Stereotaxis
Annual Report 2016

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (MARK ONE)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016OR ☐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 the 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: NoneSecurities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate 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 ☒Indicate 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 ☒ 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 ☒ 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 the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or anyamendment to this Form 10-K. ☐Indicate 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 ☒ (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 ☒The 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 on June 30, 2016) was approximately $19.5 million.The number of outstanding shares of the registrant’s common stock on February 28, 2017 was 22,456,113.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement for the registrant’s 2017 Annual Meeting of Shareholders are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14. Table of ContentsSTEREOTAXIS, INC.INDEX TO ANNUAL REPORT ON FORM 10-K Page PART I. Item 1. Business 1 Item 1A. Risk Factors 19 Item 1B. Unresolved Staff Comments 38 Item 2. Properties 38 Item 3. Legal Proceedings 38 Item 4. Mine Safety Disclosures 38 PART II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 39 Item 6. Selected Financial Data 39 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40 Item 8. Financial Statements and Supplementary Data 50 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 76 Item 9A. Controls and Procedures 77 Item 9B. Other Information 77 PART III. Item 10. Directors and Executive Officers of the Registrant 78 Item 11. Executive Compensation 79 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 80 Item 13. Certain Relationships and Related Person Transactions and Director Independence 80 Item 14. Principal Accounting Fees and Services 80 PART IV. Item 15. Exhibits and Financial Statement Schedules 80 SIGNATURES 81 SCHEDULE II—Valuation and Qualifying Accounts 82 EXHIBIT INDEX 83 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-Loop™, V-Sono™, V-CAS DeflectQuikCAS™, Cardiodrive, and Pegasus™are trademarks of Stereotaxis, Inc. All other trademarks that appear in this report are the property of their respective owners.FORWARD-LOOKING STATEMENTSThis annual report on Form 10-K, including the sections entitled “Business” and “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” contains forward-looking statements. These statements relate to, among other things: • our business strategy; • our value proposition; • our ability to fund operations; • our ability to convert backlog to revenue; • the ability of physicians to perform certain medical procedures with our products safely, effectively and efficiently; • the adoption of our products by hospitals and physicians; • the market opportunity for our products, including expected demand for our products; • the timing and prospects for regulatory approval of our additional disposable interventional devices; • the success of our business partnerships and strategic alliances; • our estimates regarding our capital requirements; • our plans for hiring additional personnel; and • any of our other plans, objectives, expectations and intentions contained in this annual report that are not historical facts.These statements relate to future events or future financial performance, and involve known and unknown risks, uncertainties, and other factors thatmay cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performanceor achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology 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.OVERVIEWWe 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 1®®®®™, ®Table of Contentsproprietary Epoch Solution, an advanced remote robotic navigation system, for use in a hospital’s interventional surgical suite, or “interventional lab”. Webelieve the Epoch Solution revolutionizes the treatment of arrhythmias and coronary artery disease by enabling enhanced safety, efficiency and efficacy forcatheter-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, 2016, we had approximately $4.5 million of backlog, consisting of outstanding purchase orders and other commitments for thesesystems. We had backlog of approximately $6.0 million and $5.7 million as of December 31, 2015 and 2014, respectively. Of the December 31, 2016backlog, we expect approximately 96.0% to be recognized as revenue over the course of 2017. 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, and coordination of marketingand sales efforts in order to continue to introduce new enhancements around the Niobe system. The Siemens and Philips alliances provide for coordination ofour sales and marketing efforts with those of our alliance partners to facilitate co-marketing of integrated systems.We were incorporated in Delaware in June, 1990 as Stereotaxis, Inc. Our principal executive offices are located at 4320 Forest Park Avenue, Suite 100,St. Louis, Missouri 63108, and our telephone number is (314)678-6100.THE STEREOTAXIS VALUE 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 2Table of Contentscomplex procedures and the types of diseases that can be treated manually. These challenges primarily involve the inherent mechanical limitations of manualinstrument control and the lack of integration of the information systems used by physicians in the interventional lab as well as a significant amount oftraining and experience required to ensure proficiency. As a result, many complex cases in electrophysiology are treated with palliative drug therapy, andmany complex procedures in interventional cardiology are still referred to highly invasive bypass 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 electrophysiology andinterventional cardiology procedures, on a cost-justified basis.We believe that our systems will: • 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. Maintaining this precision and contact canbe very challenging, especially in the most complex procedures, such as those for the treatment of ventricular tachycardia. For coronary arterydisease, precise and correct navigation and placement of expensive stents also have a significant impact on procedure costs and outcomes. Webelieve our robotic technology can enhance procedure results by improving navigation of disposable interventional devices to treatment sites,and by affecting more precise, safe, treatments once these sites are reached. • Expand the market by enhancing the treatment of more complex cases. Treatment of a number of major diseases, including ventriculartachycardia, atrial fibrillation, congenital heart diseases, and critical limb ischemia due to chronic total occlusions of peripheral arteries, ishighly problematic using conventional wire and/or catheter-based techniques. Additionally, many patients with multi-vessel disease and certaincomplex arrhythmias, such as ventricular tachycardia and atrial fibrillation 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 ventricular tachycardia, atrial fibrillation, and congenital heart diseases to be treatedinterventionally on a much broader scale than today. • Enhance patient and physician safety. The Niobe system has been used in nearly 100,000 procedures and the incidence of reported majoradverse cardiac events associated with the use of the system for all procedures is approximately 0.4%. This represents what we believe to be aclinically significant improvement in major complication rates over conventional procedures, which can range as high as 9.5% 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 through reduced usage offluoroscopy during procedures with the Niobe system due to enhanced and more fully integrated mapping capabilities of the Niobe software. 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. • Improve clinical workflow and information management. Complex ablation procedures involve several sources of information, whichconventionally require a physician to mentally integrate and process 3Table of Contents large quantities of information from different sources in real time, often from separate user interfaces. Sources of information include real time x-ray and/or ultrasound images, real time location sensing systems providing the 3-D location of a catheter tip, pre-operative map of the electricalactivity of the heart, real time recording of electrical activity of the heart, and temperature feedback from an ablation catheter. The OdysseySolution improves clinical workflow and information management efficiency by integrating and synchronizing the multiple sources ofdiagnostic and imaging information found in the interventional labs into a large-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 procedure times compared tomanual procedures, especially in the most complex procedures such as the treatment of ventricular tachycardia. We believe the Niobe system canalso reduce the variability in procedure times compared to manual methods. Greater standardization of procedure times allows for more efficientscheduling of interventional cases including staff requirements. We also believe that additional cost savings from robotics can result fromdecreased use of multiple catheters, high-end deflectable sheaths, guidewires and contrast media in procedures compared with manual methodsfurther 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 an adjacent room and outside the x-ray fluoroscopy field or beside the patient table, as in traditional interventional procedures. TheNiobe 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 initially launched in2005 and continues to develop significantly as the various systems advance.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 9% and 19% of revenue for the years ended December 31, 2016 and 2015, 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.Vdrive™ Robotic Navigation SystemThe Vdrive system provides navigation and stability for diagnostic and ablation devices designed with key features to assist in the delivery of betterablations. Important features include complementing the Niobe ES control of catheters with fully remote, single operator workflow; and providing roboticcontrol of diagnostic devices independent of magnetic navigation. The Vdrive Duo system is an optional expansion of the Vdrive hardware that allowscontrol of any two of the four available disposable options (V-Loop, V-Sono, V-CAS, and V-CAS Deflect). 5®®®Table of ContentsDisposables 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, with sales of such magnetically-enabled catheters generating royalty payable fromBiosense Webster to Stereotaxis; and • The Pegasus coronary guidewire designed for use in interventional cardiology procedures for the introduction and placement of over-the-wiretherapeutic 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 210°. • our V-Loop circular catheter manipulator (“V-Loop device”), which allows the user to control certain circular mapping catheters, such asBiosense Webster’s LASSO2515 or LASSO2515 NAV Circular Mapping Catheter, advance, retract, rotate, deflect and adjust loop radius, andhold the catheter position against the tissue to optimize electrograms; and • our V-Sono ICE catheter manipulator (“V-Sono device”) that allows a single physician to manipulate BWI SoundStar™ and AcuNav™ cathetersfrom the control room, store and recall previous positions and automatically sweep over an area of interest with adjustable speed and angle, andautomatically track a 3.5mm NAVISTAR RMT THERMOCOOL Irrigated Tip Catheter – all without leaving the control room.Disposable revenue including royalties represented 40% and 34% of revenue for the years ended December 31, 2016 and 2015, 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 represented 42%and 37% of revenue for the years ended December 31, 2016 and 2015, 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 regulatory clearance, licensing and/or CE Mark approvals necessary for us to market the Vdrive and Vdrive Duo systems with the V-CAS, V-Loop and V-Sono devices in the U.S., Canada and European Union. The V-CAS Deflect catheter advancement system has been CE Marked for sale inthe European Union.The Pegasus coronary peripheral guidewires have received Food and Drug Administration (“FDA”) clearance and the CE Mark necessary for marketingin 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 $19.4 million and $19.8 million for the years ended December 31, 2016 and 2015, respectively. Our total internationalrevenue was $12.8 million and $17.9 million for the years ended December 31, 2016 and 2015, respectively. No single country other than the U.S. accountedfor more than 10% of total revenue for the years ended December 31, 2016 and 2015. Biosense Webster Inc. accounted for $4.1 million, and $3.5 million, or13%, and 9% of total net revenue for the years ended December 31, 2016 and 2015, respectively. No other single customer accounted for more than 10% oftotal revenue for the years ended December 31, 2016 and 2015.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.ElectrophysiologyThe 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 7®®®®®®®®®®Table of Contentsfrom fatigue to stroke or death. Over 5.0 million people in the U.S. currently suffer from the resulting abnormal heart rhythms, which are known asarrhythmias. The prevalence of arrhythmias is expected to continue to rise as the population ages and life expectancy continues to increase. These conditionsare a major physical and economic burden and are 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 arrhythmias a major economic factor in healthcare. We believe payors are veryinterested in therapies that may reduce the financial impact of these diseases.Drug therapies for arrhythmias often fail to adequately control the arrhythmia and may have significant side effects. Consequently, physicians 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. Nearly onemillion electrophysiology procedures are performed annually worldwide, and procedure growth rate is over 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: • 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 of a conventional catheter making it very difficult to identify the appropriate location for the ablation, whereas magneticcatheters produce fewer extra beats and provide for easier and more efficient mapping of the diseased tissue. Successful ablation of ventriculartachycardia can extend the useful life of an implantable defibrillator, reduce shocks to the patient, reduce the need for antiarrhythmic drugs or, insome cases, obviate the need for an expensive implantable device and its associated follow-up. • 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. This chaotic electrical activity of the top chambers of the heart is estimated to be present in three million people inthe United States and over seven million people worldwide. The number of potential patients for manual catheter-based procedures for atrialfibrillation has been limited because the procedures are extremely complex and are performed by only the most highly skilledelectrophysiologists. They also typically have much longer procedure times than general ablation cases and the success rates have been lowerand more variable. We believe that our system can allow these procedures to be performed by a broader range of electrophysiologists and, byautomating some of the more complex catheter maneuvers, can standardize and reduce procedure times and significantly improve outcomes. • 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, 8®®Table of Contents the system can control the procedure and direct catheter movement from the control room, saving the physician time and helping to avoidunnecessary exposure to high doses of radiation.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, and enables catheter contact to be consistently maintained to efficiently apply energy on the wall of thebeating heart. We also believe that our system will significantly lower the skill barriers required for physicians to perform complex electrophysiologyprocedures and, additionally, improve interventional lab efficiency and reduce disposable interventional device utilization.Interventional CardiologyMore than half a million people die annually from coronary artery disease, a condition in which the formation of plaque in the coronary arteriesobstructs the supply of blood to the heart, making this the leading cause of death in the U.S. Despite various attempts to reduce risk factors, each year overone million patients undergo interventional procedures in an attempt to open blocked vessels and another one half million patients undergo open 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; • allow us to leverage the sales, distribution, service and maintenance expertise of our strategic alliances; and 9Table of Contents • 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.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% and 8% of revenue for the years ended December 31, 2016 and 2015,respectively. These royalties were used to make payments under the debt agreement with Healthcare Royalty Partners II, L.P. (formerly “Cowen HealthcareRoyalty Partners II, L.P.”) as discussed in Item 7.Biosense Webster’s distribution rights for co-developed catheters were exclusive through December 31, 2015 and currently are nonexclusive untilDecember 31, 2018. Biosense Webster’s right to distribute such products in Japan is exclusive until March 22, 2018 and nonexclusive until March 22, 2021.Upon the expiration or termination of the agreement, other than due to a change of control of Stereotaxis, the agreement provides for a continuation of supplyby Biosense Webster of the co-developed catheters to us or our customers for three years. The agreement provides an opportunity to expand the productoffering covered by the agreement to include a next generation irrigated magnetic catheter, subject to mutually agreeable terms including exclusivedistribution rights.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. These restrictions are no longer applicable after December 31, 2015. Additionally, we granted Biosense Webstercertain notice and discussion rights for product development activities we undertake relating to localization of magnetically enabled interventionaldisposable devices in fields outside of electrophysiology and mapping.Either 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 10®Table of Contentscustomers for three years (or, for non-location sensing mapping and ablation catheters, until our first sale of a competitive product after a change of control, ifearlier than three years). If either party terminates the agreement under this provision, we must pay a termination fee to Biosense Webster equal to 5% of ourtotal equity value in the change of control transaction, up to a maximum of $10 million. If a change of control of Stereotaxis occurs after Biosense Websterhas received approval from the U.S. FDA for atrial fibrillation indication for the NAVISTAR RMT THERMOCOOL catheter, we would be required to payan additional $10 million fee to Biosense Webster, and termination of the agreement by either party would not be effective until two years after the change ofcontrol. We also agreed to notify Biosense Webster if we reasonably believe that we are engaged in substantive discussions with respect to the sale of theCompany 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, 2016, 2015, and 2014, were $5.5 million, $6.3 million, and $5.2 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 2016.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 distributes magnetically enabled electrophysiology mapping and ablation catheters, co-developedpursuant to our alliance with them.Our sales and marketing efforts include two important elements: (1) selling Niobe systems, Odyssey Solutions, and Vdrive systems 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 have been reimbursed to date. In Japan, the Ministry of Health, Labor and Welfare(MHLW) has classified the Niobe system as a C2 medical device (the highest reimbursement category), and has established a “technical fee” of Japanese Yen50,000 per procedure. In other foreign countries, we may need to seek international reimbursement approvals, and we do not know if these required approvalswill be obtained in a timely manner or at all.See “Item 1A—Risk Factors” for a discussion of various risks associated with reimbursement from third-party payors.INTELLECTUAL 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, 2016, we had 87 issuedU.S. patents, 1 co-owned U.S. patent and no licensed-in U.S. patents. In addition, we had 10 pending U.S. patent applications and 1 co-owned U.S. patentapplication. As of December 31, 2016 we had 45 issued foreign patents and 11 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 in 13Table of Contentsa 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 non-RF ablation devicesincluding single-shot cryoablation devices and other new products for use in other interventional therapies. Some of these products are marketed bycompanies that may have an established presence in the field of electrophysiology, including major imaging, capital equipment and disposables companiesthat are currently selling products in the interventional lab. In addition, we face competition from companies that currently market or are developing drugs,gene or cellular therapies to treat the conditions for which our products are intended.We also face competition from companies that are developing remote interventional techniques. We are aware of three private companies that havecommercialized endovascular catheter navigation systems which have been cleared by the FDA for mapping procedures only. In addition, we are aware oftwo private companies with an electromagnetic catheter navigation system that have received CE Mark approval in Europe. However, each of thesecompanies has limited or no commercial activities.We face direct competition to certain products in our Odyssey Solution, such as the Odyssey Vision system. These competitors include 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 510(k) clearance, de novoapproval, or pre-market approval from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placedin either Class I or II, which requires the manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute thedevice, known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risks, such aslife-sustaining, or life-supporting, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in Class III, requiring pre-market approval, or PMA. All of our current products are Class II devices requiring 510(k) clearances, except for the contact detection system, a feature of theNiobe ES system designed to indicate the presence of contact between the catheter and tissue, which we recently commercialized in the European Union. Inorder to market the contact detection system in the United States for use with an ablation catheter, a PMA will be necessary. Biosense Webster’s compatiblecatheters used with our Niobe system are Class III therapeutic devices and are subject to the PMA process.If U.S. clinical data are needed to support clearance, approval or a marketing application for our devices, generally, an investigational deviceexemption, or IDE, is assembled and submitted to the FDA. The FDA reviews and must approve the IDE before the study can begin. In addition, the studymust be approved by an Institutional Review Board covering each clinical site involved in the study. When all approvals are obtained, we initiate a clinicalstudy to evaluate the device. Following completion of the study, we collect, analyze and present the data in an appropriate submission to the FDA (i.e. insupport of a 510(k), de novo, or PMA).When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed device is substantially equivalent to apreviously cleared and legally marketed 510(k) device, de novo approved device, or a device that was in commercial distribution before May 28, 1976, forwhich the FDA has not yet called for the submission of pre-market approval applications. To establish substantial equivalence, the applicant must show thatthe new device has the same intended use as the predicate device, and it either has the same technological characteristics or has been shown to be equally safeand effective and does not raise different questions of safety and effectiveness as compared to the predicate device. The FDA may require further information,including clinical trial results or product test data, to make a determination regarding substantial equivalence. The FDA’s 510(k) clearance process usuallytakes from four to 12 months, but can take longer.If a device is not eligible for the 510(k) clearance process, but the product is low or moderate risk, we may be able to obtain de novo review. The denovo process allows FDA to classify a low- to moderate-risk device not previously classified into Class I or II. If the device is not eligible for either the 510(k)or de novo processes, a PMA must be submitted to the FDA. A PMA must be supported by extensive data, including but not limited to, technical, preclinical,clinical trials, manufacturing and labeling to demonstrate reasonable evidence of the device’s safety and efficacy to the FDA’s satisfaction. The PMA processis much more costly, lengthy and uncertain than the 510(k) clearance process, and it generally takes from one to three years, but can take longer. We cannotbe sure that the FDA will ever grant 510(k) clearance, de novo approval or pre-market approval for any product we propose to market in the United States. 15Table of ContentsAfter a device receives 510(k) clearance or de novo 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. Modification to a PMA approved device or its labeling may require either anew PMA or PMA supplement approval, which could be a costly and lengthy process.After a device is placed on the market, numerous regulatory requirements apply. These include for example: • 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; • 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; and • Reports of Corrections and Removals regulation, which requires manufacturers to report recalls and field actions to the FDA if initiated to reducea risk to health posed by the device or to remedy a violation of the FD&C Act.The 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 or other regulatory requirements, we may receive a warning or untitledletter from the FDA or be subject to other enforcement actions, including fines, injunctions, civil penalties, seizures, operating restrictions, partial suspensionor total shutdown of production, refusing requests for 510(k) clearance, de novo petitions, or PMA approval of new products, withdrawing 510(k) clearance,de novo approvals, or PMA approvals already granted, and criminal prosecution. The FDA also has the authority to require us to repair, replace or refund thecost of any medical device that we have manufactured or distributed, if there is a reasonable probability that the device would cause serious, adverse healthconsequences or death.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 16Table of Contentsother 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 ourdistributors will receive any necessary approvals or clearance prior to marketing our products in these international markets.Please refer to “Regulatory Approval” in Item 1 of this annual report for a description of the regulatory clearance, licensing and/or approvals wecurrently have or are pursuing.Anti-Kickback and False Claims LawsWe are subject to various federal and state laws relating to healthcare fraud and abuse, including anti-kickback and false claims laws. The U.S. federalhealthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directlyor indirectly, in exchange for or to induce either the referral of an individual, or furnishing or arranging for a good or service, for which payment may be madeunder a federal healthcare program such as the Medicare and Medicaid programs. The definition of “remuneration” has been broadly interpreted to includeanything of value, including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash and waivers ofpayments, and providing anything of value at less than fair market value. Penalties for violations include criminal penalties and civil sanctions such as fines,imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Federal false claims laws prohibit any person fromknowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a falsestatement to have a false claim paid. Recently, several healthcare companies have been prosecuted under these laws for allegedly providing free product tocustomers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-labelpromotion, may also violate false claims laws.Many states have adopted laws similar to the federal healthcare program Anti-Kickback Statute and the federal false claims laws. Some of these stateprohibitions apply to healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.Transparency 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. Such data are made available by the government on a publiclysearchable website. In addition, we are subject to similar state laws related to the tracking and reporting of certain payments and other transfers of value tohealthcare 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. 17Table of ContentsCertificate 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, 2016, we had 120 employees, 22 of whom were engaged directly in research and development, 56 in sales and marketing activities,17 in manufacturing and service, and 25 in general administrative activities including accounting, regulatory, clinical affairs, quality and training. Asignificant majority of our employees is not covered by a collective bargaining agreement, and we consider our relationship with our employees to be good.Availability of 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. 18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.We may not be able to continue as a going concern if we do not improve the operating performance of the Company or raise additional capital.The Company has sustained operating losses throughout its corporate history and expects that its 2017 expenses will exceed its 2017 gross margin.The Company expects to continue to incur operating losses and negative cash flows until revenues reach a level sufficient to support ongoing operations orexpense reductions are in place. The Company’s liquidity needs will be largely determined by the success of clinical adoption within the installed base ofNiobe systems as well as by new placements of capital systems. The Company’s plans for improving the liquidity conditions primarily include its ability tocontrol the timing and spending of its operating expenses and raising additional funds through debt or equity financing.There can be no assurance that any of our plans will be successful or that additional capital will be available to us on reasonable terms, or at all, whenneeded. If we are unable to improve the operating performance of the Company or if we are unable to obtain sufficient additional capital, it may impair ourability to raise new capital, obtain new customers, and hire and retain employees, which could force us to substantially revise our business plan or ceaseoperations, which may reduce or negate the value of your investment.We may not be able to comply with debt covenants and may have to repay outstanding indebtedness.Our current borrowing agreement contains various covenants, including financial covenants under our credit agreement with our primary lender. If weviolate our covenants, we could be required to repay the indebtedness as to which that default relates. We could be unable to make these payments, whichcould lead to insolvency. Even if we are able to make these payments, it will lead to the lack of availability for additional borrowings under our bank loanagreement due to our borrowing capacity. There can be no assurance that we will be able to maintain compliance with these covenants or that we couldreplace this source of liquidity if these covenants were to be violated and our loans and other borrowed amounts were forced to be repaid.We may lose key personnel or fail to attract and retain replacement or additional personnel.We are highly dependent on the principal members of our management, as well as our scientific and sales staff. Attracting and retaining qualifiedpersonnel will be critical to our success, and competition for qualified 19Table of Contentspersonnel is intense. We may not be able to attract and retain personnel on acceptable terms given the competition for qualified personnel among technologyand healthcare companies and universities. The loss of personnel, in particular senior executives, or our inability to attract and retain other qualifiedpersonnel could harm our business and our ability to compete. In addition, the loss of members of our scientific staff may significantly delay or preventproduct development and other business objectives. A loss of key sales personnel could result in a reduction of revenue. In addition, if we outsource certainemployee functions that were formerly handled in-house, our personnel costs could increase.Hospital decision-makers may not purchase our Niobe, Odyssey, or Vdrive systems or may think that such systems are too expensive.To achieve and grow sales, hospitals must purchase our products, and in particular, our Niobe ES system. The Niobe ES system is a novel device, 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.Decreases in our backlog have occurred in the past and could occur in the future, causing delays in revenue recognition or even removal of orders andother commitments from our backlog. Such events would have a negative effect on our revenue and results of operations.We will likely experience long and variable sales and installation cycles, which could result in substantial fluctuations in our quarterly results 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 20Table of Contentsmanagement at hospitals, inclusion in the hospitals’ interventional lab budget process for capital expenditures, and, in some instances, a certificate of needfrom the state or other regulatory approval. In addition, historically the majority of our Niobe ES systems and Odyssey systems have been delivered less thanone year after the receipt of a purchase order from a hospital, with the timing being dependent on the construction cycle for the new or replacementinterventional suite in which the equipment will be installed. In some cases, this time frame has been extended further because the interventional suiteconstruction is part of a larger construction project at the customer site (typically the construction of a new building), which may occur with our existing andfuture purchase orders. We cannot assure you that the time from purchase order to delivery for systems to be delivered in the future will be consistent with ourhistorical experience. Moreover, a global economic slowdown may cause our customers to further delay construction or significant capital purchases, whichcould further lengthen our sales cycle. This may contribute to substantial fluctuations in our quarterly operating results. As a result, in future quarters ouroperating results could fall below the expectations of securities analysts or investors, in which event our stock price would likely decrease.The rate of technological innovation of our products might not keep pace with the rest of the market.The rate of innovation for the market in which our products compete is fast-paced and requires significant resources and innovation. If other 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. Uncertainty aboutcurrent global economic conditions and future global economic crises may cause customers to delay purchasing or installation decisions or cancel existingorders. The Niobe ES system, Odyssey Solution and Vdrive system are typically purchased as part of a larger overall capital project and an economicdownturn or the lack of a robust recovery might make it more difficult for our customers, including distributors, to obtain adequate financing to support theproject or to obtain requisite approvals. Any delay in purchasing decisions or cancellation of purchasing commitments may result in a decrease in ourrevenues. Another credit crisis similar to the credit crisis that began in 2008 could further affect our business if key suppliers are unable to obtain financing tomanufacture our products or become insolvent and we are unable to manufacture product to meet customer demand. If the United States and global economycontinues to be sluggish or deteriorates further for a longer period than we anticipate, we may experience a material negative decrease on the demand for ourproducts which may, in turn, have a material adverse effect on our revenue, profitability, financial condition, ability to raise additional capital and the marketprice 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 publicity for our products, particularly in the early phases of productintroduction. In addition, physicians may be slow to adopt our products if they perceive liability risks arising from the use of these new products. It is alsopossible that as our products become more widely used, latent defects could be identified, creating negative publicity and liability problems for us andadversely affecting demand for our products. If physicians do not use our products, we likely will not become profitable or generate sufficient cash to surviveas a going concern. 21Table of ContentsOur 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.In addition, if we fail to effectively use distributors or contract sales agents for distribution of our products where appropriate, our revenue andprofitability would be adversely affected. 22Table of ContentsOur 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 three private companies that have commercialized endovascular catheter navigation systems which have been cleared by the FDA formapping procedures only. In addition, we are aware of two private companies with an electromagnetic catheter navigation system that has received CE Markapproval 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. 23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 2017 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 devices for our Vdrive system. We also depend on various third party suppliersfor the magnets we use in our 24Table of ContentsNiobe ES system and certain components of our Odyssey Solution and Vdrive system. In addition, some of the components necessary for the assembly of ourproducts are currently provided to us by a single supplier, including the magnets for our Niobe ES system and certain components of our Odyssey Solution,and we generally do not maintain large volumes of inventory. Our reliance on these third parties involves a number of risks, including, among other things,the risk that: • 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. 25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.Security breaches and other disruptions to our information technology infrastructure could interfere with our operations, compromise confidentialinformation, and expose us to liability which could materially adversely impact our business and reputation.Security breaches and other disruptions to our information technology infrastructure could interfere with our operations; compromise informationbelonging to us, our employees, customers, and suppliers; and expose us to liability which could adversely impact our business and reputation. In theordinary course of business, we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit, andstore electronic information, and to manage or support a variety of business processes and activities. Additionally, we collect and store certain data, includingproprietary business information and customer and employee data, and may have access to confidential or personal information in certain of our businessesthat is subject to privacy and security laws, regulations, and customer-imposed controls. Despite our cyber security measures (including employee and third-party training, monitoring of networks and systems, and maintenance of backup and protective systems) which are continuously reviewed and upgraded, ourinformation technology networks and infrastructure may still be vulnerable to damage, disruptions, or shutdowns due to attack by hackers, breaches,employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, or othercatastrophic events. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, anddamage to our reputation, which could materially adversely affect our business. While we have experienced, and expect to continue to experience, thesetypes of threats to our information technology networks and infrastructure, to date none of these threats has had a material impact on our business oroperations.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. 26Table of ContentsSome 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 technology components that are utilized in our current offering eroding some differentiation in the marketplace. In addition, the lawsof some foreign countries do not protect intellectual property rights to the same extent, as do the laws of the U.S., particularly in the field of medical productsand 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. 27Table of ContentsWe 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 may not produce viable commercial products and may divert our resources from more profitable market opportunities. Moreover, we may devoteresources to developing products in these additional areas but may be unable to justify the value proposition or otherwise develop a commercial market forproducts we develop in these areas, if any. In that case, the return on investment in these additional areas may be limited, which could negatively affect ourresults of operations.We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their 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. Each medicaldevice that we wish to market in the U.S. must be designated as exempt from premarket approval or notification, or first receive either a 510(k) clearance, denovo approval, or a pre-market approval, or PMA, from the U.S. FDA pursuant to the Federal Food, Drug, and Cosmetic Act, or FD&C Act. The FDA’s 510(k)clearance process usually takes from four to 12 months, but it can take longer. The process of obtaining PMA approval is much more costly, lengthy, anduncertain, generally taking from one to three years or even longer. Although we have 510(k) clearance for many of our products, including disposableinterventional devices, and we are able to market these products commercially in the U.S., our business model 28Table of Contentsrelies significantly on revenue from new disposable interventional devices, some of which may not achieve FDA clearance or approval. We cannot assure youthat any of our devices will not be required to undergo the lengthier and more burdensome PMA process. We cannot commercially market any disposableinterventional devices in the U.S. until the necessary clearances or approvals from the FDA have been received. In addition, we are working with third partiesto co-develop disposable products. In some cases, these companies are responsible for obtaining appropriate regulatory clearance or approval to market thesedisposable devices. If these clearances or approvals are not received or are substantially delayed or if we are not able to offer a sufficient array of approveddisposable interventional devices, we may not be able to successfully market our system to as many institutions as we currently expect, which could have amaterial adverse impact on our financial condition, results of operations and cash flow.Furthermore, obtaining 510(k) clearances, de novo approvals, PMAs or PMA supplement approvals, from the FDA could result in unexpected andsignificant costs for us and consume management’s time and other resources. The FDA could ask us to supplement our submissions, collect non-clinical data,conduct clinical trials or engage in other time-consuming actions, or it could simply deny our applications. In addition, even if we obtain a 510(k) clearance,de novo approvals, or PMA or PMA supplement approval, the clearance or approval could be revoked or other restrictions imposed if post-market datademonstrates safety issues or lack of effectiveness. We cannot predict with certainty how, or when, the FDA will act on our marketing applications. If we areunable to obtain the necessary regulatory approvals, our financial condition and cash flow may be adversely affected. Also, a failure to obtain approvals maylimit our ability to grow domestically and internationally.If 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 or its policies in a way to make ongoing regulatory compliance moreburdensome and difficult.Additionally, any modification to an FDA 510(k) cleared or de novo-approved device that could significantly affect its safety or effectiveness, or thatwould constitute a major change in its intended use, requires 29Table of Contentsa new 510(k) clearance. Modifications to a PMA approved device or its labeling may require either a new PMA or PMA supplement approval, which could bea costly and lengthy process. In addition, if we are unable to obtain approval for key applications, we may face product market adoption barriers that wecannot overcome. In the future, we may modify our products after they have received clearance or approval, and we may determine that new clearance orapproval is unnecessary. We cannot assure you that the FDA would agree with any of our decisions not to seek new clearance or approval. If the FDA requiresus to seek clearance or approval for any modification that we determined to not require clearance or approval in the first instance, we could be subject toenforcement sanctions and we also may be required to cease marketing or recall the modified product until we obtain FDA clearance or approval which couldalso limit product sales, delay product shipment and harm our profitability.In many foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards, 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.In addition, we are subject to the U.S. Foreign Corrupt Practices Act, anti-bribery, antitrust and anti-competition laws, and similar laws in foreigncountries. Any violation of these laws by our distributors or agents or by us could create a substantial liability for us and also cause a loss of reputation in themarket. From time to time, we may face audits or investigations by one or more government agencies, compliance with which could be costly and time-consuming, and could divert our management and key personnel from our business operations. An adverse outcome under any such investigation or auditcould subject us to fines or other penalties, which could adversely affect our business and financial results.Our suppliers, subcontractors, or we may fail to comply with the FDA quality system regulation or other quality standards.Our manufacturing processes must comply with the FDA’s QSR, which covers the methods and documentation of the design, testing, production,control, quality assurance, labeling, packaging and shipping of our products. The FDA enforces the QSR through inspections. We cannot assure you that weor our suppliers or subcontractors would pass such an inspection. If we or our suppliers or subcontractors fail to comply with the FDA regulation or EN ISO13485:2003 standards, we or they may be required to cease all or part of our operations for some period of time until we or they can demonstrate thatappropriate steps have been taken to comply with such standards or face other enforcement action, such as a public warning letter, untitled letter, fines,injunctions, civil penalties, seizures, operating restrictions, partial suspension or total shutdown of production, refusing requests for 510(k) clearance, denovo petitions, or PMA approval of new products, withdrawing 510(k) clearance, de novo approvals, or PMA approvals already granted, and/or criminalprosecution. Furthermore, the European Union recently adopted new EN ISO 13485:2016 standards, with which we must comply no later than April 2019.We cannot assure you that we will be able to timely comply with EN ISO 13485:2016 standards. We cannot be certain that our facilities or those of oursuppliers or subcontractors will comply with the FDA, EN ISO 13485:2003, or when applicable, EN ISO 13485:2016 standards in future audits by regulatoryauthorities. Failure to pass such an inspection could force a shutdown of manufacturing 30Table of Contentsoperations, a recall of our products or the imposition of other enforcement sanctions, which would significantly harm our revenue and profitability. Further,we cannot assure you that our key component suppliers are or will continue to be in compliance with applicable regulatory requirements and qualitystandards and will not encounter any manufacturing difficulties. Any failure to comply with the FDA’s QSR, EN ISO 13485:2003 or when applicable, EN ISO13485:2016 by us or our suppliers could significantly harm our available inventory and product sales. Further, any failure to comply with FDA’s QSR by usor our suppliers could result in FDA refusing requests for and/or delays in 510(k) clearance, de novo approval, or PMA approval of new products.Software errors or other defects may be discovered in our products.Our products incorporate many components, including sophisticated computer software. Complex software frequently contains errors, especially 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.If 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 Statute, 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; 31Table of Contents • 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.Healthcare policy changes, including legislation enacted in 2010 as well as the potential repeal or amendment of such legislation, may have a materialadverse effect on us.In response to perceived increases in health care costs in recent years, there have been and continues to be proposals by the 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. Although a two-year moratorium on the excise tax has been enacted for 2016 and 2017, the tax is currentlyscheduled to resume collection on January 1, 2018. We expect that the PPACA could have a material adverse effect on our industry generally and our abilityto successfully 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. 32Table of ContentsChanges to, or repeal of, the PPACA, which the new administration and certain members of Congress have affirmatively indicated that they will pursue,could materially and adversely affect our business and financial position, and results of operations. Even if the PPACA is not amended or repealed, the newadministration could propose changes impacting implementation of the PPACA, which could materially and adversely affect our financial position oroperations. However, we cannot currently predict the content, timing or impact that any such future legislation will have on our business.The application of state certificate of need regulations and compliance by our customers with federal and state licensing or other 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 health care payment systems and third-party payors. In both the U.S.and foreign markets, health care cost-containment efforts are prevalent and are expected to continue. These efforts could reduce levels of reimbursementavailable for procedures involving our products and, therefore, reduce overall demand for our products as well. A failure to generate sufficient sales couldhave a material adverse impact on our financial condition, results of operations and cash flow.Our growth may place a significant strain on our resources, and if we fail to manage our growth, our ability to develop, market, and sell our 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. 33Table of ContentsWe face currency and other risks associated with international operations.We intend to continue to devote significant efforts to marketing our systems and products outside of the U.S. This strategy will expose us to numerousrisks associated with international operations, which could adversely affect our results of operations and financial condition, including the following: • currency fluctuations that could impact the demand for our products or result in currency exchange losses; • export restrictions, tariff and trade regulations and foreign tax laws; • customs duties, export quotas or other trade restrictions; • economic and political instability; and • shipping delays.In addition, contracts may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system.We are limited by our inability to use a short form registration statement on Form S-3, which may affect our ability to access the capital markets, ifneeded.A Registration Statement on Form S-3 permits an eligible issuer to incorporate by reference its past and future filings and reports made under theSecurities Exchange Act of 1934, as amended, or the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf”under Rule 415 of the Securities Act of 1933, as amended, or the Securities Act. The shelf registration process under Form S-3 combined with the ability toincorporate information on a forward basis, allows issuers to avoid additional delays and interruptions in the offering process and to access the capitalmarkets in a more expeditious and efficient manner than raising capital in a standard offering on Form S-1.To be eligible to use Form S-3 for a registered offering of our securities to investors, either (1) the aggregate market value of our common stock held bynon-affiliates would have to exceed $75 million or (2) our common stock would have to be listed and registered on a national securities exchange. Currently,we do not meet either of those eligibility requirements and are therefore precluded from using a Form S-3 in connection with a registered offering of oursecurities to investors.Due to our present inability to use Form S-3, if we wanted to conduct a registered offering of securities to investors, we will be required to use long formregistration and may experience delays. In addition, our ability to undertake certain types of financing transactions may be limited or unavailable to uswithout the ability to use Form S-3. Furthermore, because of the delay associated with long form registration and the limitations on the financing transactionswe may undertake, the terms of any financing transaction we are able to conduct may not be advantageous to us or may cause us not to obtain capital in atimely fashion to execute our business strategies and continue to operate as a going concern.Risks Related To Our Common StockOur principal stockholders continue to own a large percentage of our voting stock, and they have the ability to substantially influence 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 34Table of Contentsstockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significantcorporate transaction. These stockholders may also delay or prevent a change of control, even if such a change of control would benefit our otherstockholders. This significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception thatconflicts of interest may exist or arise.Future issuances of our securities could dilute current stockholders’ ownership.We have 37.3 million shares of our common stock issuable upon conversion of our Series A Convertible Preferred Stock and outstanding warrants topurchase 39 million shares of the Company’s common stock at a weighted average exercise price of $0.84, with prices ranging from $0.70 to $6.60. Shares ofSeries A Convertible Preferred Stock bear dividends at a rate of six percent (6.0%) per annum, which are cumulative and accrue daily from the date ofissuance on the $1,000 stated value. Such dividends will not be paid in cash, except in connection with any liquidation, dissolution or winding up of theCompany or any redemption of the Series A Convertible Preferred Stock. Instead, the value of the accrued dividends is added to the liquidation preference ofthe Series A Convertible Preferred Stock and will increase the number of shares of common stock issuable upon conversion, which will dilute the ownershipof our common stockholders.In addition, a significant number of shares of our common stock are subject to stock options and stock appreciation rights, and we may request theability to issue additional such securities to our employees. We may also decide to raise additional funds through public or private debt or equity financingto 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 equitysecurities or securities convertible into our common stock or other equity securities or the availability of any of the foregoing for future sale, will have on themarket price of our common stock, it is likely that sales of substantial amounts of our common stock (including shares issued upon the exercise of warrants,stock options, stock appreciation rights or the conversion of any convertible securities outstanding now or in the future, including the Series A ConvertiblePreferred Shares), will dilute the ownership of our existing stockholders and that the perception that such sales could occur, will adversely affect prevailingmarket prices for our common stock.Further, the Series A Convertible Preferred Shares rank senior to our common stock as to distributions and payments upon the liquidation, dissolutionand winding up of the Company. No such distributions or payments upon the liquidation, dissolution and winding up of the Company may be made toholders of common stock unless and until the holders of the Series A Convertible Preferred Shares have received the stated value of $1,000 per share plus anyaccrued and unpaid dividends. Until all Series A Convertible Preferred Shares have been converted or redeemed, no dividends may be paid on the commonstock without the express written consent of the holders of a majority of the outstanding Series A Convertible Preferred Shares. In the event that dividends orother distributions of assets are made or paid by the Company to the holders of the common stock, the holders of Series A Convertible Preferred Shares areentitled to participate in such dividend or distribution on an as-converted basis. Any such distributions or payments upon the liquidation, dissolution orwinding up of the Company may dilute the ownership interests of our existing stockholders.We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings to fund thedevelopment and growth of our business. In addition, the terms of our loan agreement prohibit us from declaring dividends without the prior consent of ourlender. As a result, capital appreciation, if any, of our common stock will be an investor’s sole source of gain for the foreseeable future. 35Table of ContentsOur 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 contains provisions that may similarly discourage a takeover and negatively affect our shareprice 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 have in the past created uncertainty for public companies. We continue to evaluate andmonitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional compliance costs we may incur orthe timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack ofspecificity, and as a result, their application in practice may evolve over time as new guidance is provided by courts and regulatory and governing bodies.This could result in uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.Maintaining appropriate standards of corporate governance and public disclosure may result in increased general and administrative expense and a diversionof management time and attention from revenue-generating activities to compliance activities. In addition, if we fail to comply with new or changed laws,regulations and standards, regulatory authorities may initiate legal proceedings against us and our business and reputation may be harmed.Our future operating results may be below securities analysts’ or investors’ expectations, which could cause our stock price to decline.The revenue and income potential of our products and our business model are unproven, and we may be unable to generate significant revenue or 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.Our 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. 36Table of ContentsNasdaq delisted our common stock from The Nasdaq Capital Market and our common stock began trading on the OTCQX Best Market in August2016. Trading of our shares on the over-the-counter markets could negatively impact the liquidity of our common stock and our ability to access thecapital markets and, in turn, could impair the value of your investment.On August 4, 2016, trading in our common stock on The Nasdaq Capital Market (“Nasdaq”) was suspended as a result of a determination from Nasdaqto delist our common stock due to our failure to meet certain applicable requirements. On August 4, 2016, shares of our common stock commenced trading onthe OTCQX Best Market under the Company’s existing ticker symbol of “STXS.” Trading of our shares on the over-the-counter markets could negativelyimpact the liquidity of our common stock and our ability to access the capital markets, which could impair the value of your investment.The trading of our common stock on the over-the-counter market, including the OTCQX Best Market, may adversely affect the market liquidity of ourcommon stock, limit our ability to issue additional securities (including pursuant to registration statements on Form S-3) and adversely affect our ability toobtain financing for the continuation of our operations, which could harm our business or cause us to cease operations.Furthermore, our common stock may not continue to trade on the OTCQX Best Market in the future, broker-dealers may cease to provide publicquotes of our common stock on this market, or the trading volume of our common stock may be insufficient to provide for an efficient trading market. Anysuch developments could impair the value of your investment.We expect that the price of our common stock could fluctuate substantially, possibly resulting in class action securities litigation.Our common stock is traded on the OTCQX Best Market and trading volume may be limited or sporadic. The market price of our common stock hasexperienced, and may continue to experience, substantial volatility. During 2016, our common stock traded between $0.47 and $1.95 per share, on tradingvolume ranging from approximately 0 to 3.2 million shares per day. The market price of our common stock will be affected by a number of factors, including: • actual or anticipated variations in our results of operations or those of our competitors; • the receipt or denial of regulatory approvals; • announcements of new products, technological innovations or product advancements by us or our competitors; • developments with respect to patents and other intellectual property rights; • changes in earnings estimates or recommendations by securities analysts or our failure to achieve analyst earnings estimates; • developments in our industry; and • participants in the market for our common stock may take short positions with respect to our common stock.These factors, as well as general economic, credit, political and market conditions, may materially adversely affect the market price of our commonstock. As with the stock of many other public companies, the market price of our common stock has been particularly volatile during the recent period ofupheaval in the capital markets and world economy. This excessive volatility may continue for an extended period of time following the filing date of thisreport. Furthermore, the stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated tothe operating performance of these companies. Volatility in the price of our common stock on the OTCQX Best Market may depress the trading price of ourcommon stock, which could, among other things, allow a potential acquirer of the Company to purchase a 37®®®®®®Table of Contentssignificant amount of our common stock at low prices. In addition, the volatility of our stock price could lead to class action securities litigation being filedagainst us, which could result in substantial costs 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 2016 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. The costs associated with the termination were $515,138 and were accrued as a rent liability as ofSeptember 30, 2013. As of December 31, 2016, the remaining accrued costs associated with the termination were $181,601.In the fourth quarter of 2015, the Company entered an agreement to sublease 3,152 square feet of the first floor office space through December 31,2018. This sublease was terminated through mutual agreement in July 2016.In August 2016 the Company entered into an agreement to sublease approximately 11,000 square feet of office space through December 31, 2018. Thecosts associated with the 2016 sublease were $40,972 and were accrued as a rent liability as of August 31, 2016. As of December 31, 2016, the remainingaccrued costs associated with the termination were $21,285. As part of the sublease agreement, the Company will sublease an additional 16,000 square feetbeginning in January 2017.We lease approximately 2,200 square feet of office space in Maple Grove, Minnesota, under a lease agreement through October 31, 2018, and haveleased office space in Amsterdam, The Netherlands through August 31, 2017. In addition, we lease an office space in Beijing, China under a lease agreementthrough September 8, 2017 and an office space in Japan through April 30, 2017. ITEM 3.LEGAL PROCEEDINGSWe are involved from time to time in various lawsuits and claims arising in the normal course of business. Although the outcomes of these lawsuits andclaims are uncertain, we do not believe any of them will have a material adverse effect on our business, financial condition or results of operations. ITEM 4.MINE SAFETY DISCLOSURESNot applicable. 38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. On August 4, 2016 our common stock was transferred to the OTCQX Best Market. The following table sets forththe high and low sales prices of our common stock for the periods indicated. High Low Year Ended December 31, 2016 First Quarter $1.14 $0.54 Second Quarter 1.95 0.90 Third Quarter 1.46 0.57 Fourth Quarter 0.91 0.47 Year Ended December 31, 2015 First Quarter $2.97 $1.43 Second Quarter 2.36 1.44 Third Quarter 2.53 0.65 Fourth Quarter 1.40 0.73 As of February 28, 2017, there were approximately 386 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 cash 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. ITEM 6.SELECTED FINANCIAL DATANot applicable. 39®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 system is the latest generation of the Niobe Remote Magnetic Navigation System (“Niobe system”). This system is designed to enablephysicians to complete more complex interventional procedures by providing image-guided delivery of catheters and guidewires through the blood vesselsand 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. As of December 31, 2016, the Company had an installedbase of 129 Niobe ES systems.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 40Table of Contentsconjunction with a Niobe system or on a stand-alone basis for installation in interventional labs and other locations where clinicians often desire the benefitsof the Odyssey Solution that we believe can improve clinical workflows and related efficiencies.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 (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 19 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.The Company believes the cash on hand at December 31, 2016 as well as expected borrowing capacity available will be sufficient to meet itsobligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued. However,this evaluation assumes the Company’s ability to borrow under its asset based revolving credit facility which matures on March 31, 2018. The Companyexpects to be able to renew this facility at similar terms, as it has successfully done so in the past. However, there is no assurance that the revolving creditfacility will be renewed in a timely manner, in amounts that are sufficient to meet the Company’s obligations as they become due, or on terms acceptable tothe Company, or at all. The Company has sustained operating losses throughout its corporate history and expects that its 2017 expenses will exceed its 2017gross margin. The Company expects to continue to incur operating losses and negative cash flows until revenues reach a level sufficient to support ongoingoperations or expense reductions are in place. Accordingly, management has analyzed its planned operations to evaluate the Company’s ability to continueas a going concern. The Company’s liquidity needs will be largely determined by the success of clinical adoption within the installed base of Niobe systemsas well as by new placements of capital systems. The Company’s plans, which are probable of effectively being implemented and improving the liquidityconditions, primarily include its ability to control the timing and spending of its operating expenses and raising additional funds through capitaltransactions. Specifically, cash outflows for operating expenses could be reduced or delayed by transitioning certain cash payments to stock payments, byreducing project expenses, or by reducing headcount. The Company also may consider raising cash through capital transactions, which could include eitherdebt or equity financing.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. 41Table of ContentsRevenue 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.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 (“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 grantsand units is amortized on a straight-line basis over the vesting period of the underlying issue, generally over four years except for grants to directors whichgenerally vest over one to two years. Stock compensation expense for performance-based restricted shares, if any, is amortized on a straight-line basis over theanticipated vesting period and is subject to adjustment based on the actual achievement of objectives. Compensation expenses related to option grants tonon-employees are re-measured quarterly through the vesting date. Compensation expense is recognized only for those options expected to vest, net ofestimated forfeitures. Estimates of the expected life of options have been based on the average of the vesting and expiration periods, which is the simplifiedmethod under general accounting principles for share-based payments. Estimates of volatility and forfeiture rates utilized in calculating stock-basedcompensation have been prepared based on historical data and future expectations. Actual experience to date has been consistent with these estimates. 42Table of ContentsThe amount of compensation expense to be recorded in future periods may increase if we make additional grants of options, stock appreciation rightsor restricted shares. The amount of expense to be recorded in future periods may decrease if the requisite service periods are not completed.Long-Lived and Intangible AssetsIn accordance with accounting rules for the impairment or disposal of long-lived assets, including intangible assets, such assets are reviewed at leastquarterly to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-livedassets to be held and used, we base our evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, anyhistorical or future profitability measurements and other external market conditions or factors that may be present. If impairment indicators are present orother factors exist that indicate the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurredthrough the use of an undiscounted cash flow analysis of the asset at the lowest level for which identifiable cash flows exist. Management’s assumptionsrelated to future cash flows require significant judgment as actual operating levels have fluctuated in the past and are expected to continue to do so in thefuture. If the carrying value of the asset exceeds the total anticipated undiscounted future cash flows generated by that asset, the asset is impaired and animpairment charge is incurred. The loss on impairment is recognized for the difference between the asset’s carrying amount and the asset’s discounted fairvalue, which in most cases is estimated based upon Level 2 or Level 3 inputs.Valuation of InventoryWe value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out (FIFO) method, or its current estimatedmarket value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and reserve accordingly. Our 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, 2016 and 2015Revenue. Revenue decreased to $32.2 million for the year ended December 31, 2016, from $37.7 million for the year ended December 31, 2015, adecrease of approximately 15%. Revenue from sales of systems decreased 43Table of Contentsto $5.8 million for the year ended December 31, 2016, from $10.6 million for the year ended December 31, 2015, a decrease of approximately 46%. Werecognized revenue on two Niobe ES systems, a total of $2.9 million for Odyssey and Odyssey Cinema systems, and $0.1 million for Vdrive systems duringthe 2016 period. System revenue for the prior year included revenue on seven Niobe ES systems, a total of $2.8 million for Odyssey and Odyssey Cinemasystems, and $0.8 million for Vdrive systems. Revenue from sales of disposable interventional devices, service and accessories decreased slightly to $26.4million for the year ended December 31, 2016, from $27.0 million for the year ended December 31, 2015, a decrease of approximately 2%. The decrease wasattributable to lower time and material billings in the current year.Cost of Revenue. Cost of revenue decreased to $7.5 million for the year ended December 31, 2016, from $10.4 million for the year ended December 31,2015, a decrease of approximately 28%. As a percentage of our total revenue, overall gross margin increased from 72% for the year ended December 31, 2015,to 77% for the year ended December 31, 2016, due to a shift in mix to disposable, service, and accessories revenue from system revenue. Cost of revenue forsystems sold decreased to $3.7 million for the year ended December 31, 2016, from $6.1 million for the year ended December 31, 2015, a decrease ofapproximately 40%. This decrease was primarily due to decreased system sales across Niobe and Vdrive product lines. Gross margin for systems decreased to37% for the year ended December 31, 2016 from 43% for the year ended December 31, 2015 due to a shift in mix from Niobe system revenue to Odysseysystem revenue. Cost of revenue for disposable interventional devices, service and accessories decreased to $3.9 million for the year ended December 31,2016, from $4.4 million for the year ended December 31, 2015, resulting in an increase in gross margin to 85% from 84% between these periods driven bylower expenses incurred under service contracts in the current year period.Research and Development Expense. Research and development expense decreased to $5.5 million for the year ended December 31, 2016 from $6.3million for the year ended December 31, 2015, a decrease of approximately 12%. The decrease is primarily due to an impairment charge on certain intangibleassets in the prior year period as well as lower headcount costs and timing of project based expenses in the current year period. See Note 6 for additionaldetail on the asset impairment charge.Sales and Marketing Expense. Sales and marketing expense decreased to $15.2 million for the year ended December 31, 2016, from $15.9 million forthe year ended December 31, 2015, a decrease of approximately 4%. This decrease was due to lower headcount costs, third party commissions, projectexpenses, and travel related costs, in the current year period.General and Administrative Expense. General and administrative expenses include regulatory, clinical, general management and routine trainingexpenses. General and administrative expense decreased to $10.3 million for the year ended December 31, 2016, from $10.5 million for the year endedDecember 31, 2015, a decrease of approximately 2%. This decrease was primarily driven by lower headcount costs, changes in foreign currency, and taxexpense driven by the elimination of the Medical Device Excise Tax in 2016, partially offset by increased consulting, legal, and bad debt expenses.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. The primary drivers of fluctuations in this balance are changes in the Company’s stock price from one period to the next. Other expense increased to$2.0 million for the year ended December 31, 2016 due primarily to the adjustment in fair value of warrants. Other income was $1.3 million for the year endedDecember 31, 2015 also, due primarily to the adjustment in fair value of warrants.Interest Expense. Interest expense decreased to $2.5 million for the year ended December 31, 2016 from $3.3 million for the year ended December 31,2015, due primarily to the extinguishment of the Healthcare Royalty Partners debt. 44Table of ContentsIncome 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, 2016, and December 31, 2015 to reflect these uncertainties. As of December 31, 2016, wehad gross federal net operating loss carryforwards of approximately $95.6 million which will expire between 2030 and 2036. As of December 31, 2016, wehad state net operating loss deferred tax assets of approximately $1.5 million which will expire at various dates between 2017 and 2036 if not utilized. Wemay not be able to utilize all of these loss carryforwards prior to their expiration.Capital ResourcesAs of December 31, 2016, our accumulated deficit was $471.2 million with cash and cash equivalents of $8.5 million. Since inception, we havefinanced 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, 2016, our borrowing facility was comprised of a revolving line of credit with $3.8 million of unborrowed availability with ourprimary lender, Silicon Valley Bank.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 maximum available under the line is $10.0 million subject to the value of collateralized assets. TheCompany is required under the revolving line of credit to maintain its primary operating account and the majority of its cash and investment balances inaccounts with its primary lender. The facility was amended on March 27, 2015, extending the maturity date to March 31, 2018 and on May 10, 2016, theCompany and the primary lender agreed to modify certain financial covenants. The amended agreement requires the Company to maintain a liquidity ratiogreater than 1.50:1.00, excluding certain short term advances from the calculation, and a minimum tangible net worth of not less than (no worse than)negative $24.0 million for the quarters ended June 30, 2016, September 30, 2016, December 31, 2016, March 31, 2017, June 30, 2017, and September 30,2017; and not less than (no worse than) negative $24.5 million for the quarters ended December 31, 2017 and March 31, 2018.As of December 31, 2016, 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, 2016 the Company had a borrowing capacity of $3.8 million based on the Company’scollateralized assets. The Company’s total liquidity as of December 31, 2016, was $12.3 million which included cash and cash equivalents of $8.5 million.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 was to 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 was entitled toreceive 100% of all royalties due to the Company under the Biosense Agreement until 45Table of Contentsthe loan is repaid. The loan was a full recourse loan, scheduled to mature on December 31, 2018, and bore interest at an annual rate of 16% payable quarterlywith royalties received under the Biosense Agreement. If the payments received by the Company under the Biosense Agreement had been insufficient to payall amounts of interest due on the loan, then such deficiency would have increased the outstanding principal amount on the loan. After the loan obligationwas repaid, the royalties under the Biosense Agreement are paid to the Company. The loan was also secured by certain assets and intellectual property of theCompany. The Agreement contained customary affirmative and negative covenants. The use of payments due to the Company under the Biosense Agreementwas approved by our primary lender.In September 2016, the Company extinguished the remainder of the debt of $18.1 million, net of deferred financing costs of approximately $0.3million, as well as accrued interest of $0.5 million for $13.0 million based upon an agreement entered into with Healthcare Royalty Partners. After the loanobligation was repaid, the royalties under the Biosense Agreement will again be paid to the Company. As a result of the debt extinguishment, the companyrecognized a net gain of $5.6 million.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, 2016.Convertible Preferred Stock and WarrantsOn September 26, 2016, the Company entered into a Securities Purchase Agreement with certain institutional and other accredited investors whereby itagreed to sell, for an aggregate purchase price of $24.0 million, (i) an aggregate of 24,000 shares of Series A Convertible Preferred Stock, par value $0.001with a stated value of $1,000 per share which are convertible into shares of the Company’s common stock and (ii) warrants to purchase an aggregate of36,923,078 shares of common stock. The transaction closed on September 29, 2016.The Company received net proceeds from the sale of the convertible preferred stock and warrants of $23.2 million, after offering expenses. TheCompany used $13.0 million of the funds to satisfy in full all amounts outstanding under the Loan Agreement with Healthcare Royalty Partners, as notedabove, and anticipates using the remaining proceeds for general corporate purposes.The designations, preferences, powers and rights of the convertible preferred shares are set forth in a Certificate of Designations, Preferences and Rightsof Series A Convertible Preferred Stock (“Certificate of Designations”) filed with the Delaware Secretary of State. The convertible preferred shares are entitledto vote on an as-converted basis with the common stock, subject to specified beneficial ownership issuance limitations. The convertible preferred shares beardividends at a rate of six percent (6%) per annum, which are cumulative and accrue daily from the date of issuance on the $1,000 stated value. Suchdividends will not be paid in cash except in connection with any liquidation, dissolution or winding up of the Company or any redemption of theconvertible preferred shares. Instead the value of the accrued dividends is added to the liquidation preference of the convertible preferred shares and willincrease the number of shares of common stock issuable upon conversion. Each convertible preferred share is convertible at the option of the holder from andafter the date of issuance with no expiration date, at an initial conversion price of $0.65 per share, subject to adjustment in the event of stock splits,dividends, mergers, sales of all or substantially all of our assets or similar transactions, subject to specified beneficial ownership issuance limitations. Eachholder of convertible preferred shares has the right to require us to redeem such holder’s convertible preferred shares upon the occurrence of specified events,which include certain business combinations, the sale of all or substantially all of the Company’s assets or the sale of more than 50% of the outstandingshares of the Company’s common stock. In addition, the Company has the right to redeem the convertible preferred shares in the event of a change of controlas defined in the Certificate of Designations. 46Table of ContentsThe convertible preferred shares rank senior to our common stock as to distributions and payments upon the liquidation, dissolution and winding up ofthe Company. No such distributions or payments upon the liquidation, dissolution and winding up of the Company may be made to the holders of commonstock unless and until the holders of convertible preferred shares have received the stated value of $1,000 per share plus any accrued and unpaiddividends. Until all convertible preferred shares have been converted or redeemed, no dividends may be paid on the common stock without the expresswritten consent of the holders of a majority of the outstanding convertible preferred shares. In the event that dividends or other distributions of assets aremade or paid by the Company to the holders of the common stock, the holders of convertible preferred shares are entitled to participate in such dividend ordistribution on an as-converted basis.On the date of the issuance, the fair value of the convertible preferred stock was greater than the allocated proceeds received for the Series Aconvertible preferred stock. As such, the Company accounted for the beneficial conversion feature under ASC 470-20, Debt with Conversion feature underASC 470-20, Debt with Conversion and Other Options. The Company recorded a deemed dividend charge of $6.1 million for the accretion of a discount onthe Series A convertible preferred stock. The deemed dividend was a non-cash transaction and is reflected below net loss to arrive at net loss available tocommon stockholders. Since the convertible preferred shares are subject to conditions for redemption that are outside the Company’s control, the convertiblepreferred shares are presently reported in the mezzanine section of the balance sheet.The warrants issued in conjunction with the convertible preferred stock have an exercise price equal to $0.70 per share subject to adjustments asprovided under the terms of the warrants. The warrants are exercisable through September 29, 2021, subject to specified beneficial ownership issuancelimitations. The warrants may be exercised by any holder on a cashless basis if, at any time after the date that is 180 days after the closing, the registrationstatement required by the Registration Rights Agreement described below is not effective and available for resale of all of the shares of common stockissuable upon exercise of such holder’s warrants. Due to the fact that the warrants are puttable upon the occurrence of certain events outside of the Company’scontrol, the warrants qualify as liabilities under ASC 480-10. The calculated fair value of the warrants is classified as a liability and is periodically re-measured with any changes in value recognized in “Other income (expense)” in the Statements of Operations. See Note 12 for additional details.On December 2, 2016, 100 shares of convertible preferred stock plus accumulated dividends were converted into 155,439 common shares.Listing Transfer to OTCQX Best MarketOn August 2, 2016, the Company received a determination letter from the Nasdaq Hearings Panel (the “Panel”) notifying the Company that itscommon stock would be delisted from The Nasdaq Capital Market (“Nasdaq”) and that suspension of trading in the shares would be effective at the open ofbusiness on August 4, 2016. The determination letter also indicated that Nasdaq would complete the delisting by filing a Form 25 Notification of Delistingwith the Securities Exchange Commission, after applicable appeal periods have lapsed. The Panel made the determination to delist the Company’s commonstock because the Company did not demonstrate compliance with the minimum $35 million market value of listed securities requirement for a period of tenconsecutive trading days by August 1, 2016, as required by a decision previously issued by the Panel on May 2, 2016. The Company’s shares of commonstock commenced trading on the OTCQX Best Market on August 4, 2016 under the Company’s current ticker symbol of “STXS.”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 paid Cantor a commission of 3.0% of the gross proceeds from any common stock sold through theSales Agreement. 47®®SMTable of ContentsThere were no proceeds from the Controlled Equity Offering during the twelve months ended December 31, 2016. The Sales Agreement expired inNovember 2016 upon the expiration of our Registration Statement on Form S-3.LiquidityThe following table summarizes our cash flow by operating, investing and financing activities for each of years ended December 31, 2016 and 2015 (inthousands): Twelve Months Ended December 31, 2016 2015 Cash flow used in operating activities $(6,563) $(2,529) Cash flow used in investing activities (410) (153) Cash flow provided by financing activities 9,881 1,005 Net cash used in operating activities. We used approximately $6.6 million and $2.5 million of cash in operating activities during the years endedDecember 31, 2016 and 2015, respectively. The increase in cash used in operating activities from 2015 to 2016 is the result of changes in cash used inworking capital.Net cash used in investing activities. We used approximately $0.4 million and $0.2 million during the years ended December 31, 2016 andDecember 31, 2015, respectively, for the purchase of property and equipment.Net cash provided by financing activities. We generated approximately $9.9 million from financing activities during the year ended December 31,2016 compared to $1.0 million generated for the year ended December 31, 2015. The increase in cash generated for the period ended December 31, 2016 wasdriven by the proceeds from our September 29, 2016 convertible preferred stock issuance net of issuance costs and the payoff of the Healthcare RoyaltyPartners debt. The cash generated for the period ended December 31, 2015 was driven by proceeds from stock issued through the Controlled Equity Offering.At December 31, 2016, we had a working capital deficit of approximately $16.2 million, compared to working capital of $1.1 million at December 31,2015. This increase in the working capital deficit was driven by the issuance of warrants with the convertible preferred stock transaction. At December 31,2016 these and other warrants were recorded as a current liability in the amount of $19.8 million.As of December 31, 2016, 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, 2016, the Company had a borrowing capacity of $3.8 million based on the Company’scollateralized assets. The maturity date of the revolving line of credit is March 31, 2018.The credit facility is secured by substantially all of our assets. The credit agreements include customary affirmative, negative and financial covenants.For example, we are restricted from incurring additional debt, disposing of or pledging our assets, entering into merger or acquisition agreements, makingcertain investments, allowing fundamental changes to our business, ownership, management or business locations, and from making certain payments inrespect of stock or other ownership interests, such as dividends and stock repurchases. Under our loan arrangements, as in effect at December 31, 2016, we arerequired to meet minimum tangible net worth and liquidity covenants as defined in the loan agreement. We are also required under the credit agreements tomaintain our primary operating account and the majority of our cash and investment balances in accounts with our primary lending bank. As of December 31,2016, we were in compliance with all financial covenants of this agreement.The Company believes the cash on hand at December 31, 2016 as well as expected borrowing capacity available will be sufficient to meet itsobligations as they become due in the ordinary course of business for at 48Table of Contentsleast 12 months following the date these financial statements are issued. However, this evaluation assumes the Company’s ability to borrow under its assetbased revolving credit facility which matures on March 31, 2018. The Company expects to be able to renew this facility at similar terms, as it has successfullydone so in the past. However, there is no assurance that the revolving credit facility will be renewed in a timely manner, in amounts that are sufficient to meetthe Company’s obligations as they become due, or on terms acceptable to the Company, or at all. The Company has sustained operating losses throughout itscorporate history and expects that its 2017 expenses will exceed its 2017 gross margin. The Company expects to continue to incur operating losses andnegative cash flows until revenues reach a level sufficient to support ongoing operations or expense reductions are in place. The Company’s liquidity needswill be largely determined by the success of clinical adoption within the installed base of Niobe systems as well as by new placements of capital systems. TheCompany’s plans, which are probable of effectively being implemented and improving the liquidity conditions, primarily include its ability to control thetiming and spending of its operating expenses and raising additional funds through capital transactions. Specifically, cash outflows for operating expensescould be reduced or delayed by transitioning certain cash payments to stock payments, by reducing project expenses, or by reducing headcount. TheCompany also may consider raising cash through capital transactions, which could include either debt or equity financing.Until we can generate significant cash flow from our operations, we expect to continue to fund our operations with cash resources primarily generatedfrom the proceeds of our past and future public offerings, private sales of our equity securities and working capital and equipment financing loans. In thefuture, we may finance cash needs through the sale of other equity securities or non-core assets, strategic collaboration agreements, debt financings orthrough distribution rights. We cannot assure you that such additional financing will be available on a timely basis on terms acceptable to us or at all, that wewill be able to engage in equity financings because our common stock is no longer listed on a national securities exchange, or that such financing will not bedilutive to our stockholders. If adequate funds are not available to us, we could be required to delay development or commercialization of new products, tolicense to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize ourselves or to reduce the sales,marketing, customer support or other resources devoted to our products, any of which could have a material adverse effect on our business, financialcondition 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. 49Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial StatementsIndex To Financial Statements PAGE Report of Ernst & Young LLP, Independent Registered Public Accounting Firm 51 Balance Sheets at December 31, 2016 and 2015 52 Statements of Operations for the years ended December 31, 2016 and 2015 53 Statements of Convertible Preferred Stock and Stockholders’ Equity for the years ended December 31, 2016 and 2015 54 Statements of Cash Flows for the years ended December 31, 2016 and 2015 55 Notes to the Financial Statements 56 Schedule II—Valuation and Qualifying Accounts 82 All other schedules have been omitted because they are not applicable or the required information is shown in the Financial Statements or the Notesthereto. 50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, 2016 and 2015, and the related statements ofoperations, convertible preferred stock and stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2016. Our auditsalso included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of theCompany’s management. Our responsibility 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, 2016 and 2015, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, 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 therein./s/ Ernst & Young LLPSt. Louis, MissouriMarch 16, 2017 51Table of ContentsSTEREOTAXIS, INC.BALANCE SHEETS December 31,2016 December 31,2015 (Unaudited) Assets Current assets: Cash and cash equivalents $8,501,392 $5,593,582 Accounts receivable, net of allowance of $379,817 and $93,478 in 2016 and 2015, respectively 4,665,959 6,376,470 Inventories 5,381,103 4,504,282 Prepaid expenses and other current assets 855,295 668,659 Total current assets 19,403,749 17,142,993 Property and equipment, net 1,086,244 1,067,321 Intangible assets, net 436,569 635,889 Other assets 39,241 31,693 Total assets $20,965,803 $18,877,896 Liabilities and stockholders’ deficit Current liabilities: Accounts payable $2,623,010 $1,840,135 Accrued liabilities 4,491,164 6,058,390 Deferred revenue 8,751,336 7,445,935 Warrants 19,787,007 794,130 Total current liabilities 35,652,517 16,138,590 Long-term debt — 18,080,159 Long-term deferred revenue 522,329 2,009,198 Other liabilities 320,409 275,603 Total liabilities 36,495,255 36,503,550 Convertible Preferred stock: Convertible Preferred stock, par value $0.001; 10,000,000 shares authorized, 23,900 shares and zero sharesoutstanding at 2016 and 2015, respectively 5,960,475 — Stockholders’ deficit: Common stock, par value $0.001; 300,000,000 shares authorized, 22,063,582 and 21,551,173, sharesissued at 2016 and 2015, respectively 22,064 21,551 Additional paid in capital 449,939,406 448,517,472 Treasury stock, 4,015 shares at 2016 and 2015 (205,999) (205,999) Accumulated deficit (471,245,398) (465,958,678) Total stockholders’ deficit (21,489,927) (17,625,654) Total liabilities and stockholders’ deficit $20,965,803 $18,877,896 See accompanying notes. 52Table of ContentsSTEREOTAXIS, INC.STATEMENTS OF OPERATIONS(Unaudited) Twelve Months Ended December 31, 2016 2015 Revenue: Systems $5,776,843 $10,640,584 Disposables, service and accessories 26,387,273 27,033,940 Total revenue 32,164,116 37,674,524 Cost of revenue: Systems 3,660,012 6,052,241 Disposables, service and accessories 3,869,321 4,385,917 Total cost of revenue 7,529,333 10,438,158 Gross margin 24,634,783 27,236,366 Operating expenses: Research and development 5,487,609 6,252,791 Sales and marketing 15,228,193 15,850,362 General and administrative 10,345,338 10,543,741 Total operating expenses 31,061,140 32,646,894 Operating loss (6,426,357) (5,410,528) Other income (expense) (2,009,150) 1,340,057 Interest income 368 1,864 Interest expense (2,483,752) (3,284,168) Gain on extinguishment of debt 5,632,171 — Net loss $(5,286,720) $(7,352,775) Deemed dividend on convertible preferred stock (6,145,402) — Cumulative dividend on convertible preferred stock (368,152) — Net loss available to common stockholders $(11,800,274) $(7,352,775) Net loss per common share: Basic $(0.54) $(0.35) Diluted $(0.54) $(0.35) Weighted average shares used in computing net loss per common share: Basic 21,807,634 21,113,203 Diluted 21,807,634 21,113,203 See accompanying notes. 53Table of ContentsSTEREOTAXIS, INC.STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY ConvertiblePreferred Stock Common Stock AdditionalPaid-InCapital TreasuryStock AccumulatedDeficit TotalStockholders’Equity(Deficit) Shares Amount Shares Amount Balance at December 31, 2014 $ 20,480,874 $20,481 $446,241,703 $(205,999) $(458,605,903) $(12,549,718) Issuance of common stock 809,822 809 940,545 941,354 Share-based compensation 1,312,319 1,312,319 Restricted stock vestings 241,775 242 (242) — Net loss (7,352,775) (7,352,775) Employee stock purchase plan 18,702 19 23,147 23,166 Balance at December 31, 2015 0 $0 21,551,173 $21,551 $448,517,472 $(205,999) $(465,958,678) $(17,625,654) ConvertiblePreferred Stock Common Stock AdditionalPaid-InCapital TreasuryStock AccumulatedDeficit TotalStockholders’Equity(Deficit) Shares Amount Shares Amount Balance at December 31, 2015 0 $0 21,551,173 $21,551 $448,517,472 $(205,999) $(465,958,678) $(17,625,654) Issuance of common stock (1,464) (1,464) Share-based compensation 1,365,121 1,365,121 Restricted stock vestings 317,962 318 (318) — Net loss (5,286,720) (5,286,720) Employee stock purchase plan 39,008 39 33,145 33,184 Issuance of Convertible Preferred Stock, net of discount related to warrantsof $17,649,231 and issuance costs of $159,322 24,000 5,986,081 — Beneficial conversion feature of Convertible Preferred Stock (6,145,402) 6,145,402 6,145,402 Deemed dividend related to beneficial conversion feature of ConvertiblePreferred Stock 6,145,402 (6,145,402) (6,145,402) Conversion of Convertible Preferred Stock (100) (25,606) 155,439 156 25,450 25,606 Balance at December 31, 2016 23,900 $5,960,475 22,063,582 $22,064 $449,939,406 $(205,999) $(471,245,398) $(21,489,927) See accompanying notes. 54Table of ContentsSTEREOTAXIS, INC.STATEMENTS OF CASH FLOWS(Unaudited) Twelve Months Ended December 31, 2016 2015 Cash flows from operating activities Net loss $(5,286,720) $(7,352,775) Adjustments to reconcile net loss to cash used in operating activities: Depreciation 367,611 320,301 Amortization of intangibles 199,320 299,833 Amortization of deferred finance costs 188,239 222,682 Share-based compensation 1,365,121 1,312,319 Gain on debt extinguishment (5,632,171) — Noncash interest 485,857 449,814 Adjustment of warrants 2,009,150 (1,340,057) Changes in operating assets and liabilities: Accounts receivable 1,710,511 104,029 Inventories (853,171) 1,521,995 Prepaid expenses and other current assets (187,940) 86,944 Other assets (7,548) 124,691 Accounts payable 782,875 (512,998) Accrued liabilities (1,567,226) 798,696 Deferred revenue (181,468) 1,820,798 Other liabilities 44,806 (384,773) Net cash used in operating activities (6,562,754) (2,528,501) Cash flows from investing activities Purchase of Fixed Assets (410,184) (153,151) Net cash used in investing activities (410,184) (153,151) Cash flows from financing activities Payments of deferred financing costs (100,000) — Proceeds from revolving line of credit 7,650,000 — Payments of revolving line of credit (7,650,000) — Proceeds from (payments of) Healthcare Royalty Partners debt (13,020,780) 40,413 Proceeds from issuance of stock, net of issuance costs 23,001,528 964,520 Net cash provided by (used in) financing activities 9,880,748 1,004,933 Net increase (decrease) in cash and cash equivalents 2,907,810 (1,676,719) Cash and cash equivalents at beginning of period 5,593,582 7,270,301 Cash and cash equivalents at end of period $8,501,392 $5,593,582 Supplemental disclosures of cash flow information: Interest paid 2,253,554 2,974,345 See accompanying notes. 55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-Loop™, V-Sono™, V-CAS Deflect™, QuikCAS™, Cardiodrive, and Pegasus™are trademarks of Stereotaxis, Inc. All other trademarks that appear in this report are the property of their respective owners.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. As ofDecember 31, 2016, the Company had an installed base of 129 Niobe ES systems.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 regulatory clearance, licensingand/or CE Mark approvals that allow us to market the Vdrive and Vdrive Duo systems with the V-CAS, V-Loop and V-Sono devices in the U.S., Canada andEuropean Union. The V-CAS Deflect catheter advancement system has been CE Marked for sale in the European Union. 56®®®®®Table of ContentsThe Company believes the cash on hand at December 31, 2016 as well as expected borrowing capacity available will be sufficient to meet itsobligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued. However,this evaluation assumes the Company’s ability to borrow under its asset based revolving credit facility which matures on March 31, 2018. The Companyexpects to be able to renew this facility at similar terms, as it has successfully done so in the past. However, there is no assurance that the revolving creditfacility will be renewed in a timely manner, in amounts that are sufficient to meet the Company’s obligations as they become due, or on terms acceptable tothe Company, or at all. The Company has sustained operating losses throughout its corporate history and expects that its 2017 expenses will exceed its 2017gross margin. The Company expects to continue to incur operating losses and negative cash flows until revenues reach a level sufficient to support ongoingoperations or expense reductions are in place. Accordingly, management has analyzed its planned operations to evaluate the Company’s ability to continueas a going concern. The Company’s liquidity needs will be largely determined by the success of clinical adoption within the installed base of Niobe systemsas well as by new placements of capital systems. The Company’s plans, which are probable of effectively being implemented and improving the liquidityconditions, primarily include its ability to control the timing and spending of its operating expenses and raising additional funds through capitaltransactions. Specifically, cash outflows for operating expenses could be reduced or delayed by transitioning certain cash payments to stock payments, byreducing project expenses, or by reducing headcount. The Company also may consider raising cash through capital transactions, which could include eitherdebt or equity financing.2. Summary of Significant Accounting PoliciesCash and Cash EquivalentsThe Company considers all short-term investments purchased with original maturities of three months or less to be cash equivalents. The Companyplaces its cash with high-credit-quality financial institutions and invests primarily in money market accounts. No cash was restricted at December 31, 2016 or2015.Accounts Receivable and Allowance for Uncollectible AccountsAccounts receivable primarily include amounts due from hospitals and distributors for acquisition of magnetic systems, associated disposable devicesales and service contracts. Credit is granted on a limited basis, with balances due generally within 30 days of billing. The provision for bad debts is basedupon management’s assessment of historical and expected net collections considering business and economic conditions and other collection indicators.Financial InstrumentsFinancial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt. The carrying value of such amountsreported 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. 57Table of ContentsProperty and EquipmentProperty and equipment consist primarily of leasehold improvements, computer, office, research and demonstration equipment, and equipment held forlease 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, rangingfrom 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, which in most cases is estimated based upon Level 2 or Level 3 inputs.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, which in most cases is estimated based upon Level 2 or Level 3 inputs.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 recognizes revenue based on the Multiple-Deliverable Revenue Arrangements guidance (“ASU 2009-13”).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 (“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 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 58Table of Contentstitle and risk of loss have not transferred to the customer. Amounts collected prior to satisfying the above revenue recognition criteria are reflected as deferredrevenue. Revenue from services and license fees, whether sold individually or as a separate unit of accounting in a multiple-deliverable arrangement, isdeferred and amortized over the service or license fee period, which is typically one year. Revenue from services is derived primarily from the sale of annualproduct maintenance plans. We recognize revenue from disposable device 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 asnecessary. In the past, changes in estimate have had only a de minimus effect on revenue recognized in the period. We believe that the estimate is not likelyto 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, 2016 or 2015 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.Restricted 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 Plan areconsidered to be non-compensatory.Net Earnings (Loss) per Common ShareBasic earnings (loss) per common share are computed by dividing the net earnings (loss) for the period by the weighted average number of commonshares outstanding during the period. Diluted earnings (loss) per share 59Table of Contentsare computed by dividing the earnings (loss) for the period by the weighted average number of common and common equivalent shares outstanding duringthe period. In addition, the application of the two-class method of computing earnings per share under general accounting principles for participatingsecurities is not applicable because the Company’s unearned restricted shares do not contractually participate in its losses. In addition, the net lossattributable to common stockholders’ is adjusted for the convertible preferred stock deemed dividends related to the beneficial conversion feature on thisinstrument at inception, as well as the annual dividends for the periods in which the convertible preferred stock is outstanding.The Company did not include any portion of unearned restricted shares, outstanding options, stock appreciation rights, warrants or convertiblepreferred stock in the calculation of diluted loss per common share because all such securities are anti-dilutive for all periods presented. The application ofthe two-class method of computing earnings per share under general accounting principles for participating securities is not applicable during these periodsbecause those securities do not contractually participate in its losses.As of December 31, 2016, the Company had 671,887 shares of common stock issuable upon the exercise of outstanding options and stock appreciationrights at a weighted average exercise price of $8.77 per share, 38,963,443 shares of common stock issuable upon the exercise of outstanding warrants at aweighted average exercise price of $0.84 per share, and 37,335,618 shares of our common stock issuable upon conversion of our Series A ConvertiblePreferred Stock. The Company had no unearned restricted shares outstanding for the period ended December 31, 2016.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.Patent CostsCosts related to filing and pursuing patent applications are expensed as incurred, as recoverability of such expenditures is uncertain.Concentrations of RiskThe majority of the Company’s cash, cash equivalents and investments are deposited with one major financial institution in the U.S. Deposits in thisinstitution exceed the amount of insurance provided on such deposits.Biosense Webster Inc. accounted for $4,099,075 and $3,514,897 or 13%, and 9%, of total net revenue for the years ended December 31, 2016, and2015, respectively. No other single customer accounted for more than 10% of total revenue for the year ended December 31, 2016. 60Table of ContentsReclassificationsCertain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassificationshad no effect on reported losses.Recently Issued Accounting PronouncementsIn March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”) No. 2016-09,“Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This amendment is intended to simplifyseveral aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity orliabilities, forfeitures, and classification on the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016 (January 1,2017 for the Company) and interim periods within those fiscal years, with earlier application permitted. The Company will adopt this guidance in the firstquarter of 2017 and does not expect the adoption of ASU 2016-09 to materially impact the Company’s consolidated financial position, results of operations,equity or cash flows.In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02—Leases (ASC 842), which sets out the principles for therecognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees toapply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financedpurchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basisover the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, directfinancing leases and operating leases. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective for interim and annualperiods beginning after December 31, 2018 (January 1, 2019 for the Company), with early adoption permitted. The Company is in the process of evaluatingthe impact of this accounting standard update.In November 2015, the FASB issued Accounting Standards Update (“ASU” or “Update”) No. 2015-17, “Income Taxes (Topic 740): To simplify thepresentation of deferred income taxes”. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in aclassified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. Thecurrent requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected bythe amendments in this Update. This standard is effective for public companies for financial statements issued for annual periods beginning afterDecember 15, 2016 (January 1, 2017 for the Company), and interim periods within those annual periods. We have adopted this accounting standard updateand there was no impact to the results of operations or cash flows.In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” regarding the subsequentmeasurement of inventory as part of its Simplification Initiative. This standard is effective for public companies for fiscal years beginning after December 15,2016 (January 1, 2017 for the Company), including interim periods within those fiscal years. This Update should be applied prospectively, and earlyapplication is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of adopting this accountingstandard update but do not expect this to significantly impact the results of operations, financial conditions, cash flows, or financial statement presentation.In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt IssuanceCosts”. To simplify the presentation of debt issuance costs, the 61Table of Contentsamendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction fromthat debt liability, consistent with the presentation of a debt discount. In August 2015, the FASB issued ASU 2015-15, Presentation and SubsequentMeasurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement atJune 18, 2015 EITF Meeting (SEC Update), which adds the SEC staff’s guidance on the presentation of debt issuance costs associated with lines of credit tothe Codification. The SEC staff stated it will not object to an entity presenting the costs of securing line-of-credit arrangements as an asset, regardless ofwhether there are any outstanding borrowings. The Standard is effective for financial statements issued for fiscal years beginning after December 15, 2015(January 1, 2016 for the Company), and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted for financialstatements that have not been previously issued. We have adopted this accounting standard update. The Company’s balance sheet as of December 31, 2015included $349,018 of deferred financing costs that were, under the new guidance, presented as a direct reduction to debt liabilities. In September 2016, thecompany extinguished the remainder of the debt upon an agreement entered into with Healthcare Royalty Partners. See Note 9 for additional details.In 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 (December 31, 2016 for the Company).Early adoption is permitted. We have adopted this accounting standard update and provided the relevant disclosures in Note 1.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, 2017 (January 1, 2018 for the Company). Early adoption is not permitted. The standard permits companies to either apply the adoption toall periods presented, or apply the requirements in the year of adoption through a cumulative adjustment. The Company will adopt ASU 2014-09 during thefirst quarter of 2018 and anticipates using the modified retrospective method that will result in a cumulative effect adjustment as of the date of adoption.Upon initial evaluation, management does not anticipate a significant change to its existing units of accounting which include systems, disposables andother accessories, royalty and other recurring revenue. The Company continues to evaluate other areas of the standard and its effect on the Corporation’sfinancial statements.3. InventoryInventory consists of the following: December 31,2016 December 31,2015 Raw materials $2,397,430 $2,065,676 Work in process 341,125 24,758 Finished goods 2,915,162 2,433,819 Reserve for obsolescence (272,614) (19,971) Total inventory $5,381,103 $4,504,282 62Table of Contents4. Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consist of the following: December 31,2016 December 31,2015 Prepaid expenses $575,886 $454,822 Deferred financing costs 24,658 25,960 Deposits 293,992 136,583 Deferred cost of revenue — 82,987 Total prepaid expenses and other assets 894,536 700,352 Less: Noncurrent prepaid expenses and other assets (39,241) (31,693) Total current prepaid expenses and other assets $855,295 $668,659 Certain prior year amounts have been reclassified to conform to the 2016 presentation.5. Property and EquipmentProperty and equipment consist of the following: December 31,2016 December 31,2015 Equipment $8,397,528 $8,496,636 Equipment held for lease 303,412 303,412 Leasehold improvements 2,719,860 2,320,368 11,420,800 11,120,416 Less: Accumulated depreciation (10,334,556) (10,053,095) Net property and equipment $1,086,244 $1,067,321 6. Intangible AssetsAs of December 31, 2016 and 2015, the Company had total intangible assets of $3,221,069. Accumulated amortization at December 31, 2016 and2015 was $2,784,500 and $2,585,180, respectively. Amortization expense for the years 2016 and 2015 was $199,320 and $299,833, respectively, asdetermined under the straight-line method. The estimated future amortization of intangible assets is $199,320 annually through July 2018, decreasingthereafter to $143,765 in 2018, $65,988 in 2019 and $27,496 through May 2020.The Company also recognized impairment charges of $443,931 during 2015 on certain 2010 intellectual property rights relating to the Company’sOdyssey Solution due to uncertainty around forecasted revenue under the Odyssey system distribution agreement beyond May 2016. The impairment is theresult of a decline in forecasted revenue attributable to this intellectual property that indicated it was probable the undiscounted future cash flows would notexceed the book value of the intellectual property. As a result, the book value of the intellectual property was reduced to its fair value as estimated using adiscounted cash flow analysis. The Company evaluated the discount rate in the fair value calculation with the assistance of a third party valuation specialist(Level 3). 63Table of Contents7. Accrued LiabilitiesAccrued liabilities consist of the following: December 31, December 31, 2016 2015 Accrued salaries, bonus, and benefits $2,452,183 $3,053,012 Accrued rent 965,412 1,361,379 Accrued licenses and maintenance fees 561,450 666,373 Accrued interest — 494,703 Accrued warranties 222,845 316,835 Accrued taxes 219,017 324,226 Accrued professional services 180,450 27,140 Other 210,216 90,325 Total accrued liabilities 4,811,573 6,333,993 Less: Long term accrued liabilities (320,409) (275,603) Total current accrued liabilities $4,491,164 $6,058,390 8. Deferred RevenueDeferred revenue consists of the following: December 31,2016 December 31,2015 Product shipped, revenue deferred $549,709 $366,388 Customer deposits 2,910,000 2,505,000 Deferred service and license fees 5,813,956 6,583,745 Total deferred revenue 9,273,665 9,455,133 Less: Long-term deferred revenue (522,329) (2,009,198) Total current deferred revenue $8,751,336 $7,445,935 9. Long-Term Debt and Credit FacilitiesDebt outstanding consists of the following: December 31, 2016 December 31, 2015 CarryingAmount EstimatedFair Value CarryingAmount EstimatedFair Value Healthcare Royalty Partners debt $ — $ — $18,080,159 $18,429,177 Total debt — — 18,080,159 18,429,177 Less current maturities — — — — Total long term debt $ — $ — $18,080,159 $18,429,177 As of December 31, 2016, there were no contractual principal maturities of debt.Certain prior year amounts have been reclassified to conform to the 2016 presentation.In accordance with general accounting principles for fair value measurement, the Company’s debt and credit facilities were measured at fair value as ofDecember 31, 2016 and December 31, 2015. Long-term debt fair value estimates are based on estimated borrowing rates to discount the cash flows to theirpresent value (Level 3). 64Table of ContentsThe revolving line of credit is secured by substantially all of the Company’s assets. The Company is required under the Credit Agreements to maintainits primary operating account and the 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 maximum available under the line is $10.0 million subject to the value of collateralized assets. TheCompany is required under the revolving line of credit to maintain its primary operating account and the majority of its cash and investment balances inaccounts with its primary lender. The facility was amended on March 27, 2015, extending the maturity date to March 31, 2018 and on May 10, 2016, theCompany and the primary lender agreed to modify certain financial covenants. The amended agreement requires the Company to maintain a liquidity ratiogreater than 1.50:1.00, excluding certain short term advances from the calculation, and a minimum tangible net worth of not less than (no worse than)negative $24.0 million for the quarters ended June 30, 2016, September 30, 2016, December 31, 2016, March 31, 2017, June 30, 2017, and September 30,2017; and not less than (no worse than) negative $24.5 million for the quarters ended December 31, 2017 and March 31, 2018.As of December 31, 2016, 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, 2016 the Company had a borrowing capacity of $3.8 million based on the Company’scollateralized assets. The Company’s total liquidity as of December 31, 2016, was $12.3 million which included cash and cash equivalents of $8.5 million.As of December 31, 2016, we were in compliance with all financial covenants of this agreement and we anticipate continued compliance throughout theremainder of 2017.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 was to 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 was entitled toreceive 100% of all royalties due to the Company under the Biosense Agreement until the loan is repaid. The loan was a full recourse loan, scheduled tomature on December 31, 2018, and bore interest at an annual rate of 16% payable quarterly with royalties received under the Biosense Agreement. If thepayments received by the Company under the Biosense Agreement had been insufficient to pay all amounts of interest due on the loan, then such deficiencywould have increased the outstanding principal amount on the loan. After the loan obligation was repaid, the royalties under the Biosense Agreement arepaid to the Company. The loan was also secured by certain assets and intellectual property of the Company. The Agreement contained customary affirmativeand negative covenants. The use of payments due to the Company under the Biosense Agreement was approved by our primary lender.In September 2016, the Company extinguished the remainder of the debt of $18.1 million, net of deferred financing costs of approximately $0.3million, as well as accrued interest of $0.5 million for $13.0 million based upon an agreement entered into with Healthcare Royalty Partners. After the loanobligation was repaid, the royalties under the Biosense Agreement will again be paid to the Company. As a result of the debt extinguishment, the companyrecognized a net gain of $5.6 million. 65Table of Contents10. Lease ObligationsThe Company leases its facilities under operating leases. For the years ended December 31, 2016 and 2015 rent expense was $1,187,989 and$1,205,338, respectively. The rent expense for the years ended December 31, 2016 and 2015 is net of sublease income of $91,579 and $18,912, respectively.In January 2006, the Company moved its primary operations into its current 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 whichthe Company 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, 2016, theremaining accrued costs associated with the termination were $181,601.In the fourth quarter of 2015, the Company entered a sublease agreement to sublease 3,152 square feet of the first floor office space throughDecember 31, 2018. In July 2016, the Company and the subtenant mutually agreed to an early termination of the sublease, effective July 31, 2016.In August 2016 the Company entered into an agreement to sublease approximately 11,000 square feet of office space through December 31, 2018. Thecosts associated with the sublease were $40,972 and were accrued as a rent liability as of August 31, 2016. As of December 31, 2016, the remaining accruedcosts associated with the termination were $21,286. As part of the sublease agreement, the Company will sublease an additional 16,000 square feet beginningin January 2017.The future minimum lease payments under non-cancelable leases as of December 31, 2016 are as follows (excluding sublease income): Year OperatingLeasePayments 2017 $2,002,1782018 2,037,8582019 11,496Total minimum lease payments 4,051,532Less amounts representing sublease receipts (1,510,631) $2,540,90111. Convertible Preferred Stock and 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, 2016.Convertible Preferred Stock and WarrantsOn September 26, 2016, the Company entered into a Securities Purchase Agreement with certain institutional and other accredited investors whereby itagreed to sell, for an aggregate purchase price of $24.0 million, (i) an aggregate of 24,000 shares of Series A Convertible Preferred Stock, par value $0.001with a stated value of $1,000 per share which are convertible into shares of the Company’s common stock and (ii) warrants to purchase an aggregate of36,923,078 shares of common stock. The transaction closed on September 29, 2016. 66Table of ContentsThe Company received net proceeds from the sale of the convertible preferred stock and warrants of $23.0 million, after offering expenses. TheCompany used $13.0 million of the funds to satisfy in full all amounts outstanding under the Loan Agreement with Healthcare Royalty Partners, as notedabove, and anticipates using the remaining proceeds for general corporate purposes.The designations, preferences, powers and rights of the convertible preferred shares are set forth in a Certificate of Designations, Preferences and Rightsof Series A Convertible Preferred Stock (“Certificate of Designations”) filed with the Delaware Secretary of State. The convertible preferred shares are entitledto vote on an as-converted basis with the common stock, subject to specified beneficial ownership issuance limitations. The convertible preferred shares beardividends at a rate of six percent (6%) per annum, which are cumulative and accrue daily from the date of issuance on the $1,000 stated value. Suchdividends will not be paid in cash except in connection with any liquidation, dissolution or winding up of the Company or any redemption of theconvertible preferred shares. Instead the value of the accrued dividends is added to the liquidation preference of the convertible preferred shares and willincrease the number of shares of common stock issuable upon conversion. Each convertible preferred share is convertible at the option of the holder from andafter the date of issuance with no expiration date, at an initial conversion price of $0.65 per share, subject to adjustment in the event of stock splits,dividends, mergers, sales of all or substantially all of our assets or similar transactions, subject to specified beneficial ownership issuance limitations. Eachholder of convertible preferred shares has the right to require us to redeem such holder’s convertible preferred shares upon the occurrence of specified events,which include certain business combinations, the sale of all or substantially all of the Company’s assets or the sale of more than 50% of the outstandingshares of the Company’s common stock. In addition, the Company has the right to redeem the convertible preferred shares in the event of a change of controlas defined in the Certificate of Designations.The convertible preferred shares rank senior to our common stock as to distributions and payments upon the liquidation, dissolution and winding up ofthe Company. No such distributions or payments upon the liquidation, dissolution and winding up of the Company may be made to the holders of commonstock unless and until the holders of convertible preferred shares have received the stated value of $1,000 per share plus any accrued and unpaiddividends. Until all convertible preferred shares have been converted or redeemed, no dividends may be paid on the common stock without the expresswritten consent of the holders of a majority of the outstanding convertible preferred shares. In the event that dividends or other distributions of assets aremade or paid by the Company to the holders of the common stock, the holders of convertible preferred shares are entitled to participate in such dividend ordistribution on an as-converted basis.On the date of the issuance, the fair value of the convertible preferred stock was greater than the allocated proceeds received for the Series Aconvertible preferred stock. As such, the Company accounted for the beneficial conversion feature under ASC 470-20, Debt with Conversion feature underASC 470-20, Debt with Conversion and Other Options. The Company recorded a deemed dividend charge of $6.1 million for the accretion of a discount onthe Series A convertible preferred stock. The deemed dividend was a non-cash transaction and is reflected below net loss to arrive at net loss available tocommon stockholders. Since the convertible preferred shares are subject to conditions for redemption that are outside the Company’s control, the convertiblepreferred shares are presently reported in the mezzanine section of the balance sheet.The warrants issued in conjunction with the convertible preferred stock have an exercise price equal to $0.70 per share subject to adjustments asprovided under the terms of the warrants. The warrants are exercisable through September 29, 2021, subject to specified beneficial ownership issuancelimitations. The warrants may be exercised by any holder on a cashless basis if, at any time after the date that is 180 days after the closing, the registrationstatement required by the Registration Rights Agreement described below is not effective and available for resale of all of the shares of common stockissuable upon exercise of such holder’s warrants. Due to the fact that the warrants are puttable upon the occurrence of certain events outside of the Company’scontrol, the warrants qualify as liabilities under ASC 480-10. The calculated fair value of the warrants is classified as a liability and is periodically re-measured with any changes in value recognized in “Other income (expense)” in the Statements of Operations. See Note 12 for additional details. 67Table of ContentsOn December 2, 2016 100 shares of convertible preferred stock plus accumulated dividends were converted into 155,439 common shares.Listing Transfer to OTCQX Best MarketOn August 2, 2016, the Company received a determination letter from the Nasdaq Hearings Panel (the “Panel”) notifying the Company that itscommon stock would be delisted from The Nasdaq Capital Market (“Nasdaq”) and that suspension of trading in the shares would be effective at the open ofbusiness on August 4, 2016. The determination letter also indicated that Nasdaq would complete the delisting by filing a Form 25 Notification of Delistingwith the Securities Exchange Commission, after applicable appeal periods have lapsed. The Panel made the determination to delist the Company’s commonstock because the Company did not demonstrate compliance with the minimum $35 million market value of listed securities requirement for a period of tenconsecutive trading days by August 1, 2016, as required by a decision previously issued by the Panel on May 2, 2016. The Company’s shares of commonstock commenced trading on the OTCQX Best Market on August 4, 2016 under the Company’s current ticker symbol of “STXS.”Controlled Equity OfferingThe Company entered into a Controlled Equity Offering sales agreement (the “Sales Agreement”) in May 2014, as amended on March 26, 2015, withCantor Fitzgerald & Co. (“Cantor”), as agent and/or principal, pursuant to which the Company could issue and sell, from time to time, shares of its commonstock having an aggregate gross sales price of up to $18.0 million. The Company paid Cantor a commission of 3.0% of the gross proceeds from any commonstock sold through the Sales Agreement.There were no proceeds from the Controlled Equity Offering during the twelve months ended December 31, 2016. The Sales Agreement expired inNovember 2016 upon the expiration of our Registration Statement on Form S-3.The Company has reserved shares of common stock for conversion of convertible preferred stock, exercise of warrants, and the issuance of optionsgranted under the Company’s stock option plan and its stock purchase plan as follows: December 31,2016 December 31,2015 Warrants 38,963,443 2,120,365 Series A Convertible Preferred Stock Series 47,844,562 — Stock award plans 1,524,996 731,442 Employee Stock Purchase Plan 192,290 231,298 88,525,291 3,083,105 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 68®®SMTable of Contentsthe option on the date the option is granted. The vesting provisions of individual options may vary, but incentive stock options generally vest 25% on thefirst anniversary of each grant and 1/48 per month over the next three years. Stock appreciation rights are rights to acquire a calculated number of shares ofthe Company’s common stock upon exercise of the rights. The number of shares to be issued is calculated as the difference between the exercise price of theright and the aggregate market value of the underlying shares on the exercise date divided by the market value as of the exercise date. Stock appreciationrights granted under the 2012 Stock Incentive Plan generally vest 25% on the first anniversary of such grant and 1/48 per month over the next three years andexpire no later than ten years from the date of grant. The Company generally issues new shares upon the exercise of stock options and stock appreciationrights.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, 2016 is as follows: Number ofOptions/SARs Range ofExercise Price WeightedAverage ExercisePrice per Share Outstanding, December 31, 2015 706,494 $1.45 - $116.40 $9.34 Granted 1,000 $1.55 $1.55 Exercised — — — Forfeited (35,607) $1.74 - $99.00 $19.79 Outstanding, December 31, 2016 671,887 $1.45 - $116.40 $8.77 As of December 31, 2016, the weighted average remaining contractual life of the options and stock appreciation rights outstanding was 7.06 years. Ofthe 671,887 options and stock appreciation rights that were outstanding as of December 31, 2016, 429,029 were vested and exercisable with a weightedaverage exercise price of $12.15 per share and a weighted average remaining term of 6.64 years.A summary of the options and stock appreciation rights outstanding by range of exercise price is as follows: Year Ended December 31, 2016 Range of Exercise Prices OptionsOutstanding WeightedAverageRemainingLife WeightedAverageExercise Price Number ofOptionsCurrentlyExercisable WeightedAverageExercisePrice PerVested Share $0.00 - $10.00 581,142 7.67 years $3.07 338,284 $3.26 $30.01 - $40.00 58,745 4.03 years $34.86 58,745 $34.86 $40.01 - $50.00 12,250 2.44 years $43.90 12,250 $43.90 $50.01 - $60.00 12,250 1.41 years $54.90 12,250 $54.90 $90.01+ 7,500 0.33 years $113.60 7,500 $113.60 671,887 7.06 years $8.77 429,029 $12.15 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 69Table of Contentsstock appreciation rights that were in-the-money at December 31, 2016. The intrinsic value of the options and stock appreciation rights outstanding atDecember 31, 2016 and the intrinsic value of fully vested options and stock appreciation rights outstanding at December 31, 2016 were zero based on aclosing share price of $0.65 on December 31, 2016. No options or stock appreciation rights were exercised under the Company’s stock option plans duringthe years ended December 31, 2015 or 2016 and the Company realized no proceeds during these periods. The weighted average grant date fair value ofoptions and stock appreciation rights granted during the year ended December 31, 2016 was $1.55 per share.A summary of the restricted stock unit activity for the year ended December 31, 2016 is as follows: Number ofRestrictedStock Units Weighted AverageGrant Date FairValue per Unit Outstanding, December 31, 2015 752,008 $2.63 Granted 862,600 $0.84 Vested (317,962) $2.45 Forfeited (129,547) $1.51 Outstanding, December 31, 2016 1,167,099 $1.48 The intrinsic value of restricted stock units outstanding at December 31, 2016 was $0.8 million based on a closing share price of $0.65 as ofDecember 31, 2016. During the year ended December 31, 2016, the aggregate intrinsic value of restricted stock units vested was $0.3 million determined atthe date of vesting.During the fourth quarter of 2016, the Company adjusted its estimated forfeiture rates based on historical information, which resulted in an increase toshare-based compensation of approximately $0.2 million for the year ended December 31, 2016.As of December 31, 2016, 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 $1.8 million, net of estimated forfeitures of approximately $0.3 million. Thiscost will be amortized over a weighted average period of approximately one and a half years on a straight-line basis over the underlying estimated serviceperiods and will be adjusted for subsequent changes in 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, 2016, there were 192,290 remaining shares available for issuance under the Employee Stock Purchase Plan. 70Table of Contents12. 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.The following table sets forth the Company’s assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy.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) Liabilities at December 31, 2016: Warrants issued May 2012 $66,081 — — 66,081 Warrants issued August 2013 151,695 — — 151,695 Warrants issued September 2016 19,569,231 — — 19,569,231 Total liabilities at fair value: $19,787,007 — — 19,787,007 Assets at December 31, 2015: Cash equivalents $524,083 524,083 — — Total assets at fair value $524,083 524,083 — — Liabilities at December 31, 2015: Warrants issued May 2012 $143,681 — — 143,681 Warrants issued August 2013 650,449 — — 650,449 Total liabilities at fair value: $794,130 — — 794,130 Level 1The Company’s financial assets consist of cash equivalents invested in money market funds in the amount of $524,083 at December 31, 2015. Therewere no cash equivalents invested in money market funds at December 31, 2016. These assets are classified as Level 1 as described above and total interestincome recorded for these investments was insignificant during both the years ended December 31, 2016 and December 31, 2015. There were no transfers inor out of Level 1 during the year ended December 31, 2016. 71Table of ContentsLevel 2The Company does not have any financial assets or liabilities classified as Level 2.Level 3In conjunction with the Company’s May 2012, August 2013 and September 2016 financing transactions, the Company issued warrants to purchaseshares of the Company’s common stock. Due to the provisions included in the warrant agreements, the warrants did not meet the exemptions for equityclassification and as such, the Company accounts for these warrants as derivative instruments. The calculated fair value of the warrants is classified as aliability and is periodically re-measured with any changes in value recognized in “Other income (expense)” in the Statements of Operations.The remaining warrants from the May 2012 transaction (PIPE Warrants) expire in May 2018 and were valued using an option pricing model as ofDecember 31, 2015 using the following assumptions: 1) volatility of 113.4%; 2) risk-free interest rate of 1.06%; and 3) a closing stock price of $0.74.The PIPE warrants were revalued using an option pricing model as of December 31, 2016 using the following assumptions: 1) volatility of 121.12%; 2)risk-free interest rate of 1.20%; and 3) a closing stock price of $0.65.The remaining warrants from the August 2013 transaction (Exchange warrants) expire in November 2018 and were valued using an option pricingmodel as of December 31, 2015 using the following assumptions: 1) volatility of 182.94%; 2) risk-free interest rate of 1.31%; and 3) a closing stock price of$0.74.The Exchange warrants were revalued using an option pricing model as of December 31, 2016 using the following assumptions: 1) volatility of110.32%; 2) risk-free interest rate of 1.20%; and 3) a closing stock price of $0.65.The September 2016 warrants expire in September 2021 and were valued as of September 30, 2016 using the following assumptions: 1) volatility of120.43%; 2) risk-free interest rate of 1.14%; and 3) a closing stock price of $0.87. These warrants were revalued using an option pricing model as ofDecember 31, 2016 using the following assumptions: 1) volatility of 121.31%; 2) risk-free interest rate of 1.93%; and 3) a closing stock price of $0.65.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) liability fair value measurement.The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the year ended December 31,2016: Warrantsissued May2012 Warrantsissued August2013 Warrantsissued September2016 TotalLiabilities Balance at beginning of period $143,681 $650,449 $ — $794,130 Issues — — 17,649,231 17,649,231 Settlements — — — — Revaluation (77,600) (498,754) 1,920,000 1,343,646 Balance at end of period $66,081 $151,695 $19,569,231 $19,787,007 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. 72Table of Contents13. Income TaxesThe provision for income taxes consists of the following: Year Ended December 31, 2016 2015 Deferred: Federal $(757,955) $(2,529,455) State and local (328,867) 169,266 (1,086,822) (2,360,189) Valuation allowance 1,086,822 2,360,189 $— $— 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, 2016 2015 U.S. statutory income tax rate 34.0% 34.0%State and local taxes, net of federal tax benefit 1.0% 1.9%Permanent differences between book and tax (15.9)% 5.6%Deferred tax adjustments (5.9)% (9.3)%State rate adjustments 7.4% (0.1)%Valuation allowance (20.6)% (32.1)%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 state rate adjustments are a result ofchanges in apportionment and various state rate law changes.The components of the deferred tax asset are as follows: December 31, 2016 2015 Current accruals $1,638,298 $1,687,951 Deferred revenue 126,631 269,797 Depreciation and amortization 2,131,933 2,269,341 Deferred compensation 1,464,533 1,389,832 Net operating loss carryovers 33,943,745 32,744,557 Deferred tax assets 39,305,140 38,361,478 Valuation allowance (39,000,095) (37,912,693) Net deferred tax assets before deferred tax liabilities 305,045 448,785 Accounting method changes (305,045) (448,785) 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 73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 approximately $290 million of the Company’s federal net operating loss carryovers would expire unused due to the limitationunder IRC Section 382. The Company reduced the net operating loss carryover and corresponding valuation allowance as a result of these limitations. Theremaining net operating loss carryforwards following the ownership change have been assigned a full valuation 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 the contributed capital.As of December 31, 2016, we had gross federal net operating loss carryforwards of approximately $95.6 million. The federal net operating losscarryforwards reflect accumulated book losses reduced for the 2013 IRC Section 382 ownership change limitation of $290 million and approximately $86million of book/ tax differences and expiration of unused carryforwards. The federal net operating loss carryforwards will expire between 2030 and 2036. Asof December 31, 2016, we had state net operating loss deferred tax assets of approximately $1.5 million which will expire at various dates between 2017 and2036 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, 1997 forward, all tax years from 1997 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, 2016 accrued interest and penalties were less than $0.1 million.At December 31, 2016 and 2015, the Company had approximately $0.1 million and $0.3 million, respectively, 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: Twelve months ended December 31, 2016 2015 Net loss $(5,286,720) $(7,352,775) Deemed dividend on convertible preferred stock (6,145,402) — Cumulative dividend on convertible preferred stock (368,152) — Net loss available to common stockholders $(11,800,274) $(7,352,775) Weighted average shares used to compute basic and diluted net loss per share 21,807,634 21,113,203 Basic and diluted net loss per share $(0.54) $(0.35) 74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, 2016 2015 Shares issuable upon vesting/exercise of: Options to purchase common stock 671,887 706,494 Series A Convertible Preferred Stock and Accumulated Dividends 37,335,618 — Restricted stock units 1,167,099 752,008 Warrants 38,963,443 2,120,365 78,138,047 3,578,867 15. Employee Benefit PlanThe Company offers employees the opportunity to participate in a 401(k) plan. Employer contributions are discretionary under the 401(k)plan. Currently the Company does not match employee contributions.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 31,2016 December 31,2015 Warranty accrual, beginning of the fiscal period $316,835 $364,548 Accrual adjustment for product warranty 103,743 171,384 Payments made (197,733) (219,097) Warranty accrual, end of the fiscal period $222,845 $316,835 17. Related Party TransactionsIn September 2016, the Company entered into a Securities Purchase Agreement with certain institutional and other accredited investors whereby itagreed to sell, for an aggregate purchase price of $24.0 million, (i) an aggregate of 24,000 shares of Series A Convertible Preferred Stock, and (ii) warrants topurchase an aggregate of 36,923,078 shares of common stock (see Note 11 to the accompanying financial statements for further information). Pursuant to thetransaction agreements, the Company reimbursed transaction related legal fees of $85,000 to a law firm engaged by DAFNA Capital Management. Fundsmanaged by DAFNA Capital Management own more than 5% of the outstanding shares of the Company. Also, pursuant to the Securities PurchaseAgreement, the Board appointed David Fischel, Principal at DAFNA Capital Management, and Joe Kiani, also an investor in the offering, to the Board,effective as of the closing of the Offering. Subsequent to the transaction, the Company reimbursed an additional $120,367 in transaction-related legal feesincurred by law firms engaged by these investors. In February, 2017, David Fischel was appointed acting Chief Executive Officer of Stereotaxis, Inc. 75Table of Contents18. 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.19. 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 devices are developed and marketed to a broad base of hospitals in the United States andinternationally. The Company considers all such sales to be part of a single operating segment. Geographic revenues for the years ended December 31, 2016and 2015 were as follows: Year Ended December 31, 2016 2015 United States $19,420,815 $19,757,986 International 12,743,301 17,916,538 Total $32,164,116 $37,674,524 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.20. Subsequent EventsNone. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. 76Table of ContentsITEM 9A.CONTROLS AND PROCEDURESReport on Internal Control Over Financial ReportingAs of December 31, 2016, 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, 2016. 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, 2016.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. ITEM 9B.OTHER INFORMATIONNone. 77Table of ContentsPART 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 thanMay 1, 2017, 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. Stammer4320 Forest Park Avenue, Suite 100St. Louis, MO 63108314-678-6100We intend to promptly disclose any amendments to, or waivers from, any provision of the Code of Business Conduct and Ethics by posting therelevant material on our website (www.stereotaxis.com) in accordance with SEC rules.The following is information with respect to our executive officers:David L. FischelActing Chief Executive Officer and Chairman of the Board since February 2017Director since September 2016Mr. Fischel, 30, was named Acting Chief Executive Officer and Chairman of the Board on February 3, 2017. He has served as a director of Stereotaxis sinceleading the equity investment and positive strategic initiatives announced in September 2016. He has served for over eight years as Principal and portfoliomanager for medical device investments at DAFNA Capital Management, LLC. In addition to his research responsibilities, Mr. Fischel has been deeplyinvolved in all aspects of DAFNA Capital’s operations including legal, accounting, IT, compliance, human resources and marketing. Prior to joining DAFNACapital, he was a research analyst at SCP Vitalife, a healthcare venture capital fund. Mr. Fischel completed his B.S. magna cum laude in Applied Mathematicswith a minor in Accounting at the University of California at Los Angeles and received his MBA from Bar-Ilan University in Tel Aviv. He is a CertifiedPublic Accountant, Chartered Financial Analyst and Chartered Alternative Investment Analyst.Paul A. Brathwaite, Ph.D.Vice President, Research and DevelopmentOfficer since July 2015Dr. Brathwaite, 47, was appointed Vice President of Research and Development in 2012 and was named an officer in 2015. He joined Stereotaxis inSeptember 2003 as a software engineer and has held several positions 78Table of Contentswithin the Company with increasing responsibility, including Software Project Manager, Director of Clinical Adoption Engineering, and Senior Director ofResearch and Development. Prior to joining Stereotaxis, Dr. Brathwaite was employed as a software engineer at AutoQuant Imaging, Inc. Dr. Brathwaite holdsa Doctorate in biomedical engineering and a Master of Science in electrical engineering from the University of Iowa. He also holds a Bachelor of Science incomputer engineering from Queen’s University, Canada.Karen W. DurosSenior Vice President, General Counsel and SecretaryOfficer since October 2010Ms. Duros, 62, 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, 68, 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, 36, 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 the Company as Senior Manager, Financial Reporting in October 2009. Prior to joining theCompany, from 2003 to 2009, Mr. Stammer was employed in various roles and capacities at Deloitte & Touche LLP, including most recently as AuditManager. Mr. Stammer received his M.S. and B.S. in Accountancy from 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. 79Table of ContentsITEM 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 INDEPENDENCEIn September 2016, the Company entered into a Securities Purchase Agreement with certain institutional and other accredited investors whereby itagreed to sell, for an aggregate purchase price of $24.0 million, (i) an aggregate of 24,000 shares of Series A Convertible Preferred Stock, and (ii) warrants topurchase an aggregate of 36,923,078 shares of common stock (see Note 11 to the accompanying financial statements for further information). Pursuant to thetransaction agreements, the Company reimbursed transaction related legal fees of $85,000 to a law firm engaged by DAFNA Capital Management. Fundsmanaged by DAFNA Capital Management own more than 5% of the outstanding shares of the Company. Also, pursuant to the Securities PurchaseAgreement, the Board appointed David Fischel, Principal at DAFNA Capital Management, and Joe Kiani, also an investor in the offering, to the Board,effective as of the closing of the Offering. Subsequent to the transaction, the Company reimbursed an additional $120,367 in transaction-related legal feesincurred by law firms engaged by these investors.Any other information required by this item regarding certain relationships and related transactions is incorporated by reference to the information setforth in the section titled “Certain Relationships and Related Party Transactions” in our Proxy Statement. The information required by this item regardingdirector independence is incorporated by reference to the information set forth in the section titled “Corporate Governance Information” in our ProxyStatement. 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 herein. 80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, 2017 By: /s/ DAVID L. FISCHEL David L. FischelActing Chief Executive OfficerKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David L. Fischel 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/ DAVID L. FISCHELDavid L. Fischel Chairman of the Board of Directors and Acting ChiefExecutive Officer (principal executive officer) March 16, 2017/s/ MARTIN C. STAMMERMartin C. Stammer Chief Financial Officer (principal financial officer andprincipal accounting officer) March 16, 2017/s/ DAVID W. BENFERDavid W. Benfer Director March 16, 2017/s/ NATHAN FISCHELNathan Fischel Director March 16, 2017/s/ JOE KIANIJoe Kiani Director March 16, 2017/s/ ARUN MENAWATArun Menawat Director March 16, 2017/s/ ROBERT J. MESSEYRobert J. Messey Director March 16, 2017/s/ FRED A. MIDDLETONFred A. Middleton Director March 16, 2017/s/ ERIC N. PRYSTOWSKYEric N. Prystowsky Director March 16, 2017 81Table of ContentsSCHEDULE IIVALUATION AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 Balance atBeginning ofYear AdditionsCharged toCost andExpenses Deductions Balance at theEnd of Year Allowance for doubtful accounts and returns: Year ended December 31, 2016 $93,478 $292,690 $(6,351) $379,817 Year ended December 31, 2015 $131,464 $(9,463) $(28,523) $93,478 Allowance for inventories valuation: Year ended December 31, 2016 $19,971 $283,441 $(30,798) $272,614 Year ended December 31, 2015 $59,634 $42,258 $(81,921) $19,971 82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 the Registrant’sForm 8-K (File No. 000-50884) filed on July 10, 2012. 3.2 Restated Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscalquarter ended September 30, 2004. 3.3 Certificate of Designations, incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (file No. 001-36159)filed on September 30, 2016. 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 Third Amendment to Note and Warrant Purchase Agreement effective November 10, 2010,between the Registrant and certain investors named therein (included in Exhibit 10.16d). 4.3b 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. 4.3c 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.). 4.3d Form of Warrant issued pursuant to that certain Sixth Amendment to Note and Warrant Purchase Agreement, dated May 7, 2012, between theCompany and certain investors named therein (included in Exhibit 10.77 of the Registrant’s Registration Statement on Form S-1 (File No.000-50884) filed May 23, 2012). 4.3e Amendment to Warrants of Stereotaxis, Inc., dated May 10, 2012, by and between the Company and the Warrant Holders, incorporated byreference to Exhibit 4.7 of the Registrant’s Registration Statement on Form S-1 (File No. 000-50884) filed May 23, 2012. 4.3f 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. 4.3g 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. 83Table of ContentsNumber Description 4.3h 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 Warrant issued pursuant to that certain Exchange Agreement, dated August 7, 2013, incorporated by reference to Exhibit 10.2 of theRegistrant’s Current Report on Form 8-K (File No. 000-50884) filed on August 8, 2013. 4.5 Form of Warrant incorporated by reference to Exhibit 410.1 of the Registrant’s Current Report on Form 8-K (file No. 001-36159) filed onSeptember 28, 2016.10.1a# Amended and Restated Stereotaxis, Inc. 2012 Stock Incentive Plan, effective February 9, 2016, incorporated by reference to Exhibit 10.2 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 10.2 ofthe Registrant’s Form 10-Q (File No. 001-36159) for the fiscal quarter ended June 30, 2016.10.1c# Form of Restricted Share Unit Terms of Award Under Stereotaxis, Inc. 2012 Stock Incentive Plan, Director Award, incorporated by reference toExhibit 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 reference toExhibit 10.1d of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2012.10.1e# Amended and Restated Stereotaxis, Inc. Stock Incentive Plan, as adopted February 9, 2016, incorporated by reference to Exhibit 10.2 of theRegistrant’s Form 10-Q (File No. 001-36159) for the fiscal quarter ended June 30, 2016.10.2# 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, 2009.10.3a# 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, 2014.10.3b# Amendment to Stereotaxis, Inc. 2009 Employee Stock Purchase Plan, as adopted February 27, 2015, incorporated by reference to Exhibit 10.3of the Registrant’s Form 10-Q (File No. 001-36159) for the fiscal quarter ended March 31, 2015.10.4# 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, 2014.10.5# Form of Amended and Restated Executive Employment Agreement, 2013, between certain executive officers and the Company, incorporatedby reference to Exhibit 10.6 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31, 2012.10.6# Summary of Management Bonus Plan adopted as of February 24, 2015, incorporated by reference to Exhibit 10.4 of the Registrant’s Form 10-Q (File No, 001-36159) for the fiscal quarter ended March 31, 2015.10.7# 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. 84Table of ContentsNumber Description10.8# 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, 2014.10.9a† 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 10.9.10.9b† 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 10.10.10.9c† 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, 2006.10.10a† 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 10.11.10.10b† 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 10.12.10.10c† 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, 2007.10.10d† Second Amendment to Development Alliance and Supply Agreement, dated as of July 18, 2008, between the Registrant and BiosenseWebster, Inc., incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 000-50884) for the fiscal quarter endedSeptember 30, 2008.10.10e 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, 2009.10.10f 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, 2010.10.10g 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, 2010.10.10h† 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, 2010.10.10i 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. 85Table of ContentsNumber Description10.11 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 10.14.10.12† 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 10.16.10.13a† 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, 2004.10.13b 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, 2007.10.13c 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, 2013.10.13d 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, 2013.10.13e Fourth Amendment to Office Lease, effective October 1, 2015, between Registrant and Wexford 4320 Forest Park, LLC, successor to CortexWest Development I, LLC, incorporated by reference to Exhibit 10.13e of the Registrant’s Form 10-K (File No. 001-36159) filed onMarch 11, 2016.10.14a 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, 2012.10.14b 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, 2012.10.14c 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 the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on August 8,2013.10.15a 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, 2011.10.15b 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, 2012.10.15c 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. 86Table of ContentsNumber Description10.15d Third Amendment to Amended and Restated Loan and Security Agreement (Domestic), dated May 7, 2012, between the Company,Stereotaxis International, Inc. and Silicon Valley Bank, incorporated by reference to Exhibit 10.75 of the Registrant’s Registration Statementon Form S-1 (File No. 000-50884) filed May 23, 2012.10.15e 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 year endedDecember 31, 2012.10.15f 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 April 1,2013.10.15g Sixth Loan Modification and Waiver Agreement (Domestic), dated June 28, 2013, between the Company, Stereotaxis International, Inc., andSilicon Valley Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed onJuly 1, 2013.10.15h 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) filedon August 2, 2013.10.15i 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, 2013.10.15j 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 on March31, 2014.10.15k Tenth Loan Modification Agreement (Domestic), dated March 27, 2015, between Silicon Valley Bank, the Company, and StereotaxisInternational, Inc., incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36159) filed onMarch 30, 2015.10.15l Eleventh Loan Modification Agreement (Domestic), dated May 10, 2016, between the Company, Stereotaxis International, Inc., and SiliconValley Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (File No. 001-36159) filed on May 11, 2016.10.16a 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, 2007.10.16b First Amendment to Note and Warrant Purchase Agreement, effective December 29, 2008, between the Registrant and the investors namedtherein, incorporated by reference to Exhibit 10.32 of the Registrant’s Form 10-K (File No. 000-50884) for the fiscal year ended December 31,2008.10.16c 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, 2009.10.16d Third Amendment to Note and Warrant Purchase Agreement, effective November 10, 2010, between the Registrant and the investors namedtherein incorporated by reference to Exhibit 10.21d of the Registrant’s Form 10-K (File No. 000-50884) filed for the fiscal year endedDecember 31, 2010.10.16e 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. 87Table of ContentsNumber Description10.16f 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, 2012.10.16g 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, 2012.10.16h 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, 2013.10.16i 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, 2013.10.17a Loan Agreement dated as of November 30, 2011, by and among the Company, Stereotaxis International, Inc. and Healthcare Royalty PartnersII, L.P. f/k/a Cowen Healthcare Royalty Partners II LLC incorporated by reference to Exhibit 10.22a of the Registrant’s Form 10-K (File No.000-50884) for the fiscal year ended December 31, 2011.10.17b 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, 2011.10.18 Stock and Warrant Purchase Agreement, effective May 7, 2012, between the Company, and certain purchasers named therein, incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-50884) filed on May 8, 2012.10.19a 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, 2014.10.19b Amendment No. 2, dated June 2, 2016, to Consulting Agreement, dated June 4, 2014, between Stereotaxis, Inc. and Eric N. Prystowsky, M.D.filed herewith.10.20 Purchase Agreement, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No. 001-36159) filed onSeptember 28, 2016.10.21 Registration Rights Agreement, incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K (File No. 001-36159) filed on September 28, 2016.21.1 List of Subsidiaries of the Registrant, incorporated by reference to Exhibit 21.1 of the Registrant’s Form 10-K (File No. 000-50884) for thefiscal year ended December 31, 2009.23.1 Consent of Ernst & Young LLP.31.1 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer).31.2 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer).32.1 Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer).32.2 Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer). 88Table of ContentsNumber Description101.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. 89Exhibit 10.19(b)Second Amendment to Consulting AgreementThis Second Amendment, effective as of June 2, 2016 (the “Amendment”) is made to the Consulting Agreement dated June 4, 2014, as amended (the“Agreement”) by and between Stereotaxis, Inc., a Delaware corporation (hereinafter “Stereotaxis”) with offices located at 4320 Forest Park Avenue, Suite 100,St. Louis, Missouri 63108, USA and Eric N. Prystowsky, M.D. (hereinafter “Consultant”).WHEREAS, Consultant and Stereotaxis wish to amend the Agreement to extend the term of the Agreement for a period of one year;NOW, THEREFORE, Stereotaxis and Consultant hereby agree as follows: 1.The Term of the Agreement is hereby extended for a period of one year from the effective date of this Amendment, up to and including June 1,2017.Except as specifically modified by this Amendment, all terms and conditions of the Agreement shall remain in full force and effect.[Signature Page Follows] Page 1 of 2IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. This Amendment may be executed incounterparts, by facsimile transmission or by e-mail delivery of a “.pdf” format data file, each of which shall constitute an original and all of which togethershall constitute one instrument. STEREOTAXIS, INC.By: /s/ Karen W. DurosTitle: Sr. VP & General Counsel Compliance OfficerDate: May 11, 2016 CONSULTANT:By: /s/ Eric N. Prystowsky, M.D.Date: May 11, 2016 Page 2 of 2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-1 No. 333-214255) of Stereotaxis, Inc. pertaining to the registration of 86,065,014 of shares of common stock ofStereotaxis, Inc.of our report dated March 16, 2017, with respect to the financial statements and schedule of Stereotaxis, Inc., included in this Annual Report (Form 10-K) forthe year ended December 31, 2016. /s/ Ernst & Young LLPSt. Louis, MissouriMarch 16, 2017Exhibit 31.1Certification of Principal Executive OfficerI, David L. Fischel,, 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, 2017 /s/ David L. Fischel David L. Fischel Acting 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, 2017 /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, 2016 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, David L. Fischel, Acting Chief Executive Officer of the Company, certify, pursuantto Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, 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, 2017 /s/ David L. Fischel David L. Fischel Acting 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, 2016 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, 2017 /s/ Martin C. Stammer Martin C. Stammer Chief Financial Officer Stereotaxis, Inc.

Continue reading text version or see original annual report in PDF format above