Stereotaxis
Annual Report 2014

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 OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 001-36159 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.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨ 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 Capital Market on June 30, 2014) was approximately $65.5million.The number of outstanding shares of the registrant’s common stock on February 28, 2015 was 20,732,097.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 18 Item 1B. Unresolved Staff Comments 35 Item 2. Properties 35 Item 3. Legal Proceedings 36 Item 4. Mine Safety Disclosures 36 PART II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 37 Item 6. Selected Financial Data 39 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 51 Item 8. Financial Statements and Supplementary Data 53 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 79 Item 9A. Controls and Procedures 79 Item 9B. Other Information 81 PART III. Item 10. Directors and Executive Officers of the Registrant 81 Item 11. Executive Compensation 83 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 83 Item 13. Certain Relationships and Related Person Transactions and Director Independence 83 Item 14. Principal Accounting Fees and Services 83 PART IV. Item 15. Exhibits and Financial Statement Schedules 83 SIGNATURES 84 SCHEDULE II—Valuation and Qualifying Accounts 85 EXHIBIT INDEX 86 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,PowerAssert™, Titan and Pegasus™ are trademarks of Stereotaxis, Inc. All other trademarks that may appear in this report are the property of their respectiveowners.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 suchas “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue”, or thenegative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements arereasonable, we cannot guarantee future results, levels of activity, performance, or achievements. These statements are only predictions.Factors that may cause our actual results to differ materially from our forward-looking statements include, among others, changes in general 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 diseaseby enabling enhanced safety, efficiency and efficacy for catheter-based, or interventional, procedures.The Epoch Solution is comprised of the Niobe ES Remote Magnetic Navigation System (“Niobe ES system”), Odyssey Information ManagementSolution (“Odyssey Solution”), and the Vdrive Robotic Navigation System (“Vdrive system”), and related devices. We consider our technology an importantadvancement in the ongoing trend toward fully digitized, integrated and automated interventional labs. We believe our technology provides substantial,clinically important improvements over manual interventional methods, which often result in long and unpredictable procedure times with suboptimaltherapeutic outcomes. We believe our products also support efficient and effective information management and physician collaboration. The core elementsof our technology, especially the Niobe ES system, are protected by an extensive patent portfolio, as well as substantial expertise and trade secrets.We promote the full Epoch Solution in a typical hospital implementation, subject to regulatory approvals or clearances. The full Epoch 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 uponpurchasing of the necessary upgrade or expansion.Not all products have and/or require regulatory clearance in all of the markets we serve. Please refer to “Regulatory Approval” in Item 1 for adescription of our regulatory clearance, licensing, and/or approvals we currently have or are pursuing.As of December 31, 2014, we had approximately $5.7 million of backlog, consisting of outstanding purchase orders and other commitments for thesesystems. We had backlog of approximately $6.8 million and $8.9 million as of December 31, 2013 and 2012, respectively. Of the December 31, 2014backlog, we expect approximately 83% to be recognized as revenue over the course of 2015. There can be no assurance that we will recognize such revenuein any particular period or at all because some of our purchase orders and other commitments are subject to contingencies that are outside our control. Theseorders and commitments may be revised, modified or canceled, either by their express terms, as a result of negotiations or by project changes or delays. Inaddition, the sales cycle for the Epoch Solution is lengthy and generally involves construction or renovation activities at customer sites. 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 and distribution of disposable interventional devices, coordination of marketing andsales efforts in order to continue to introduce new enhancements around the Niobe system, and non-exclusive commercialization of the Odyssey Solution toBiosense customers in the electrophysiology field in certain countries such as the United States. The Siemens and Philips alliances provide for coordinationof our sales and marketing efforts with those of our alliance partners to facilitate co-marketing of integrated systems. 2Table of ContentsTHE STEREOTAXIS VALUE PROPOSITIONAlthough great strides have been made in manual device technology and in related manual interventional techniques, significant challenges remainthat reduce interventional productivity and limit both the number of complex procedures and the types of diseases that can be treated manually. Thesechallenges primarily involve the inherent mechanical limitations of manual instrument control and the lack of integration of the information systems used byphysicians in the interventional lab as well as a significant amount of training and experience required to ensure proficiency. As a result, many complex casesin electrophysiology are treated with palliative drug therapy, and many complex procedures in interventional cardiology are still referred to highly invasivebypass surgery.The 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 cardiologyand electrophysiology 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, congenital heart diseases, and critical limb ischemia due to chronic total occlusions of peripheral arteries, is highlyproblematic 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 complexcases interventionally. Because our robotic technology provides precise, computerized control of the working tip of disposable interventionaldevices, we believe that it will potentially enable difficult atrial fibrillation, ventricular tachycardia and congenital heart diseases to be treatedinterventionally on a much broader scale than today. • Improve patient outcomes by optimizing therapy. Difficulty in controlling the working tip of disposable interventional devices can lead to sub-optimal results in many procedures. Conversely, the precise control of multiple complex diagnostic and therapeutic devices by a singlephysician can lead to better outcomes for the patient. Precise instrument control is necessary for treating a number of cardiac conditions. To treatarrhythmias, precise placement of an ablation catheter against a beating inner heart wall is necessary. For coronary artery disease, precise andcorrect navigation and placement of expensive stents also have a significant impact on procedure costs and outcomes. We believe our robotictechnology can enhance procedure results by improving navigation of disposable interventional devices to treatment sites, and by effectingmore precise, safe, treatments once these sites are reached. • Enhance patient and physician safety. The Niobe system has been used in more than 75,000 procedures and the incidence of 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, during conventional catheter-based procedures, each of thephysicians who stand by the patient table to manually control the catheter, the nursing staff assisting with the procedure, and the patient areexposed to the potentially harmful x-ray radiation from the fluoroscopy field. This exposure can be minimized by reducing procedure times.Reducing procedure times is also beneficial to the patient because of the direct correlation between complication rates and procedure length. Ourrobotic technology can further improve physician safety and reduce physician fatigue by enabling them to conduct procedures remotely from anadjacent control room, which reduces their exposure to harmful radiation, and the orthopedic burden of wearing lead. 3Table of Contents • 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, oftenfrom separate user interfaces. Sources of information include real time x-ray and/or ultrasound images, real time location sensing systemsproviding the 3-D location of a catheter tip, pre-operative map of the electrical activity of the heart, real time recording of electrical activity ofthe heart, and temperature feedback from an ablation catheter. The Odyssey Solution improves clinical workflow and information managementefficiency by integrating and synchronizing the multiple sources of diagnostic and imaging information found in the interventional labs into alarge-screen user interface with single mouse and keyboard 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 comparedto manual 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, high-end deflectable sheaths, guidewires and contrast mediain procedures compared with manual 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 safely andeffectively 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 abroader range of interventional physicians, with more standardized outcomes. In addition, interventional physicians can learn to use roboticsystems in a relatively short period of time. The Niobe system can also be programmed to carry out sequences of complex navigationautomatically further enhancing 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 Remote 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 canbe operated either from beside the patient table, as in traditional interventional procedures, or from an adjacent room and outside the x-ray fluoroscopy field.The Niobe system allows the operator to navigate disposable interventional devices to the treatment site through complex paths in the blood vessels andchambers of the heart to deliver treatment by using computer controlled, externally applied magnetic fields to directly govern the motion of the working tipof these devices, each of which has a magnetically sensitive tip that predictably responds to magnetic fields generated by our system. Because the workingtip of the disposable interventional device is directly controlled by these external magnetic fields, the physician has the same degree of control regardless ofthe number or type of turns, or the distance traveled by the working tip to arrive at its position in the blood vessels or chambers of the heart. This results inhighly precise digital control of the working tip of the disposable interventional device while still giving the physician the option to manually advance thedevice. 4®Table of ContentsThrough our alliances with Siemens, Philips and Biosense Webster, this precise digital instrument control has been integrated with the visualizationand information 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 locationof the working tip of the instrument, and with Biosense Webster’s ablation tip technology. The combination of these technologies was fully launched in2005.The components of the Niobe system are identified and described below:Niobe Remote 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 lessthan 10% of the strength of fields typically generated by MRI equipment and therefore require significantly less shielding, and cause significantly lessinterference, 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”) in conjunction with the QuikCAS automated catheter advancement system is used to remotelyadvance and retract the electrophysiology catheter in the patient’s heart while the Niobe magnets precisely steer the working tip of the device.Niobe system revenue represented 12%, 23%, and 26% of revenue for the years ended December 31, 2014, 2013, and 2012, respectively.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. 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 8%, 10%, and 14% of revenue for the years ended December 31, 2014, 2013, and 2012, respectively.Vdrive™ Robotic Navigation SystemThe Vdrive system reaches further into the evolution of electrophysiology robotic navigation technologies than any platform before it. More than arobotic catheter manipulator, the Vdrive system and Niobe ES robotic system provide independent remote manipulation of diagnostic catheters and magneticablation catheters in a single interface. The Vdrive system provides breakthrough navigation and stability for diagnostic and ablation devices designed withkey features to assist in the delivery of better ablations. Important features include complementing the Niobe ES control of catheters with fully remote, singleoperator workflow; and providing 5®®®Table of Contentsrobotic control of diagnostic devices independent of magnetic navigation. The Vdrive Duo system is an optional expansion of the Vdrive hardware thatallows control 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 QuikCAS automated catheter advancement disposables designed to provide precise remote advancement of proprietary electrophysiologycatheters; • Biosense Webster’s CARTO RMT navigation and ablation system, CELSIUS RMT, NAVISTAR RMT, NAVISTAR RMT DS, NAVISTARRMT THERMOCOOL and CELSIUS RMT THERMOCOOL Irrigated Tip Diagnostic/Ablation Steerable Tip Catheters co-developed byBiosense Webster and Stereotaxis, as described below; and • Our suite of Pegasus coronary guidewire designed for use in interventional cardiology procedures for the introduction and 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 deviceswith tip dimensions as small as 14 thousandths (0.014) of an inch to be oriented and positioned in a predictable and controllable fashion. We believe thisapproach to bringing digital control to disposable interventional devices using embedded magnets can simplify the overall design of these devices becausemechanical controls are no longer required.In addition to the Vdrive and Vdrive Duo systems, we also manufacture and market various disposable components which can be manipulated by thesesystems. 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 as BiosenseWebster’s LASSO2515 or LASSO2515 NAV Circular Mapping Catheter, advance, retract, rotate, deflect and adjust loop radius, and hold thecatheter position against the tissue to optimize electrograms; and • our V-Sono ICE catheter manipulator (“V-Sono device”) that allows a single physician to manipulate BWI SoundStar™ and AcuNav™ cathetersand CARTO 3™ System from the control room, store and recall previous positions and automatically sweep over an area of interest withadjustable speed and angle—all without leaving the control room.Disposable revenue including royalties represented 39%, 33%, and 32% of revenue for the years ended December 31, 2014, 2013, and 2012,respectively.Other Recurring RevenueOther recurring revenue includes revenue from software licenses, product maintenance plans, and other post warranty maintenance. Revenue fromservices and license fees is deferred and amortized over the service or license fee period, which is typically one year. Other recurring revenue represented38%, 33%, and 26% of revenue for the years ended December 31, 2014, 2013, and 2012, respectively. 6®®®®®®®®®®Table of ContentsRegulatory ApprovalWe have received regulatory clearance, licensing and/or CE Mark approvals necessary for us to market the Niobe system, Cardiodrive, and variousdisposable interventional devices in the U.S., Canada, Europe, China, Japan, and various other countries.We have received regulatory clearance, licensing and/or CE Mark approvals necessary for us to market the Odyssey Solution in the U.S., Canada,European Union, China, Japan and other selected countries and we are in the process of obtaining necessary approvals for extending our markets in othercountries.We have received the CE Mark that allows us to market the Vdrive and Vdrive Duo systems with the V-CAS, V-CAS Deflect, V-Loop and V-Sonodevices in Europe. In addition, we have received licensing to market the Vdrive and Vdrive Duo systems with the V-CAS, V-CAS Deflect, V-Loop and V-Sonodevices in Canada. We have received regulatory clearance that allows us to market the Vdrive and Vdrive Duo systems with the V-CAS, V-Loop, and V-Sonodevices 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 Pegasus coronaryperipheral guidewires in the U.S. and Europe.Biosense Webster has received FDA approval, and CE Mark for the CARTO RMT navigation system for use with the Niobe system, the 4mmCELSIUS RMT Diagnostic/Ablation Steerable Tip Catheter, the 4mm NAVISTAR RMT Diagnostic/Ablation Steerable Tip Catheter, the 8mm NavistarRMT DS Diagnostic/Ablation Steerable Tip Catheter, and the 3.5mm NAVISTAR RMT THERMOCOOL Irrigated Tip Catheter. In addition, BiosenseWebster has received FDA approval and CE Mark for the 3.5mm CELSIUS RMT THERMOCOOL Irrigated Tip Catheter. Biosense Webster also receivedChina CFDA approval and Japan PMDA approval for the CARTO RMT navigation system for use with the Niobe system, and the 3.5mm NAVISTAR RMTTHERMOCOOL Irrigated Tip Catheter. Our alliance with Biosense Webster provides for co-development of catheters that can be navigated with our system,both with and without Biosense Webster’s 3D catheter location sensing technology. In addition, we can utilize technology which allows our system torecognize specific disposable interventional devices in order to prevent unauthorized use of our system. See “Strategic Alliances – Disposable DevicesAlliance” below for a description of our arrangements with Biosense Webster.FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS AND CUSTOMERSOur total U.S. revenue was $21.6 million, $24.0 million, and $27.0 million for the years ended December 31, 2014, 2013, and 2012, respectively. Ourtotal international revenue was $13.4 million, $14.0 million and $19.5 million for the years ended December 31, 2014, 2013, and 2012, respectively. Nosingle country other than the U.S. accounted for more than 10% of total revenue for the years ended December 31, 2014, 2013, or 2012. Biosense WebsterInc. accounted for $4.7 million, $3.9 million, and $3.4 million, or 13%, 10%, and 7%, of total revenue for the years ended December 31, 2014, 2013, and2012, respectively. No other customers accounted for more than 10% of total revenue for the years ended December 31, 2014, 2013, or 2012.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 hasbroad applicability in other areas, such as structural heart repair, interventional neurosurgery, interventional neuroradiology, peripheral vascular, renaldenervation, pulmonology, urology, gynecology and gastrointestinal medicine, and some of our patents may be applicable in these areas as well. 7®®®®®®®®®®Table of ContentsElectrophysiologyThe rhythmic beating of the heart results from the transmission of electrical impulses. When these electrical impulses are mistimed or uncoordinated,the heart fails to function properly, resulting in symptoms that can range from fatigue to stroke or death. Over 4.0 million people in the U.S. currently sufferfrom the resulting abnormal heart rhythms, which are known as arrhythmias. The most common arrhythmia in adults is atrial fibrillation. This chaoticelectrical activity of the top chambers of the heart is estimated to be present in three million people in the United States and over seven million peopleworldwide. The incidence is expected to continue to rise as the population ages and life expectancy continues to increase. Atrial fibrillation is a majorphysical and economic burden. This arrhythmia is associated with stroke, heart failure, and adverse symptoms causing patients to be very motivated to seektreatment. The combination of symptoms, prevalence and co-morbidities make atrial fibrillation a major economic factor in healthcare. We believe payors arevery 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 mappingprocedure, the physician may then use an ablation catheter to eliminate the aberrant signal or signal path, restoring the heart to its normal rhythm. In caseswhere an ablation is anticipated, physicians will choose an ablation catheter and perform both the mapping and ablation with the same catheter. In February2009 the FDA approved the Biosense Webster NAVISTAR THERMOCOOL irrigated catheter to be labeled for the treatment of atrial fibrillation. This is thefirst device approved by the FDA to be labeled for the interventional treatment of this arrhythmia. We believe this important milestone will accelerateacceptance of ablations for the treatment of atrial fibrillation.We believe more than 3,000 interventional labs around the world are currently capable of conducting electrophysiology procedures. Approximately700,000 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 canallow these procedures to be performed by a broader range of electrophysiologists and, by automating some of the more complex cathetermaneuvers, can standardize 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. The magnetic catheter has been characterized as the ideal tool for this application. These arrhythmias can often be modified or interruptedby the pressure 8®®Table of Contents of a conventional catheter making it very difficult to identify the appropriate location for the ablation, whereas magnetic catheters produce fewerextra beats and provide for easier and more efficient mapping of the diseased tissue. Successful ablation of ventricular tachycardia can extend theuseful life of an implantable defibrillator, reduce shocks to the patient, reduce the need for antiarrhythmic drugs or, in some cases, obviate theneed for an expensive implantable device and its associated follow-up.We believe that our system can address the current challenges in electrophysiology by permitting the physician to remotely navigate disposableinterventional devices from a control room outside the x-ray field. Additionally, we believe that our system allows for more predictable and efficientnavigation of these devices to the treatment site, including the left atrium for atrial fibrillation procedures, and enables catheter contact to be consistentlymaintained to efficiently apply energy on the wall of the beating heart. We also believe that our system will significantly lower the skill barriers required forphysicians to perform complex electrophysiology procedures and, additionally, improve interventional lab efficiency and reduce disposable interventionaldevice 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 heartsurgery to bypass blocked coronary arteries.Blockages within a coronary artery, often called lesions, are categorized by degree of obstruction as partial occlusions, non-chronic total occlusionsand chronic total occlusions. Lesions are also categorized by the degree of difficulty with which they can be opened as simple or complex. Complex lesions,such as chronic total occlusions, longer lesions, and lesions located within smaller diameter vessels, are often very difficult or time consuming to open withmanual interventional techniques.We believe approximately 11,000 interventional labs worldwide are currently capable of conducting interventional cardiology. Approximately4 million interventional cardiology procedures are performed annually in the U.S. alone. We estimate that approximately 10-15% of these interventionalcardiology procedures currently being performed are complex and therefore require longer procedure times and may have sub-optimal outcomes. We believethat our system 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. We believe the Niobe system also has a range ofpotential applications in minimally invasive neurosurgery, including biopsies and the treatment of tumors, treatment of vascular malformations and fetalinterventions.STRATEGIC ALLIANCESWe have entered into strategic alliances with technology leaders in the global interventional market, including Siemens, Philips, and BiosenseWebster, that we believe aid us in commercializing our Niobe system. We believe our two imaging partners, Siemens and Philips, have a significantpercentage of the installed 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; 9Table of Contents • 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 eventthat another party wants to acquire us or with board representation where a strategic alliance has made a debt or equity investment in us.Imaging AlliancesSiemens and Philips Alliances. We have successfully integrated our Niobe system with both Siemens’ and Philips’ digital fluoroscopy systems toprovide advanced interventional lab visualization and instrument control through user-friendly computerized interfaces. We also coordinate our sales effortswith Siemens and Philips to co-market integrated systems at leading hospital sites in the U.S., Europe and in Asia. We have also entered into a softwaredistribution agreement with Siemens under which we have the right to sublicense Siemens’ 3D pre-operative image navigation software as part of ouradvanced user interface for the Niobe ES system.Disposables Devices AllianceBiosense Webster Alliance. Through our alliance with Biosense Webster, we have successfully integrated 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, withthe Niobe system. We have jointly developed associated location and non-location sensing electrophysiology mapping and ablation catheters that arenavigable with the Niobe system. We believe that these integrated products provide physicians with the elements required for effective complexelectrophysiology procedures: highly accurate information as to the exact location of the catheter in the body and highly precise control over the working tipof the catheter. We also coordinate our sales force efforts with Biosense Webster in order to place Biosense CARTO RMT systems and our Niobe systemsthat, together with the co-developed catheters, comprise the full integration of our instrument control and 3D location sensing technologies in theinterventional lab. Additionally, Biosense Webster has non-exclusive rights to resell Stereotaxis’ Odyssey products, including Odyssey Vision and OdysseyCinema systems in most countries.The co-developed catheters are manufactured and distributed by Biosense Webster, and both of the parties agreed to contribute to the resourcesrequired for their development. We are entitled to royalty payments from Biosense Webster, payable quarterly based on net revenues from sales of the co-developed catheters. Royalty revenue from the co-developed catheters represented 9%, 8%, and 7% of revenue for the years ended December 31, 2014, 2013,and 2012, respectively. These royalties are used to make payments under the debt agreement with Healthcare Royalty Partners II, L.P. (formerly “CowenHealthcare Royalty Partners II, L.P.”) as discussed in Item 7.Biosense Webster’s distribution rights for co-developed catheters are exclusive through December 31, 2015 and thereafter are nonexclusive untilDecember 31, 2018. Biosense Webster’s rights to distribute such products in Japan is exclusive to the later of December 31, 2017 or five years after the dateof approval of the applicable product for sale in Japan and on a nonexclusive basis to the later of December 31, 2020 or eight years after the date of approvalof the applicable product for sale in Japan. The catheter most recently developed under the collaboration activities with Biosense Webster was approved forsale in Japan on March 22, 2013. Additionally, Biosense Webster agreed to expand the product offering covered by the agreement to include a nextgeneration irrigated magnetic catheter, subject to mutually agreeable terms. If a next generation of catheter is commercialized, Biosense Webster’s exclusivedistribution rights will be extended.Under the alliance with Biosense Webster, we agreed to certain restrictions on our ability to co-develop and distribute catheters competitive with thosewe are developing with Biosense Webster and we granted Biosense Webster certain notice and discussion rights for product development activities weundertake relating to localization of magnetically enabled interventional disposable devices in fields outside of electrophysiology and mapping. 10®Table of ContentsEither party may terminate this alliance in certain specified “change of control” situations, although the termination would not be effective until oneyear after the change of control and then would be subject to a wind-down period during which Biosense Webster would continue to supply co-developedcatheters to us or to our customers for three years (or, for non-location sensing mapping and ablation catheters, until our first sale of a competitive productafter a change of control, if earlier than three years). If either party terminates the agreement under this provision, we must pay a termination fee to BiosenseWebster equal to 5% of our total equity value in the change of control transaction, up to a maximum of $10 million. If a change of control of Stereotaxisoccurs after Biosense Webster has received approval from the U.S. FDA for atrial fibrillation indication for the NAVISTAR RMT THERMOCOOL catheter,we would be required to pay an additional $10 million fee to Biosense Webster, and termination of the agreement by either party would not be effective untiltwo years 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.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 teaching hospitals, whichserve to increase our access to world class physicians and to expand our name recognition in the medical community. Our research and developmentexpenses for the years ending December 31, 2014, 2013, and 2012, were $5.2 million, $5.7 million, and $8.4 million, respectively.CUSTOMER SERVICE AND SUPPORTWe provide worldwide maintenance and support services to our customers for our integrated products directly or with the assistance of outsourcedproduct and service representatives. By utilizing these relationships, we provide direct, on-site technical support activities, including call center, customersupport engineers and service parts logistics and delivery. In certain situations, we use these third parties as a single point of contact for the customer, whichallows us to focus on providing installation, training, and back-up technical support.Our back-up technical support includes a combination of on-line, telephone and on-site technical assistance services 24 hours a day, seven days aweek. We have also hired service and support engineers with networking and medical equipment expertise, and have outsourced a portion of our installationand support services. We offer different levels of support to our customers, including basic hardware and software maintenance, extended productmaintenance, and rapid response capability for both parts and service.We have established a call center in our St. Louis facilities, which provides real-time clinical and technical support to our customers worldwide.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 11®®Table of Contentsmanufacturing strategy for Vdrive system is to build all subassemblies in-house using sub-contract manufactured components. We maintain quality controlfor all of our systems by completing final system assembly and inspection in-house.We purchase both custom and off-the-shelf components from a large number of suppliers and subject them to quality specifications and processes.Some of the components necessary for the assembly of our products are currently provided to us by sole-sourced suppliers (the only recognized supply sourceavailable to us) or single-sourced suppliers (the only approved supply source for us among other sources). We purchase the majority of our components andmajor assemblies through purchase orders rather than long-term supply agreements and generally do not maintain large volumes of finished goods.Disposable Interventional DevicesOur manufacturing strategy for disposable interventional devices is to outsource their manufacture through subcontracting and through our alliancewith Biosense Webster and to expand partnerships for other interventional devices. We work closely with our contract manufacturers and have strongrelationships with 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, the Vdrive system and Odyssey Solution, including control and application software, are developedboth internally and with integrated modules we purchase or license. We perform final testing of software products in-house prior to their commercial release.GeneralOur manufacturing facility operates under processes that meet the FDA’s requirements under the Quality System Regulation (QSR). Our ISO registrarand European notified British Standard Institution (BSI) has audited our facility annually since 2001 and found the facility to be in compliance with relevantrequirements. The initial ISO 9001 certification was issued in January 2002 and the most recent ISO 13485 certificate was issued in 2013.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, supported byaccount managers and clinical specialists who provide training, clinical support, and other services to our customers. In addition, our strategic alliances forman important part of our sales and marketing strategy. We leverage the sales forces of our imaging partners to co-market integrated systems on a worldwidebasis. This approach allows us to maximize our leads and knowledge of the market opportunities while using our resources to sell directly to the customer.Under the terms of our agreement, Biosense Webster exclusively distributes 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 throughdistributors; and (2) leveraging our installed base of systems to drive recurring 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 or Vdrivesystem have been reimbursed to date. We expect that third-party payors will reimburse, under existing billing codes, procedures in which our line of ablationcatheters and those on 12Table of Contentswhich we are collaborating with Biosense Webster, as well as our line of guidewires, are used. We expect healthcare facilities in the U.S. to bill various third-party payors, such as Medicare, Medicaid, other government programs and private insurers, for services performed with our products. We believe thatprocedures performed using our products, or targeted for use by products that do not yet have regulatory clearance or approval, are generally alreadyreimbursable under government programs and most private plans. Accordingly, we believe providers in the U.S. will generally not be required to obtain newbilling authorizations or codes in order to be compensated for performing medically necessary procedures using our products on insured patients. We cannotguarantee that reimbursement policies of third-party payors will not change in the future with respect to some or all of the procedures using the Niobe system.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 orin clinical trials, conducted with the Niobe system or Vdrive system has been reimbursed to date. In Japan, the Ministry of Health, Labor and Welfare(MHLW) has classified the Niobe system as a C2 medical device (the highest reimbursement category), and has established a “technical fee” of Japanese Yen50,000. In other foreign countries, we may need to seek international reimbursement approvals, and we do not know if these required approvals will beobtained 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 PROPERTYThe proprietary nature of, and protection for, our products, processes and know-how are important to our business. We seek patent protection in theUnited States and internationally for our systems and other technology where available and when appropriate.We have an extensive patent portfolio that we believe protects the fundamental scope of our technology, including our magnet technology,navigational methods, procedures, systems, disposable interventional devices and our 3D integration technology. As of December 31, 2014, we had 95 issuedU.S. patents, 2 co-owned U.S. patents and 1 licensed-in U.S. patent. In addition, we had 20 pending U.S. patent applications and 2 co-owned U.S. patentapplications. As of December 31, 2014 we had 40 issued foreign patents and 10 owned foreign patent applications. The key patents that protect our Niobesystem extend until 2022 and beyond. We also have a number of invention disclosures under consideration and several applications that are being preparedfor filing. We cannot be certain that any patents will be issued from any of our pending patent applications, nor can we be certain that any of our existingpatents or any patents that may be granted in the future will provide us with protection.It would be technically difficult and costly to reverse engineer our Niobe system, which contains numerous complex algorithms that control ourdisposable devices inside the magnetic fields generated by the Niobe system. We further believe that our patent portfolio is broad enough in scope to enableus to obtain legal relief if any entity not licensed by us attempted to market disposable devices in the U.S. that can be navigated by the Niobe system. We canalso utilize security keys, such as embedded smart chips or associated software that could allow our system to recognize specific disposable interventionaldevices in order to prevent unauthorized use of our system.We have also developed substantial expertise in magnet design, magnet physics and magnetic instrument control that was developed in connectionwith the development of the Niobe system, which we maintain as trade secrets. This expertise centers around our proprietary magnet design, which is a criticalaspect of our ability to design, manufacture and install a cost-effective Magnetic Navigation System that is small enough to be installed 13Table of Contentsin a standard interventional lab. Our Odyssey Solution contains numerous complex algorithms and proprietary software and hardware configurations, andrequires substantial knowledge to design and assemble, which we maintain as trade secrets. These proprietary software and hardware, some of which is ownedby Stereotaxis, and some of which is licensed to Stereotaxis, is a material aspect of the ability to design, manufacture and install a cost-effective and efficientinformation integration, storage, and delivery platform.In addition, we seek to protect our proprietary information by entering into confidentiality, assignment of invention or license agreements with ouremployees, consultants, contractors, advisers and other third parties. However, we believe that these measures afford only limited protection.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.In electrophysiology we consider the primary competition to our Epoch Solution to be traditional catheter-based electrophysiology ablationapproaches including RF (radiofrequency) ablation and non-RF therapies. To our knowledge, we are the only company that has commercialized remote,digital and direct control of the working tip of catheters for use in RF ablation procedures. Our success depends in part on convincing hospitals andphysicians to convert traditional interventional procedures to procedures using our Epoch Solution.We face competition from companies that are developing and marketing new products for use in electrophysiology. These products include nextgeneration mapping systems and RF ablation devices with which our Epoch Solution is not currently compatible, as well as new products for use in otherinterventional therapies. Some of these products are marketed by companies that may have an established presence in the field of electrophysiology,including major imaging, capital equipment and disposables companies that are currently selling products in the interventional lab. In addition, we facecompetition from companies that currently market or are developing drugs, gene or cellular therapies to treat the conditions for which our products areintended.We also face competition from companies that are developing remote interventional techniques. We are aware of one public company and one privatecompany that have commercialized electrophysiology catheter navigation systems which have been cleared by the FDA for mapping procedures only. Inaddition, we are aware of one private company with an electromagnetic catheter navigation system that has received CE Mark approval in Europe.We face direct competition to certain products in our Odyssey Solution, such as the Odyssey Vision system. These competitors include establishedimaging companies as well as dedicated solution providers. 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 approvalis also an important competitive factor. See “Item 1A—Risk Factors” for a discussion of other competitive risks facing our business.GOVERNMENT REGULATIONOur products are medical devices that are subject to extensive regulation in the U.S. and in foreign countries where we do business. The U.S. FDAregulates the development, testing, manufacturing, labeling, storage, recordkeeping, promotion, marketing, distribution and service of medical devices in theU.S. to ensure that medical products distributed domestically are safe and effective for their intended uses. In addition, the FDA regulates the export ofmedical devices manufactured in the U.S. to international markets and the importation of medical devices manufactured abroad. 14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, our products must meet the requirements of a large and growing body of international standards which govern thedesign, manufacture, materials content and sourcing, testing, certification, packaging, installation, use and disposal of our products. Failure to meet thesestandards could limit the ability to market our products in those regions which require compliance to such standards. Examples of groups of such standardsare electrical safety standards such as those of the International Electrotechnical Commission and composition standards such as the Reduction of HazardousSubstances (“RoHS”) and Waste Electrical and Electronic Equipment (“WEEE”) Directives.U.S. Food and Drug AdministrationUnless an exemption applies, each medical device we wish to commercially market in the United States will require either 510(k) clearance or pre-market approval from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either Class I orII, which requires the manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute the device, known as510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining,life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in Class III, requiringpre-market approval, or PMA. All of our current products are Class II devices requiring 510(k) clearances. Biosense Webster’s compatible catheters used withour Niobe system are Class III therapeutic devices and are subject to the PMA process.When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed device is substantially equivalent to apreviously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yetcalled for the submission of pre-market approval applications. The FDA may require further information, including clinical trial results, to make adetermination regarding substantial equivalence. The FDA’s 510(k) clearance process usually takes from four to 12 months, but can take longer.If a device is not eligible for the 510(k) clearance process, a PMA must be submitted to the FDA. A PMA must be supported by extensive data,including but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate reasonable evidence of the device’s safety andefficacy to the FDA’s satisfaction. The PMA process is much more costly, lengthy and uncertain than the 510(k) clearance process, and it generally takes fromone to three years, but can take longer. We cannot be sure that the FDA will ever grant either 510(k) clearance or pre-market approval for any product wepropose to market in the United States.After a device receives 510(k) clearance or a PMA approval, any modification that could significantly affect its safety or effectiveness, or that wouldconstitute a significant change in its intended use, will require a new clearance or approval.After a device is placed on the market, numerous regulatory requirements apply. These include: • The Quality System Regulation, or QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing,documentation and other quality assurance procedures during product design and throughout the manufacturing process; • Labeling requirements and the FDA prohibitions against promoting products for uncleared, unapproved or “off-label” uses; and • Medical device reporting regulations, which requires that manufacturers report to the FDA if their device may have caused or contributed to adeath or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were torecur. 15Table of ContentsThe FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine ourcompliance with the QSR and other regulations. If we fail to comply with the QSR requirements, we may receive a warning letter from the FDA or be subjectto other enforcement actions. The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we havemanufactured or distributed.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 and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries maydiffer from that required to obtain FDA clearance or approval.The primary regulatory environment in Europe is that of the European Union, which encompasses most of the major countries in Europe. The EuropeanUnion, along with other member countries of the European Economic Area, or EEA, requires that manufacturers of medical products obtain the right to affixthe CE Mark to their products before selling them in member countries of the EEA. The CE Mark is an international symbol of adherence to quality assurancestandards and compliance with applicable directives. In order to obtain the right to affix the CE Mark to products, a manufacturer must obtain certificationthat its processes meet certain quality standards. Compliance with the Medical Device Directive, as certified by a recognized European Notified Body,permits the medical device manufacturer to affix the CE Mark on its products and commercially distribute those products throughout the EEA. We are subjectto annual surveillance audits and periodic re-certification audits in order to maintain our CE Mark permissions.To be sold in Japan, most medical devices must undergo thorough safety examinations and demonstrate medical efficacy before they receiveregulatory (“Shonin”) approval. We are subject to additional regulations in other foreign countries, including, but not limited to, Canada, Taiwan, China,Korea, and Russia, in order to sell our products. We intend that either we or our distributors will receive any necessary approvals or clearance prior tomarketing our products in these international markets.Please refer to “Regulatory Approval” in Item 1 of this annual report for a description of the regulatory clearance, licensing and/or approvals wecurrently have or are pursuing.Anti-Kickback LawsWe are subject to various federal and state laws relating to healthcare fraud and abuse, including anti-kickback laws. The U.S. Anti-Kickback Statuteprohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induceeither the referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program suchas the Medicare and Medicaid programs. The definition of “remuneration” has been broadly interpreted to include anything of value, including for example,gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash and waivers of payments, and providing anything of value atless than fair market value. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion fromMedicare, 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. 16Table of ContentsTransparency LawsUnder the Physician Payments Sunshine Act, or the Sunshine Act, which was enacted by Congress as part of the Patient Protection and Affordable CareAct, we are required to track and report to the federal government on an annual basis, subject to certain exceptions, all payments and other transfers of valueto U.S. physicians and teaching hospitals, as well as ownership interests held by physicians in our equity. Such data will be made available by thegovernment on a publicly searchable website. In addition, we are subject to similar state laws related to the tracking and reporting of certain payments andother transfers of value to healthcare professionals.HIPAA and Other Privacy LawsWe are subject to laws and regulations protecting the privacy and integrity of patient medical information, including the Health Insurance Portabilityand Accountability Act of 1996, or HIPAA, which imposes certain requirements relating to the privacy, security and transmission of individually identifiablehealth information, and the applicable Privacy and Security Standards of HITECH, the Health Information Technology for Economic and Clinical Health Act.HIPAA also prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. In addition tofederal regulations issued under HIPAA, some states and foreign countries have enacted privacy and security statutes or regulations that, in some cases, aremore stringent than those issued under HIPAA. In those cases, it may be necessary to modify our operations and procedures to comply with the more stringentstate and foreign laws, which may entail significant and costly changes for us.Certificate of Need LawsIn a number of states in the U.S., a certificate of need or similar regulatory approval is required prior to the acquisition of high-cost capital items orvarious types of advanced medical equipment, such as our Niobe system. Many of the states in which we sell Niobe systems have laws that requireinstitutions 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.EmployeesAs of December 31, 2014, we had 133 employees, 22 of whom were engaged directly in research and development, 62 in sales and marketing activities,22 in manufacturing and service, 4 in regulatory, clinical affairs and quality activities, 5 in training activities and 18 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-Q, current reports on Form 8-K, and allamendments and exhibits to those reports, available free of charge in the Investors section of our website, http://www.stereotaxis.com, as soon as reasonablypracticable after they are filed with the SEC. The filings are also available through the SEC at the SEC’s Public Reference Room at 100 F Street, N.E.,Washington, D.C. 20549 or by calling 1-800-SEC-0330. Further, these filings are available on the Internet at http://www.sec.gov. Information contained onour website is not part of this report and such information is not incorporated by reference into this report. 17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 may require additional funds to meet our operational, working capital and capital expenditure needs in the future. We cannot be certain that wewill be able to obtain additional funds on favorable terms or at all. If we cannot raise capital on acceptable terms, we will not be able to, among other things: • 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 going concern, wemay be required to substantially revise our business plan or cease operations.As of December 31, 2014, we had cash and cash equivalents of $7.3 million and working capital of $4.6 million. We incurred operating losses of $5.4million, $8.8 million, and $10.6 million in 2014, 2013 and 2012, respectively. As a result, our auditors have expressed substantial doubt about our ability tocontinue as a going concern. Our auditors included an explanatory paragraph regarding our ability to continue as a going concern in their auditors’ report onour 2012 and 2013 financial statements as well. We cannot assure you that we will be able to obtain sufficient funds from our operating or financingactivities to support our continued operations. If we cannot continue as a going concern, we may need to substantially revise our business plan or ceaseoperations, which may reduce or negate the value of your investment. In addition, our continued receipt of an opinion from our auditors that expresses doubtabout our ability to continue as a going concern may impair our ability to raise new capital, obtain new customers, and hire and retain employees.We may not be able to comply with debt covenants and may have to repay outstanding indebtedness.We have financed our operations through equity transactions, a financing of our catheter royalty stream under the Healthcare Royalty Partners II, L.P.(formerly “Cowen Healthcare Royalty Partners II, L.P.”) facility entered into in November 2011, as well as bank and other borrowings. In the first quarter of2014, we extended our revolving line of credit, which matures on March 31, 2015. In addition, our current borrowing agreements contain various covenants,including financial covenants under our credit agreement with our primary lender. The covenants in these various agreements are similar, but are notidentical in all respects. If we violate our covenants, we could be required to repay the indebtedness as to which that default relates. In addition, as a result ofvarious cross-default provisions in these agreements, a violation of the covenants under one or more of such agreements could trigger our obligation to repayall of our existing indebtedness. We could be unable to make these payments, which could lead to insolvency. Even if we are able to make these payments, itwill lead to the lack of availability for additional borrowings under our bank loan agreement due to our borrowing capacity. There can be no assurance thatwe will be able to maintain compliance with these covenants or that we could replace this source of liquidity if these covenants were to be violated and ourloans and other borrowed amounts were forced to be repaid. 18Table of ContentsWe may lose key personnel or fail to attract and retain replacement or additional personnel.We are highly dependent on the principal members of our management, as well as our scientific and sales staff. Attracting and retaining qualifiedpersonnel 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 ofmembers of our scientific staff may significantly delay or prevent product development and other business objectives. A loss of key sales personnel couldresult in a reduction of revenue. In addition, if we outsource certain employee functions that were formerly handled in-house, our personnel costs couldincrease.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, andhospitals and physicians are traditionally slow to adopt new products and treatment practices. In addition, hospitals may delay their purchase or installationdecision for the Niobe ES system based on the disposable interventional devices that have received regulatory clearance or approval. Moreover, the Niobe ESsystem is an expensive piece of capital equipment, representing a significant portion of the cost of a new or replacement interventional lab. Although pricedsignificantly below a Niobe ES system, the Odyssey Solution and Vdrive system are still expensive products. If hospitals do not widely adopt our systems, orif they decide that they are too expensive, we may never become profitable. Any failure to sell as many systems as our business plan requires could also havea seriously detrimental impact on our results of operations, financial condition, and cash flow.If we are unable to fulfill our current purchase orders and other commitments on a timely basis or at all, we may not be able to achieve future salesgrowth.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 ofour control. Although the actual installation of our Niobe ES system requires only a few weeks, and can be accomplished by either our staff or bysubcontractors, successful installation of our system can be subjected to delays related to the overall construction or renovation process. If we experience anyfailures or delays in completing the installation of these systems, our reputation would suffer and we may not be able to sell additional systems. We haveexperienced situations in which our purchase orders and other commitments did not result in recognizing revenue from placement of a system with acustomer. In addition to construction delays, there are risks that an institution will attempt to cancel a purchase order as a result of subsequent project reviewby the institution or the departure from the institution of physicians or physician groups who have expressed an interest in the Epoch Solution.In 2014, 2013 and 2012, we experienced 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 effecton our revenue and results of operations. 19Table of ContentsWe 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 ourNiobe ES systems and Odyssey systems have been delivered less than one year after the receipt of a purchase order from a hospital, with the timing beingdependent on the construction cycle for the new or replacement interventional suite in which the equipment will be installed. In some cases, this time framehas been extended further because the interventional suite construction is part of a larger construction project at the customer site (typically the constructionof a new building), which may occur with our existing and future purchase orders. We cannot assure you that the time from purchase order to delivery forsystems to be delivered in the future will be consistent with our historical experience. Moreover, the global economic slowdown may cause our customers tofurther delay construction or significant capital purchases, which could further lengthen our sales cycle. This may contribute to substantial fluctuations in ourquarterly operating results. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in whichevent our stock price would likely decrease.The rate of technological innovation of our products might not keep pace with the rest of the market.The rate of innovation for the market in which our products compete is fast-paced and requires significant resources and innovation. If other productsand technologies are developed that compete with, or may compete with, the Niobe, Odyssey and Vdrive systems, it could be difficult for us to maintain ouradvantages associated with being an early developer of this technology. In addition, connectivity with other devices in the electrophysiology lab is a keydriver of value. If the Company is not able to continue to commit sufficient resources to ensure that its products are compatible with other products within theelectrophysiology lab, this could have a negative impact on revenue.General economic conditions could materially adversely impact us.Our operating performance is dependent upon economic conditions in the United States and in other countries in which we operate. The recenteconomic downturn 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 delaypurchasing or installation decisions or cancel existing orders. The Niobe ES system, Odyssey Solution and Vdrive system are typically purchased as part of alarger overall capital project and an economic downturn or the lack of a robust recovery might make it more difficult for our customers, includingdistributors, to obtain adequate financing to support the project or to obtain requisite approvals. Any delay in purchasing decisions or cancellation ofpurchasing commitments may result in a decrease in our revenues. Another credit crisis similar to the credit crisis that began in 2008 could further affect ourbusiness if key suppliers are unable to obtain financing to manufacture our products or become insolvent and we are unable to manufacture product to meetcustomer demand. If the United States and global economy continues to be sluggish or deteriorates further for a longer period than we anticipate, we mayexperience a material negative decrease on the demand for our products which may, in turn, have a material adverse effect on our revenue, profitability,financial condition, ability to raise additional capital and the market price of our stock.Physicians may not use our products if they do not believe they are safe, efficient and effective.We believe that physicians will not use our products unless they determine that the Niobe ES system and Vdrive system provide a safe, effective andpreferable alternative to interventional methods in general use today. If longer-term patient studies or clinical experience indicate that treatment with oursystem or products is less effective, less efficient or less safe than our current data suggest, our sales would be harmed, and we could be subject to significantliability. Further, unsatisfactory patient outcomes or patient injury could cause negative 20Table of Contentspublicity for our products, particularly in the early phases of product introduction. In addition, physicians may be slow to adopt our products if they perceiveliability risks arising from the use of these new products. It is also possible that as our products become more widely used, latent defects could be identified,creating negative publicity and liability problems for us and adversely affecting demand for our products. If physicians do not use our products, we likelywill not become profitable or generate sufficient cash to survive as a going concern.Our collaborations with Siemens, Philips, Biosense Webster or other parties may fail, or we may not be able to enter into additional 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 instrumentcontrol technology with their respective imaging products or disposable interventional devices and to co-develop additional disposable interventionaldevices for use with 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: • we fail to or are unable to maintain adequate compatibility of our products with the most prevalent imaging products or disposableinterventional devices expected by our customers for their clinical practice; • any of our collaboration partners delays or fails in the integration of its technology or new products with our Niobe system; • 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 orability to fulfill their obligations to us.The failure of one or more of our collaborations could have a material adverse effect on our financial condition, results of operations and cash flow. Inaddition, if we are unable to enter into additional collaborations in the future, or if these collaborations fail, our ability to develop and commercializeproducts could be impacted negatively and our revenue could be adversely affected.The complexity associated with selling, marketing, and distributing products could impair our ability to increase revenue.We currently market our products in the U.S., Europe and the rest of the world through a direct sales force of sales specialists, distributors and 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; • 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. 21Table of ContentsIn 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, andcollaboration from highly regarded physicians at leading commercial and research hospitals, particularly in the U.S. and Europe. If we are unable to gainand/or maintain such support, training services, and collaboration or if the reputation or standing of these physicians is impaired or otherwise adverselyaffected, our ability to market our products and, as a result, our financial condition, results of operations and cash flow could be materially and adverselyaffected.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 toensure they maintain the skill set necessary to use the interface. Continued market acceptance could be delayed by lack of physician willingness to attendtraining sessions, by the time required to complete this training, or by state or institutional restrictions on our ability to provide training. An inability to traina sufficient number of physicians to generate adequate demand for our products could have a material adverse impact on our financial condition and cashflow.Customers may choose to purchase competing products and not ours.Our products must compete with traditional interventional methods. These methods are widely accepted in the medical community, have a long historyof use and do not require the purchase of an additional expensive piece of capital equipment. In addition, many of the medical conditions that can be treatedusing our products can also be treated with pharmaceuticals or other medical devices and procedures. Many of these alternative treatments are also widelyaccepted in the medical community and have a long history of use.We are aware of one public company and one private company that have commercialized electrophysiology catheter navigation systems which havebeen cleared by the FDA for mapping procedures only. In addition, we are aware of one private company with an electromagnetic catheter navigation systemthat has received CE Mark approval in Europe.We face competition from companies that are developing drugs, gene or cellular therapies or other medical devices or procedures to treat theconditions for which our products are intended. The medical device and pharmaceutical industries make significant investments in research anddevelopment, and innovation is rapid and continuous. Other companies in the medical device industry continue to develop new devices and technologies fortraditional interventional methods.If these or other new products or technologies emerge that provide the same or superior benefits as our products at equal or lesser cost, it could renderour products obsolete or unmarketable. In addition, the presence of other competitors may cause potential customers to delay their purchasing decisions,resulting in a longer than expected sales cycle, even if they do not choose our competitors’ products. We cannot be certain that physicians will use ourproducts to replace or supplement established treatments or that our products will be competitive with current or future products and technologies.Many of our other competitors also have longer operating histories, significantly greater financial, technical, marketing and other resources, greatername recognition and a larger base of customers than we do. In addition, as the markets for medical devices develop, additional competitors could enter themarket. We cannot assure you that we will be able to compete successfully against existing or new competitors. Our revenue would be reduced or eliminatedif our competitors develop and market products that are more effective and less expensive than our products. 22Table of ContentsIf the magnetic fields generated by our system are not compatible with, or interfere with, other widely used equipment in the interventional labs, sales ofour 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. Ifother equipment in the interventional labs or elsewhere in a hospital is incompatible with the magnetic fields generated by our system, or if our systeminterferes with such equipment, we may be required to install additional shielding, which may be expensive and which may not solve the problem. Ifmagnetic interference becomes a significant issue at targeted institutions, it would increase our installation costs at those institutions and could limit thenumber of hospitals that would be willing to purchase and install our systems, either of which would adversely affect our financial condition, results ofoperations and cash flow.The use of our products could result in product liability claims that could be expensive, divert management’s attention, and harm our reputation andbusiness.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, and result in significant legal defense costs,significant harm to our reputation and a decline in revenue.Our costs could substantially increase if we receive a significant number of warranty claims.We generally warrant each of our products against defects in materials and workmanship for a period of 12 months following the installation of 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 losses into 2015 as we continue the commercialization of our products.We are still in the process of realizing the full potential of the commercialization of our technology, and will need to continue to make improvements to thattechnology. Moreover, the extent of our future losses and the timing of profitability are highly uncertain. Although we have achieved operating profitabilityduring one quarter, we may not achieve profitable operations on an annual basis, and if we achieve profitable operations, we may not sustain or increaseprofitability on a quarterly or annual basis. If we require more time than we expect to generate significant revenue and achieve annual profitability, or if weare unable to sustain profitability once achieved, we may not be able to continue our operations. Our failure to achieve annual profitability or sustainprofitability on an annual or quarterly basis could negatively impact the market price of our common stock. Furthermore, even if we achieve significantrevenue, we may choose to pursue a strategy of increasing market penetration and presence or expand or accelerate new product development or clinicalresearch activities at the expense of profitability.Our reliance on contract manufacturers and on suppliers, and in some cases, a single supplier, could harm our ability to meet demand for our productsin 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, guidewires and disposable 23Table of Contentsdevices for our Vdrive system. We also depend on various third party suppliers for the magnets we use in our Niobe ES system and certain components of ourOdyssey Solution and Vdrive system. In addition, some of the components necessary for the assembly of our products are currently provided to us by a singlesupplier, including the magnets for our Niobe ES system and certain components of our Odyssey Solution, and we generally do not maintain large volumes ofinventory. Our reliance on these third parties involves a number of risks, including, among other things, the risk that: • we may not be able to control the quality and cost of our system or respond to unanticipated changes and increases in customer orders; • we may lose access to critical services, materials, or components, resulting in an interruption in the manufacture, assembly and shipment of 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 or inadequateinventory 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 enterinto agreements with new manufacturers or suppliers on commercially reasonable terms or at all. Additionally, obtaining components from a new suppliermay require a new or supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume product sales.Any disruptions in product flow may harm our ability to generate revenue, lead to customer dissatisfaction, damage our reputation and result in additionalcosts or cancellation of orders by our customers.We also rely on Biosense Webster and other parties to manufacture a number of disposable interventional devices for use with our Niobe system. Ifthese parties 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 because materials used tomanufacture 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,including the imposition of import restrictions, could adversely affect our business. The flow of components from our vendors could also be adverselyaffected by financial or political instability in any of the countries in which the goods we purchase are manufactured, if the instability affects the productionor export of product components from those countries. Trade restrictions in the form of tariffs or quotas, or both, could also affect the importation of thoseproduct components and could increase the cost and reduce the supply of products available to us. In addition, decreases in the value of the U.S. dollaragainst foreign currencies could increase the cost of products we purchase from overseas vendors. 24Table of ContentsWe may encounter problems at our manufacturing facilities or those of our subcontractors or otherwise experience manufacturing delays that couldresult in lost revenue.We subcontract all or part of the manufacture and assembly of components of our Niobe ES system, Odyssey Solution, and Vdrive system, and all of 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, whichcould materially diminish the value of the patent. We also cannot assure you that we will be able to develop additional patentable technologies. If we fail toobtain adequate patent protection for our technology, or if any protection we obtain becomes limited or invalidated, others may be able to make and sellcompeting products, 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, employees, consultants and others who participate in developing our products or in commercial relationships with us may breach theiragreements with us regarding our intellectual property, and we may not have adequate remedies for the breach.Our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology and 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 25Table of Contentstechnology components that are utilized in our current offering eroding some differentiation in the marketplace. In addition, the laws of some foreigncountries do not protect intellectual property rights to the same extent, as do the laws of the U.S., particularly in the field of medical products and procedures.Third parties may assert that we are infringing their intellectual property rights.Successfully commercializing our products will depend in part on not infringing patents held by third parties. It is possible that one or more of ourproducts, including those that we have developed in conjunction with third parties, infringes existing patents. We may also be liable for patent infringementby third parties whose products we use or combine with our own and for which we have no right to indemnification. In addition, because patent applicationsare maintained under conditions of confidentiality and can take many years to issue, there may be applications now pending of which we are unaware andwhich may later result in issued patents that our products infringe. Determining whether a product infringes a patent involves complex legal and factualissues and may not become clear until finally determined by a court in litigation. Our competitors may assert that our products infringe patents held by them.Moreover, as the number of competitors in our market grows the possibility of a patent infringement claim against us increases. If we were not successful inobtaining a license or redesigning our products, we could be subject to litigation. If we lose in this kind of litigation, a court could require us to paysubstantial damages or prohibit us from using technologies essential to our products covered by third-party patents. An inability to use technologies essentialto our products would have a material adverse effect on our financial condition, results of operations and cash flow and could undermine our ability tocontinue operating as a going concern.Expensive intellectual property litigation is frequent in the medical device industry.Infringement actions, validity challenges and other intellectual property claims and proceedings, whether with or without merit, can be expensive andtime-consuming and would divert management’s attention from our business. We have incurred, and expect to continue to incur, substantial costs inobtaining patents and may have to incur substantial costs defending our proprietary rights. Incurring such costs could have a material adverse effect on ourfinancial condition, results of operations and cash flow.We may not be able to maintain all the licenses or rights from third parties necessary for the development, manufacture, or marketing of new andexisting 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 orrights for any of our products, we could be forced to try to design around those patents at additional cost or abandon the product altogether, which couldadversely affect revenue and results of operations. If we have to abandon a product, our ability to develop and grow our business in new directions andmarkets would be adversely affected. If we do not maintain licenses or exclusivity with suppliers of certain components of our Odyssey Solution, competitorsmay enter the market, negatively impacting our ability to develop and commercialize the Odyssey Solution.Our products and related technologies can be applied in different medical applications, and we may fail to focus on the most profitable areas.The Niobe system is designed to have the potential for expanded applications beyond electrophysiology and interventional cardiology, includingcongestive heart failure, structural heart repair, interventional neurosurgery, interventional neuroradiology, peripheral vascular, pulmonology, urology,gynecology and gastrointestinal medicine. We continue to develop the Odyssey Solution and Vdrive system for interventional labs that have a Niobe systeminstalled as well as those standard interventional labs that do not have a Niobe system installed. However, we have limited financial and managerial resourcesand therefore may be required to focus on products in selected industries and sites and to forego efforts with regard to other products and industries. Ourdecisions 26Table of Contentsmay not produce viable commercial products and may divert our resources from more profitable market opportunities. Moreover, we may devote resources todeveloping products in these additional areas but may be unable to justify the value proposition or otherwise develop a commercial market for products wedevelop in these areas, if any. In that case, the return on investment in these additional areas may be limited, which could negatively affect our results ofoperations.We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their formeremployers.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 oftheir former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetarydamages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result insubstantial costs and be a distraction to management. Incurring such costs could have a material adverse effect on our financial condition, results ofoperations and cash flow.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 ifsuch 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 anexemption applies, each medical device that we wish to market in the U.S. must be designated as Class I, exempt from premarket approval or notification, orfirst receive either a 510(k) clearance or a pre-market approval, or PMA, from the U.S. FDA pursuant to the Federal Food, Drug, and Cosmetic Act, or FD&CAct. 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 morecostly, lengthy, and uncertain, generally taking from one to three years or even longer. Although we have 510(k) clearance for many of our products,including disposable interventional devices, and we are able to market these products commercially in the U.S., our business model relies significantly onrevenue from disposable interventional devices, some of which may not achieve FDA clearance or approval. We cannot assure you that any of our deviceswill not be required to undergo the lengthier and more burdensome PMA process. We cannot commercially market any disposable interventional devices inthe U.S. until the necessary clearances or approvals from the FDA have been received. In addition, we are working with third parties to co-develop disposableproducts. In some cases, these companies are responsible for obtaining appropriate regulatory clearance or approval to market these disposable devices. Ifthese clearances or approvals are not received or are substantially delayed or if we are not able to offer a sufficient array of approved disposableinterventional devices, we may not be able to successfully market our system to as many institutions as we currently expect, which could have a materialadverse impact on our financial condition, results of operations and cash flow.Furthermore, obtaining 510(k) clearances, PMAs or PMA supplement approvals, from the FDA could result in unexpected and significant costs for 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 when, the FDA will act on our marketing applications. If we are unable to obtain the necessaryregulatory approvals, our financial condition and cash flow may be adversely affected. Also, a failure to obtain approvals may limit our ability to growdomestically and internationally. 27Table of ContentsIf our strategic alliances elect not to or we fail to obtain regulatory approvals in other countries for products under development, we will not be able tocommercialize these products in those countries.In order to market our products outside of the U.S., we and our strategic alliances or distributors must establish and comply with numerous and varyingregulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional producttesting and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDAapproval. 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 maynegatively impact the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining suchapproval could have the same adverse effects described above regarding FDA approval in the U.S. In addition, we are relying on our strategic alliances insome instances to assist us in this regulatory approval process in countries outside the U.S. and Europe, for example, in Japan.We may fail to comply with continuing regulatory requirements of the FDA and other authorities and become subject to enforcement action, which mayinclude 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 FD&C Act, and the FDA could modify its regulations promulgated under this law in a way to make ongoing regulatory compliance more burdensome anddifficult.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 sanctionsand we also may be required to cease marketing or recall the modified product until we obtain FDA clearance or approval which could also limit productsales, delay product shipment and harm our profitability.In many foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards, 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 qualificationscould have a material adverse effect on our business, financial condition and results of operations. Due to the movement toward harmonization of standardsin the European Union, we expect a changing regulatory environment in Europe characterized by a shift from a country-by-country regulatory system to aEuropean Union-wide single regulatory system. We cannot predict the timing of this harmonization and its effect on us. Adapting our business to changingregulatory systems could have a material adverse effect on our business, financial condition, and results of operations. If we fail to comply with applicableforeign regulatory requirements, we may be subject to fines, suspension, or withdrawal of regulatory approvals, product recalls, seizure of products, operatingrestrictions and criminal prosecution. 28Table of ContentsIn 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. Wecannot 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.Further, any failure to comply with FDA’s QSR by us or our suppliers could result in FDA refusing requests for and/or delays in 510(k) clearance or PMAapproval of new products.Software errors or other defects may be discovered in our products.Our products incorporate many components, including sophisticated computer software. Complex software frequently contains errors, especially whenfirst introduced. Because our products are designed to be used to perform complex interventional procedures, we expect that physicians and hospitals willhave an 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; • additional regulatory filings; • product recalls; • increased service or warranty costs; and/or • product liability claims relating to the software defects. 29Table of ContentsIf we fail to comply with health care regulations, we could face substantial penalties and our business, operations and financial condition could beadversely 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 weconduct our business, and internationally. The regulations that may affect our ability to operate include: • the federal healthcare program Anti-Kickback Law, which prohibits, among other things, persons from soliciting, receiving or 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 if weprovide 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 theprivacy, security and transmission of individually identifiable health information; and the applicable Privacy and Security Standards ofHITECH, the Health Information Technology for Economic and Clinical Health Act, which is Title XIII of the American Recovery andReinvestment 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; • federal and state Sunshine laws, which require manufacturers of certain medical devices to collect and report information on payments ortransfers of value to physicians and teaching hospitals, as well as investment interests held by physicians and their immediate family members;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 restructuring ofour 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, and electronic transaction laws, we may be required to modify our operations with respect to the handling of patient information. Implementingthese modifications may prove costly. At this time, we are not able to determine the full consequences to us, including the total cost of compliance, of thesevarious federal and state laws. 30Table of ContentsHealthcare 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). Among other things, the law imposes a tax onmedical device manufacturers and producers equal to 2.3% of the sales price for all sales beginning January 1, 2013. This excise tax applies to the majority ofour products sold within the United States. We expect that the PPACA could have a material adverse effect on our industry generally and our ability tosuccessfully commercialize 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 forthe years 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 this limitedavailability, hospitals and other health care providers may be unable to obtain a certificate of need for the purchase of our systems. Further, our sales andinstallation 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, including the costs of the disposable interventional devices used in these procedures. If in thefuture our disposable interventional devices do not fall within U.S. reimbursement categories and our procedures are not reimbursed, or if the reimbursementis insufficient to cover the costs of purchasing our system and related disposable interventional devices, the adoption of our systems and products would besignificantly slowed or halted, and we may be unable to generate sufficient sales to support our business. Our success in international markets also dependsupon the eligibility of our products for reimbursement through government-sponsored 31Table of Contentshealth care payment systems and third-party payors. In both the U.S. and foreign markets, health care cost-containment efforts are prevalent and are expectedto continue. These efforts could reduce levels of reimbursement available for procedures involving our products and, therefore, reduce overall demand for ourproducts as well. A failure to generate sufficient sales could have a material adverse impact on our financial condition, results of operations and cash flow.Our growth will place a significant strain on our resources, and if we fail to manage our growth, our ability to develop, market, and sell our productswill 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.Our continuing ability to use Form S-3 may be limited.As of the date of the filing of this Form 10-K, our public float is below $75 million. As a result, we are limited in our ability to file new shelf registrationstatements on SEC Form S-3 and/or to fully use the remaining capacity on our existing registration statements on SEC Form S-3. We have relied significantlyon shelf registration statements on SEC Form S-3 for many of our financings in recent years, so any such limitations may harm our ability to raise the capitalwe need. In addition, if we are unable to remain compliant with our bank financing covenants, or if we are not able to timely file and make effectiveregistration statements prior to the dates required under the federal securities laws, we would be ineligible to use Form S-3 for a 12-month period. Under thosecircumstances, until we are again eligible to use Form S-3, we would be required to use a registration statement on Form S-1 to register securities with the SECor issue such securities in a private placement, which could increase the cost of raising capital. 32Table of ContentsRisks Related To Our Common StockIf we fail to continue to meet all applicable NASDAQ Capital Market requirements and NASDAQ determines to delist our common stock, the delistingcould adversely affect the market liquidity of our common stock, which would impair the value of your investment and ultimately harm our business bylimiting our access to equity markets for capital raising.Our common stock is currently listed on the NASDAQ Capital Market. In order to maintain that listing, we must satisfy minimum financial and otherlisting requirements, including the requirement to maintain a market value of listed securities of at least $35 million. During the fourth quarter 2014, ourmarket value of listed securities occasionally dropped below $35 million. If we fail to maintain a market value of listed securities of at least $35 million for30 consecutive business days, we expect to receive notice from the NASDAQ Listing Qualifications Department notifying us that our common stock issubject to delisting unless we are able to demonstrate compliance with the market value of listed securities requirement during the applicable grace periods.We may be unable to demonstrate such compliance in a timely manner. It is also possible that we would otherwise fail to satisfy another NASDAQrequirement for the continued listing of our common stock. If we fail to continue to meet all applicable NASDAQ Capital Market requirements in the futureand NASDAQ determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, which would adverselyaffect our ability to obtain financing for the continuation of our operations, as a result, harming our business. This delisting could also impair the value ofyour investment.Our principal stockholders continue to own a large percentage of our voting stock, and they have the ability to substantially influence matters requiringstockholder approval.Certain of our directors and individuals or entities affiliated with them as well as other principal stockholders beneficially own or control a substantialpercentage of the outstanding shares of our common stock. Moreover, as a result of the issuance of warrants to certain institutional investors, certain of ourdirectors and their affiliated funds have the ability to obtain a substantial portion of our common stock. Accordingly, these stockholders acting as a group,will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger,consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also delay or prevent 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 have outstanding warrants to purchase 2.2 million shares of the Company’s common stock at a weighted average exercise price of $6.12, withprices ranging from $1.55 to $42.50. A significant number of shares of our common stock are subject to stock options and stock appreciation rights, and wemay request the ability to issue additional such securities to our employees. We may also decide to raise additional funds through public or private debt orequity financing to fund our operations. While we cannot predict the effect, if any, that future exercises of warrants or future sales of debt, our common stock,other equity securities or securities convertible into our common stock or other equity securities or the availability of any of the foregoing for future sale, willhave on the market price of our common stock, it is likely that sales of substantial amounts of our common stock (including shares issued upon the exerciseof warrants, stock options, stock appreciation rights or the conversion of any convertible securities outstanding now or in the future), or the perception thatsuch 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 33Table of Contentsagreement prohibit us from declaring dividends without the prior consent of our lender. As a result, capital appreciation, if any, of our common stock will bean investor’s sole source of gain for the foreseeable future.Our certificate of incorporation and bylaws, Delaware law and one of our alliance agreements contain provisions that could discourage a takeover.Our certificate of incorporation and bylaws and Delaware law contain provisions that might enable our management to resist a takeover. 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 thatmay similarly discourage a takeover and negatively affect our share price as described above.Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.Changing laws, regulations and standards relating to corporate governance and public disclosure, including the new SEC regulations such as theDodd-Frank Wall Street Reform and Consumer Protection Act, and NASDAQ Capital Market rules have in the past created uncertainty for public companies.We continue to evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additionalcompliance costs we may incur or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, inmany cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by courts andregulatory and governing bodies. This could result in uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions todisclosure and governance practices. Maintaining appropriate standards of corporate governance and public disclosure may result in increased general andadministrative expense and a diversion of management time and attention from revenue-generating activities to compliance activities. In addition, if we failto comply with new or changed laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business andreputation 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 alliances 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. 34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 Capital Market and trading volume may be limited or sporadic. The market price of our common stockhas experienced, and may continue to experience, substantial volatility. During 2014, our common stock traded between $1.32 and $6.34 per share, ontrading volume ranging from approximately 3,400 to 5.1 million shares per day. The market price of our common stock will be affected by a number offactors, 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 Capital Market may depress the trading price ofour common stock, which could, among other things, allow a potential acquirer of the Company to purchase a significant amount of our common stock at lowprices. In addition, the volatility of our stock price could lead to class action securities litigation being filed against us, which could result in substantialcosts and a diversion of our management resources, which could significantly harm our business. ITEM 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 2014 fiscal year and that remain unresolved. ITEM 2.PROPERTIESOur primary company facilities are located in St. Louis, Missouri where we currently lease approximately 52,000 square feet of office and 12,000square feet of demonstration and assembly space. In the third quarter of 2013, the Company modified the existing lease agreement to terminateapproximately 13,000 square feet of unimproved space. This space is leased under an agreement through December 31, 2018.We lease approximately 3,900 square feet of office space in Maple Grove, Minnesota, under a lease agreement through October 31, 2015, and haveleased office space in Amsterdam, The Netherlands through 35Table of ContentsAugust 31, 2015. In addition, we lease an office space in Beijing, China under a lease agreement through September 8, 2015. In 2014, we entered a new leaseagreement for an office space in Japan through October 31, 2015. 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 alleged 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 sought unspecifieddamages, costs, attorneys’ fees and such other relief as the Court may deem appropriate. On May 18, 2012, the Company filed a motion to dismiss theAmended Complaint. On July 24, 2012, Lead Plaintiff filed its response to the motion to dismiss, and on August 30, 2012, the Company filed its reply briefin support of the motion to dismiss. On March 18, 2014, the Court granted the Company’s motion to dismiss and entered judgment in favor of the defendantsand against the plaintiffs. The plaintiffs did not file a notice of appeal prior to the deadline of April 17, 2014.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, apurported shareholder of the Company, against the directors of the Company and the Company as a nominal defendant. The Complaint in this action allegedthat 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 were at issue in the purported class action. The Complaint sought 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, theCourt entered an order staying the case pending resolution of the motion to dismiss in the securities class action. On July 18, 2014, the Court granted theparties’ joint motion to dismiss the case without prejudice.Additionally, we are involved from time to time in various lawsuits and claims arising in the normal course of business. Although the outcomes ofthese lawsuits and claims are uncertain, we do not believe any of them will have a material adverse effect on our business, financial condition or results ofoperations. ITEM 4.MINE SAFETY DISCLOSURESNot applicable. 36Table of ContentsITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESPRICE RANGE OF COMMON STOCKOur common stock began trading on the NASDAQ Global Market under the symbol “STXS” on August 12, 2004 and was transferred to the NASDAQCapital Market effective August 19, 2013. The following table sets forth the high and low sales prices of our common stock for the periods indicated andreported by NASDAQ. High Low Year Ended December 31, 2014 First Quarter $6.34 $3.60 Second Quarter 4.74 3.10 Third Quarter 3.61 2.30 Fourth Quarter 2.35 1.32 Year Ended December 31, 2013 First Quarter $3.28 $1.77 Second Quarter 2.07 1.31 Third Quarter 10.85 1.21 Fourth Quarter 6.24 3.10 As of February 28, 2015, there were approximately 324 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 use cash and cash equivalents in the operation and expansion of ourbusiness, and therefore do not anticipate paying any cash dividends for the next several years. In addition, the terms of our loan agreement prohibit us fromdeclaring dividends without the prior consent of our lender.The information required by this item regarding equity compensation is incorporated by reference to the information set forth in Item 12 of this AnnualReport on Form 10-K. 37Table of ContentsSTOCK PRICE PERFORMANCE GRAPHThe following graph shows the total stockholder return from December 31, 2009 through December 31, 2014 for a $100 investment in Stereotaxis, Inc.,the NASDAQ Composite (U.S.) Index and the NASDAQ OMX Global 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,nor is 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 OMX Global Index 38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, 2014 2013 2012 2011 2010 Consolidated Statements of OperationsData: Revenue $35,011,276 $38,031,081 $46,562,434 $41,987,432 $54,051,237 Cost of revenue 8,223,380 11,001,301 14,781,055 12,498,081 15,564,687 Gross margin 26,787,896 27,029,780 31,781,379 29,489,351 38,486,550 Operating costs and expenses: Research and development 5,158,331 5,672,058 8,405,086 12,886,488 12,244,163 Sales and marketing 15,168,940 17,132,093 20,607,999 31,635,415 30,178,818 General and administrative 11,845,289 13,066,103 13,394,556 16,908,656 15,022,689 Total operating expenses 32,172,560 35,870,254 42,407,641 61,430,559 57,445,670 Operating loss (5,384,664) (8,840,474) (10,626,262) (31,941,208) (18,959,120) Interest and other income (expense), net 182,223 (59,917,115) 1,387,835 (89,967) (964,367) Net loss $(5,202,441) $(68,757,589) $(9,238,427) $(32,031,175) $(19,923,487) Basic and diluted net loss per common share $(0.26) $(5.95) $(1.33) $(5.84) $(3.94) Shares used in computing basic and dilutednet loss per common share 19,945,038 11,554,566 6,944,928 5,482,627 5,052,200 Consolidated Balance Sheet Data: Cash, cash equivalents and short-terminvestments $7,270,301 $13,775,130 $7,777,718 $13,954,919 $35,248,819 Working capital 4,566,908 4,351,694 (5,715,760) (6,596,218) 12,395,426 Total assets 23,880,771 31,076,396 32,165,944 39,931,832 65,761,792 Long-term debt, less current maturities 18,388,764 18,481,478 16,824,736 17,290,531 8,000,000 Accumulated deficit (458,605,903) (453,403,462) (384,645,873) (375,407,446) (343,376,271) Total stockholders’ equity (12,549,718) (11,701,995) (18,790,226) (18,828,895) 10,475,246 (1)Other income recorded in 2010 includes $1.5 million in grants under the Qualifying Therapeutic Discovery Project Program.(2)Other income (expense) recorded in 2014, 2013, 2012, 2011, and 2010 includes $3.5 million, ($47.3) million, $8.2 million, $3.4 million, and $0.6million in warrant and other mark-to-market adjustments, respectively. 39 (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 on Form10-K. Operating results are not necessarily indicative of results that may occur in future periods.This report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Our actualresults could differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth in Item 1A.“Risk Factors.” Forward-looking statements discuss matters that are not historical facts. Forward-looking statements include, but are not limited to,discussions regarding our operating strategy, sales and marketing strategy, regulatory strategy, industry, economic conditions, financial condition,liquidity and capital resources and results of operations. Such statements include, but are not limited to, statements preceded by, followed by or thatotherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “can,” “could,” “may,” “will,” “would,” or similarexpressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities LitigationReform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They giveour expectations regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements,whether as a result of new information, future events or otherwise, unless required by law.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 thatour technology represents an important advance in the ongoing trend toward digital instrumentation in the interventional lab and provides substantial,clinically important improvements and cost efficiencies over manual interventional methods, which require years of physician training and often result inlong and unpredictable 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, Japan 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. 40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 market variousdisposable components (V-Loop, V-Sono, V-CAS, and V-CAS Deflect) which can be manipulated by these systems.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.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 thoseof our partners.Since our inception, we have generated significant losses. As of December 31, 2014, we had incurred cumulative net losses of approximately $458.6million. As of December 31, 2014, the Company had an installed base of 119 Niobe ES systems. In 2015, the Company plans to continue developing theNiobe ES system with the goal of furthering clinical adoption. Although we achieved an operating profit in the fourth quarter 2014, we expect to havenegative cash flow from operations into 2015 as we continue the development and commercialization of our products, conduct our research and developmentactivities and advance new products into clinical development from our existing research programs and fund additional sales and marketing initiatives. Ourexisting cash, cash equivalents and borrowing facilities may not be sufficient to fund our operating expenses and capital equipment requirements through thenext 12 months, which would require us to obtain additional financing before that time.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 recurring operatinglosses and the net capital deficiency. The financial statements do not include any adjustments relating to the recoverability and classification of assetscarrying amounts or 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 judgmentsthat affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. We review our estimates and judgments on an ongoingbasis. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates. We believe the following accounting policies are critical to the judgments and estimates we usein preparing our financial statements.Revenue RecognitionThe Company adopted Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) in the fourth quarter of2009, effective as of January 1, 2009. 41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 vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”). This requires management to record revenue for certain elements of a transaction eventhough it might not have delivered other elements of the transaction, for which it was unable to meet the requirements for establishing VSOE or TPE. TheCompany believes that the guidance significantly improves the reporting of these types of transactions to more closely reflect the underlying economiccircumstances. This guidance also prohibits the use of the residual method for allocating revenue to the various elements of a transaction and requires that therevenue be allocated proportionally based on the relative estimated selling prices.Under our revenue recognition policy, a portion of revenue for Niobe systems, Vdrive systems and certain types of Odyssey systems 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. Revenue is recognized for other types of Odyssey systems upon completionof installation, since there are no qualified third party installers. When installation is the responsibility of the customer, revenue from system sales isrecognized upon shipment since these arrangements do not include an installation element or right of return privileges. We do not recognize revenue insituations in which inventory remains at a Stereotaxis warehouse or in situations in which title and risk of loss have not transferred to the customer. Amountscollected prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Revenue from services and license fees, whether soldindividually or as a separate unit of accounting in a multi-element arrangement, is deferred and amortized over the service or license fee period, which istypically one year. Revenue from services is derived primarily from the sale of annual product maintenance plans. We recognize revenue from disposabledevice sales or accessories upon shipment and establish an appropriate reserve for returns. The return reserve, which is applicable only to disposable devices,is estimated based on historical experience which is periodically reviewed and updated as necessary. In the past, changes in estimate have had only a deminimus effect on revenue recognized in the period. We believe that the estimate is not likely to change significantly in the future.Stock-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, directors, and third-party consultants. The fairvalue of options and stock appreciation rights granted was determined using the Black-Scholes valuation method which gives consideration to the estimatedvalue of the underlying stock at the date of grant, the exercise price of the option, the expected dividend yield and volatility of the underlying stock, theexpected life of the option and the corresponding risk-free interest rate. The fair value of the grants of restricted shares and units was determined based on theclosing price of our stock on the date of grant. Stock compensation expense for options, stock appreciation rights and for time-based restricted share grants isamortized on a straight-line basis over the vesting period of the underlying issue, generally over four years except for grants to directors which generally vestover one to two years and restricted stock units which generally vest over a period of 18 months to four years. Stock compensation expense for performance-based restricted shares is amortized on a straight-line basis over the anticipated vesting period and is subject to adjustment based on the actual achievementof objectives. Compensation expenses related to option grants to non-employees are re-measured quarterly through the vesting date. Compensation expenseis recognized only for those options expected to vest, net of estimated forfeitures. Estimates of the expected life of options have been based on the average ofthe vesting and expiration periods, which is the simplified method under general accounting principles for share-based payments. Estimates of volatility andforfeiture rates utilized in calculating stock-based compensation have been prepared based on historical data and future expectations. Actual experience todate 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 rightsor restricted shares or if we determine that actual forfeiture rates are less than anticipated. The amount of expense to be recorded in future periods maydecrease if the requisite service periods are not completed or if the actual forfeiture rates are greater than anticipated. 42Table of ContentsValuation 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 reserveestimate for excess and obsolete is based on expected future use. Our reserve estimates have historically been consistent with our actual experience asevidenced by actual 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 taxassets because we are not able to conclude, due to our history of operating losses, that it is more likely than not that we will be able to realize any portion ofthe deferred 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 futurelosses over periods which the deferred tax assets are deductible, we determined that a 100% valuation allowance of deferred tax assets was appropriate.Results of OperationsComparison of the Years ended December 31, 2014 and 2013Revenue. Revenue decreased to $35.0 million for the year ended December 31, 2014, from $38.0 million for the year ended December 31, 2013, adecrease of approximately 8%. Revenue from sales of systems decreased to $7.8 million for the year ended December 31, 2014, from $12.7 million for theyear ended December 31, 2013, a decrease of approximately 38%. We recognized revenue on three Niobe ES systems, a total of $1.8 million for systeminstallation revenue, two Niobe ES system upgrades and a customer deposit for a previously cancelled Niobe system order. In addition, we recognizedrevenue on a total of $2.8 million for Odyssey and Odyssey Cinema systems, and a total of $0.8 million for Vdrive systems during the 2014 reporting periodcompared to nine Niobe ES systems, and a total of $0.9 million for Niobe ES upgrades, $3.7 million for Odyssey and Odyssey Cinema systems, and a total of$0.3 million for Vdrive systems during the 2013 reporting period. Revenue from sales of disposable interventional devices, service and accessories increasedto $27.2 million for the year ended December 31, 2014, from $25.3 million for the year ended December 31, 2013, an increase of approximately 7%. Theincrease was attributable to higher disposable sales volume and increased service revenue.Cost of Revenue. Cost of revenue decreased to $8.2 million for the year ended December 31, 2014, from $11.0 million for the year ended December 31,2013, a decrease of approximately 25%. As a percentage of our total revenue, overall gross margin increased from 71% for the year ended December 31, 2013,to 77% for the year ended December 31, 2014, due to a shift in mix from system revenue to disposable, service, and accessories revenue. Cost of revenue forsystems sold decreased to $4.2 million for the year ended December 31, 2014, from $6.9 million for the year ended December 31, 2013, a decrease ofapproximately 39%. This decrease was primarily due to decreased Niobe system sales volumes. Gross margin for systems was 46% for both the years endedDecember 31, 2014 and December 31, 2013. Cost of revenue for disposable interventional devices, service and accessories decreased to $4.0 million for theyear ended December 31, 2014, from $4.1 million for the year ended December 31, 2013, resulting in an increase in gross margin to 85% from 84% betweenthese periods. The increase is primarily due to improved service margins. 43Table of ContentsResearch and Development Expense. Research and development expense decreased to $5.2 million for the year ended December 31, 2014 from $5.7million for the year ended December 31, 2013, a decrease of approximately 9%. The decrease is primarily due to lower depreciation, reduced headcountexpenses and timing of project based expenses.Sales and Marketing Expense. Sales and marketing expense decreased to $15.2 million for the year ended December 31, 2014, from $17.1 million forthe year ended December 31, 2013, a decrease of approximately 11%. The decrease was driven by the lease amendment in the prior year third quarter and areduction in headcount costs, including severance costs, as part of the Company’s continued efforts to reduce operating expenses.General and Administrative Expense. General and administrative expenses include regulatory, clinical, general management and routine trainingexpenses. General and administrative expense decreased to $11.8 million for the year ended December 31, 2014, from $13.1 million for the year endedDecember 31, 2013, a decrease of approximately 9%. The decrease was primarily due to rent reduction driven by the lease amendment in the prior year thirdquarter and a reduction in consulting and legal expenses in the current year period.Other Income (Expense). Other income (expense) represents the non-cash change in market value of certain warrants classified as a derivative andrecorded as a current liability under general accounting principles for determining whether an instrument (or embedded feature) is indexed to an entity’s ownstock. Other expense in prior year also includes the adjustment in fair value of the derivative asset and liability related to the conversion features embeddedin the subordinated convertible debentures during periods in which the debentures were outstanding. The primary drivers of fluctuations in this balance arechanges in the Company’s stock price from one period to the next. Other income increased to $3.5 million for the year ended December 31, 2014 dueprimarily to the adjustment in fair value of warrants. Other expense was $47.3 million for the year ended December 31, 2013 due to non-cash charges incurredas a result of capital transactions with convertible note holders and other equity investors.Interest Expense. Interest expense decreased to $3.3 million for the year ended December 31, 2014 from $12.6 million for the year ended December 31,2013, due primarily to the extinguishment of the convertible debentures and pay off of the line of credit and term loan in 2013.Comparison of the Years ended December 31, 2013 and 2012Revenue. Revenue decreased to $38.0 million for the year ended December 31, 2013, from $46.6 million for the year ended December 31, 2012, adecrease of approximately 18%. Revenue from sales of systems decreased to $12.7 million for the year ended December 31, 2013, from $19.7 million for theyear ended December 31, 2012, a decrease of approximately 35%. We recognized revenue on nine Niobe ES systems, a total of $0.9 million for Niobe ESupgrades, $3.7 million for Odyssey and Odyssey Cinema systems, and a total of $0.3 million for Vdrive systems during the 2013 reporting period compared tonine Niobe systems, and a total of $3.3 million for Niobe ES upgrades, $6.5 million for Odyssey and Odyssey Cinema systems, and $1.1 million for Vdrivesystems during the 2012 reporting period. Revenue from sales of disposable interventional devices, service and accessories decreased to $25.3 million for theyear ended December 31, 2013, from $26.9 million for the year ended December 31, 2012, a decrease of approximately 6%. The decrease was attributable tolower disposable sales volume as a result of lower utilization.Cost of Revenue. Cost of revenue decreased to $11.0 million for the year ended December 31, 2013, from $14.8 million for the year endedDecember 31, 2012, a decrease of approximately 26%. As a percentage of our total revenue, overall gross margin increased from 68% for the year endedDecember 31, 2012, to 71% for the year ended December 31, 2013, due to a shift in mix from system revenue to disposable, service, and accessories revenue.Cost of revenue for systems sold decreased to $6.9 million for the year ended December 31, 2013, from $9.9 million for the year ended December 31, 2012, adecrease of approximately 31%. This decrease was 44Table of Contentsprimarily due to decreased system sales volumes across Odyssey, Odyssey Cinema and Vdrive product lines. Gross margin for systems was 46% for the yearended December 31, 2013, compared to 50% for year ended December 31, 2012. The decrease is primarily attributable to lower production volumes andrelated cost absorption as well as lower gross margin on Niobe ES systems. Cost of revenue for disposable interventional devices, service and accessoriesdecreased to $4.1 million for the year ended December 31, 2013, from $4.9 million for the year ended December 31, 2012, resulting in an increase in grossmargin to 84% from 82% between these periods. The increase is due to higher margins on service in the current year period due to fewer ES upgradesprovided in exchange for extended service contracts.Research and Development Expense. Research and development expense decreased to $5.7 million for the year ended December 31, 2013 from $8.4million for the year ended December 31, 2012, a decrease of approximately 33%. The decrease is primarily due to reduced headcount expenses and areduction in consulting, contract research, and material expenses as part of the Company’s efforts to reduce operating expenses.Sales and Marketing Expense. Sales and marketing expense decreased to $17.1 million for the year ended December 31, 2013, from $20.6 million forthe year ended December 31, 2012, a decrease of approximately 17%. The decrease was due to primarily due to reduced headcount and related travelexpenses as well as decreased 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 $13.1 million for the year ended December 31, 2013, from $13.4 million for the year ended December 31,2012, a decrease of approximately 2%. The decrease was primarily due to reduced headcount, partially offset by increased consulting expenses, lease exitactivities and medical device excise tax.Other Income (Expense). Other expense represents the non-cash change in market value of certain warrants classified as a derivative and recorded as acurrent liability under general accounting principles for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Otherexpense also includes the adjustment in fair value of the derivative asset and liability related to the conversion features embedded in the subordinatedconvertible debentures. Other expense increased to $47.3 million for the year ended December 31, 2013, due primarily to the adjustment of warrants andconvertible debt features in connection with the third quarter capital transactions with convertible note holders and other equity investors.Interest Expense. Interest expense increased to $12.6 million for the year ended December 31, 2013 from $6.9 million for the year ended December 31,2012, due primarily to the write-off of the unamortized debt discount in connection with the third quarter capital transactions with convertible note holdersand other equity investors.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, 2014, 2013 and 2012 to reflect these uncertainties. As of December 31, 2014, we had grossfederal net operating loss carryforwards of approximately $85.0 million which will expire between 2018 and 2034. As of December 31, 2014, we had state netoperating loss deferred tax assets of approximately $1.4 million which will expire at various dates between 2015 and 2034 if not utilized. We may not be ableto utilize all of these loss carryforwards prior to their expiration.Capital ResourcesAs of December 31, 2014, our accumulated deficit was $458.6 million with cash, cash equivalents, and short-term investments of $7.3 million, and$18.4 million debt principal outstanding. Since inception, we have 45Table of Contentsfinanced our operations primarily through cash generated by operations, borrowings on our revolving line of credit and proceeds from our debt and stockofferings. As of December 31, 2014, our borrowing facilities were comprised of a revolving line of credit with $4.5 million of unborrowed availability withour primary lender, Silicon Valley Bank, as well as the Healthcare Royalty Partners debt discussed in the following sections.Revolving line of creditThe Company has had a working capital line of credit with its primary lender, Silicon Valley Bank, since 2004. The revolving line of credit is securedby substantially all of the Company’s assets. The Company is required under the revolving line of credit to maintain its primary operating account and themajority of its cash and investment balances in accounts with its primary lender. The facility was last amended on March 28, 2014, extending the maturitydate one year to March 31, 2015 and increasing the maximum available under the line from $3 million to $10 million subject to the value of collateralizedassets. The current agreement requires the Company to maintain a minimum tangible net worth of not less than (no worse than) negative $21 million, withsuch minimum requirement subject to increase under certain circumstances as described in the agreement, and to maintain a liquidity ratio of greater than1.75:1.00, excluding certain short term advances from the calculation.As of December 31, 2014, the Company had no outstanding debt under the revolving line of credit. Draws on the line of credit are made based on theborrowing capacity one week in arrears. As of December 31, 2014 the Company had a borrowing capacity of $4.5 million based on the Company’scollateralized assets.Between 2008 and August 2013, the Company’s agreement with the primary lender was secured in part by guarantees provided by certain affiliates ofcurrent or former members of our Board of Directors, “the Lenders”. As discussed below, in exchange for their guarantees, the Company issued the Lendersfive year warrants at each extension of the revolving working line of credit. In August, 2013, the Company and the Bank agreed to eliminate the guaranteesprovided by the Lenders.Term noteIn 2010, the Company entered into a $10 million term loan maturing on December 31, 2013, with $2 million of principal due in 2011 and $4 millionof principal due in each of 2012 and 2013. Interest on the term loan accrued at the rate of prime plus 3.5%. Under this agreement, the Company provided itsprimary lender with warrants to purchase 11,111 shares of common stock. The warrants are exercisable at $36.00 per share, beginning on December 17, 2010and expiring on December 17, 2015. The fair value of these warrants of $228,332, calculated using the Black-Scholes method, was deferred and amortized tointerest expense ratably over the life of the term loan. The term note was paid in full in September 2013.Healthcare Royalty Partners DebtIn November 2011, the Company entered into a loan agreement with Healthcare Royalty Partners (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$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 thetwelve months ended December 31, 2012. The loan will be repaid through, and secured by, royalties payable to the Company under its Development,Alliance and Supply Agreement with Biosense Webster, Inc. The Biosense Agreement relates to the development and distribution of magnetically enabledcatheters used with Stereotaxis’ Niobe system in cardiac ablation procedures. Under the terms of the Agreement, Healthcare Royalty Partners will be entitledto receive 100% of all royalties due to the Company under the Biosense Agreement until the loan is repaid. The loan is a full recourse loan, matures onDecember 31, 2018, and bears interest at an annual rate of 46Table of Contents16% payable quarterly with royalties received under the Biosense Agreement. If the payments received by the Company under the Biosense Agreement areinsufficient to pay all amounts of interest due on the loan, then such deficiency will increase the outstanding principal amount on the loan. After the loanobligation is repaid, the royalties under the Biosense Agreement will again be paid to the Company. The loan is also secured by certain assets andintellectual property of the Company. The Agreement also contains customary affirmative and negative covenants. The use of payments due to the Companyunder the Biosense Agreement was approved by our primary lender.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”), whichbecame convertible into shares of the Company’s common stock at a conversion price of $3.361 per share (or approximately 2.5 million shares in theaggregate), on July 10, 2012, the date that the Company received shareholder approval for the transaction. The purchasers of the Debentures also receivedwarrants, which were scheduled to expire in November 2018, to purchase an aggregate of approximately 2.5 million shares of the Company’s common stockat an exercise price of $3.361 per share (“Convert Warrants”). The Debentures bore interest at 8% per year and were scheduled to mature on May 7, 2014. Inaddition, the Company had the ability to issue shares of its common stock in lieu of cash interest payments under certain circumstances, and following theregistration of the shares for resale, the Company issued shares in lieu of cash interest payments.The Company recorded the Debentures on the balance sheet net of the debt discount. The debt discount of $7.6 million was 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 liabilitywere $4.1 million and $3.5 million, respectively. The debt discount was amortized over the life of the loan using the effective interest method and thewarrants and derivative liability were recorded at fair value on each reporting period. Refer to Note 12 for additional discussion of the fair value of thewarrants and conversion features.On August 7, 2013, holders of Convert Warrants exercised all of their Convert Warrants for an aggregate of approximately $2.5 million shares of ourcommon stock, resulting in cash proceeds of approximately $8.5 million. In addition, holders of all of the Debentures exchanged the balance of theirunconverted Debentures for an aggregate of approximately 2.7 million shares of the Company’s common stock and additional warrants (the “ExchangeWarrants”) to purchase approximately 2.5 million shares, having an exercise price of $3.361 per share. On August 8, 2013, certain former holders of theDebentures exercised Exchange Warrants to purchase an aggregate of 1.4 million shares of common stock in cashless net exercises as provided for in theExchange Warrants, which resulted in the issuance to such funds of an aggregate of 0.8 million shares of common stock, but no net proceeds to the Company.The Company is relying on the exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended, based on representations tothe Company made by the warrant holders.The mark-to-market expense associated with the adjustment of warrants and convertible debt features in connection with the third quarter capitaltransactions are included in other expense for the year ended December 31, 2013. The write-off of the unamortized debt discount is included in interestexpense for the year ended December 31, 2013.Listing Transfer to NASDAQ Capital MarketOn August 15, 2013, the NASDAQ Listing Qualifications Panel (the “Panel”) granted approval of the Company’s request to transfer its listing to TheNASDAQ Capital Market from The NASDAQ Global Market. The Company’s securities began trading on the NASDAQ Capital Market effective August 19,2013. 47Table of ContentsReverse 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 Reverse Stock Split was effective as of July 10, 2012, and the Company’s common stockbegan trading 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 and convertibledebentures outstanding immediately prior to the effectiveness of the Reverse Stock Split. The Reverse Stock Split reduced the number of shares of theCompany’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.Common StockThe holders of common stock are entitled one vote for each share held and to receive dividends whenever funds are legally available and whendeclared by the Board of Directors subject to the prior rights of holders of all classes of stock having priority rights as dividends and certain conditions of ouragreement with our primary lender. No dividends have been declared or paid as of December 31, 2014.Issuances of Common StockIn 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 withsix-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$3.361 per share (the “PIPE Warrants”). Each purchaser received a PIPE Warrant to purchase one share of common stock for every share of PIPE CommonStock purchased. Net proceeds from the sale of the securities were approximately $9.1 million, after placement agent fees and other offering expenses. TheCompany used the funds to repay $7 million of the revolving credit facility guaranteed by the Lenders.Between March and July 2013, the Company amended its agreement with its primary lender and extended the $3 million guarantee of the revolvingcredit facility provided by affiliates of current and former members of the Board of Directors, “the Lenders”. As a result of these extensions, the Companyissued the Lenders warrants to purchase common stock. The lenders received 113,636 warrants at $1.98 per share, 48,387 warrants at $1.55 per share, and14,313 warrants at $5.24 per share.On August 7, 2013, venture funds affiliated with Sanderling Ventures received an aggregate of 183,478 shares of common stock based upon thecashless exercise of warrants to purchase an aggregate of 262,450 shares of common stock. These warrants were comprised of 75,758 warrants with an exerciseprice of $1.98 per share, 156,204 warrants with an exercise price of $3.361 per share and 30,488 warrants with an exercise price of $4.10 per share. Thewarrants were issued by the Company in private placements in 2012 and 2013 in connection with the extension of previously disclosed guarantees.On August 13, 2013, venture funds affiliated with Sanderling Ventures exercised PIPE Warrants to purchase an aggregate of 650,619 shares of commonstock in a cashless net exercise as provided for in the PIPE Warrants, which resulted in the issuance to such funds of an aggregate of 308,194 shares ofcommon stock. As a result, there were no net proceeds to the Company. 48Table of ContentsOn August 16, 2013, certain affiliates of Franklin Templeton exercised PIPE Warrants to purchase an aggregate of 650,618 shares of common stock forcash. The Company received an aggregate of $2,186,727 gross proceeds from the sale.On August 16, 2013, Alafi Capital Company exercised PIPE Warrants to purchase an aggregate of 261,241 shares of common stock for cash. TheCompany received an aggregate of $878,031 gross proceeds from the sale.On November 27, 2013, the Company announced the results of its previously announced offering of subscription rights to purchase shares of itscommon stock, par value $0.001 per share. Pursuant to the rights offering, subscription rights to purchase approximately 3.4 million shares of common stockwere exercised, resulting in gross proceeds to Stereotaxis of approximately $10.2 million.Controlled Equity OfferingIn May 2014, the Company entered into a Controlled Equity Offering sales agreement (the “Sales Agreement”), with Cantor Fitzgerald & Co.(“Cantor”), as agent and/or principal, pursuant to which the Company could issue and sell, from time to time, shares of its common stock having an aggregategross sales price of up to $18.0 million. The Company will pay Cantor a commission of 3.0% of the gross proceeds from any common stock sold through theSales Agreement.During the twelve months ended December 31, 2014, the Company sold an aggregate of 878,077 shares of common stock under the Sales Agreement,at an average price of approximately $3.57 per share for gross proceeds of $3,131,201 and net proceeds of $3,037,265, after deducting Cantor’s commission.As of December 31, 2014, $14.9 million of common stock remained available to be sold under this facility, subject to certain conditions as specified in theSales Agreement.LiquidityThe following table summarizes our cash flow by operating, investing and financing activities for each of years ended December 31, 2014, 2013, and2012 (in thousands): 2014 2013 2012 Cash flow used in operating activities $(9,092) $(6,332) $(12,118) Cash flow used in investing activities (124) — (131) Cash flow provided by financing activities 2,711 12,329 6,071 Net cash used in operating activities. We used approximately $9.1 million, $6.3 million, and $12.1 million of cash in operating activities during theyears ended December 31, 2014, 2013, and 2012, respectively. The decrease in cash used in operating activities from December 31, 2012 to 2013, isprimarily a result of changes in working capital. The increase in cash used in operating activities from 2013 to 2014 is the result of changes in workingcapital partially offset by a reduction in operating loss.Net cash used in investing activities. There were no purchases of equipment during the year ended December 31, 2013. We used approximately $0.1million during the years ended December 31, 2012 and December 31, 2014, for the purchase of property and equipment.Net cash provided by financing activities. We generated approximately $2.7 million from financing activities during the year ended December 31,2014 compared to $12.3 million generated for the year ended December 31, 2013 and $6.1 million generated for the year ended December 31, 2012. Thedecrease from 2013 to 2014 in cash generated was primarily due to lower proceeds from equity transactions with 2014 proceeds from the controlled equityoffering of $2.9 million compared to $21.3 million generated from 2013 warrant exercises and rights offering offset by a $9.0 million reduction in debt paydown. The increase in cash generated from 2012 49SMTable of Contentsto 2013 was primarily driven by increased stock transactions, including warrant exercises, of $12.2 million compared to 2012 offset by reduced debtfinancing of $5.9 million in 2013 compared to 2012.At December 31, 2014, we had working capital of approximately $4.6 million, compared to working capital of $4.4 million at December 31, 2013.As of December 31, 2014, the Company had no outstanding debt under the revolving line of credit. Draws on the line of credit are made based on theborrowing capacity one week in arrears. As of December 31, 2014, the Company had a borrowing capacity of $4.5 million based on the Company’scollateralized assets. The maturity date of the revolving line of credit is March 31, 2015.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 at December 31,2014, we are required to meet minimum tangible net worth and liquidity covenants as defined in the loan agreement. We are also required under the creditagreements to maintain our primary operating account and the majority of our cash and investment balances in accounts with our primary lending bank. As ofDecember 31, 2014, we were in compliance with all covenants of this agreement.We expect to have negative cash flow from operations into 2015. Throughout 2015, we expect to continue the development and commercialization ofour existing products, our research and development programs and the advancement of new products into clinical development. During 2015, we expectoperating expenses to be generally consistent with 2014 with additional investment in certain targeted areas.We may 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 cash needs through the sale of otherequity 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 andborrowing facilities may not be sufficient to fund our operating expenses and capital equipment requirements through the next 12 months, which wouldrequire us to obtain additional equity or other financing before that time. We cannot assure you that such additional financing will be available on a timelybasis on terms acceptable to us or at all, that we will be able to engage in equity financings if our common stock is delisted from NASDAQ, or that suchfinancing will not be dilutive to our stockholders. If adequate funds are not available to us, we could be required to delay development or commercializationof new products, to license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize ourselves orto reduce the sales, marketing, customer support or other resources devoted to our products, any of which could have a material adverse effect on ourbusiness, financial condition and results of operations. In addition, we could 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. 50Table of ContentsContractual ObligationsThe following table summarizes all significant contractual payment obligations by payment due date: Payments by Period (In thousands) Under1 Year 1 –3Years 3 –5Years Over5 Years Total Long-term debt $— $— $18,389 $— $18,389 Operating leases $1,585 $3,886 $2,009 $— $7,480 Total $1,585 $3,886 $20,398 $— $25,869 Commercial CommitmentsIn 2012, we entered into a letter of credit to support a commitment in the amount of approximately $0.1 million. This letter of credit is valid through2015. ITEM 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 themajority of our revenue and expenses are transacted in U.S. dollars, a portion of our operations are conducted in Euros and to a lesser extent, in othercurrencies. As such, we have foreign exchange exposure with respect to non-U.S. dollar revenues and expenses as well as cash balances, accounts receivable,accounts payable and other asset and liability balances denominated in non-US dollar currencies. Our international operations are subject to risks typical 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 weexecute a 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, 2014 we have not hedged exposures in foreign currencies or entered into any other derivative instruments.For the year ended December 31, 2014, sales denominated in foreign currencies were approximately 14.5% of total revenue. For the year endedDecember 31, 2014, our revenue would have decreased by approximately $0.5 million if the U.S. dollar exchange rate used would have strengthened by 10%.For the year ended December 31, 2014, expenses denominated in foreign currencies were approximately 10.8% of our total expenses. For the year endedDecember 31, 2014, our operating expenses would have decreased by approximately $0.4 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, 2014 would have resulted in a $0.1 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 principalwhile at the same time maximizing the income we receive from our invested cash without significantly increasing the risk of loss. Our interest income issensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term debt instruments. We investour excess cash primarily in U.S. government securities and marketable debt securities of financial institutions and corporations with strong credit ratings.These instruments generally have maturities of 51Table of Contentstwo years or less when acquired. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitiveinstruments, positions or transactions. Accordingly, we believe that while the instruments we hold are subject to changes in the financial standing of theissuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices,equity prices or other market changes that affect market risk sensitive instruments.We have exposure to market risk related to any investments we might hold. Market liquidity issues might make it impossible for the Company toliquidate its holdings or require that the Company sell the securities at a substantial loss. As of December 31, 2014, the Company did not hold anyinvestments other than those held in money market funds.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 shouldthe interest rate increase above a defined percentage. Certain issuances of our outstanding debt are subject to a minimum interest of 7.0%, however, ahypothetical increase in interest rates of 100 basis points would have no impact on interest expense due to interest rate floors on our floating rate debt.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. 52Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial StatementsIndex To Financial Statements PAGE Report of Ernst & Young LLP, Independent Registered Public Accounting Firm 54 Balance Sheets at December 31, 2014 and 2013 55 Statements of Operations for the years ended December 31, 2014, 2013, and 2012 56 Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013, and 2012 57 Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012 58 Notes to the Financial Statements 59 Schedule II—Valuation and Qualifying Accounts 85 All other schedules have been omitted because they are not applicable or the required information is shown in the Financial Statements or the Notesthereto. 53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, 2014 and 2013, and the related statements ofoperations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. 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 werenot engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control overfinancial reporting 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 atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by 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. atDecember 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, inconformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation tothe basic financial statements 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 net capital deficiency. These conditions raise substantial doubt about the Company’sability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The financial statements do not includeany adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that mayresult from the outcome of this uncertainty regarding the Company’s ability to continue as a going concern./s/ Ernst & Young LLPSt. Louis, MissouriMarch 16, 2015 54Table of ContentsSTEREOTAXIS, INC.BALANCE SHEETS December 31,2014 December 31,2013 Assets Current assets: Cash and cash equivalents $7,270,301 $13,775,130 Accounts receivable, net of allowance of $131,464 and $383,077 in 2014 and 2013, respectively 6,480,499 7,558,152 Inventories 6,371,903 4,879,039 Prepaid expenses and other current assets 1,094,837 1,479,956 Total current assets 21,217,540 27,692,277 Property and equipment, net 894,728 1,184,589 Intangible assets, net 1,379,653 1,679,486 Long-term receivables — 20,431 Other assets 388,850 499,613 Total assets $23,880,771 $31,076,396 Liabilities and stockholders’ deficit Current liabilities: Short-term debt and current maturities of long-term debt $— $49,733 Accounts payable 2,353,133 3,512,339 Accrued liabilities 5,505,142 7,069,759 Deferred revenue 6,658,170 7,519,754 Warrants and debt conversion features 2,134,187 5,644,626 Total current liabilities 16,650,632 23,796,211 Long-term debt, less current maturities 18,388,764 18,481,478 Long-term deferred revenue 976,165 491,080 Other liabilities 414,928 9,622 Stockholders’ deficit: Preferred stock, par value $0.001; 10,000,000 shares authorized, none outstanding at 2014 and 2013 — — Common stock, par value $0.001; 300,000,000 shares authorized, 20,480,874, and 19,311,390 sharesissued at 2014 and 2013, respectively 20,481 19,311 Additional paid in capital 446,241,703 441,888,155 Treasury stock, 4,015 shares at 2014 and 2013 (205,999) (205,999) Accumulated deficit (458,605,903) (453,403,462) Total stockholders’ deficit (12,549,718) (11,701,995) Total liabilities and stockholders’ deficit $23,880,771 $31,076,396 See accompanying notes. 55Table of ContentsSTEREOTAXIS, INC.STATEMENTS OF OPERATIONS Year Ended December 31, 2014 2013 2012 Revenue: Systems $7,839,006 $12,743,218 $19,672,983 Disposables, service and accessories 27,172,270 25,287,863 26,889,451 Total revenue 35,011,276 38,031,081 46,562,434 Cost of revenue: Systems 4,204,719 6,870,954 9,905,528 Disposables, service and accessories 4,018,661 4,130,347 4,875,527 Total cost of revenue 8,223,380 11,001,301 14,781,055 Gross margin 26,787,896 27,029,780 31,781,379 Operating expenses: Research and development 5,158,331 5,672,058 8,405,086 Sales and marketing 15,168,940 17,132,093 20,607,999 General and administrative 11,845,289 13,066,103 13,394,556 Total operating expenses 32,172,560 35,870,254 42,407,641 Operating loss (5,384,664) (8,840,474) (10,626,262) Other income (expense) 3,510,439 (47,349,378) 8,265,507 Interest income 7,084 5,800 7,361 Interest expense (3,335,300) (12,573,537) (6,885,033) Net loss $(5,202,441) $(68,757,589) $(9,238,427) Net loss per common share: Basic $(0.26) $(5.95) $(1.33) Diluted $(0.26) $(5.95) $(1.33) Weighted average shares used in computing net loss per common share: Basic 19,945,038 11,554,566 6,944,928 Diluted 19,945,038 11,554,566 6,944,928 See accompanying notes. 56Table of ContentsSTEREOTAXIS, INC.STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock AdditionalPaid-InCapital 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) Common Stock AdditionalPaid-InCapital TreasuryStock AccumulatedDeficit TotalStockholders’Equity(Deficit) Shares Amount Balance at December 31, 2012 8,018,615 $8,019 $366,053,627 $(205,999) $(384,645,873) $(18,790,226) Issuance of common stock and warrants 7,742,717 7,743 64,586,770 64,594,513 Share-based compensation 1,050,260 1,050,260 Rights offering 3,400,349 3,400 10,197,647 10,201,047 Grant of restricted shares, net of forfeitures (61,910) (62) 62 — Restricted stock vestings 211,619 211 (211) — Net Loss (68,757,589) (68,757,589) Balance at December 31, 2013 19,311,390 $19,311 $441,888,155 $(205,999) $(453,403,462) $(11,701,995) Common Stock AdditionalPaid-InCapital TreasuryStock AccumulatedDeficit TotalStockholders’Equity(Deficit) Shares Amount Balance at December 31, 2013 19,311,390 $19,311 $441,888,155 $(205,999) $(453,403,462) $(11,701,995) Issuance of common stock 878,077 879 2,852,794 2,853,673 Share-based compensation 1,501,045 1,501,045 Grant of restricted shares, net of forfeitures 259 — — Restricted stock vestings 291,148 291 (291) — Net Loss (5,202,441) (5,202,441) Balance at December 31, 2014 20,480,874 $20,481 $446,241,703 $(205,999) $(458,605,903) $(12,549,718) See accompanying notes. 57Table of ContentsSTEREOTAXIS, INC.STATEMENTS OF CASH FLOWS Year Ended December 31, 2014 2013 2012 Cash flows from operating activities Net loss $(5,202,441) $(68,757,589) $(9,238,427) Adjustments to reconcile net loss to cash used in operating activities: Depreciation 413,773 919,136 1,300,188 Amortization of intangibles 299,833 299,833 299,833 Amortization of deferred finance costs and debt discount 240,601 7,703,336 2,977,119 Share-based compensation 1,501,045 1,050,260 2,293,731 Gain on debt conversion — — (75,612) Loss on asset disposal — 36,103 12,444 Adjustment of warrants and convertible debt features (3,510,439) 47,450,066 (8,189,895) Interest due from issuance of stock — 551,296 192,128 Changes in operating assets and liabilities: Accounts receivable 1,098,084 4,065,106 (428,079) Inventories (1,492,864) 219,202 937,810 Prepaid expenses and other current assets 144,518 429,025 (760,474) Other assets 110,763 (1,376) 7,773 Accounts payable (1,159,206) (44,349) (2,053,493) Accrued liabilities (1,564,617) 1,717,571 (514,689) Deferred revenue (376,499) (1,969,264) 1,125,079 Other liabilities 405,306 — (3,094) Net cash used in operating activities (9,092,143) (6,331,644) (12,117,658) Cash flows from investing activities Purchase of equipment (123,912) — (130,699) Net cash used in investing activities (123,912) — (130,699) Cash flows from financing activities Payments of term loan — (4,000,000) (4,000,000) Proceeds from revolving line of credit — 37,237,131 54,806,154 Payments of revolving line of credit — (44,490,148) (62,842,934) Proceeds from subordinated convertible debt, net of issuance costs — — 7,738,351 Proceeds from Healthcare Royalty Partners debt — 2,546,328 2,500,000 Payments of Healthcare Royalty Partners debt (142,447) (263,192) (1,252,647) Proceeds from issuance of stock and warrants, net of issuance costs 2,853,673 21,298,937 9,122,232 Net cash provided by financing activities 2,711,226 12,329,056 6,071,156 Net increase (decrease) in cash and cash equivalents (6,504,829) 5,997,412 (6,177,201) Cash and cash equivalents at beginning of period 13,775,130 7,777,718 13,954,919 Cash and cash equivalents at end of period $7,270,301 $13,775,130 $7,777,718 Supplemental disclosures of cash flow information: Interest paid 3,028,884 3,187,353 3,258,900 See accompanying notes. 58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-owned subsidiaries. Epoch™,Niobe, Odyssey, Odyssey Cinema™, Vdrive™, Vdrive Duo™, V-CAS™, V-CAS Deflect™, V-Loop™, V-Sono™, QuikCAS™, Cardiodrive,PowerAssert™, Titan and Pegasus™ are trademarks of Stereotaxis, Inc. All other trademarks that may appear in this report are the property of their respectiveowners.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 RemoteMagnetic Navigation System (“Niobe ES system”), Odyssey Information Management Solution (“Odyssey Solution”), and the Vdrive Robotic NavigationSystem (“Vdrive system”), and related devices.The Niobe system is designed to enable physicians to complete more complex interventional procedures by providing image-guided delivery ofcatheters and guidewires through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied magnetic fields thatgovern the motion 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 market variousdisposable 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 uponpurchasing of the necessary upgrade or expansion.The core components of Stereotaxis systems, such as, Niobe system, Odyssey Solution, Cardiodrive and various disposable interventional devices havereceived regulatory clearance in the U.S., Europe, Canada, China, Japan and various other countries. We have received the CE Mark that allows us to marketthe Vdrive and Vdrive Duo systems with the V-CAS, V-CAS Deflect, V-Loop and V-Sono devices in Europe. In addition, we have 59®®®®®Table of Contentsreceived licensing to market the Vdrive and Vdrive Duo systems with the V-CAS, V-CAS Deflect, V-Loop and V-Sono devices in Canada. We have receivedregulatory clearance that allows us to market the Vdrive and Vdrive Duo systems with the V-CAS, V-Loop, and V-Sono devices in the United States.Since our inception, we have generated significant losses. As of December 31, 2014, we had incurred cumulative net losses of approximately $458.6million. In May 2011, the Company introduced the Niobe ES system and as of December 31, 2014, the Company had an installed base of 119 Niobe ESsystems. In 2015, the Company plans to continue developing the Niobe ES system with the goal of furthering clinical adoption. Between 2011 and 2014, theCompany implemented a wide ranging plan to rebalance and reduce operating expenses by 15% to 20% on an annual run rate basis. Although we had anoperating profit in the fourth quarter 2014, we expect to incur additional losses into 2015 as we continue the development and commercialization of ourproducts, conduct our research and development activities and advance new products into clinical development from our existing research programs andfund additional sales and marketing initiatives. During 2015, we expect operating expenses to be generally consistent with 2014 with additional investmentin certain targeted areas.We may 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 cash needs through the sale of otherequity 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 may not be sufficient to fund our operating expenses and capital equipment requirementsthrough the next 12 months, which would require us to obtain additional financing before that time. Further, our revolving line of credit with Silicon ValleyBank matures on March 31, 2015. We cannot assure you that additional financing will be available on a timely basis on terms acceptable to us or at all, thatwe will be able to engage in equity financings if our common stock is delisted from NASDAQ, or that such financing will not be dilutive to our stockholders.If adequate funds are not available to us, we could be required to delay development or commercialization of new products, to license to third parties therights to commercialize products or technologies that we would otherwise seek to commercialize ourselves or to reduce the sales, marketing, customersupport or other resources devoted to our products, any of which could have a material adverse effect on our business, financial condition and results ofoperations. In addition, we could be required to cease operations.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. In 2012, we entered into a letter of credit tosupport a commitment in the amount of approximately $0.1 million. This letter of credit is valid through 2015. No cash was restricted at December 31, 2014or 2013.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. 60Table of ContentsFinancial InstrumentsFinancial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt. The carrying valueof 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 givesthe highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (“Level 1”) and the lowest priority to unobservable inputs(“Level 3”). See Note 12 for disclosure of fair value measurements.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 leasehold improvements, computer, office, and research and demonstration equipment, and equipmentheld for lease and are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives or life of the base lease term,ranging from three to ten years.Long-Lived AssetsIf facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the carryingvalue of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carryingvalue of the asset 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 theirestimated useful lives of 10-15 years. If facts and circumstances suggest that an intangible asset may be impaired, the carrying value is reviewed. If this reviewindicates that the carrying value of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over itsremaining life, the carrying value of the asset is reduced to its estimated fair value.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 quarter of2009, effective as of January 1, 2009.ASU 2009-13 permits management to estimate the selling price of undelivered components of a bundled sale for which it is unable to establish vendor-specific objective evidence (“VSOE”) or third-party evidence 61Table of Contents(“TPE”). 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 Company believes that the guidance significantly improvesthe reporting of these types of transactions to more closely reflect the underlying economic circumstances. This guidance also prohibits the use of theresidual method for allocating revenue to the various elements of a transaction and requires that the revenue be allocated proportionally based on the relativeestimated selling prices.Under our revenue recognition policy, a portion of revenue for Niobe systems, Vdrive systems and certain Odyssey systems 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. Revenue is recognized for other types of Odyssey systems upon completionof installation, since there are no qualified third party installers. When installation is the responsibility of the customer, revenue from system sales isrecognized upon shipment since these arrangements do not include an installation element or right of return privileges. The Company does not recognizerevenue in situations in which inventory remains at a Stereotaxis warehouse or in situations in which title and risk of loss have not transferred to thecustomer. Amounts collected prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Revenue from services and licensefees, whether sold individually or as a separate unit of accounting in a multiple-deliverable arrangement, is deferred and amortized over the service or licensefee period, which is typically one year. Revenue from services is derived primarily from the sale of annual product maintenance plans. We recognize revenuefrom disposable device sales or accessories upon shipment and establish an appropriate reserve for returns. The return reserve, which is applicable only todisposable devices, is estimated based on historical experience which is periodically reviewed and updated as necessary. In the past, changes in estimate havehad only a de minimus effect on revenue recognized in the period. We believe that the estimate is not likely to change significantly in the future.Costs of systems revenue include direct product costs, installation labor and other costs, estimated warranty costs, and initial training and 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. There were no material receivables atDecember 31, 2014 or 2013 under these types of agreements. Advance receipts or other unearned reimbursements are included in accrued liabilities on theaccompanying balance sheet until earned.Share-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 inconjunction with selling, goods or services, and recognized over the service period. Deferred compensation for options granted to non-employees isremeasured on a quarterly basis through the vesting or forfeiture date.The Company utilized the Black-Scholes valuation model to determine the fair value of share-based payments at the date of previously issued grantusing risk-free interest rate based on the Treasury yield on the date of the grant and expected volatility based on the Company’s historical volatility over theexpected term of the option. The resulting compensation expense is recognized over the requisite service period, generally one to four years. Compensationexpense is recognized only for those awards expected to vest, with forfeitures estimated based on the Company’s historical experience and futureexpectations. 62Table of ContentsRestricted shares and units granted to employees are valued at the fair market value at the date of grant. The Company amortizes the amount to expenseover the service period on a straight-line basis for those shares with graded vesting. If the shares are subject to performance objectives, the resultingcompensation expense is amortized over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives.Shares purchased by employees under the 2004 Employee Stock Purchase Plan were considered to be compensatory and were accounted for inaccordance with general accounting principles for share-based payments. Shares purchased by employees under the 2009 Employee Stock Purchase Planwere considered to be non-compensatory.Net Earnings (Loss) per Common ShareOn 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, 2014, 2013, and 2012 are presented on a post-split basis. See Note 11 for additional discussion of the reverse stock split.Basic earnings (loss) per common share are computed by dividing the net loss for the period by the weighted average number of common sharesoutstanding during the period. Diluted earnings (loss) per share are computed by dividing the loss for the period by the weighted average number of commonand common equivalent shares outstanding during the period. In addition, the application of the two-class method of computing earnings per share undergeneral accounting principles for participating securities is not applicable because the Company’s unearned restricted shares do not contractually participatein 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.As of December 31, 2014, the Company had 487,146 shares of common stock issuable upon the exercise of outstanding options and stock appreciationrights at a weighted average exercise price of $17.21 per share and 2,197,883 shares of common stock issuable upon the exercise of outstanding warrants at aweighted average exercise price of $6.12 per share. The Company had no unearned restricted shares outstanding for the period ended December 31, 2014.Income TaxesIn accordance with general accounting principles for income taxes, a deferred income tax asset or liability is determined based on the differencebetween the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse.The Company provides a valuation allowance against net deferred income tax assets unless, based upon available evidence, it is more likely than not thedeferred income 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. 63Table of ContentsPatent 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.Biosense Webster Inc. accounted for $4,651,490, $3,902,178, and $3,447,386, or 13%, 10% and 7%, of total net revenue for the years endedDecember 31, 2014, 2013, and 2012, respectively. No other single customer accounted for more than 10% of total revenue for the year ended December 31,2014.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 August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”) No. 2014-15, tocommunicate amendments to FASB Account Standards Codification Subtopic 205-40, “Disclosure of Uncertainties about an Entity’s Ability to Continue asa Going Concern.” The ASU requires management to evaluate relevant conditions, events and certain management plans that are known or reasonablyknowable as of the evaluation date when determining whether substantial doubt about an entity’s ability to continue as a going concern exists. Managementwill be required to make this evaluation for both annual and interim reporting periods. Management will have to make certain disclosures if it concludes thatsubstantial doubt exists or when it plans to alleviate substantial doubt about the entity’s ability to continue as a going concern. The standard is effective forannual periods ending after December 15, 2016 and for interim reporting periods starting in the first quarter of 2017. Early adoption is permitted. We arecurrently evaluating the impact of adopting this accounting standard update on our financial statement disclosures and have not concluded on an adoptionmethod.In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which converges the FASB’s and the InternationalAccounting Standards Board’s current standards on revenue recognition. The standard provides companies with a single model to use in accounting forrevenue arising from contracts with customers and supersedes current revenue guidance. The standard is effective for annual and interim periods beginningafter December 15, 2016. Early adoption is not permitted. The standard permits companies to either apply the adoption to all periods presented, or apply therequirements in the year of adoption through a cumulative adjustment. We are currently evaluating the impact of adopting this accounting standard updateon our financial statements and disclosures and have not concluded on an adoption method.In 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 requirementsfor items 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. 64Table of Contents3. InventoryInventory consists of the following: December 31,2014 December 31,2013 Raw materials $2,746,926 $3,141,111 Work in process 374,236 364,779 Finished goods 3,310,375 1,453,362 Reserve for obsolescence (59,634) (80,213) Total inventory $6,371,903 $4,879,039 4. Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consist of the following: December 31,2014 December 31,2013 Prepaid expenses $679,740 $591,305 Deferred financing costs 492,385 622,949 Deposits 311,562 692,616 Deferred cost of revenue — 72,699 Total prepaid expenses and other assets 1,483,687 1,979,569 Less: Noncurrent prepaid expenses and other assets (388,850) (499,613) Total prepaid expenses and other current assets $1,094,837 $1,479,956 Certain prior year amounts have been reclassified to conform to the 2014 presentation.5. Property and EquipmentProperty and equipment consist of the following: December 31,2014 December 31,2013 Equipment $8,264,804 $8,143,000 Equipment held for lease 303,412 303,412 Leasehold improvements 2,328,381 2,328,381 10,896,597 10,774,793 Less: Accumulated depreciation (10,001,869) (9,590,204) Net property and equipment $894,728 $1,184,589 6. Intangible AssetsAs of December 31, 2014 and 2013, the Company had total intangible assets of $3,665,000. Accumulated amortization at December 31, 2014 and2013, was $2,285,347 and 1,985,514, respectively. Amortization expense for the years 2014, 2013, and 2012 was $299,833 per year, as determined under thestraight-line method. The estimated future amortization of intangible assets is $299,833 annually through July 2018, decreasing thereafter to $166,500annually through May 2020. 65Table of Contents7. Accrued LiabilitiesAccrued liabilities consist of the following: December 31, December 31, 2014 2013 Accrued salaries, bonus, and benefits $2,557,557 $3,565,385 Accrued rent 1,407,740 1,499,942 Accrued licenses and maintenance fees 661,766 302,384 Accrued interest 493,616 498,058 Accrued warranties 364,548 501,212 Accrued taxes 332,364 360,475 Other 102,479 351,925 Total accrued liabilities 5,920,070 7,079,381 Less: Long term accrued liabilities (414,928) (9,622) Total current accrued liabilities $5,505,142 $7,069,759 Certain prior year amounts have been reclassified to conform to the 2014 presentation.8. Deferred RevenueDeferred revenue consists of the following: December 31,2014 December 31,2013 Product shipped, revenue deferred $457,348 $1,368,007 Customer deposits 1,065,371 421,544 Deferred service and license fees 6,111,616 6,221,283 7,634,335 8,010,834 Less: Long-term deferred revenue (976,165) (491,080) Total current deferred revenue $6,658,170 $7,519,754 9. Long-Term Debt and Credit FacilitiesDebt outstanding consists of the following: December 31, 2014 December 31, 2013 CarryingAmount EstimatedFair Value CarryingAmount Estimated FairValue Healthcare Royalty Partners debt $18,388,764 $18,388,764 $18,531,211 $18,531,211 Less current maturities — — (49,733) (49,733) Total long term debt $18,388,764 $18,388,764 $18,481,478 $18,481,478 Contractual principal maturities of debt at December 31, 2014 are as follows: 2015 $— 2016 — 2017 — 2018 18,388,764 2019 — 2020 and Beyond — $18,388,764 66Table of ContentsIn accordance with general accounting principles for fair value measurement, the Company’s debt and credit facilities were measured at fair value as ofDecember 31, 2014 and December 31, 2013. Long-term debt fair value estimates are based on estimated borrowing rates to discount the cash flows to theirpresent value (Level 3).The revolving line of credit and the Company’s obligations with Healthcare Royalty Partners II, L.P. (collectively, the “Credit Agreements”) aresecured by substantially all of the Company’s assets. The Company is required under the Credit Agreements to maintain its primary operating account andthe majority of its cash and investment balances in accounts with the primary lender.Revolving line of creditThe Company has had a working capital line of credit with its primary lender, Silicon Valley Bank, since 2004. The revolving line of credit is securedby substantially all of the Company’s assets. The Company is also required under the revolving line of credit to maintain its primary operating account andthe majority of its cash and investment balances in accounts with its primary lender. The facility was last amended on March 28, 2014 extending the maturitydate one year to March 31, 2015. The current agreement requires the Company to maintain a minimum tangible net worth of not less than (no worse than)negative $21 million, with such minimum requirement subject to increase under certain circumstances as described in the agreement, and to maintain aliquidity ratio of greater than 1.75:1.00, excluding certain short term advances from the calculation.As of December 31, 2014, the Company had no outstanding debt under the revolving line of credit. Draws on the line of credit are made based on theborrowing capacity one week in arrears. As of December 31, 2014 the Company had a borrowing capacity of $4.5 million based on the Company’scollateralized assets.Between 2008 and August 2013, the Company’s agreement with its primary lender was secured in part by guarantees provided certain affiliates ofcurrent or former members of our Board of Directors, “the Lenders”. In exchange for their guarantees, the Company issued the Lenders five year warrants ateach extension of the revolving line of credit. In August, 2013, the Company and the Bank agreed to eliminate the guarantees provided by the Lenders.Term noteIn 2010, the Company entered into a $10 million term loan maturing on December 31, 2013, with $2 million of principal due in 2011 and $4 millionof principal due in each of 2012 and 2013. Interest on the term loan accrued at the rate of prime plus 3.5%. Under this agreement, the Company provided itsprimary lender with warrants to purchase 11,111 shares of common stock. The warrants are exercisable at $36.00 per share, beginning on December 17, 2010and expiring on December 17, 2015. The fair value of these warrants of $228,332, calculated using the Black-Scholes method, was deferred and amortized tointerest expense ratably over the life of the term loan. The term note was paid in full in September 2013.Healthcare Royalty Partners DebtIn November 2011, the Company entered into a loan agreement with Healthcare Royalty Partners II, L.P. (formerly “Cowen Healthcare Royalty PartnersII, L.P.”). Under the agreement the Company borrowed from Healthcare Royalty Partners $15 million. The Company was permitted to borrow up to anadditional $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, the Company borrowed an additional $2.5 million based upon achievement of a milestone related to Niobe system sales for the nine months endedJune 30, 2012. On January 31, 2013, the Company borrowed an additional $2.5 million based upon achievement of a milestone related to Niobe system salesfor the twelve months ended December 31, 2012. The loan will be repaid through, and secured by, royalties payable to the Company under its Development,Alliance and Supply Agreement with Biosense Webster, Inc. 67Table of ContentsThe Biosense Agreement relates to the development and distribution of magnetically enabled catheters used with Stereotaxis’ Niobe system in cardiacablation procedures. Under the terms of the Agreement, Healthcare Royalty Partners will be entitled to receive 100% of all royalties due to the Companyunder the Biosense Agreement until the loan is repaid. The loan is a full recourse loan, matures on December 31, 2018, and bears interest at an annual rate of16% payable quarterly with royalties received under the Biosense Agreement. If the payments received by the Company under the Biosense Agreement areinsufficient to pay all amounts of interest due on the loan, then such deficiency will increase the outstanding principal amount on the loan. After the loanobligation is repaid, the royalties under the Biosense Agreement will again be paid to the Company. The loan is also secured by certain assets andintellectual property of the Company. The Agreement also contains customary affirmative and negative covenants. The use of payments due to the Companyunder the Biosense Agreement was approved by our primary lender.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”), whichbecame convertible into shares of the Company’s common stock at a conversion price of $3.361 per share (or approximately 2.5 million shares in theaggregate), on July 10, 2012, the date that the Company received shareholder approval for the transaction. The purchasers of the Debentures also receivedwarrants, which were scheduled to expire in November 2018, to purchase an aggregate of approximately 2.5 million shares of the Company’s common stockat an exercise price of $3.361 per share. The Debentures bore interest at 8% per year and were scheduled to mature on May 7, 2014. In addition, the Companyhad the ability to issue shares of its common stock in lieu of cash interest payments under certain circumstances, and following the registration of the sharesfor resale, the Company issued shares in lieu of cash interest payments.The Company recorded the Debentures on the balance sheet net of the debt discount of $7.6 million. The debt discount was 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 liabilitywere $4.1 million and $3.5 million, respectively. The debt discount was amortized over the life of the loan using the effective interest method and thewarrants and derivative liability were recorded at fair value on each reporting period. Refer to Note 12 for additional discussion of the fair value of thewarrants and conversion features.On August 7, 2013, holders of Convert Warrants exercised all of their Convert Warrants for an aggregate of approximately 2.5 million shares of ourcommon stock, resulting in cash proceeds of approximately $8.5 million. In addition, holders of all of the Debentures exchanged the balance of theirunconverted Debentures for an aggregate of approximately 2.7 million shares of the Company’s common stock and additional warrants (the “ExchangeWarrants”) to purchase approximately 2.5 million shares, having an exercise price of $3.361 per share. On August 8, 2013, certain former holders of theDebentures exercised Exchange Warrants to purchase an aggregate of 1.4 million shares of common stock in cashless net exercises as provided for in theExchange Warrants, which resulted in the issuance to such funds of an aggregate of 0.8 million shares of common stock but no net proceeds to the Company.The Company is relying on the exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended, based on representations tothe Company made by the warrant holders. Refer to Note 11 for discussion of total outstanding warrants.The mark-to-market expense associated with the adjustment of warrants and convertible debt features in connection with the third quarter 2013 capitaltransactions are included in other expense for the year ended December 31, 2013. The write-off of the unamortized debt discount of $5.4 million is includedin interest expense for the year ended December 31, 2013. 68Table of Contents10. Lease ObligationsThe Company leases its facilities under operating leases. For the years ended December 31, 2014, 2013, and 2012 rent expense was $1,068,972,$1,925,813, and $1,697,153, respectively.In January 2006, the Company moved its primary operations into new facilities. The facility is subject to a lease which expires in December 31, 2018.Under the terms of the lease, the Company has options to renew for up to three additional years. The lease contains an escalating rent provision which theCompany has straight-lined over the term of the lease.In the third quarter of 2013, the Company modified the existing lease agreement to terminate approximately 13,000 square feet of unimproved space.The costs associated with the termination were $515,138, and were accrued as a rent liability as of September 30, 2013. As of December 31, 2014, theremaining accrued costs associated with the termination were $354,680.The future minimum lease payments under non-cancelable leases as of December 31, 2014 are as follows: Year OperatingLease 2015 $1,584,709 2016 1,930,829 2017 1,955,243 2018 2,008,832 Total minimum lease payments $7,479,613 11. Stockholders’ EquityThe holders of common stock are entitled one vote for each share held and to receive dividends whenever funds are legally available and whendeclared by the Board of Directors subject to the prior rights of holders of all classes of stock having priority rights as dividends and the conditions of theRevolving Credit Agreement. No dividends have been declared or paid as of December 31, 2014.Listing Transfer to NASDAQ Capital MarketOn August 15, 2013, the NASDAQ Listing Qualifications Panel (the “Panel”) granted approval of the Company’s request to transfer its listing to TheNASDAQ Capital Market from The NASDAQ Global Market. The Company’s securities began trading on the NASDAQ Capital Market effective August 19,2013.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 Reverse Stock Split was effective as of July 10, 2012, and the Company’s common stockbegan trading 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 and convertibledebentures outstanding immediately prior to the effectiveness of the Reverse Stock Split. The Reverse Stock Split reduced the number of shares of theCompany’s common stock outstanding from approximately 78 million to 7.8 million at the time of the Reverse Stock Split. In addition, the Amendment 69Table of Contentsincreased 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.Issuances of Common StockIn 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 withsix-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$3.361 per share (the “PIPE Warrants”). Each purchaser received a PIPE Warrant to purchase one share of common stock for every share of PIPE CommonStock purchased. Net proceeds from the sale of the securities were approximately $9.1 million, after placement agent fees and other offering expenses. TheCompany used the funds to repay $7 million of the revolving credit facility guaranteed by the Lenders and plans to use the balance for working capital andgeneral corporate purposes.Between March and July 2013, the Company amended its agreement with its primary lender and extended the $3 million guarantee of the revolvingcredit facility provided by affiliates of current and former members of the Board of Directors, “the Lenders”. As a result of these extensions, the Companyissued the Lenders warrants to purchase common stock. The lenders received 113,636 warrants at $1.98 per share, 48,387 warrants at $1.55 per share, and14,313 warrants at $5.24 per share.On August 7, 2013, venture funds affiliated with Sanderling Ventures received an aggregate of 183,478 shares of common stock based upon thecashless exercise of warrants to purchase an aggregate of 262,450 shares of common stock. These warrants were comprised of 75,758 warrants with an exerciseprice of $1.98 per share, 156,204 warrants with an exercise price of $3.361 per share and 30,488 warrants with an exercise price of $4.10 per share. Thewarrants were issued by the Company in private placements in 2012 and 2013 in connection with the extension of previously disclosed guarantees.On August 13, 2013, venture funds affiliated with Sanderling Ventures exercised PIPE Warrants to purchase an aggregate of 650,619 shares of commonstock in a cashless net exercise as provided for in the PIPE Warrants, which resulted in the issuance to such funds of an aggregate of 308,194 shares ofcommon stock. As a result, there were no net proceeds to the Company.On August 16, 2013, certain affiliates of Franklin Templeton exercised PIPE Warrants to purchase an aggregate of 650,618 shares of common stock forcash. The Company received an aggregate of $2,186,727 gross proceeds from the sale.On August 16, 2013, Alafi Capital Company exercised PIPE Warrants to purchase an aggregate of 261,241 shares of common stock for cash. TheCompany received an aggregate of $878,031 gross proceeds from the sale. Refer to Note 9 for the discussion of warrants issued in conjunction with debtofferings.On November 27, 2013, the Company announced the results of its previously announced offering of subscription rights to purchase shares of itscommon stock, par value $0.001 per share. Pursuant to the rights offering, subscription rights to purchase approximately 3.4 million shares of common stockwere exercised, resulting in gross proceeds to Stereotaxis of approximately $10.2 million. 70Table of ContentsThe Company has reserved shares of common stock for the exercise of warrants, the issuance of options granted under the Company’s stock option planand its stock purchase plan as follows: December 31,2014 December 31,2013 Warrants 2,197,883 3,021,302 Stock award plans 1,297,389 1,032,462 Employee Stock Purchase Plan 250,000 — 3,745,272 4,053,764 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 fromthe date of grant. The exercise price of each incentive stock option shall not be less than 100% of the fair value of the stock subject to the option on the datethe option is granted. The vesting provisions of individual options may vary, but incentive stock options generally vest 25% on the first anniversary of eachgrant and 1/48 per month over the next three years. Stock appreciation rights are rights to acquire a calculated number of shares of the Company’s commonstock upon exercise of the rights. The number of shares to be issued is calculated as the difference between the exercise price of the right and the aggregatemarket value of the underlying shares on the exercise date divided by the market value as of the exercise date. Stock appreciation rights granted under the2012 Stock Incentive Plan generally vest 25% on the first anniversary of such grant and 1/48 per month over the next three years and expire no later than tenyears from the date of grant. The Company generally issues new shares upon the exercise of stock options and stock appreciation rights.Restricted 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 four years. Options granted to non-employee directors expire no laterthan 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 stock subjectto 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, 2014 is as follows: Number ofOptions/SARs Range ofExercise Price WeightedAverage ExercisePrice per Share Outstanding, December 31, 2013 188,947 $1.69 - $116.40 $48.38 Granted 336,850 $4.04 - $5.19 $4.04 Exercised — — — Forfeited (38,651) $1.69 - $116.40 $54.80 Outstanding, December 31, 2014 487,146 $1.69 - $116.40 $17.21 71Table of ContentsAs of December 31, 2014, the weighted average remaining contractual life of the options and stock appreciation rights outstanding was 7.50 years. Ofthe 487,146 options and stock appreciation rights that were outstanding as of December 31, 2014, 148,370 were vested and exercisable with a weightedaverage exercise price of $46.83 per share and a weighted average remaining term of 3.58 years.A summary of the options and stock appreciation rights outstanding by range of exercise price is as follows: Year Ended December 31, 2014 Range of Exercise Prices OptionsOutstanding WeightedAverageRemainingLife WeightedAverageExercise Price Number ofOptionsCurrentlyExercisable WeightedAverageExercisePrice PerVested Share $0.00 - $10.00 338,031 9.23 years $4.06 1,389 $6.49 $30.01 - $40.00 81,455 4.92 years $35.15 79,321 $35.15 $40.01 - $50.00 36,660 1.76 years $44.13 36,660 $44.13 $50.01 - $60.00 12,250 3.41 years $54.90 12,250 $54.90 $70.01 - $80.00 4,500 0.46 years $78.00 4,500 $78.00 $90.01+ 14,250 1.76 years $105.94 14,250 $105.94 487,146 7.50 years $17.21 148,370 $46.83 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, 2014. The intrinsic valueof the options and stock appreciation rights outstanding at December 31, 2014 and the intrinsic value of fully vested options and stock appreciation rightsoutstanding at December 31, 2014 were zero based on a closing share price of $1.48 on December 31, 2014. No options or stock appreciation rights wereexercised under the Company’s stock option plans during the year ended December 31, 2014. The weighted average grant date fair value of options andstock appreciation rights granted during the year ended December 31, 2014 was $4.04 per share.During the year ended December 31, 2014, no options or stock appreciation rights were exercised. The Company realized less than $0.1 million and $0from the exercise of stock options and stock appreciation rights during 2013 and 2012, respectively.A summary of the restricted share grant activity for the year ended December 31, 2014 is as follows: Number ofShares Weighted AverageGrant Date FairValue per Share Outstanding, December 31, 2013 6,600 $35.20 Granted — — Vested (6,600) ($35.20) Forfeited — — Outstanding, December 31, 2014 — — There were no restricted shares outstanding as of December 31, 2014. During the year ended December 31, 2013, the Company determined that it wasnot probable that the performance conditions related to certain of its outstanding restricted share awards would be achieved and accordingly reversed therelated shares outstanding. 72Table of ContentsA summary of the restricted stock unit activity for the year ended December 31, 2014 is as follows: Number ofRestricted StockUnits Weighted AverageGrant Date FairValue per Unit Outstanding, December 31, 2013 588,759 $2.05 Granted 410,400 $3.91 Vested (291,148) $2.00 Forfeited (10,260) $3.65 Outstanding, December 31, 2014 697,751 $3.14 The intrinsic value of restricted shares and restricted stock units outstanding at December 31, 2014 was zero and $1.0 million, respectively, based on aclosing share price of $1.48 as of December 31, 2014. During the year ended December 31, 2014, the aggregate intrinsic value of restricted shares andrestricted stock units vested was less than $0.1 and $1.1 million, respectively, determined at the date of vesting.During the fourth quarter of 2014, the Company made an adjustment to its forfeiture rate based on historical information, which resulted in an increaseto share-based compensation of approximately $0.1 million for the year ended December 31, 2014.As of December 31, 2014, the total compensation cost related to options, stock appreciation rights and non-vested stock granted to employees underthe Company’s stock award plans but not yet recognized was approximately $1.6 million, net of estimated forfeitures of approximately $1.5 million. Thiscost will be amortized over a weighted average period of approximately two years on a straight-line basis over the underlying estimated service periods andwill be adjusted for subsequent changes in estimated forfeitures.2009 Employee Stock Purchase PlanIn 2009, the Company adopted its 2009 Employee Stock Purchase Plan (“ESPP”). In June 2014, our shareholders approved a proposal to amend theESPP to increase the number of shares authorized for issuance under the ESPP by 250,000 shares. Eligible employees have the opportunity to participate in anew purchase period every 3 months. Under the terms of the plan, employees can purchase up to 15% of their compensation of the Company’s common stock,subject to an annual maximum of $25,000, at 95% of the fair market value of the stock at the end of the purchase period, subject to certain plan limitations.As of December 31, 2014, there were 250,000 remaining shares available for issuance under the Employee Stock Purchase Plan.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 or liabilities.Level 2: Values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments inmarkets that are not active, or other model-based valuation techniques for which all significant assumptions are observable in themarket.Level 3: Values are generated from model-based techniques that use significant assumptions not observable in the market. 73Table of ContentsThe 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.As required by the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification, assets and liabilities are classified in theirentirety based 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, 2014: Cash equivalents $5,361,053 5,361,053 — — Total assets at fair value $5,361,053 5,361,053 — — Liabilities at December 31, 2014: Warrants issued May 10, 2012 $728,712 — — 728,712 Warrants issued August 2013 1,405,475 1,405,475 Total liabilities at fair value: $2,134,187 — — 2,134,187 Assets at December 31, 2013: Cash equivalents $11,995,481 11,995,481 — — Total assets at fair value $11,995,481 11,995,481 — — Liabilities at December 31, 2013: Warrants issued December 29, 2008 $16,863 — — 16,863 Warrants issued May 10, 2012 1,915,753 — — 1,915,753 Warrants issued August 2013 3,712,010 3,712,010 Total liabilities at fair value: $5,644,626 — — 5,644,626 Level 1The Company’s financial assets consist of cash equivalents invested in money market funds in the amount of $5,361,053 and $11,995,481 atDecember 31, 2014 and December 31, 2013, respectively. These assets are classified as Level 1 as described above and total interest income recorded forthese investments was insignificant during both the years ended December 31, 2014 and December 31, 2013. There were no transfers in or out of Level 1during the year ended December 31, 2014.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 the exercise price if certain equity events occurred. Under the provisions of generalaccounting principles for derivatives and hedging activities and determining whether an instrument (or embedded feature) is indexed to an entity’s ownstock, such a reset provision does not meet the exemptions for equity classification and as such, the Company accounted for these warrants as derivativeinstruments. The calculated fair value of the warrants was classified as a liability and was periodically remeasured with any changes in value recognized in“Other income (expense)” in the Statement of Operations. General accounting principles for determining whether an instrument (or embedded feature) isindexed to an entity’s own stock became effective for the Company as of January 1, 74Table of Contents2009. Accordingly, the fair value of the warrants as of that date was reclassified from stockholders’ equity into current liabilities. This tranche of warrantsissued in conjunction with the December 2008 registered direct offering were expired as of December 31, 2014.The warrants issued in conjunction with the May 2012 Stock and Warrant Purchase Agreement (“PIPE warrants”) described in Note 11 are considered aliability. Due to the provisions included in the warrant agreements, the PIPE warrants do not meet the exemptions for equity classification and as such, theCompany accounts for these PIPE warrants as derivative instruments. The PIPE warrants are periodically remeasured with any changes in value recognized in“Other income (expense)” in the Statement of Operations.A Monte-Carlo simulation was used to value the warrants upon issuance on May 10, 2012 using the following assumptions: 1) volatility of 80%; 2)risk-free interest rate of 1.035%; and 3) a closing stock price of $3.413.The remaining PIPE warrants expire in May 2018 and were revalued as of December 31, 2014 using the following assumptions: 1) volatility of165.27%; 2) risk-free interest rate of 1.10%; and 3) a closing stock price of $1.48.The Exchange warrants issued on August 7, 2013 are also considered a liability. Due to the provisions included in the warrant agreements, the warrantsdo not meet the exemptions for equity classification and as such, the Company accounts for these warrants as derivative instruments. These warrants wereinitially valued using the following assumptions: 1) volatility of 111%; 2) risk-free interest rate of 1.46%; and 3) a closing stock price of $8.69.The remaining Exchange warrants expire in November 2018 and were revalued as of December 31, 2014 using the following assumptions: 1) volatilityof 158.08%; 2) risk-free interest rate of 1.10%; and 3) a closing stock price of $1.48.The significant unobservable input used in the fair value measurement of the Company’s warrants is volatility. Significant increases (decreases) in thevolatility in isolation would result in a significantly higher (lower) asset and liability fair value measurements.The 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, 2014: WarrantsissuedDecember 29,2008 Warrantsissued May2012 Warrantsissued August2013 TotalLiabilities Balance at beginning of period $16,863 $1,915,753 $3,712,010 $5,644,626 Issues — — — — Settlements — — — — Revaluation (16,863) (1,187,041) (2,306,535) (3,510,439) Balance at end of period $— $728,712 $1,405,475 $2,134,187 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. 75Table of Contents13. Income TaxesThe provision for income taxes consists of the following: Year Ended December 31, 2014 2013 2012 Deferred: Federal $(894,506) $(93,078,760) $4,586,506 State and local (1,582,500) (6,128,198) 493,946 (2,477,006) (99,206,958) 5,080,452 Valuation allowance 2,477,006 99,206,958 (5,080,452) $— $— $— 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, 2014 2013 2012 U.S. statutory income tax rate 34.0% 34.0% 34%State and local taxes, net of federal tax benefit 2.4% 0.3% 5.7% Permanent differences between book and tax 17.1% (26.9)% 22.1% Deferred tax adjustments (71.9)% (151.7)% (8.2)% State rate adjustments (29.2)% — % — %Valuation allowance 47.6% 144.3% (53.6)%Effective income tax rate — % — % — %Included in permanent differences between book and tax in the above table are the impacts of the non-deductible mark-to-market activity associatedwith convertible debt and warrants as well as permanent differences such as nondeductible meals and entertainment. The deferred tax adjustment for the yearended December 31, 2014 is a write-off of a portion of the deferred tax asset related to stock compensation. The deferred tax adjustment for the year endedDecember 31, 2013 represents the impact of the Section 382 limitation discussed below. The deferred tax adjustment for the year ended December 31, 2012 isa write-off of a portion of the deferred tax asset related to stock compensation and net operating losses due to expiration. The state rate adjustments are aresult of changes in apportionment and various state rate law changes.The components of the deferred tax asset are as follows: December 31, 2014 2013 Current accruals $1,416,823 $1,998,086 Depreciation and amortization 2,302,685 2,566,979 Deferred compensation 1,589,935 5,421,688 Net operating loss carryovers 30,246,136 28,045,831 Deferred tax assets 35,555,579 38,032,584 Valuation allowance (35,555,579) (38,032,584) Net deferred tax assets $— $— Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the “Code”, if a corporation undergoes an “ownership change,” thecorporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax 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 a cumulative change in our ownership by 76Table of Contents“5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Followingsignificant ownership changes during 2013, the Company initiated a review of the availability of its U.S. net operating loss carryforwards. As a result of thisreview, it was determined that a large portion of the Company’s net operating loss carryovers would expire unused due to the limitation under IRCSection 382. The Company reduced the net operating loss carryover and corresponding valuation allowance as a result of these limitations as reflected in thenet operating loss carryovers in the table above. The remaining net operating loss carryforwards following the ownership change have been assigned a fullvaluation allowance against all deferred tax assets.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 inwhich those 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 periods over which the deferred tax assets are deductible, theCompany determined that a 100% valuation allowance of deferred tax assets was appropriate. The valuation allowance for deferred tax assets includesamounts for which subsequently recognized tax benefits will be applied directly to contributed capital.Based on the results of the review, discussed above, as of December 31, 2014, we had gross federal net operating loss carryforwards of approximately$85.0 million. The federal net operating loss carryforwards will expire between 2018 and 2034. As of December 31, 2014, we had state net operating lossdeferred tax assets of approximately $1.4 million which will expire at various dates between 2015 and 2034 if not utilized.The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. As the Company has a federal 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 provisionas applicable. As of December 31, 2014 accrued interest and penalties were less than $0.1 million.At December 31, 2014 and 2013, the Company had approximately $0.2 million in reserves for uncertain tax positions.14. 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: 2014 2013 2012 Numerator: Numerator for basic EPS $(5,202,441) $(68,757,589) $(9,238,427) Numerator for diluted EPS $(5,202,441) $(68,757,589) $(9,238,427) Denominator: Denominator for basic EPS—weighted average shares 19,945,038 11,554,566 6,944,928 Denominator for diluted EPS 19,945,038 11,554,566 6,944,928 Basic EPS $(0.26) $(5.95) $(1.33) Diluted EPS $(0.26) $(5.95) $(1.33) 77Table of ContentsThe 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, 2014 2013 2012 Shares outstanding Restricted shares — 6,600 68,543 Shares issuable upon vesting/exercise of: Options to purchase common stock 487,146 188,947 373,899 Restricted stock units 697,751 588,759 529,312 Warrants 2,197,883 3,021,302 6,099,476 3,382,780 3,805,608 7,071,230 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 arediscretionary under the 401(k) plan. As of October 1, 2011, the Company suspended all matching contributions indefinitely. The Company had no expensesrelated to the employee contribution matching program for the year ended December 31, 2014 and December 31, 2013. For the year ended December 31,2012, the Company expensed $8,595 related to the plan.16. Product Warranty ProvisionsThe Company’s standard policy is to warrant all Niobe, Odyssey and Vdrive 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.Accrued warranty, which is included in other accrued liabilities, consists of the following: December 31,2014 December 31,2013 Warranty accrual, beginning of the fiscal period $501,212 $653,473 Accrual adjustment for product warranty 84,402 84,562 Payments made (221,066) (236,823) Warranty accrual, end of the fiscal period $364,548 $501,212 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 andrelated information. The Company’s system and disposable 78Table of Contentsdevices 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 asingle operating segment. Year Ended December 31, 2014 2013 2012 United States $21,626,788 $24,063,932 $27,034,200 International 13,384,488 13,967,149 19,528,234 Total $35,011,276 $38,031,081 $46,562,434 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, 2014 and 2013: Net Sales Gross Profit Net Income(Loss) Basic NetIncome(Loss) PerShare DilutedNetIncome(Loss) PerShare 2014 First quarter $8,354,670 $6,735,584 $(4,139,848) $(0.21) $(0.21) Second quarter 8,047,537 6,062,775 (1,941,479) (0.10) (0.10) Third quarter 8,854,101 6,516,169 22,670 0.00 0.00 Fourth quarter 9,754,968 7,473,368 856,216 0.04 0.04 2013 First quarter $8,408,204 $6,215,559 $(4,920,147) $(0.61) $(0.61) Second quarter 9,733,407 7,261,519 (3,006,792) (0.37) (0.37) Third quarter 10,821,444 7,321,820 (56,868,442) (4.49) (4.49) Fourth quarter 9,068,026 6,230,882 (3,962,208) (0.23) (0.23) 20. Subsequent EventsNone. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. ITEM 9A.CONTROLS AND PROCEDURES 79Table of ContentsReport on Internal Control Over Financial ReportingAs of December 31, 2014, 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) promulgatedunder the 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 Rules13a-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 generallyaccepted accounting principles in the United States of America. The Company’s management assessed the effectiveness of our internal control over financialreporting as of December 31, 2014. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (2013 Framework) in Internal Control—Integrated Framework. Based on our assessment, our management has concluded that ourinternal control over financial reporting is effective as of December 31, 2014.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 controlissues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part uponcertain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not bedetected.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 affectedor is reasonably likely to materially affect, the Company’s internal control over financial reporting. 80Table of ContentsITEM 9B.OTHER INFORMATIONNone.PART IIICertain information required by Part III is omitted from this Report on Form 10-K since we intend to file our definitive Proxy Statement for our nextAnnual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”), no later thanApril 30, 2015, and certain information to be included in the Proxy Statement is incorporated herein by reference. ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTInformation required by this item concerning our directors is incorporated by reference to the information set forth in the section titled “InformationAbout the Board of Directors” in our Proxy Statement. Information regarding Section 16 reporting compliance is incorporated by reference to the informationset forth in the section titled “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement. Information about our audit committeemembers and audit committee financial expert is incorporated by reference to the information set forth in the section titled “Board Meetings andCommittees” in our Proxy Statement.Our Board of Directors adopted a Code of Business Conduct and Ethics for all our directors, officers and employees effective August 1, 2004 asamended from time to time. Stockholders may request a free copy of our Code of Business Conduct and Ethics from our Chief Financial Officer as follows: Stereotaxis,Inc. Attn:Martin C. Stammer 4320 Forest Park Avenue, Suite 100 St.Louis, MO 63108 314-678-6100To the extent required by law or the rules of the NASDAQ Capital Market, any amendments to, or waivers from, any provision of the Code of BusinessConduct and Ethics will be promptly disclosed publicly. To the extent permitted by such requirements, we intend to make such public disclosure by postingthe relevant material on our website (www.stereotaxis.com) in accordance with SEC rules.The following is information with respect to our executive officers:William C. Mills IIIChief Executive Officer since April 2013, Chairman of the Board since May 2012Director since June 2000Mr. Mills, 59, has served as our Chief Executive Officer since April 2013 and as the Chairman of our Board of Directors since May 2012. From 2004 until2009, Mr. Mills was a managing member of a management company conceived by EGS Healthcare Capital Partners to manage EGS Private HealthcarePartnership III. Earlier, Mr. Mills was a Partner in the Boston office of Advent International, a private equity and venture capital firm, for five years. AtAdvent, he was co-responsible for healthcare venture capital investments and focused on investments in the medical technology and biopharmaceuticalsectors. Before joining Advent, Mr. Mills spent more than 11 years with the Venture Capital Fund of New England where he was a General Partner. Prior tothat, he spent seven years at PaineWebber Ventures/Ampersand Ventures as Managing General Partner. He currently serves as Chairman of the Board ofManagers of Ascension Ventures III, L.P., a strategic healthcare venture fund focused on the medical device, healthcare information technology, and servicesectors, and he is a member of the board of directors of Interleukin Genetics, Inc., a publicly traded company that develops and markets genetic 81Table of Contentstests. Mr. Mills received an S.M. in Chemistry from the Massachusetts Institute of Technology, an M.S. in Management from the Massachusetts Institute ofTechnology Sloan School of Management, and an A.B. cum laude in Chemistry from Princeton University.Frank J. ChengSenior Vice President, Marketing and Business DevelopmentOfficer since April 2010Mr. Cheng, 47, joined Stereotaxis in April 2010 as Senior Vice President and currently has executive responsibility in Marketing, Training, ClinicalResearch, Business Development and Asia Business. He has over 20 years of experience in the medical technology industry leading marketing, businessdevelopment, and P&L general management. Prior to joining Stereotaxis, Mr. Cheng was President and 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. Chengwas President and Chief Executive Officer of OBS Medical. For four years prior to that, he was Vice President of Business Development for RocheDiagnostics. Earlier in his career, Mr. Cheng held marketing and strategic planning positions at GE Medical Systems for three years and HillenbrandIndustries (including its subsidiary, Hill-Rom Company) for four years. Mr. Cheng has an MBA from Vanderbilt University and a BBA from WuhanUniversity.Karen W. DurosSenior Vice President, General Counsel and SecretaryOfficer since October 2010Ms. Duros, 60, joined Stereotaxis in 2010. She has over 30 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, 66, joined Stereotaxis in January 2007. He was named an officer in 2010. Mr. Giffin has over 40 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 Consultant at The Bannon Consulting Group. He spent the early years of hiscareer with Monsanto Company where he held a variety of human resources positions with increasing responsibility. Mr. Giffin earned his M.B.A. and a B.S.in Psychology from Purdue University.Martin C. StammerChief Financial OfficerOfficer since February 2013Mr. Stammer, 34, was appointed as the Chief Financial Officer in February 2013. He previously served as Vice President, Controller since August 2012 and asCorporate Controller from July 2011 to August 2012. He joined 82Table of Contentsthe Company as Senior Manager, Financial Reporting in October 2009. Prior to joining the Company, from 2003 to 2009, Mr. Stammer was employed invarious roles and capacities at Deloitte & Touche LLP, including most recently as Audit Manager. Mr. Stammer received his M.S. and B.S. in Accountancyfrom the University of Illinois and is a Certified Public Accountant. ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item regarding executive compensation is incorporated by reference to the information set forth in the section titled“Executive Compensation” in our Proxy Statement. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to theinformation set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement. The informationrequired by this item regarding securities authorized for issuance under equity plans is incorporated by reference to the information set forth in the sectiontitled “Executive Compensation” in our Proxy Statement. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS AND DIRECTOR INDEPENDENCEThe information required by this item regarding certain relationships and related transactions is incorporated by reference to the information set forthin the section titled “Certain Relationships and Related Party Transactions” in our Proxy Statement. The information required by this item regarding directorindependence is incorporated by reference to the information set forth in the section titled “Corporate Governance Information” in our Proxy Statement. ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item regarding principal accounting fees and services is incorporated by reference to the information set forth in thesection titled “Principal Accounting Fees and Services” in our Proxy Statement.Part IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) The following documents are filed as part of this Annual Report on Form 10-K (1)Financial Statements—See Index to the Financial Statements at Item 8 of this Report on Form 10-K. (2)The following financial statement schedule of Stereotaxis, Inc. is filed as part of this Report and should be read in conjunction with the 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 setforth in the consolidated financial statements or related notes thereto. (3)ExhibitsSee Exhibit Index appearing on page 86 herein. 83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: March 16, 2015 By: /s/ WILLIAM C. MILLS III William C. Mills IIIChief Executive OfficerKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William C. Mills III and Martin 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 his name, placeand stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and any other documents and instruments incidentalthereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents, and each of them, full Power and authority to do and perform each and every act and thing requisite or necessary to bedone in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of 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 and ChiefExecutive Officer (principal executive officer) March 16, 2015/s/ MARTIN C. STAMMERMartin C. Stammer Chief Financial Officer (principal financial officer andprincipal accounting officer) March 16, 2015/s/ DAVID W. BENFERDavid W. Benfer Director March 16, 2015/s/ JOSEPH D. KEEGANJoseph D. Keegan Director March 16, 2015/s/ FRED A. MIDDLETONFred A. Middleton Director March 16, 2015/s/ ROBERT J. MESSEYRobert J. Messey Director March 16, 2015/s/ ERIC N. PRYSTOWSKYEric N. Prystowsky Director March 16, 2015/s/ EUAN S. THOMSONEuan S. Thomson Director March 16, 2015 84Table of ContentsSCHEDULE IIVALUATION AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012 Balance atBeginning ofYear AdditionsCharged toCost andExpenses Deductions Balance at theEnd of Year Allowance for doubtful accounts and returns: Year ended December 31, 2014 $383,077 $48,742 $(300,355) $131,464 Year ended December 31, 2013 $640,183 $65,781 $(322,887) $383,077 Year ended December 31, 2012 $667,529 $763 $(28,109) $640,183 Allowance for inventories valuation: Year ended December 31, 2014 $80,213 $6,970 $(27,549) $59,634 Year ended December 31, 2013 $72,639 $179,803 $(172,229) $80,213 Year ended December 31, 2012 $151,157 $122,783 $(201,301) $72,639 85Table of ContentsEXHIBIT INDEX Number Description 3.1a 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 theRegistrant’s Form 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 Company andcertain 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. 4.3a 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’sForm 10-K (File 000-50884) for the fiscal year ending December 31, 2007). 4.3b 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). 4.3c 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 Exhibit10.31c of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2009). 4.3d 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). 4.3e 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. 4.3f Form of Warrant issued pursuant to that certain Fifth Amendment to Note and Warrant Purchase Agreement, dated May 1, 2012, between theCompany and certain investors named therein (included in Exhibit 10.3 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on May 2, 2012.). 4.3g Form of Warrant issued pursuant to that certain Sixth Amendment to Note and Warrant Purchase Agreement, dated May 7, 2012, betweenthe Company and certain investors named therein (included in Exhibit 10.77 of the Registrant’s Registration Statement on Form S-1(File No. 000-50884) filed May 23, 2012). 4.3h 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. 86Table of ContentsNumber Description 4.3i Form of Warrant issued pursuant to that certain Seventh Amendment to Note and Warrant Purchase Agreement dated March 29, 2013,between the Company and certain investors named therein, incorporated by reference to Exhibit 4.5i of the Registrant’s Form 10-K (File No.001-36159) for the fiscal year ended December 31, 2013. 4.3j Form of Warrant issued pursuant to that certain Eighth Amendment to Note and Warrant Purchase Agreement dated June 28, 2013, betweenthe Company and certain investors named therein, incorporated by reference to Exhibit 4.1 of the Registrant’s Form 10-Q (File No. 001-36159) filed for the fiscal quarter ended June 30, 2013. 4.3k Form of Warrant issued to certain investors in connection with extensions of loan guarantees by such investors, incorporated by reference toExhibit 4.5k of the Registrant’s Form 10-K (File No. 001-36159) for the fiscal year ended December 31, 2013. 4.4 Form of Series A Warrant, issued pursuant to that certain Securities Purchase Agreement, dated December 29, 2008, incorporated byreference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed December 29, 2008. 4.5 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. 4.6 Warrant to Purchase Stock pursuant to that certain Loan and Security Agreement, dated December 17, 2010, between Silicon Valley Bankand the Company incorporated by reference to Exhibit 4.10 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year endedDecember 31, 2010). 4.7 Form of Warrant issued pursuant to that certain Exchange Agreement, dated August 7, 2013, incorporated by reference to Exhibit 10.2 ofRegistrant’s Current Report on Form 8-K (File No. 000-50884) filed on August 8, 2013.10.1a# Amended and Restated Stereotaxis, Inc. 2012 Stock Incentive Plan, as adopted March 27, 2014, incorporated by reference to Exhibit 10.4 ofthe Registrant’s Form 10-Q (File No. 001-36159) for the fiscal quarter ended June 30, 2014.10.1b# Form of Restricted Share Unit Terms of Award under Stereotaxis, Inc. 2012 Stock Incentive Plan, incorporated by reference to Exhibit 10.2of Registrant’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, incorporated by referenceto Exhibit 10.1c of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2012.10.1d# Form of Restricted Share Unit Terms of Award Under Stereotaxis, Inc. 2012 Stock Incentive Plan, March 5, 2013, incorporated by referenceto Exhibit 10.1d of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2012.10.2a# 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 Restricted Performance Share Terms and Conditions Under Stereotaxis, Inc. 2002 Stock Incentive Plan, February 14, 2012,incorporated by reference to Exhibit 10.2h of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2012.10.3a# Amended and Restated Stereotaxis, Inc. Employee Stock Purchase Plan, as adopted March 27, 2014, incorporated by reference to Exhibit10.5 of the Registrant’s Form 10-Q (File No. 001-36159) for the fiscal quarter ended June 30, 2014. 87Table of ContentsNumber Description10.4# Form of Retention Agreement dated April 23, 2013 between the Company and certain executive officers, incorporated by reference toExhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on April 26, 2013.10.5# Executive Employment Agreement dated May 30, 2014, between Stereotaxis, Inc. and William C. Mills III, incorporated by reference toExhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36159) filed on June 2, 2014.10.6# Form of Amended and Restated Executive Employment Agreement, 2013, between certain executive officers and the Company,incorporated by reference to Exhibit 10.6 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2012.10.7# Summary of management bonus plan, incorporated by reference to Exhibit 10.8 of the Registrant’s Form 10-K (File No. 000-50884) for thefiscal year ended December 31, 2012.10.8# Description of compensation of named executive officers, incorporated by reference to Exhibit 10.9 of the Registrant’s Form 10-K (File No.001-36159) for the fiscal year ending December 31, 2013.10.9# Summary of Non-Employee Director Compensation Program, incorporated by reference to Exhibit 10.2 of the Registrant’s Form 10-Q (FileNo. 001-36159) for the fiscal quarter ended March 31, 2014.10.10 Consulting Agreement dated April 12, 2013 by and between the Company and Michael Kaminski, incorporated by reference to Exhibit99.1 of the Registrant’s Current Report on Form 8-K/A (File No. 000-50884) filed on April 17, 2013.10.11a† 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 10.9.10.11b† 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, asamended thereafter, at Exhibit 10.10.10.11c† 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, 2006.10.12a† Development and Supply Agreement dated May 7, 2002, between the Registrant and Biosense Webster, Inc., incorporated by reference tothe Registration Statement on Form S-1 (File No. 333-115253) originally filed with the Commission on May 7, 2004, as amended thereafter,at Exhibit 10.11.10.12b† 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 10.12.10.12c† 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, 2007.10.12d† 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. 88Table of ContentsNumber Description10.12e 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, 2009.10.12f 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, 2010.10.12g 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, 2010.10.12h† 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) for the fiscal year ended December 31, 2010.10.12i 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 31,2011.10.13 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 10.14.10.14† 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 10.16.10.15a† 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, 2004.10.15b 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, 2007.10.15c Second Amendment to Office Lease dated May 1, 2013, between Registrant and Wexford 4320 Forest Park, LLC, successor to Cortex WestDevelopment I, LLC, incorporated by reference to Exhibit 10.17c of the Registrant’s Form 10-K (File No. 001-36159) for the fiscal yearending December 31, 2013.10.15d Third Amendment to Office Lease dated August 14, 2013, between Registrant and Wexford 4320 Forest Park, LLC, successor to CortexWest Development I, LLC, incorporated by reference to Exhibit 10.17d of the Registrant’s Form 10-K (File No. 001-36159) for the fiscalyear ending December 31, 2013.10.16a 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, 2012.10.16b Form of Convertible Debt Registration Rights Agreement incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report onForm 8-K (File No. 000-50884) filed on May 8, 2012.10.16c 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. 89Table of ContentsNumber Description10.16d Form of Amendment and Exchange Agreement between Company and each of the holders of its convertible debentures participating in theexchange, incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on August 8,2013.10.17a 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, 2011.10.17b 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, 2012.10.17c 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, 2012.10.17d 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 onForm 8-K (File No. 000-50884) filed on May 2, 2012.10.17e 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 RegistrationStatement on Form S-1 (File No. 000-50884) filed May 23, 2012.10.17f Fourth Loan Modification Agreement (Domestic), dated December 28, 2012, between the Company, Stereotaxis International, Inc. andSilicon Valley Bank incorporated by reference to Exhibit 10.19f of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal yearended December 31, 2012.10.17g Fifth Loan Modification Agreement (Domestic) dated March 29, 2013 between the Company, Stereotaxis International, Inc. and SiliconValley Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on April1, 2013.10.17h Sixth Loan Modification and Waiver Agreement (Domestic), dated June 28, 2013, between the Company, Stereotaxis International, Inc.,and Silicon Valley Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884)filed on July 1, 2013.10.17i Seventh Loan Modification and Waiver Agreement (Domestic), dated July 31, 2013, between the Company, Stereotaxis International, Inc.and Silicon Valley Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884)filed on August 2, 2013.10.17j Eighth Loan Modification Agreement (Domestic), dated August 30, 2013, between the Company, Stereotaxis International, Inc. and SiliconValley Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed onSeptember 3, 2013.10.17k Ninth Loan Modification Agreement (Domestic), dated March 28, 2014, between the Company, Stereotaxis International, Inc. and SiliconValley Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36159) filed onMarch 31, 2014. 90Table of ContentsNumber Description10.18a 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 10.20e of the Registrant’s Form 10-K (File No. 000-50884)for the fiscal year ended December 31, 2011.10.18b Export-Import Bank First Loan Modification Agreement, between the Company, Stereotaxis International, Inc. and Silicon Valley Bank,dated March 30, 2012, incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (File No. 000-50884) filed on April 2, 2012.10.18c Export-Import Bank Second Loan Modification and Waiver Agreement, dated May 1, 2012, between the Company, StereotaxisInternational, Inc. and Silicon Valley Bank, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (FileNo. 000-50884) filed on May 2, 2012.10.18d 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, 2012.10.18e Export-Import Bank Fourth Loan Modification Agreement, dated March 29, 2013, between the Company, Stereotaxis International, Inc. andSilicon Valley Bank, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filedon April 1, 2013.10.18f Export-Import Bank Fifth Loan Modification Agreement, dated June 28, 2013, between the Company, Stereotaxis International, Inc. andSilicon Valley Bank, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filedon July 1, 2013.10.18g Export-Import Bank Sixth Loan Modification Agreement, dated July 31, 2013, between the Company, Stereotaxis International, Inc. andSilicon Valley Bank, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filedon August 2, 2013.10.18h Export-Import Bank Seventh Loan Modification Agreement, dated August 30, 2013, 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 September 3, 2013.10.19a 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, 2007.10.19b 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 endedDecember 31, 2008.10.19c 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 endedDecember 31, 2009.10.19d 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. 91Table of ContentsNumber Description10.19e 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, 2012.10.19f 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, 2012.10.19g 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, 2012.10.19h Seventh Amendment to Note and Warrant Purchase Agreement, dated March 29, 2013, between the Registrant and the investors namedtherein, incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on April 1,2013.10.19i Eighth Amendment to Note and Warrant Purchase Agreement, dated June 28, 2013, 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 July 1, 2013.10.20a Loan Agreement dated as of November 30, 2011, by and among the Company, Stereotaxis International, Inc. and Healthcare RoyaltyPartners II, 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(File No. 000-50884) for the fiscal year ended December 31, 2011.10.20b 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, 2011.10.21a 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, 2012.10.21b Form of PIPE Registration Rights Agreement incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (FileNo. 000-50884) filed on May 8, 2012.10.21c 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, 2012.10.22 Controlled Equity Offering Sales Agreement dated May 16, 2014, by and between Stereotaxis, Inc. and Cantor Fitzgerald & Co.,incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36159) filed on May 16, 2014.10.23 Consulting Agreement effective June 4, 2014, between Stereotaxis, Inc. and Eric N. Prystowsky, M.D., incorporated by reference to Exhibit10.3 of the Registrant’s Form 10-Q (File No. 001-36159) for the fiscal quarter ended June 30, 2014.21.1 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). 92SMTable of ContentsNumber Description 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. 93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 (2)Registration Statement (Form S-8 No. 333-197930) of Stereotaxis, Inc. pertaining to the Stereotaxis, Inc. 2009 Employee Stock Purchase Plan (3)Registration Statement (Form S-8 No. 333-197929) of Stereotaxis, Inc. pertaining to the Stereotaxis, Inc. 2012 Stock Incentive Plan (4)Registration Statement (Form S-3 No. 333-192606) of Stereotaxis, Inc. pertaining to the registration of up to $75 million of the Stereotaxis, Inc.’scommon stock, preferred stock, debt securities, warrants, and/or unitsof our report dated March 16, 2015, with respect to the financial statements and schedule of Stereotaxis, Inc., included in this Annual Report (Form 10-K) forthe year ended December 31, 2014./s/ Ernst & Young LLPSt. Louis, MissouriMarch 16, 2015Exhibit 31.1Certification of Principal Executive OfficerI, William C. Mills III, 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 statementsfor external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about 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, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which 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: March 16, 2015 /s/ William C. Mills III William C. Mills III 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 statementsfor external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about 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, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which 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: March 16, 2015 /s/ Martin C. Stammer Martin C. Stammer 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, 2014 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, William C. Mills III, Chief Executive Officer of the Company, certify, pursuant toRule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that to the best of my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 16, 2015 /s/ William C. Mills III William C. Mills III 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, 2014 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Martin C. Stammer, Chief Financial Officer of the Company, certify, pursuant toRule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that to the best of my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 16, 2015 /s/ Martin C. Stammer Martin C. Stammer Chief Financial Officer Stereotaxis, Inc.

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