ii) the invention results from any work performed byEmployee for Company. 7)Confidential Information. Employee agrees to keep secret and confidential, and not to use or disclose to any third parties, except as directly required forEmployee to perform Employee’s employment responsibilities for Company, any of Company’s Confidential Information. Excluded from the scope ofthese restrictions is Confidential Information that becomes generally available to the public in any manner other than by a breach of this Agreement bythe Employee. 48)Company Materials. All notes, records, correspondence, data, hardware, software, documents or the like obtained by or provided to the Companyregarding Stereotaxis Business, or otherwise made, produced, or compiled during the course or as a result of employment with the Company whichcontain Confidential Information, regardless of the type of medium in which such is preserved, (“Company Materials”), are the sole and exclusiveproperty of the Company, and shall be surrendered to the Company on request or upon Employee’s termination for any reason. During Employee’semployment, Employee will not copy, reproduce or otherwise duplicate, record, abstract, summarize or otherwise use, any Company Materials except asexpressly permitted or required for the proper performance of Employee’s duties on behalf of the Company. 9)Attention to Duties; Conflict of Interest. a)Employee represents that the execution and delivery of the Agreement and Employee’s employment with Company do not violate any previousemployment agreement or other contractual obligation of Employee, and there are no outstanding commitments or agreements inconsistent with anyof the terms of this Agreement or the services to be rendered to Company. b)While employed by the Company, Employee shall devote Employee’s full business time, energy and abilities exclusively to the business andinterests of the Company and shall not, without the Company’s prior written consent, obtain any direct or indirect interests in or relationshipswith any organization that might affect the objectivity and independence of the Employee’s judgment or conduct in carrying out duties andresponsibilities to the Company under this Agreement or that would interfere with the performance of Employee’s duties under this Agreement.However, nothing herein shall preclude Employee from pursuing Employee’s personal, financial and legal affairs, or, subject to the prior writtenconsent of the Company, (i) serving on any corporate or governmental board of directors, (ii) serving on the board of, or working for, anycharitable, not-for-profit or community organization, or (iii) pursuing any other activity; provided that Employee shall not engage in any otherbusiness, profession, occupation or other activity, for compensation or otherwise, which would violate the provisions of this Agreement or wouldotherwise conflict or interfere with the performance of Employee’s duties and responsibilities hereunder, either directly or indirectly. c)If in the course of Employee’s employment, Employee becomes aware of any obligations or commitments under Section 9(a) or any real orapparent conflicts of commitment or conflicts of interest, Employee shall immediately disclose them to Employee’s supervisor. 10)Non-Competition, Non-solicitation. Employee agrees that during the Restricted Period, and regardless of how Employee’s termination occurs andregardless of whether it is with or without Cause, Employee shall not, directly or indirectly (whether individually or as owner, partner, consultant,employee or otherwise): a)engage in, assist or have an interest in, enter the employment of, or act as an agent, advisor or consultant for, any person or entity that then is orintends to be in competition with the Company with respect to Stereotaxis Business. A person or entity will be deemed “in competition” if it isinvolved in research, development, manufacture, supplying or sale of a product, process, apparatus, service or development which is competitivewith a product, process, apparatus, service or development on which Employee worked, or with respect to which Employee has or had access toConfidential Information during the Employee’s employment. b)solicit, divert, or take away, or attempt to solicit, divert or take away from the Company the business of any customers for the purpose of sellingor providing to such customer any product or service which is included in the Stereotaxis Business as defined herein; 5 c)knowingly to cause or attempt to cause any customer, vendor, or other third party collaborating with the Company to terminate or reduce itsexisting relationship with the Company; or d)knowingly solicit, induce, or hire, or attempt to solicit, induce, or hire, any employee, consultant, or distributor of the Company to leave theemploy of the Company and/or to work for any competitor of the Company. 11)Notification; Non-disparagement. Employee shall notify any prospective employer of the existence and terms of this Agreement, prior to acceptance ofemployment outside of the Company. Company may inform any person or entity subsequently employing, or evidencing an intention to employEmployee of the nature of the information Company asserts to be Confidential Information, and may inform that person or entity of the existence of thisAgreement, the terms hereof, and provide to that person or entity a copy of these terms and conditions. Neither party shall in any way disparage theother, including current or former officers, directors and employees of the Company, and neither party shall make or solicit any comments, statementsor the like to the media or to others, including their agents or representatives, that may be considered to be derogatory or detrimental to the good name orbusiness reputation of the other party. 12)Acknowledgments Regarding Restrictions. Employee acknowledges, understands, and agrees that: a)The provisions relating to confidentiality, conflicts of interest, non-competition, and their post-employment continuation are material considerationfor the compensation and other benefits of Employee’s employment by Company, and without Employee’s agreement to these provisions andrestrictions, Employee would not be employed by the Company. b)Employee agrees that the covenants relating to non-competition, non-solicitation, and disparagement in this Agreement are appropriate and fair andnecessary to avoid conflicts of interest and commitment and to protect the Company’s legitimate interests in its Confidential Information,goodwill, and relationships. c)The restrictions contained herein are not limited geographically in view of Company’s worldwide operations and the nature of the ConfidentialInformation, customers and/or other business relationships to which Employee will have access. These restrictions may preclude, for a time,Employee’s employment with competitors of Company. Company agrees, however, that if it is commercially reasonable, after the Employee’semployment and within the Restricted Period it may provide written permission for Employee to provide services to or be employed by firms thatare engaged in Stereotaxis Business, so long as such services or employment are provided to divisions, departments, or affiliates that are notengaged in Stereotaxis Business within those firms. Such permission shall not be deemed to waive or diminish the prohibitions on disclosure oruse of Confidential Information or the covenants of non-competition in this Agreement. d)None of these restrictions is intended to prevent the Employee from owning up to one percent (1%) of the publicly traded stock of any companyduring the Restricted Period. e)In the event of a breach or threatened breach of any of Employee’s duties and obligations under Sections 7 to 11, Company shall be entitled, inaddition to any other legal or equitable remedies (including any right to damages), to temporary, preliminary and permanent injunctive reliefrestraining such breach or threatened breach. Employee expressly acknowledges that the harm that might result to Company’s business as a resultof any noncompliance by Employee with any of the provisions of these Sections would be largely irreparable, and specifically agrees that if thereis a question as to the enforceability of any of the provisions of these Sections, Employee will not engage in conduct alleged to be inconsistent withor contrary to such Sections before the question has been resolved by a final judgment of an arbitrator or court of competent jurisdiction. 6 f)To ensure Employee’s understanding of and compliance with the obligations under this Agreement, Employee agrees to engage in an exit interviewwith the Company at the Company’s expense prior to Employee’s last day of employment, at a time and place or by telephone, as designated bythe Company, and that Employee may be required to confirm that Employee will comply with Employee’s post termination obligations. 13)Non-Waiver of Rights. Company’s failure at any time to enforce or require performance by Employee of any of the provisions of this Agreement shall inno way be construed to be a waiver of such provisions or to affect either the validity of this Agreement, or any part hereof, or the right of Companythereafter to enforce each and every provision in accordance with the terms of this Agreement. 14)Employee’s Separation from Service Without Cause. a)Subject to provisions of Sections 16 and 19 hereof, in the event of the Employee’s separation from service without Cause, for a period of twelve(12) months following the date of the Employee’s separation from service, the Company shall pay to Employee an amount equal to Employee’sannualized base salary in effect immediately prior to the date of the separation from service without Cause. Salary continuation payments underthis Section 14 shall be made in accordance with the Company’s regular payroll schedule in effect on the date of Employee’s separation fromservice. Any salary continuation payable under this Section 14 will be offset by the amount of any compensation Employee receives during theSeverance Period from the Company or another employer or as an independent contractor. b)If the Employee elects to continue his/her medical and dental benefits under the Consolidated Omnibus Reconciliation Act of 1985, as amended(“COBRA”), the Employee shall pay the same amount for such coverage as if he/she had remained employed by the Company with suchamounts deducted from the severance payable under subsection (a) above and the Company shall pay the remaining portion of the requiredmonthly COBRA premium for up to the first twelve months following the Employee’s separation from service or if earlier, the date the Employeebecomes eligible for comparable benefits from another employer. c)The Company shall maintain in full force and effect, for one year following Employee’s separation from service, for the continued benefit of theEmployee (and his/her spouse and dependents, if applicable), all life insurance, accident, and disability plans and programs in which theEmployee was entitled to participate immediately before the occurrence of the event(s) giving rise to his/her separation, provided that the continuedparticipation is possible under the general terms and provisions of such plans and programs. If the continued participation in any such plan orprogram is barred, the Company shall arrange to provide the Employee, upon comparable terms, with benefits substantially similar to the benefitsto which the Employee would have otherwise been entitled under such plans and programs. Employee’s receipt, from a new employer, of any ofthe benefits described in this subsection shall not eliminate the Company’s obligations to provide the Employee with such benefits (or theirequivalent), but shall act as an offset to the Company’s obligations hereunder. 15)Separation from Service In Connection with a Change of Control. a)The Employee shall be entitled to benefits under this Section, rather than under any other severance program of the Company, including amountsdescribed in Section 14 above, if he/she incurs a separation from service under the circumstances described in this Section 15. b)Subject to Sections 16, 17 and 19 herein, if the Company effects the Employee’s separation from service without Cause during the periodcommencing six (6) months prior to a Change of Control and ending two (2) years after a Change of Control, or if the Employee separates fromservice for Good Reason within two years after the occurrence of a Change of Control, then the Company shall pay to the Employee (withoutregard to the provisions of any benefit plan) within thirty (30) days following the Employee’s separation from service date, the sum of thefollowing amounts: 7 i)any accrued and owing portion of the Employee’s full base salary through the date of separation at a rate equal to the greater of the rate ineffect immediately before the Employee’s separation or the rate in effect immediately before the Change of Control; plus an amount equal tounpaid salary with respect to any vacation days accrued but not taken as of the date of separation; ii)an amount equal to the Employee’s annual base salary at a rate equal to the greater of: the rate in effect immediately before the Employee’sseparation or the rate in effect immediately before the Change of Control; and iii)in lieu of further payments not otherwise addressed by this Agreement under any long term incentive, bonus or compensation plan of theCompany or any subsidiary thereof or any successor plan, an amount equal to all awards earned or accrued thereunder, but not yet paid,for periods up to and including the date of separation. c)Subject to Section 16 herein, the Employee shall be entitled to the following benefits in addition to the severance amounts payable pursuant tosubsection (b) above: i)the Company shall maintain in full force and effect, for one year following Employee’s separation from service, for the continued benefitof the Employee (and his/her spouse and dependents, if applicable), all life insurance, accident, and disability plans and programs inwhich the Employee was entitled to participate immediately before the occurrence of the event(s) giving rise to his/her separation, providedthat the continued participation is possible under the general terms and provisions of such plans and programs. In addition, the Companywill pay the cost for the Employee (and his/her spouse and dependents, if applicable) to continue group health coverage under theCompany’s plan pursuant to COBRA for up to one year following Employee’s separation from service. If the continued participation inany such plan or program is barred, the Company shall arrange to provide the Employee, upon comparable terms, with benefitssubstantially similar to the benefits to which the Employee would have otherwise been entitled under such plans and programs.Employee’s receipt, from a new employer, of any of the benefits described in this subsection shall not eliminate the Company’sobligations to provide the Employee with such benefits (or their equivalent), but shall act as an offset to the Company’s obligationshereunder. ii)all awards to the Employee under any Company stock plan shall vest upon the Change of Control. This section supersedes anyinconsistent provisions in any stock plan or award issued thereunder, and constitutes an amendment to any such award that has beenapproved by the Compensation Committee of the Board of Directors of the Company as provided under any stock plan (provided,however, that notwithstanding any agreement elsewhere to the contrary, the period of time in which the Employee may exercise vestedstock awards shall end on the date on which the right to exercise such award would have expired if the Employee had remained anemployee of the Company); iii)the Company shall pay all reasonable out-of-pocket expenses, including reasonable legal fees and legal expenses, incurred by the Employeein connection with any judicial or other proceeding, including any arbitration proceeding, to enforce this Agreement or to construe,determine, or defend the validity of this Agreement. 16)Conditions. The continuation of any salary and benefits under Sections 14 and 15 (other than subsection 15(b)(i)) is conditioned on Employee’s(a) compliance with the terms and conditions of this Agreement, including any post-termination restrictions and covenants, and (b) execution of a releaseof any and all claims against the Company and its officers, directors, and employees arising from or related to the Employee’s employment. The releaserequired pursuant to subsection (b) above shall be substantially similar with respect to all material terms and conditions to the form attached hereto asAttachment A, and must be executed and returned to the Company within forty five (45) days after the Employee’s separation from service to avoidforfeiture by Employee of the amounts payable under 14 or 15 above. In the event the prescribed 45-day period extends in to a new calendar year, thebenefits under Section 14 or 15 shall be paid in the second calendar year. 817)Code Section 280G. Notwithstanding any provision herein to the contrary, if Employee is a “disqualified individual” for purposes of application ofSection 280G of the Internal Revenue Code of 1986, as amended, and the regulations and other guidance promulgated thereunder (“Code Section 280G),then to the extent that the aggregate severance benefits payable under this Agreement and any other compensation payable to Employee constitute a“parachute payment” within the meaning of Code Section 280G, the amount of the aggregate benefits to which Employee is entitled shall be limited to(a) or (b), whichever yields the greatest after-tax benefit, where (a) refers to such aggregate amounts payable without regard to this Section 17, and(b) refers to such aggregate amounts reduced to the minimum extent necessary to avoid triggering tax under Code Section 4999. Any such reductionsunder this Section 17(b) shall be made first from the severance benefits that are not deferred compensation subject to regulation under CodeSection 409A. 18)General Code Section 409A Compliance. It is intended that this Agreement shall comply with the provisions of Section 409A of the Internal RevenueCode of 1986, as amended, and the regulations and other guidance promulgated thereunder (“Code Section 409A”), or be exempt from the application ofCode Section 409A. For purposes of Code Section 409A, the right to a series of installment payments hereunder shall be treated as a right to a series ofseparate payments. In no event may Executive, directly or indirectly, designate the calendar year of any payment under this Agreement. 19)Specified Employee Six Month Deferral. Notwithstanding anything to the contrary in this Agreement, to the extent any amounts payable under Sections14 or 15 on account of a separation of service are classified as nonqualified deferred compensation subject to the requirements under Internal RevenueCode Section 409A and the regulations thereunder, payment of such amounts shall be deferred until six (6) months after the date of the Employee’sseparation from service if necessary for the Employee to avoid adverse tax consequences under Code Section 409A. Payment of any such nonqualifieddeferred compensation otherwise due during the first six months following the Employee’s separation from service shall be suspended and becomepayable in a lump sum at the end of such six (6) month period, and shall not otherwise be subject to any offset or reduction pursuant to Section 17above solely because of said deferral. 20)Taxable Reimbursements. Notwithstanding anything to the contrary in this Agreement, all taxable reimbursements provided under this Agreement thatare subject to Code Section 409A shall be made in accordance with the requirements of Code Section 409A. The amount of expenses eligible forreimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year. Reimbursement of an eligibleexpense shall be made in accordance with the Company’s policies and practices and as otherwise provided herein, provided, that, in no event shallreimbursement be made after the last day of the year following the year in which the expense was incurred. The right to reimbursement is not subject toliquidation or exchange for another benefit. 21)No Obligation to Mitigate. The Employee shall not be required to mitigate the amount of any payment or benefits provided for in Section 14 or 15 byseeking other employment or otherwise. The amount of any payment or benefits provided for in Section 15 shall not be reduced by any payments orbenefits received by the Employee as the result of employment by another employer after the date of separation, or otherwise; provided, however, that theamount payable under Section 14 or 15 shall be reduced by the amount of any severance, termination, or notice pay (or any other similar amounts)required by law to be paid to the Employee during any notice period that the Company or its subsidiaries is required by law to provide. 22)Binding Arbitration. Except in the case of a separation of Employee’s service by the Company or by Employee for Good Reason following a Change ofControl: 9 a)Any dispute, claim or controversy with respect to Employee’s employment or its termination (whether the termination of employment is voluntaryor involuntary) shall be settled exclusively (except as set out in Section 12(e) above) by arbitration in accordance with the rules of the AmericanArbitration Association (“AAA”). Either party may request arbitration in writing after good faith efforts to resolve the matter internally, and theparties shall select an arbitrator under the AAA rules. Employee and Company each waive their constitutional rights to have such mattersdetermined by a jury, explicitly and definitely prefer arbitration to recourse to the courts, and have prescribed arbitration as their sole andexclusive method of binding dispute resolution because, among other reasons, it is quicker, less expensive, and less formal than litigation incourt. b)Except as set out in Section 24 below, the arbitrator shall not have the authority to modify, add to or eliminate any provision of this Agreement.The arbitration shall be held in St. Louis, Missouri. The award of the arbitrator shall be final and binding on the parties. Judgment upon thearbitrator’s award may be entered in any court, state or federal, having jurisdiction over the parties. If a written request for arbitration is not madewithin one (1) year of the date of the termination of employment or separation from service or, in the case of disputes not resolved internally, thedate of the final decision reached by the Human Resources Department, all remedies regarding such dispute, claim or controversy shall be waived. 23)Choice of Forum and Governing Law. Employee acknowledges and agrees that substantial and material aspects of the employment under this Agreementtake place in St. Louis, Missouri and that the important decisions, training, planning and activities hereunder are focused in St. Louis, Missouri. Inlight of Company’s substantial contacts with the State of Missouri, the parties’ interests in ensuring that disputes regarding the interpretation, validityand enforceability of this Agreement are resolved on a uniform basis, and Company’s execution of, and the making of this Agreement in Missouri, theparties agree that: (a) any litigation involving any noncompliance with or breach of the Agreement, or regarding the interpretation, validity and/orenforceability of the Agreement, shall be filed and conducted exclusively in the state or federal courts in St. Louis County, Missouri; and (b) theAgreement shall be interpreted in accordance with and governed by the laws of the State of Missouri. 24)Severability. If any provision(s) of this Agreement are or become invalid, are ruled illegal or are deemed unenforceable by any tribunal of competentjurisdiction, it shall be modified and enforced to the maximum extent permissible under applicable law. It is the intention of the parties that the remainderof this Agreement shall not be affected, provided that a party’s rights under this Agreement are not materially affected, in which case the parties covenantand agree to revise any such provision or the Agreement in good faith in order to provide a term, covenant, condition or application of this Agreement thatmost closely complies with the intent of the parties under the Agreement as originally executed. 25)Assignment. The Company may assign this Agreement and Employee’s employment to any entity to which the operations it currently manages aretransferred, whether through reorganization, merger, sale or any other transfer. As a contract for personal services, neither this Agreement nor any rightshereunder shall be assigned by Employee. 26)Construction. The parties to this Agreement represent and acknowledge that in executing this Agreement they do not rely and have not relied upon anyrepresentation or statement made by the other party or the other party’s agents, attorneys or representatives regarding the subject matter, basis, or effectof this Agreement or otherwise, other than those specifically stated in this written Agreement. This Agreement shall be interpreted in accordance with theplain meaning of its terms and not strictly for or against any party. This Agreement shall be construed as if each party was its author and each partyhereby adopts the language of this Agreement as if it were his/her or its own. Section headings are provided in this Agreement for convenience only andshall not be deemed to substantively affect the content of such sections. In addition, in light of the post-employment compensation to be paid toEmployee under Section 14 of this Agreement if Employee is terminated without Cause, Employee acknowledges and agrees that Employee’s post-employment obligations under Section 10 are reasonable and should be fully enforceable regardless of why or how his/her employment may end, andregardless of the reason(s) why and/or whether or not such termination of employment is with or without Cause. 1027)Entire Agreement. This Agreement, including any Exhibits attached hereto, sets forth all the covenants, promises, agreements, representations,conditions and understandings between the parties hereto with respect to the subject matter hereof and supersedes and terminates all prior agreements andunderstandings between the parties. There are no covenants, promises, agreements, representations, conditions or understandings, either oral or written,between the parties with respect to the subject matter hereof other than as set forth herein and therein. No amendment, change or addition to thisAgreement shall be binding upon the parties unless reduced to writing and signed by the Employee and an authorized representative of the Company.This Agreement cannot be changed orally or by any conduct of either Employee or the Company or any course of dealings between Employee, or anotherperson and the Company.[The Remainder of This Page Has Intentionally Been Left Blank] 11Employee and the Company have executed this Agreement and agree to enter into and be bound by the provisions hereof as of .BY SIGNING THIS AGREEMENT, EMPLOYEE IS HEREBY CERTIFYING THAT EMPLOYEE (A) HAS RECEIVED A COPY OF THISAGREEMENT FOR REVIEW AND STUDY BEFORE EXECUTING IT; (B) HAS READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT;(C) HAS HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THE AGREEMENT TO ASK ANY QUESTIONS EMPLOYEE HAS ABOUT THEAGREEMENT AND HAS RECEIVED SATISFACTORY ANSWERS TO ALL SUCH QUESTIONS AND TO CONFER WITH COUNSEL; AND(D) UNDERSTANDS EMPLOYEE’S RIGHTS AND OBLIGATIONS UNDER THE AGREEMENT.THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION. Employee Stereotaxis, Inc. David GiffinVice President, Human Resources 12Attachment AFORM OF SEVERANCE AGREEMENT AND RELEASEThis Severance Agreement and Release (“Agreement”) is made between Stereotaxis, Inc. (“Stereotaxis”), including its divisions, subsidiaries, parent andaffiliated corporations, their successors and assigns (individually and collectively “Stereotaxis”) and with Employee’s heirs, executors,administrators, successors and assigns (“Employee”).WHEREAS, Stereotaxis and Employee entered into an Employment Agreement dated (said agreement and any and all amendments collectively,the “Employment Agreement”), and now desire to terminate their employment relationship and settle all legal rights and obligations resulting from Employee’semployment with Stereotaxis.NOW, THEREFORE, in consideration of the foregoing and the mutual promises, representations and undertakings of the parties set forth herein, theadequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1.Separation Date. Employee’s employment with Stereotaxis will terminate effective . 2.Pursuant to the Amended and Restated Executive Employment Agreement, in consideration for Employee’s execution of, and subject to the terms andconditions of this Severance Agreement and Release, Stereotaxis agrees as set forth below. In the event of a conflict between the terms of the EmploymentAgreement and the benefits described below, the Employment Agreement shall control: (a)Severance. Employee will receive [ weeks of base pay in the amount of $ per week],][an amount equal to Employee’s annual basesalary at a rate of $ ], as severance pay less deductions required by law. Employee’s severance will payable in accordance with Stereotaxis’normal payroll dates and will commence once the revocation period set forth in section 6(e) has elapsed without Employee revoking this Release. (b)Insurance. Stereotaxis will permit Employee to exercise his/her COBRA continuation privileges as provided by law, effective .[Stereotaxis will pay the cost under COBRA for continuing Employee’s group medical and dental insurance from through ,provided Employee’s regular monthly contribution is made by deduction from the severance payments.] or [Stereotaxis will pay for continuingEmployee’s group medical and dental insurance from through .] Thereafter, Employee shall be responsible topay the cost to continue group medical and dental insurance under COBRA. In addition, Stereotaxis will permit Employee to participate in all lifeinsurance, accident and disability plans and programs in which Employee was entitled to participate immediately prior to his/her separation fromservice or, if such participation is barred, provide substantially similar benefits. (c)[Incentive or Compensation Plans. Employee will be paid $ , less deductions required by law, representing amounts earned or accruedby Employee under any long-term incentive, bonus or compensation plan of the Stereotaxis or any subsidiary or successor that is unpaid.] (d)[Acceleration of Vesting. Employee’s award(s) under any Stereotaxis stock plan shall become fully vested.] 13 (e)[Out-of-Pocket Expenses. Employee shall be reimbursed for reasonable out-of-pocket expenses, including reasonable legal fees and expenses,incurred in connection with any judicial or other proceeding to enforce his/her rights under the Executive Employment Agreement or to construe,determine or defend the validity of such Agreement.] 3.The parties agree that the compensation and benefits described above provided Employee by Stereotaxis represent additional compensation and benefitsto which Employee would not be entitled absent this Agreement, and constitute the total compensation and benefits payable by Stereotaxis to Employeewith regard to Employee’s employment by Stereotaxis and its termination, and that no other compensation, commissions, bonuses, benefits or paymentsof any kind will be paid other than the amounts set forth above. 4.Employee hereby waives and releases Stereotaxis, its subsidiaries, related, parent and affiliated corporations and business entities, their successors andassigns, and their past and present officers, directors, shareholders, employees and agents (“the Released Parties”) from any and all claims made, to bemade, or which might have been made of whatever nature, whether known or unknown, since the beginning of time through the date of this Agreement,including, but not limited to, any claim Employee may have under any agreements which Employee may have with any of the Released Parties, anyclaims that arose as a consequence of Employee’s employment by Stereotaxis, or arising out of the termination of the employment relationship, or arisingout of any acts committed or omitted during or after the existence of the employment relationship through the date of this Agreement. Such release andwaiver of claims will include, but shall not be limited to, those claims which were, could have been, or could be the subject of an internal grievance orappeal procedure or an administrative or judicial proceeding filed either by Employee or on Employee’s behalf under any federal, state or local law orregulation, any claim of discrimination under any state or federal statute, regulation or ordinance including, but not limited to Titles 29 and 42 of theUnited States Code, Title VII of the Civil Rights Act of 1964, as amended, the Employee Retirement Income Security Act of 1974, as amended, theCivil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Civil Rights Act of 1866, the Rehabilitation Act of 1973, as amended, theFamily and Medical Leave Act, the Older Worker Benefit Protection Act, the Missouri Human Rights Act, City of St. Louis Ordinance 62710, anyother federal, state or local law, ordinance or regulation regarding employment, discrimination in employment or termination of employment, any claimsfor breach of contract, wrongful termination, promissory estoppel, detrimental reliance, negligent or intentional infliction of emotional distress, or anyother actions at common law, in contract or tort, all claims for lost wages, bonuses, commissions, benefits, expenses, severance, service letter, re-employment, compensatory or punitive damages, attorney’s fees, and all claims for any other type of legal or equitable relief. Employee further waivesall rights to future employment with Stereotaxis and agrees not to apply for employment with Stereotaxis.This Release does not affect any vested rights Employee may have under any retirement plan of Stereotaxis. 5.Employee covenants not to sue or otherwise make any claims against Stereotaxis or any other party released herein with respect to any claim releasedpursuant to this Agreement. 6.By execution of this document, Employee expressly waives any and all rights to claims under the Age Discrimination in Employment Act of 1967, 29U.S.C. § 621, et seq. (the “ADEA”). (a)Employee acknowledges that Employee’s waiver of rights or claims refers to rights or claims arising under the ADEA is in writing and isunderstood by Employee. (b)Employee expressly understands that by execution of this document, Employee does not waive any rights or claims under the ADEA that mayarise after the date the waiver is executed. 14 (c)Employee acknowledges that the waiver of Employee’s rights or claims arising under the ADEA is in exchange for the consideration outlined inthis Agreement which is above and beyond that to which Employee is entitled. (d)Employee acknowledges that Stereotaxis expressly advised Employee to consult an attorney of Employee’s choosing prior to executing thisdocument and that Employee has been given a period of not less than forty-five (45) days within which to consider this Agreement. (e)Employee acknowledges that Employee has been advised by Stereotaxis that Employee is entitled to revoke (in the event Employee executes thisdocument) Employee’s waiver of rights or claims arising under the ADEA within seven (7) days after executing this document by notifyingStereotaxis in writing at: Stereotaxis, 4320 Forest Park Avenue, Suite 100, St. Louis, Missouri 63108, Attn: VP of Human Resources thatEmployee intends to revoke this waiver and that said waiver will not and does not become effective or enforceable until the seven (7) day periodhas expired. Employee agrees that payment of monies due under this executed and unrevoked waiver shall not be payable until the seven (7) dayrevocation period has expired and Employee has not revoked this waiver. 7.Employee agrees that the terms and provisions of this Agreement and the fact and amount of consideration paid pursuant to this Agreement shall at alltimes remain confidential and not be disclosed to anyone not a party to this Agreement, other than (a) to the extent disclosure is required by law, or (b) toEmployee’s spouse, attorneys, accountant and tax advisors who have a need to know in order to render Employee professional advice or service.Employee agrees to ensure said individuals maintain such confidentiality. 8.Employee agrees not to (a) disclose or use confidential information of Employer required to be kept confidential under the Employment Agreement,(b) violate any covenants of non-competition or any other surviving terms or conditions of the Employment Agreement, (c) disparage Employer or makeor solicit any comments, statements, or the like to the media or to any third party that may be considered to be derogatory or detrimental to the goodname and/or business reputation of Employer, including its directors, officers, employees, agents, representatives and customers. 9.Employee agrees to promptly return to Stereotaxis any and all electronic media files, company keys, company vehicles, credit cards, equipment,documents, papers, records, notes, memoranda, plans, files, and other records containing information concerning Stereotaxis or its employees,customers, or operations, and any other information or materials required to be returned pursuant to the Employment Agreement. 10.Nothing contained in this Agreement shall be construed to require the commission of any act contrary to law or to be contrary to law, and whenever thereis any conflict between any provision of this Agreement and any present or future statute, law, government regulation or ordinance contrary to which theparties have no legal right to contract, the latter shall prevail, but in such event the provisions of this Agreement affected shall be curtailed and restrictedonly to the extent necessary to bring them within legal requirements. 11.The existence and execution of this Agreement shall not be considered, and shall not be admissible in any proceeding, as an admission by Stereotaxis oranyone released hereby, of any liability, error, violation or omission. 12.This Agreement shall be governed by, and construed and interpreted according to, the laws of the State of Missouri and whenever possible, eachprovision herein shall be interpreted in such manner as to be effective or valid under applicable law. 1513.The parties acknowledge this Agreement constitutes the entire agreement between them superseding all prior written and oral agreements orunderstandings between them, with the exception of any terms and conditions of the Employment Agreement that survive its termination. 14.This Agreement may not be modified, altered or changed except by written agreement signed by the parties hereto. 15.Employee acknowledges that the only consideration for Employee signing this Agreement are the terms stated above and that no other promise,agreement, statement or representation of any kind has been made to Employee by any person or entity to cause Employee to sign this Agreement, andthat Employee (a) has read this Agreement, (b) has had a reasonable amount of time to consider its terms, (c) is competent to execute this Agreement,(d) has had an adequate opportunity to discuss this Agreement with an attorney and has done so or has voluntarily elected not to do so, (e) fullyunderstands the meaning and intent of this Agreement, and (f) is voluntarily executing it of Employee’s own free will. AGREED TO AND ACCEPTED: EmployeeSTATE OF ) )COUNTY OF )COMES NOW , who states to me that he/she has read and understands the foregoing Agreement and agrees to and accepts its terms andconditions as a free act of his/her own volition.Subscribed and sworn to before me this day of . Notary PublicMy Commission Expires: STEREOTAXIS:By: Date: 16Exhibit 10.8SUMMARY OF MANAGEMENT BONUS PLANThe Stereotaxis Management Bonus Plan is designed to bring annual focus to the financial and operating metrics that contribute to sustainable growth inshareholder value. The bonus plan performance measures for any particular year represent key drivers of our business such as orders, revenue, grossmargins, utilization, operating expenses, operating profitability, and specific strategic initiatives.Each year the Compensation Committee of the Board of Directors will determine the objectives and corresponding weighting for the bonus plan based on thepriorities of the business for the upcoming performance year. Three levels of performance are established for each objective. The annual business plan, whichincludes growth rates or other success metrics for each objective, establishes the target level of performance; threshold performance is defined as 90% of thebusiness plan for each objective; and the maximum level of performance is 120% of the business plan.The 2013 Management Bonus Plan has been modified to include four quarterly performance periods with one-fourth of the targeted bonus opportunityestablished for each period. LEVEL PERFORMANCEThreshold 90% Business PlanTarget 100 % of Business PlanMaximum 120 % of Business PlanParticipants in the Stereotaxis Management Bonus Plan, based on their ability to impact results, will be assigned to one of five target incentive award levelsranging from 15% to 50% of base salary. Each level is assigned an overachievement performance factor ranging from 10% to 100% of the target incentiveaward. LEVEL GROUP TARGET %BASE OVERACHIEVEMENTV Certain Executive Staff 50 % +100% TargetIV Balance of Executive Staff 40 % +50% TargetIII Vice Presidents 30 % +25% TargetII Directors 20 % +25% TargetI Senior Key Contributors 15% +10% TargetAn incentive payout level is associated with each level of performance against each objective. Performance at threshold results in payout of 50% of targetaward; performance at target will result in a payout of 100% of target award; and performance at maximum results in a payout at the correspondingoverachievement level of the participant.PERFORMANCE % TARGET AWARDThreshold 50%Target 100 %Maximum 200 % (Level V)150% (Level IV)125% (Level II – III)110% (Level I)Award Pool DeterminationThe payout result of each objective will be independently calculated incorporating the actual performance against the objective, the weighting of each objective,and the overachievement factor, if performance against the objective is above plan. The total of each calculation determines the Company’s overall level ofperformance against its objectives. This total percent, multiplied by the total sum of the target awards for each participant, determines the total award pool.The Compensation Committee approves the award pool and all awards to executive officers.Award Pool DistributionThe distribution of the award pool will be allocated by the President & CEO to each function based on its level of contribution toward the achievement ofannual objectives. In turn, each functional leader will determine each participant’s award, as follows: • 25% will automatically be awarded to each individual as a participant in the plan. • The remaining 75% will be adjusted by the functional leader based on performance of each participant against his or her personal goals.Exhibit 10.9ANNUAL CASH COMPENSATION OF EXECUTIVE OFFICERSThe named executive officers of Stereotaxis, Inc. (the “Company”) have their base salaries determined yearly by the Compensation Committee (the“Committee”) of the Board of Directors. The executive officers are all “at will” employees, and each has a written employment agreement which is filed, asrequired, as an exhibit to reports filed by the Company under the Securities Exchange Act of 1934. Messrs. Kaminski, Cheng, and Giffin and Ms. Durosproposed and agreed to voluntary base salary reductions for the period from October 1, 2011 through March 31, 2013. Each of said named executive officersentered into an amendment to his or her respective employment agreement on October 10, 2011, providing for the base salary reduction. On October 30, 2012,the Committee reinstated the base salaries of Messrs. Kaminski, Cheng, and Giffin and Ms. Duros to their September 30, 2011 levels effective January 1,2013. Additionally, Mr. Duggan’s base salary was increased by 10% effective November 1, 2012 in recognition of his below market competitive positioning.On February 27, 2013 , the Committee considered the base salaries for named executive officers of the Company and made no further adjustments. Also, theCommittee made two semi-annual awards to the named executive officers under the Company’s 2012 bonus plan (the “2012 Plan”). The 2012 Plan wasdesigned to reward the accomplishments of these officers on behalf of the Company in 2012 pursuant to and consistent with the goals for the year asestablished by the Committee. The 2012 Plan was divided into two semi-annual performance periods in order to create a sense of urgency in drivingperformance consistent with the Company’s current circumstances. The 2012 base salaries, 2012 bonuses and 2013 base salaries are summarized in thefollowing table: 2012 Annual Salary Reduced Salary11/1/11 to 12/31/12 2012 Bonus 2013 Salary Michael P. Kaminski President & Chief Executive Officer $420,000 $352,000 $69,946 $420,000 Samuel W. Duggan II Chief Financial Officer $297,000(10% increase) N/A $30,000 $297,000 Frank J. ChengSenior Vice President, Marketing & Business Development $285,000 $256,500 $39,244 $285,000 Karen W. DurosSenior Vice President, General Counsel & Secretary $270,000 $243,000 $39,100 $270,000 David A. GiffinVice President, Human Resources $200,000 $180,000 $27,926 $200,000 As determined by the Committee at the February 2013 meeting, the 2013 annual bonus program will be based on management achieving certainperformance goals established by the Committee for each of the four fiscal quarters in 2013. Mr. Kaminski has announced his resignation as President & CEO effective April 12, 2013. Mr. Duggan resigned from the Company effective February 22, 2013. Mr. Duggan’s salary was increased effective November 1, 2012.(1)(2)(3)123Exhibit 10.19fFOURTH LOAN MODIFICATION AGREEMENT (DOMESTIC)This Fourth Loan Modification Agreement (Domestic) (this “Loan Modification Agreement”) is entered into as of December , 2012 (the“Fourth Loan Modification (Domestic) Effective Date”), by and between SILICON VALLEY BANK, a California corporation, with its principal placeof business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at 380 Interlocken Crescent, Suite 600,Broomfield, Colorado 80021 (“Bank”), STEREOTAXIS, INC., a Delaware corporation (“Stereotaxis”), and STEREOTAXIS INTERNATIONAL,INC., a Delaware corporation, each with offices located at 4320 Forest Park Avenue, Suite 100, St. Louis, Missouri 63108 (“International”, and togetherwith Stereotaxis, individually and collectively, jointly and severally, “Borrower”).1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrowerto Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of November 30, 2011, evidenced by, among other documents, (i) a certainSecond Amended and Restated Loan and Security Agreement (Domestic) dated as of November 30, 2011, as amended by a certain First Loan ModificationAgreement (Domestic), dated as of March 30, 2012, as further amended by a certain Second Loan Modification and Waiver Agreement (Domestic), dated as ofMay 1, 2012 and as further amended by a certain Third Loan Modification Agreement, dated as of May 7, 2012 (as may be amended from time to time, the“Loan Agreement”) and (ii) a certain Amended and Restated Export-Import Bank Loan and Security Agreement, dated as of November 30, 2011, asamended by a certain Export-Import Bank First Loan Modification Agreement, dated as March 30, 2012, as amended by that certain Export-Import BankSecond Loan Modification and Waiver Agreement, dated as of May 1, 2012, as further amended by that certain Export-Import Bank Third Loan ModificationAgreement, dated as of May 7, 2012 (as may be amended from time to time, the “EXIM Bank Loan and Security Agreement”), in each case betweenBorrower and Bank. Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement and the EXIM BankLoan and Security Agreement, and the “Intellectual Property Collateral” as described in those certain IP Security Agreements, entered into by eachBorrower and Bank, dated as of November 30, 2011 (together with any other collateral security granted to Bank, the “Security Documents”).Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing LoanDocuments”.3. DESCRIPTION OF CHANGE IN TERMS. A.Modifications to Loan Agreement. 1The Loan Agreement shall be amended by inserting the following new definitions in Section 13.1 thereof, each in its appropriatealphabetical order:“Fourth Loan Modification Agreement” is that certain Fourth Loan Modification Agreement (Domestic), by and between Borrower andBank, dated as of the Fourth Loan Modification (Domestic) Effective Date.“Fourth Loan Modification (Domestic) Effective Date” is defined in the preamble to the Fourth Loan Modification Agreement. 2The Loan Agreement shall be amended by deleting the following definitions appearing in Section 13.1 thereof:“Sanderling Guaranty” is that certain Second Amended and Restated Guaranty, executed by Sanderling and dated as of November 30,2011, as the same may be amended from time to time“Tangible Net Worth” is, on any date, the consolidated total assets of Borrower and its Subsidiaries plus (a) Subordinated Debt (otherthan the Cowen Indebtedness), minus (b) any amounts attributable to (i) goodwill, (ii) intangible items including unamortized debtdiscount and expense, patents, trade and service marks and names, copyrights and capitalized research and development expenses (exceptprepaid expenses), (iii) notes, accounts receivable and other obligations owing to Borrower from its officers or other Affiliates, and(iv) reserves not already deducted from assets, minus (c) Total Liabilities (including, without limitation, the Cowen Indebtedness), plus(d) mark-to-market expenses incurred in accordance with GAAP as a result of mark-to-market adjustments of the value of warrants of theBorrower, in an aggregate amount not to exceed Four Million Five Hundred Thousand Dollars ($4,500,000).and inserting in lieu thereof the following:“Sanderling Guaranty” is that certain Third Amended and Restated Guaranty, executed by Sanderling and dated as of December ,2012, as the same may be amended from time to time.“Tangible Net Worth” is, on any date, the consolidated total assets of Borrower and its Subsidiaries plus (a) Subordinated Debt (otherthan the Cowen Indebtedness), minus (b) any amounts attributable to (i) goodwill, (ii) intangible items including unamortized debtdiscount and expense, patents, trade and service marks and names, copyrights and capitalized research and development expenses (exceptprepaid expenses), (iii) notes, accounts receivable and other obligations owing to Borrower from its officers or other Affiliates, and(iv) reserves not already deducted from assets, minus (c) Total Liabilities (including, without limitation, the Cowen Indebtedness), plus(d) mark-to-market liabilities established in accordance with GAAP as a result of non-cash, mark-to-market adjustments, of the value ofwarrants and other derivative liabilities of the Borrower. 3The Compliance Certificate attached as Exhibit B to the Loan Agreement is hereby deleted and replaced with Exhibit A attached hereto.4. FEES. Borrower shall reimburse Bank for all legal fees and expenses incurred in connection with the Existing Loan Documents and this Loan ModificationAgreement.5. CONDITIONS PRECEDENT. Borrower hereby agrees that the following documents shall be delivered to the Bank prior to or concurrently with the FourthLoan Modification (Domestic) Effective Date, each in form and substance satisfactory to the Bank (collectively, the “Conditions Precedent”): A.copies, certified by a duly authorized officer of each Borrower, to be true and complete as of the date hereof, of each of (i) the governing documentsof each Borrower as in effect on the date hereof (but only to the extent modified since last delivered to the Bank), (ii) the resolutions of eachBorrower authorizing the execution and delivery of this Loan Modification Agreement, the other documents executed in connection herewith andeach Borrower’s performance of all of the transactions contemplated hereby (but only to the extent required since last delivered to Bank), and(iii) an incumbency certificate giving the name and bearing a specimen signature of each individual who shall be so authorized on behalf of eachBorrower (but only to the extent any signatories have changed since such incumbency certificate was last delivered to Bank); B.duly executed and Third Amended and Restated Unconditional Guaranty from Sanderling, together with Two Million Dollars ($2,000,000) in anaccount of Sanderling maintained at Bank for the purpose of securing the Guaranty Obligations of Sanderling owed to Bank; 2 C.duly executed and delivered Reaffirmation of Intercreditor Agreement from Cowen Healthcare Royalty Partners II, L.P.; D.duly executed and delivered Reaffirmation of Second Amended and Restated Unconditional Limited Guaranty from Alafi; E.evidence satisfactory to Bank that the Alafi Letter of Credit has been extended and/or has not been terminated; and F.such other documents as Bank may request, in its reasonable discretion.6. ADDITIONAL COVENANTS; RATIFICATION OF PERFECTION CERTIFICATE. Borrower is not a party to, nor is bound by, any license or otheragreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’sinterest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with the Bank’s right to sell anyCollateral. Borrower shall provide written notice to Bank within ten (10) days of entering or becoming bound by any such license or agreement (other thanover-the-counter software that is commercially available to the public). Borrower shall take such steps as Bank requests to obtain the consent of, or waiver by,any person whose consent or waiver is necessary for (x) all such licenses or contract rights to be deemed “Collateral” and for Bank to have a security interestin it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement (such consent or authorization may include alicensor’s agreement to a contingent assignment of the license to Bank if Bank determines that is necessary in its good faith judgment), whether now existing orentered into in the future, and (y) Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance withBank’s rights and remedies under the Loan Agreement and the other Loan Documents. Except as otherwise disclosed in that certain Perfection Certificate datedNovember 30, 2011, as amended and supplemented as of the Third Loan Modification (Domestic) Effective Date, the Borrower hereby certifies that noCollateral is in the possession of any third party bailee (such as at a warehouse). In the event that Borrower, after the date hereof, intends to store or otherwisedeliver the Collateral to such a bailee, then Borrower shall first receive, the prior written consent of Bank and such bailee must acknowledge in writing that thebailee is holding such Collateral for the benefit of Bank. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosurescontained in a certain Perfection Certificate, dated as of November 30, 2011, as amended and supplemented as of the Fourth Loan Modification (Domestic)Effective Date with the disclosures attached as Exhibit B hereto, if any, and acknowledges, confirms and agrees the disclosures and information aboveBorrower provided to Bank in the Perfection Certificate as so updated remain true and correct in all material respects as of the date hereof.7. AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file UCC financing statements without notice to Borrower, with all appropriatejurisdictions, as Bank deems appropriate, in order to further perfect or protect Bank’s interest in the Collateral, including a notice that any disposition of theCollateral, by either the Borrower or any other Person, shall be deemed to violate the rights of the Bank under the Code.8. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.9. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of each of the Loan Documentsand all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.10. NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims againstBank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims againstBank, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liabilitythereunder.11. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’srepresentations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan ModificationAgreement, the terms of the Existing 3Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this LoanModification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreementshall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents,unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement.12. RIGHT OF SET-OFF. In consideration of Bank’s agreement to enter into this Loan Modification Agreement, Borrower hereby reaffirms and hereby grantsto Bank, a lien, security interest and right of set off as security for all Obligations to Bank, whether now existing or hereafter arising upon and against alldeposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of SiliconValley Bank (including a Bank subsidiary) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default,without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmaturedand regardless of the adequacy of any other collateral securing the loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS ORREMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OFSETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY,VOLUNTARILY AND IRREVOCABLY WAIVED.13. CONFIDENTIALITY. Bank may use confidential information for the development of databases, reporting purposes, and market analysis, so long assuch confidential information is aggregated and anonymized prior to distribution unless otherwise expressly permitted by Borrower. The provisions of theimmediately preceding sentence shall survive the termination of the Loan Agreement.14. JURISDICTION/VENUE/TRIAL WAIVER. Borrower accepts for itself and in connection with its properties, unconditionally, the exclusive jurisdictionof any state or federal court of competent jurisdiction in the State of Illinois in any action, suit, or proceeding of any kind against it which arises out of or byreason of this Loan Modification Agreement. NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT TO BRING ANYACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THEBANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THEBANK’S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER ANDBANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THISLOAN MODIFICATION AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT,TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTOTHIS LOAN MODIFICATION AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.15. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.[The remainder of this page is intentionally left blank] 4IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the State of Illinois asof the Fourth Loan Modification (Domestic) Effective Date. BORROWER: STEREOTAXIS, INC.By /s/ Samuel W. Duggan IIName: Samuel W. Duggan IITitle: Chief Financial Officer STEREOTAXIS INTERNATIONAL, INC.By /s/ Samuel W. Duggan IIName: Samuel W. Duggan IITitle: President, Treasurer BANK: SILICON VALLEY BANKBy /s/ Thomas HertbergName: Thomas HertzbergTitle: Relationship Manager[Signature page to Fourth Loan Modification Agreement (Domestic)]Exhibit A to Fourth Loan Modification AgreementEXHIBIT BCOMPLIANCE CERTIFICATE TO: SILICON VALLEY BANKDate: FROM: STEREOTAXIS, INC. and STEREOTAXIS INTERNATIONAL, INC.The undersigned authorized officer of STEREOTAXIS, INC., a Delaware corporation and STEREOTAXIS INTERNATIONAL, INC. (collectively,jointly and severally, the “Borrower”) certifies that under the terms and conditions of the Second Amended and Restated Loan and Security Agreementbetween Borrower and Bank (as amended, the “Agreement”), (1) Borrower is in complete compliance for the period ending with all requiredcovenants except as noted below, (2) there are no Events of Default, (3) all representations and warranties in the Agreement are true and correct in all materialrespects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties thatalready are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to aspecific date shall be true, accurate and complete in all material respects as of such date, (4) Borrower, and each of its Subsidiaries, has timely filed allrequired tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed byBorrower except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement, and (5) no Liens have been levied or claims made againstBorrower or any of its Subsidiaries, if any, relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notificationto Bank. Attached are the required documents supporting the certification. The undersigned certifies that these are prepared in accordance with generally GAAPconsistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no borrowingsmay be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance isdetermined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in theAgreement.Please indicate compliance status by circling Yes/No under “Complies” column. Reporting Covenant Required CompliesMonthly financial statements with Compliance Certificate Monthly within 30 days Yes NoAnnual financial statement (CPA Audited) + CC FYE within 120 days Yes No10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes NoA/R & A/P Agings, Deferred Revenue and InventoryReports Monthly within 30 days Yes NoTransaction Reports Weekly, within 5 days Yes NoProjections Annually within 30 days prior to FYE Yes No10% of the outstanding balance of EXIM Bank accounts receivable Quarterly within 30 days Yes NoThe following Intellectual Property was registered after the Effective Date (if no registrations, state “None”) Financial Covenant Required Actual Complies Maintain as indicated: Minimum Tangible Net Worth* (tested quarterly) $ $ Yes No Minimum Liquidity Ratio** (tested monthly) :1.00 :1.00 Yes No May 2102 Debenture Proceeds (on or before the Third Loan Modification(Domestic) Effective Date) $15,500,000 $ Yes No *See Section 6.9(a) of the Loan Agreement**See Section 6.9(b) of the Loan AgreementThe following financial covenant analyses and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”) STEREOTAXIS, INC.STEREOTAXIS INTERNATIONAL, INC. BANK USE ONLYBy: Received by: Name: AUTHORIZED SIGNERTitle: Date: Verified: AUTHORIZED SIGNER Date: Compliance Status: Yes NoSchedule 1 to Compliance CertificateFinancial Covenants of BorrowerDated: I.Tangible Net Worth (Section 6.9(a))Required: Maintain a minimum Tangible Net Worth, tested quarterly, as of the last day of each fiscal quarter, of not less than (no worse than)($20,000,000); provided that in the event that Guaranteed Advances are no longer available under the Guaranteed Line, the foregoing covenant level shall beadjusted by Bank, in its good faith business judgment. Such Tangible Net Worth requirements set forth above shall be increased by (i) seventy five percent(75%) of the net proceeds from issuances of equity securities of the Borrower and/or Subordinated Debt (other than the Cowen Indebtedness and the proceedsfrom the 2012 Equity Event as of the Third Loan Modification (Domestic) Effective Date) issued or incurred after the Third Loan Modification (Domestic)Effective Date; plus (ii) fifty percent (50%) of positive quarterly Net Income.Actual: A. Consolidated total assets of Borrower and its Subsidiaries $ B. Subordinated Debt (other than the Cowen Indebtedness) $ C. Adjusted Assets [line A plus line B] $ D. Amounts attributable to Goodwill $ E. Intangible items including unamortized debt discount and expense, patents, trade and service marks and names, copyrights andcapitalized research and development expenses (except prepaid expenses) $ F. Notes, accounts receivable and other obligations owing to Borrower from its officers or other Affiliates $ G. Reserves not already deducted from assets $ H. Intangible assets [line D plus line E plus line F plus line H] $ I. Total Liabilities (including, without limitation, the Cowen Indebtedness) $ J. Mark-to-market liabilities established in accordance with GAAP as a result of non-cash, mark-to-market adjustments, of the valueof warrants and other derivative liabilities of the Borrower $ K. TANGIBLE NET WORTH [line C minus line H minus line I plus line J] $ Is line K equal to or greater than (no worse than) the sum of ($20,000,000) plus (i) seventy five percent (75%) of the net proceeds from issuances of equitysecurities of the Borrower and/or Subordinated Debt (other than the Cowen Indebtedness and the proceeds from the 2012 Equity Event as of the Third LoanModification (Domestic) Effective Date) issued or incurred after the Third Loan Modification (Domestic) Effective Date; plus (ii) fifty percent (50%) ofpositive quarterly Net Income? No, not in compliance Yes, in compliance II.Liquidity Ratio (Section 6.9(b))Required: Maintain (i) at all times during the months of January, February, April, May, July, August, October and November of each fiscal year, a LiquidityRatio of not less than 1.25:1.00; and (ii) at all times during the months of March, June, September and December of each fiscal year, a Liquidity Ratio of notless than 1.50:1.00, it being understood that Short Term Advances shall be excluded from the foregoing calculation.Actual: A. Borrower’s unrestricted cash at Bank $ B. Borrower’s Eligible Accounts (excluding the Biosense Accounts) and Borrower’s Eligible EXIM Accounts $ C. the unused available amount under the Guaranteed Line $ D. LIQUIDITY [line A plus line B plus line C] $ E. Total outstanding Obligations of Borrower owed to Bank (other than Short Term Advances) $ F. LIQUIDITY RATIO [line D divided by line E] $ Is line F equal to or greater than [ ]:1.00? No, not in compliance Yes, in compliance III.2012 Equity Event (Section 6.9(c).Required: On or prior to the Third Loan Modification (Domestic) Effective Date, Borrower shall provide Bank evidence satisfactory to Bank, in its solediscretion, that Borrower has received not less than Fifteen Million Five Hundred Thousand Dollars ($15,500,000) in net proceeds from the 2012 EquityEvent. No, not in compliance Yes, in compliance Exhibit BUpdates to Perfection Certificate, if any(See attached.)Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the following Registration Statements and the related prospectuses: (1)Registration Statement (Form S-8 No. 333-161079) of Stereotaxis, Inc. pertaining to the Stereotaxis, Inc. 2002 Stock Incentive Plan and theStereotaxis, Inc. 2009 Employee Stock Purchase Plan (2)Registration Statement (Form S-8 No. 333-186124) of Stereotaxis, Inc. pertaining to the Stereotaxis, Inc. 2012 Stock Incentive Planof our report dated April 1, 2013, with respect to the financial statements and schedule of Stereotaxis, Inc., included in this Annual Report (Form 10-K) for theyear ended December 31, 2012./s/ Ernst & Young LLPSt. Louis, MissouriApril 1, 2013Exhibit 31.1Certification of Principal Executive OfficerI, Michael P. Kaminski, certify that: 1.I have reviewed this annual report on Form 10-K of Stereotaxis, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting. 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: April 1, 2013 /s/ Michael P. Kaminski Michael P. Kaminski Chief Executive Officer Stereotaxis, Inc. (Principal Executive Officer)Exhibit 31.2Certification of Principal Financial OfficerI, Martin C. Stammer, certify that: 1.I have reviewed this annual report on Form 10-K of Stereotaxis, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting. 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: April 1, 2013 /s/ Martin C. Stammer Martin C. Stammer Interim Chief Financial Officer Stereotaxis, Inc. (Principal Financial Officer)Exhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the annual report of Stereotaxis, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2012 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Michael P. Kaminski, President & Chief Executive Officer of the Company, certify,pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, that to the best of my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 1, 2013 /s/ Michael P. Kaminski Michael P. Kaminski Chief Executive Officer Stereotaxis, Inc.Exhibit 32.2CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the annual report of Stereotaxis, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2012 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Martin C. Stammer, Interim Chief Financial Officer of the Company, certify,pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, that to the best of my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 1, 2013 /s/ Martin C. Stammer Martin C. Stammer Interim Chief Financial Officer Stereotaxis, Inc.

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