kevin pound, et al. v. stereotaxis, inc., et al. 11-cv-01752-first...
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Case: 4:11-cv-01752-HEA Doc. #: 18 Filed: 03/19/12 Page: 1 of 62 PageID #: 209
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
KEVIN POUND, on Behalf of Himself and All Lead Case No. 4:11-cv-01752-HEA Others Similarly Situated,
CLASS ACTION Plaintiff,
v.
STEREOTAXIS, INC., MICHAEL P. KAMINSKI, and DANIEL J. JOHNSTON,
Defendants.
FIRST CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES EXCHANGE ACT OF 1934
NATURE AND SUMMARY OF THE ACTION
COMES NOW Lead Plaintiff Local 522 Pension Fund ("Plaintiff"), by and through counsel,
and for its First Amended Consolidated Class Action Complaint for Violations of sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), states and alleges based upon
personal knowledge, the investigation of its counsel, information and belief, and publically available
information, as follows:
1. Plaintiff brings this action under the federal securities laws on behalf of itself and all
other persons who purchased or otherwise acquired the publicly traded securities of Stereotaxis, Inc.
("Stereotaxis" or the "Company") between February 28, 2011 and August 8, 2011, inclusive (the
"Class Period"), and were damaged by the conduct asserted herein (the "Class"). Plaintiff asserts
claims against Stereotaxis, its Chief Executive Officer ("CEO"), defendant Michael P. Kaminski
("Kaminski") and its former Chief Financial Officer ("CFO"), defendant Daniel J. Johnston
("Johnston") (collectively, "Defendants"), for violations of sections 10(b) and 20(a) of the Exchange
Act, and U.S. Securities and Exchange Commission ("SEC") Rule 10b-5.
2. Defendant Stereotaxis designs, manufactures, and markets robotic devices used in the
treatment of coronary artery disease and arrhythmias. Stereotaxis' flagship product during the Class
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Period was the Niobe Magnetic Navigation System ("Niobe System"). The Niobe System is a
robotically-controlled catheter ablation device that provides image guided delivery of catheters and
guidewires through the blood vessels and chambers of the heart to treatment sites.
3. During the Class Period, Defendants misled investors by claiming that the Niobe
System had made substantial progress towards " setting a new standard of care " for interventional
cardiology instruments, and had gained broad acceptance in the medical community that would
support a "predictable ramp to [Niobe System] usage and clinical adoption " in the "robust market "
for robotic cardiac ablation solutions. Defendants told investors that the Niobe System had entered a
new phase of accelerating clinical adoption, evidenced by the " strength in global new capital
orders " and increasing "backlog," which they claimed consisted of "outstanding purchase orders and
other commitments that management believes will result in recognition of revenue upon delivery or
installation of [the] systems." Defendants touted " $43 million of backlog, consisting ofoutstanding
purchase orders and other commitments for these systems " as of December 31, 2010. Defendants
repeatedly acknowledged that investors considered the Niobe System backlog a " significant
indicator of future performance " for the Company. Based on these claims of broad acceptance in
the medical community, a rapid and predictable ramp to broad clinical adoption, and growing order
backlog, Defendants published hopelessly aggressive 2011 financial guidance, projecting that new
capital orders would grow in the mid-30% range; total revenue would grow in the mid-20% range;
and gross margins would reach the high-60% range. Defendants re-confirmed this guidance three
months later with the May 2, 2011 announcement of first quarter 2011 results.
4. Unbeknownst to investors, Defendants knew that, far from setting a "new standard for
care" that would ensure a predictable ramp to broad clinical adoption, medical professionals were
increasingly abandoning the Niobe System before becoming clinically proficient due to well-
understood problems in navigating the catheter with the Niobe System's complex magnetic guidance
system. Feedback for the Niobe System was never better than "mixed." These challenges, the
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tremendous investment of time required for physicians to become proficient in using the Niobe
System in real world clinical settings, and the Niobe System's tremendous cost (over $1 million per
unit) resulted in weakening demand for the Niobe System throughout the Class Period. Clinical
adoption and actual sales (as opposed to the "capital orders" Defendants reported on the basis of
mere letters of intent) were declining, not increasing. As negative customer feedback mounted,
stalled accounts rose, and costly training initiatives implemented to reverse these trends failed.
Defendants knew that the Niobe System would never achieve broad clinical adoption because most
customers were demanding "fundamental product improvements."
These undisclosed fundamental flaws in the Niobe System technology undermined
broad clinical adoption and led end-users to hedge their bets. The backlog Defendants touted did not
represent revenues the Company could reasonably expect to realize. The truth was that most of the
"capital orders" in the reported backlog were nothing more than letters of intent that carried no
obligation to actually complete the purchase of a Niobe System. As resistance to the Niobe System
grew, the backlog began to soften – a trend Defendants knew or recklessly disregarded would be
accelerated by their strategy to address the Niobe System's fundamental problems. When
Defendants could no longer hide the truth about declining interest in the Niobe System, they were
forced to take over 62% of purported "capital orders" out of the active backlog. Two Niobe Systems
were removed from backlog in the first quarter of 2011, seven Niobe Systems were removed from
backlog in the second quarter of 2011, three Niobe Systems were removed from backlog in the third
quarter of 2011, and five Niobe Systems were removed from backlog in the fourth quarter of 2011.
The removal of these systems out of backlog was not caused by the completion of any purchases,
but, on the contrary, the Defendants' acknowledgment that they were unlikely to lead to revenue
recognition within a reasonable time period, if at all.
6. Even as Defendants claimed that the Niobe Systems set a new standard for care and
had turned the corner towards a predictable ramp to broad clinical adoption, they were investing
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enormous monetary and engineering resources in a substantially upgraded system, the "Epoch
Platform." The Epoch Platform was designed to address the fundamental deficiencies that had
plagued the Niobe System from inception and had stalled its clinical adoption and completed sales.
Defendants knew but failed to disclose that, against the backdrop of the Niobe System's well-
understood problems, the introduction of the Epoch Platform would be the death-knell for the Niobe
System, undercutting orders in the backlog, stymying future sales, and producing a material three-
quarter revenue gap before sales of the Epoch Platform could even begin to fill the gap. Defendants
knew or recklessly disregarded the fact that the 2011 financial guidance they had provided to the
market could not be achieved because Stereotaxis was on the verge of a critical transition to a "new
standard of care" that would have an immediate and materially negative impact on the Company's
earnings until the Epoch Platform sales ramped in volume.
7. The truth began to emerge on August 8, 2011, when Stereotaxis announced after the
close of trading that second quarter 2011 revenue had declined over 22%, and that the Company's
net loss of $9.7 million doubled the losses reported for the second quarter of 2010. Defendants
withdrew their previous financial guidance and told investors that the Company would provide no
further guidance for 2011. Defendant Kaminski revealed that the Company's financial performance
had been negatively impacted by " a slowdown in Niobe II momentum ." He admitted that " [tJhe
slowdown in Niobe is due to the market's demand for a more efficient solution for complex
ablation procedures ." "Market feedback from users" of the Niobe System was "mixed [,]" and the
Niobe System needed "fundamental product improvements ," including changes in user interface
and navigation technology that would reduce the " long learning curve " to clinical proficiency.
Kaminski also admitted that "[tJhe significant interest in Epoch's dramatically enhanced efficiency
in electrophysiology procedures has intensified the market shift away from the current Niobe II ."
8. The release of disappointing financial results and discontinued guidance only three
months after re-confirming Defendants' bullish financial guidance and claims of a predictable ramp
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to broad clinical acceptance for the Niobe System was accompanied by the announcement that
Stereotaxis' CFO, defendant Johnston, was resigning. Stereotaxis' Chief Technology and Operations
Officer ("CTO"), Doug Bruce ("Bruce") announced his resignation on March 9, 2012 (effective
March 31, 2012), seven months after Johnston resigned. This announcement came just four days
after Kaminski effectively admitted that the Company's backlog was unreliable.
9. The market reacted immediately to these material revelations. On August 9, 2011,
Stereotaxis' stock price immediately plunged over 58% on unprecedented trading volume of
5,462,296 shares, nearly double the Company's previous record daily trading volume, and over
1,600% greater than the average daily trading volume up to that point in 2011, and closed at $1.19.
Defendants' false and misleading statements and material omissions had artificially inflated
Stereotaxis' stock price throughout the Class Period, during which it reached prices as high as $4.24
per share – 256% higher than the August 9, 2011 closing price. As the ramifications for Stereotaxis'
2011 performance became clearer in the weeks following the announcement, Stereotaxis' stock price
continued to decline and sustained losses in the range of another 23%.
JURISDICTION AND VENUE
10. The claims asserted herein arise under section 10(b) and section 20(a) of the
Exchange Act, 15 U.S.C. §78j(b) and §78t(a), and Rule 10b-5 promulgated thereunder by the SEC,
17 C.F.R. §240.10b-5.
11. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.
§1331 and section 27 of the Exchange Act.
12. This Court has jurisdiction over each defendant named herein because each defendant
is an individual who has sufficient minimum contacts with this District so as to render the exercise of
jurisdiction by the District Court permissible under traditional notions of fair play and substantial
justice.
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13. Venue is proper in this Court pursuant to 28 U.S.C. §1391(a) and section 27 of the
Exchange Act because: (i) one or more of the Defendants resides in this District; (ii) a substantial
portion of the transactions and wrongs complained of herein, including the Defendants' primary
participation in the wrongful acts detailed herein, and aiding and abetting and conspiracy in violation
of fiduciary duties owed to Stereotaxis, occurred in this District; and (iii) Defendants have received
substantial compensation in this District by doing business here and engaging in numerous activities
that had an effect on this District.
PARTIES
14. Plaintiff, as set forth in the accompanying certification and incorporated by reference
herein, purchased securities of Stereotaxis during the Class Period and has been damaged thereby.
15. Defendant Stereotaxis is a Delaware corporation that designs, manufactures, and
markets advanced cardiology instruments for use in hospitals, interventional surgical labs, and
electrophysiology labs to treat arrhythmias and other coronary artery disease. The Company's main
product, the Niobe System, is designed to enable physicians to complete more complex
interventional procedures by providing image guided delivery of catheters and guidewires through
the blood vessels and chambers of the heart to treatment sites. The Company also manufactures and
markets the Odyssey System, 1 which consolidates all lab information from multiple sources enabling
doctors to focus on the patient for optimal procedure efficiency. The principal executive offices of
Stereotaxis are located at 4320 Forest Park Avenue, Suite 100, St. Louis, Missouri.
1 Stereotaxis’ Odyssey portfolio of products provides a solution for integrating, recording, and networking interventional lab information within hospitals around the world. Odyssey Vision integrates data for magnetic and standard interventional labs. The Odyssey Cinema Studio then captures a complete record of synchronized procedure data that can be viewed live or from a comprehensive archive of cases performed. The Odyssey solution then enables hospitals to share live and recorded clinical data.
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16. Defendant Kaminski is CEO of Stereotaxis and has been since January 2009,
President and has been since February 2007, and a director and has been since August 2008.
Kaminski was also Chief Operating Officer of Stereotaxis from April 2002 to January 2009.
Kaminski acted as a controlling person of Stereotaxis within the meaning of Section 20(a) of the
Exchange Act as alleged herein. Based on the Company's own Code of Ethics, Kaminski was
required to be familiar with and comply with the Company’s disclosure controls and procedures so
that the Company’s public reports and documents filed with the SEC comply in all material respects
with the applicable federal securities laws and SEC rules. In addition, because Kaminski had direct
or supervisory authority regarding these SEC filings or the Company’s other public communications
concerning its general business, results, financial condition, and prospects, he was required to
consult with other Company officers and employees and take other appropriate steps regarding these
disclosures with the goal of making full, fair, accurate, timely, and understandable disclosure.
17. Defendant Johnston was CFO of Stereotaxis from November 2009 to August 2011,
and a Senior Vice President from September 2009 to August 2011 when he resigned from the
Company. Johnston provided consulting services to Stereotaxis until December 2011. Johnston
acted as a controlling person of Stereotaxis within the meaning of Section 20(a) of the Exchange Act
as alleged herein. The Company's Code of Ethics required Johnston to be familiar with and comply
with the Company’s disclosure controls and procedures so that the Company’s public reports and
documents filed with the SEC comply in all material respects with the applicable federal securities
laws and SEC rules. In addition, because Johnston had direct or supervisory authority regarding
these SEC filings or the Company’s other public communications concerning its general business,
results, financial condition, and prospects, he was required to consult with other Company officers
and employees and take other appropriate steps regarding these disclosures with the goal of making
full, fair, accurate, timely, and understandable disclosure.
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18. The defendants named above in ¶¶16-17 are sometimes collectively referred to herein
as the "Individual Defendants."
19. The Individual Defendants, because of their positions as the top executive officers
responsible for day-to-day management, decision-making, and public disclosures regarding
Stereotaxis' core Niobe System and Epoch Platform products, possessed the power and authority to
control the contents of Stereotaxis' quarterly reports, press releases, and presentations to securities
analysts, money and portfolio managers, and institutional investors. They were directly involved in
determining the content of the Company's reports and press releases alleged herein to be misleading
and were provided with copies of them prior to their issuance. They had the power, opportunity, and
indeed the responsibility to prevent their issuance or cause them to be corrected. Because of their
positions with the Company, and their access to material, non-public information available to them
but not to the public, the Individual Defendants knew that the adverse facts specified herein had not
been disclosed and were being concealed from the public and that the positive representations being
made were materially false and misleading. The Individual Defendants are liable for the false
statements pleaded herein.
20. The Individual Defendants are liable as participants in a fraudulent scheme and
course of conduct that operated as a fraud or deceit on purchasers of Stereotaxis common stock by
disseminating false and misleading statements and/or concealing material adverse facts. Defendants
deceived the investing public as to Stereotaxis' business, operations, and management and the
intrinsic value of Stereotaxis common stock, causing plaintiff and members of the Class to purchase
Stereotaxis common stock at artificially inflated prices and then to lose millions of dollars when
information was later released correcting Defendants' false and misleading statements.
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NON-PARTY WITNESSES WITH PERSONAL KNOWLEDGE OF RELEVANT INFORMATION ABOUT DEFENDANTS' WRONGDOING
21. Confidential Witness 1 ("CW1") was the Director of Clinical Training and
Development at Stereotaxis from February 2010 until approximately September 2011. In her/his
official capacity, CW1 was responsible for designing and implementing a new global clinical
training pathway program for teaching and training clinicians, doctors, and/or electrophysiologists
on how to use the Company's Niobe System. By virtue of CW1's position and responsibilities at the
Company, she/he was privy to customer feedback regarding the Niobe System. CW1was hired by
the Company to address the product deficiencies and long learning curve associated with the Niobe
System. Based on customer feedback she/he received while in the field, CW1 confirmed that the
Niobe System's serious product deficiencies, including difficulty in navigating the catheter
robotically using the Niobe System's complex magnetic guidance system, were well understood by
executives throughout the Company during the Class Period, and had resulted in the slow clinical
adoption of the Niobe System, including many stalled accounts. CW1 reported directly to Paul
Khait ("Khait"), the Vice President of Global Training and Development, who in turn reported
directly to Bruce, CTO and Senior Vice President of Research and Development. Bruce reported
directly to Defendant Kaminski, and is currently (and was during the Class Period) a member of the
Company's executive management team 2 with Defendants Kaminski and Johnston. As Stereotaxis'
CTO, Bruce was responsible for communicating critical issues impacting development and sales of
the Company's core products' (Niobe System and Odyssey System) technical issues to the rest of the
executive management team. Bruce attended executive meetings on a weekly basis with Kaminski
2 In addition to Bruce, whose resignation will be effective March 31, 2012, current members of the Executive Management Team include: defendant Kaminski, CEO; Samuel W. Duggan II ("Duggan"), the Company's new CFO after defendant Johnston resigned; Frank J. Cheng, Senior Vice President, Marketing and Business Development, General Manager, Odyssey Business; David A. Giffin, Vice President, Human Resources; and Karen W. Duros, Senior Vice President, General Counsel and Secretary.
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and Johnston, in which they discussed the Company's core operations, including the performance
and sales of the Niobe System, and the development, trials, and plans for rolling out the Epoch
Platform.
22. Confidential Witness 2 ("CW2") was a Global Director of Sales Training for
Stereotaxis from July 17, 2010 to February 10, 2012. In her/his official capacity, CW2 was
responsible for leading the global sales training efforts for all internal employees and distributors in
order to drive clinical adoption and capital sales of the Niobe System and Odyssey System
equipment. By virtue of her/his position at Stereotaxis, CW2 confirmed that she/he interacted and
collaborated with various departments employees, including sales, marketing, clinical affairs,
engineering, and research and development. CW2 trained Regional Sales Managers (f/k/a Account
Executives) and Account Managers – those with primary responsibility for interfacing with
customers – on how to use the Niobe System (and software) for the various procedures involved in
treating cardiac arrhythmias (such as mapping and ablation to address atrial fibrillation, ventricular
tachycardia, and other similar maladies). 3 Specifically, CW2 taught the staff how to use the
technology to navigate and operate in all four chambers of the heart. CW2 was also responsible for
training Biosense Webster representatives, one of Stereotaxis' collaborative partners, on all software
updates. In addition to training responsibilities, CW2 supervised the team responsible for handling
customer calls in Stereotaxis' customer call center, among the primary sources of physician feedback
regarding the Niobe System. By virtue of CW2's position and her/his job responsibilities of fielding
customer inquiries and complaints, she/he came to understand the Niobe System's fundamental
deficiencies that stymied broad clinical adoption. With only around 150 Niobe Systems in the field,
CW2 was able to gain a firm understanding of the broad-based resistance to the Niobe System
3 Regional Sales Managers were responsible for selling Stereotaxis systems to hospitals. Once sales were completed, Account Managers were assigned to specific accounts and were responsible for training and supporting physicians "on-site" i.e., at the hospital, to increase clinical adoption.
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adoption. CW2 explained that it was extremely frustrating fielding complaints from customers.
She/he would directly report this customer feedback to her/his direct supervisor, Khait, Stereotaxis'
Vice President of Global Training, who, in turn reported directly to Bruce. CW2 confirmed that
Stereotaxis used a software system provided by Salesforce.com to track all information related to
customer accounts, including: System sales, recurring revenue (i.e., disposables sales), service
contracts, warranties, and the like. CW2 confirmed that the information in the system was up-to-
date, available anytime, and accessible by the executive management team. According to CW2,
Kaminski and Johnson were intimately involved in the Company's operations. CW2 stated that
Kaminski "knew every customer, every sale, and was acutely aware of the status of purchase
orders." CW2 also confirmed that Stereotaxis was a small company, and while they had
approximately 200 employees worldwide, she/he estimated that only about 100 associates actually
worked at the corporate headquarters.
23. Confidential Witness 3 ("CW3") was a Director of Installations at Stereotaxis for
nearly six years, from 2004 until June 2010. Though CW3 was employed at the Company before the
Class Period, she/he was able to confirm the Defendants' knowledge of the problems with the Niobe
System. CW3's responsibilities, which generally concerned the installation and support for the
Niobe System at multiple sites in the United States, included: (i) participating in the sale of the
product by providing support to account executives; (ii) contacting customers to coordinate and plan
the installation process; (iii) working with engineers, architects, and contractors to ensure the
electrophysiology lab met required room specifications (e.g., making sure the magnets did not
interfere with room equipment, overseeing the construction/building process); (iv) coordinating
system delivery and installation; and (v) familiarizing physicians with the device and introducing
them to the technology. By virtue of her/his position, CW3 interacted on a daily basis with Regional
Sales Managers and Account Executives representing many of the approximately 150 Niobe
Systems actually in the field. Based on these interactions, CW3 learned of the Company's
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misleading backlog system. CW3 confirmed that sales associates would have conversations with
potential customers about purchasing the Niobe System and the Company would request that the
customer sign a "letter of intent" confirming interest. Most customers signed the letter of intent
because the document contained no commitment from the customer to actually buy the equipment.
In fact, hospitals signed letters of intent when they were interested in the product, but did not or
could not obtain the funds to purchase the technology. CW3 estimated that less than 50% of the
orders in backlog actually amounted to a completed purchase order. CW3 further confirmed that
once customers signed the letter of intent, Stereotaxis used that letter to justify putting the potential
sale into the Company's backlog. CW3 reported this improper behavior to her/his supervisor Ed
Henderson, Director of Installation Operations at Stereotaxis, who in turn reported directly to Frank
Kloiber ("Kloiber"), Vice President of Worldwide Sales until 2009. According to CW3, Kloiber was
defendant Kaminski's "right hand man" and communicated all sales and backlog issues to Kaminski.
24. Confidential Witness 4 ("CW4") was an Account Manager from July 2009 until
February 2010, and similar to CW3, confirmed that the fundamental problems preventing broad
clinical adoption of the Niobe System were well-understood throughout Stereotaxis' management
before the Class Period. CW4 was responsible for increasing clinical adoption and product
utilization by training cardiac electrophysiologists and physicians on how to use Stereotaxis products
in electrophysiology labs to treat cardiac arrhythmias. CW4 provided clinical support and case
coverage to accounts in Delaware, New York, New Jersey, Ohio, Indiana, Kentucky, Michigan, and
Massachusetts. At the onset of CW4's employment, she/he reported to Joshua Stewart ("Stewart")
Director of Clinical Adoption & Utilization until Stewart was replaced by Paige Hargrove, Vice
President of Worldwide Clinical Sales and Training. CW4 confirmed that training customers on the
Niobe System was very time-consuming and difficult, equating to a "courting process." Prior to
system installation, potential customers came to Stereotaxis and were trained to become proficient
with the system. CW4 was responsible for training physicians on simulated cardiac surgery using
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3D Phantom Heart in an electrophysiology lab. Once a Niobe System was purchased and installed
(the "go-live" date), training continued at the customer's on-site location. The majority of CW4's
responsibilities commenced on the "go-live" date and involved on-site training and feedback from
the Niobe System's intended users. CW4 confirmed that the Niobe System suffered from
fundamental product deficiencies that generated significant resistance, including long procedure
times and a steep learning curve. CW4 confirmed that these product flaws led physicians to use the
system "passively," and were preventing broad clinical adoption – problems Defendants admitted
only after the Class Period had plagued the Niobe System from its inception and had prevented
wide-scale acceptance.
SUBSTANTIVE ALLEGATIONS
I. BACKGROUND
A. Ablation Therapies for Cardiac Arrhythmia
25. An arrhythmia is an abnormal rhythm of the heart that occurs as a result of the
disruption of the electrical signals responsible for the normal pumping of the heart muscle.
Arrhythmias result in disturbances of the heart's contractile patterns, either pumping too fast, too
slow, or irregularly, causing the heart to pump less effectively, and resulting in inadequate blood
flow to the body.
26. The most common interventional treatment for arrhythmias involving heart rates that
are too high or are irregular is an electrophysiology ablation, during which diseased tissue is isolated
or destroyed. Prior to performing an electrophysiology ablation, a physician typically performs a
diagnostic procedure in which the electrical signal patterns of the heart wall are "mapped" to identify
the heart tissue generating the aberrant electrical signals.
27. Electrophysiological cardiac mapping studies are invasive tests in which a small
electrode catheter (thin wire) is inserted through the groin or neck of the patient into the heart.
Cardiac mapping may be performed to locate cardiac arrhythmias and directly measure the electrical
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activity from various regions in the heart. The physician stimulates the atria or ventricles of the
heart electrically to determine response. These studies are performed for both diagnostic and
therapeutic purposes. Determining the exact location of an arrhythmia is a pre-requisite for
understanding the pathophysiological mechanisms that underlie the arrhythmia and allows for the
evaluation of the effect of drugs, as well as facilitating surgical catheter-ablation procedures.
28. During an ablation procedure, a catheter is positioned inside one's heart near the
pulmonary veins. Radio energy applied to the tip of this catheter is used to ablate (cauterize) the
heart tissue causing an "electrical disconnection." As a result, the abnormal electrical signals from
the pulmonary veins can no longer reach the rest of the heart. Ablation procedures can be performed
by doctors who perform catheterizations by hand, and by robotically-controlled catheter ablation
devices. Robotics systems, such as Stereotaxis' Niobe System, are meant to accomplish with greater
accuracy what the physicians used to do by hand. Manually controlled catheters and guide wires
used in conventional electrophysiological studies of patients with cardiac arrhythmias may have
inherent functional limitations. According to those involved in the robotically-controlled catheter
ablation device business, the primary advantage is that robotic control provides very precise catheter
navigation. Furthermore, it has been suggested that manual control of the distal tip becomes
increasingly difficult as blood vessels become smaller and less accessible, emphasizing the need for
a robotic system. The difficulty of navigating the catheter with the complex Niobe System's
magnetically driven navigational system became the product's Achilles' Heel.
B. The Niobe System
29. Stereotaxis' robotically-controlled catheter ablation technology was called the Niobe
System. The Niobe System was designed to enable physicians to complete more complex
interventional procedures by providing image guided delivery of catheters and guidewires through
the blood vessels and chambers of the heart to treatment sites using magnets to steer the catheters
and guidewires. Stereotaxis received initial U.S. Food and Drug Administration approval for its
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Niobe System in 2003.
30. The Niobe System employs an array of magnets that create a 360 degree magnetic
field around the patient to orient the tip of a magnetic device in the desired direction. Magnets are
placed at the tip of the catheters and guide wires, which are inserted into the arteries. The opposing
magnetic field immediately surrounding the patient on the catheterization table is used to align the
catheter's magnet. The physician then uses the device to pinpoint the affected area and guide the
catheter to the location. This new way of "steering" catheters differs from the more traditional
method of manually twisting, turning, and pushing the catheter through the arteries. Stereotaxis
claims that this magnetic method of directing movement permits the guidewire or catheter to make
sharp turns, as the movement of the device is not limited by physician dexterity.
31. A physician performing cardiac procedures with the Niobe System is not in the room
with the patient. The procedure is conducted remotely, at a control panel, which provides the
physician with a three dimensional image of the patient's heart during the procedure without being
exposed to radiation.
32. Installing the Niobe System was time-consuming, costly, and disruptive. Each Niobe
System cost approximately $1 million. In addition, a hospital would spend between $250,000 and
$500,000 to build an onsite lab to house the Niobe System. According to CW1, it took at least six
months from the time of sale to actually install the Niobe System. Most of this time was spent
building the onsite lab and shielding the Niobe System, as its intense magnetic field had the tendency
to disrupt surrounding medical machinery.
33. CW1 described the process involved in the sale of a Niobe System. Once a machine
was assembled, Stereotaxis would ship the machine from their site to an offsite warehouse where the
machine was stored until the hospital lab being built was ready. Once the hospital lab was ready, the
machine was taken out of storage and brought to the lab for installation. CW1 confirmed that
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representatives from Stereotaxis were required to be present, monitor, and assist the installation
process.
34. Since 2003, Stereotaxis claims to have sold approximately 150 Niobe Systems
worldwide. Revenue from sales of the Niobe System made up a significant portion of the
Company's overall revenue prior to the Class Period. During 2010, Niobe System sales represented
40% of the Company's revenue. Given the novelty of Stereotaxis' product line, the Company puts a
large premium on maintaining a strong sales force to market its products in the United States and
internationally. Out of 204 individuals employed by the Company as of December 31, 2010, nearly
half (92) were in sales and marketing positions. The Company separated its sales efforts into two
fronts: (i) a direct sales force of senior sales specialists, distributors, and sales agents, supported by
account managers and clinical specialists who provide training, clinical support, and other services to
customers; and (ii) strategic alliances with the sales forces of the Company's imaging partners to co-
market integrated systems on a worldwide basis.
C. The Niobe System's Fundamental Deficiencies
35. Throughout the Class Period, Defendants were aware of the fact that the Niobe
System had fundamental deficiencies that prompted significant adverse feedback from customers.
These fundamental deficiencies included that: (i) the Niobe System's user interface was not user-
friendly; (ii) catheter navigation was very difficult for doctors to master; (ii) physicians took much
longer to complete procedures with the Niobe System than conducting manual procedures; (iii) there
was a steep learning curve associated with the technical aspects of the Niobe System, which caused a
lack of long-term commitment to the product; (iv) many doctors were not willing to complete the
extensive training process associated with becoming proficient in using the Niobe System, a process
that took as long as six months; (v) efficacy of the Niobe System was questionable due to unresolved
issues in controlling catheter contact force; and (vi) there was a low level of technical support from
Stereotaxis. These problems stymied broad clinical adoption by physicians, even in hospitals that
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had installed Niobe Systems. These were not sudden new developments that arose during the Class
Period. Defendants belatedly admitted that they were aware of these problems from the Niobe
System's inception, facts confirmed by former Stereotaxis employees.
36. For example, according to CW1, who worked in the Clinical Training and
Development department at Stereotaxis, it was well understood by Stereotaxis executives that the
Niobe System was not being broadly adopted because of the significant difficulties and time required
to become trained and proficient in its operation. In fact, CW1 stated that she/he was specifically
hired in February 2010 to design and implement a new training program because the Niobe System
was not being adopted by the clinicians, doctors, and electrophysiologists. According to CW1,
based on feedback from clinicians, doctors, and electrophysiologists prior to and during the Class
Period, the Niobe System was not being clinically adopted primarily because there was a very steep
learning curve associated with the technical aspects of implementing and operating the machinery.
This produced a large number of what the Company internally called "stalled accounts." Stalled
accounts were accounts in which the customer acquired the technology (anywhere from one to five
years ago), but the technology was not being used at all or was being used in a very limited way,
such as only having five cases performed per year, "if that." CW1 personally witnessed a large
number of stalled accounts. CW1 confirmed that in 2010, shortly after she/he was hired, stalled
accounts in the United States were already topping 30%. In addition, CW1 stated that there were
very few accounts that: (i) were actually using the technology; (ii) were proficient in the technology;
and (iii) had clinically adopted the technology to perform procedures on a regular basis. CW1
explained that the Company would see usage during the first month of a new client purchasing the
Niobe System, and then usage would completely stop.
37. To address the learning curve, the Company: (i) hired CW1 to design and implement
a new training program called, Five Steps for Mastering Remote Magnetic Navigation ("Five-
Steps"); and (ii) made upgrades to the technology that supported the Niobe System. In addition to
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implementing the training program for new accounts, the Company tasked CW1 with implementing
the training program for stalled accounts to try to "bring the doctors back on board" and get them to
adopt the technology in the clinical setting.
38. The Five-Steps training program, however, required a substantial commitment of
time, which discouraged most doctors from participating. The training program would start by
having new customers/doctors fly to Chicago, where the initial phase of training was conducted in a
lab setting with phantom procedures for eight to ten hours. The new customer/doctor would then
perform five to ten cases with a doctor that was familiar with the technology. The new
customer/doctor would then do ten to fifteen cases with the support of an account manager. After
twenty-five cases were conducted, an advanced training session was held in which the new
customer/doctor practiced performing cases with peers. After fifty cases were conducted, an
advanced training session was held and the new customer/doctor was finally deemed "clinically
independent and efficient." The program was set up so doctors could finish the training in three to
six months. According to CW1, however, it was hard to get doctors to commit to this training
regime and most of those who signed up never completed the training.
39. CW2's experiences were consistent with those of CW1. In addition to training
responsibilities, CW2's team was responsible for fielding the customer call center, thus, CW2 was
privy to physician feedback regarding the Niobe System. By virtue of CW2's position and her/his
job responsibilities of fielding customer complaints, she/he was privy to product deficiencies. With
only approximately 150 Niobe systems in the field, CW2 was able to gain an understanding of the
broad-based resistance to the Niobe System adoption. CW2 discussed the following product flaws
identified by nearly all the physicians/customers:
(a) Procedure Time: It took physicians longer to complete procedures/cases with
the Niobe System than it did if the physicians performed the procedure manually. Specifically,
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procedures that usually took physicians two to three hours to complete manually were taking
physicians approximately five to seven hours with the Niobe System;
(b) Steep Learning Curve: The Niobe System had a steep learning curve and was
hard to learn even after months of training. The more the system was used, the more skilled the
physician became; but increased skill was only obtained through long hours of practice. It took
many months, and sometimes longer, for physicians to become comfortable with the system; and
(c) Efficacy: some physicians were concerned with the efficacy of the actual
ablation and how clinically effective it was compared to other products. Physicians were concerned
about the catheter contact force.
40. These product flaws caused physicians to use the Niobe System "passively" at first,
and then ultimately prevented widespread clinical adoption and use. CW2 explained that it was
extremely frustrating fielding complaints from customers because engineers were not focused on
addressing current issues to ensure broad clinical adoption, but were focused instead on developing
upgrades, bringing new products to the market, and getting them installed. CW2 could not get the
Company to address or fix the problems with the current Niobe System, even after reporting the
adverse customer feedback to her/his direct supervisor, Khait, who reported directly to Bruce, the
CTO was tasked with reporting material technical problems impacting sales of the Niobe System to
CEO, defendant Kaminski.
D. The Epoch Platform, Stereotaxis' "New Standard of Care"
41. Defendants withheld from shareholders the fact that the fundamental problems which
plagued the Niobe System from its inception, stalled its clinical adoption, and jeopardized realization
of revenues from Stereotaxis' backlog, had already led Defendants to invest heavily in the
development of a substantially upgraded system, the Epoch Platform. Even as Defendants claimed
that the Niobe System set the "new standard for care" and was on a predictable ramp towards broad
clinical adoption, they were preparing to introduce within three quarters a new system designed to
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address the well-known fundamental deficiencies that had stalled Niobe System's clinical adoption
and completed sales.
42. CW1 confirmed that in addition to investing in new training procedures to address the
Niobe System's problems, Stereotaxis launched the Epoch Platform, a fundamentally new upgrade
which rendered the Niobe System obsolete. The Epoch Platform upgrade included substantially
improved hardware and software designed to address the myriad of problems plaguing the Niobe
System based on user feedback. According to CW1, the Epoch Platform was "a much better
technology" and the updates "addressed 90–95% of the concerns clinicians had."
43. Defendants introduced the Epoch Platform to the market in April 2011. What the
Defendants knew and failed to disclose to investors when they published their bullish 2011 revenue,
sales, and gross margin projections was that the faltering interest in the Niobe System would be
exacerbated by the launch of the Epoch Platform, with many choosing to wait for this upgrade rather
than make the significant capital and time investment required for purchase, implementation, and
clinical adoption of the Niobe System. Defendants knew 2011 was going to be a transition year for
the Company, yet still published hopelessly aggressive and unattainable guidance of new capital
order growth in the mid-30% range, total revenue growth in the mid-20% range, and gross margins
in the high-60% range.
44. CW1 confirmed that this was widely understood within Stereotaxis. She/he explained
that prior to and during the Class Period, Stereotaxis' existing customer base was unsatisfied with the
Niobe System, resistance that was amplified by anticipation of the Epoch Platform. The facts were
well understood by Stereotaxis executives. Stereotaxis developed and marketed the Epoch Platform
specifically to address the concerns of customers that the Niobe System did not perform as expected
or promised. Indeed, CW1 recalled attending the Heart Rhythm Society's conference in San
Francisco during May 5-7, 2011, in which Stereotaxis had a booth displaying the new Epoch
Platform technology, where the pitch was that the Epoch Platform had been designed to address the
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complaints of doctors who had purchased the Niobe System. Hospitals and clinics that wanted the
newer technology did not want to have to buy the Niobe System only to have to reinvest in the
superior Epoch Platform, and physicians did not want to spend more time learning to use the difficult
Niobe System when the easier-to-use Epoch Platform would soon provide the performance that had
been promised for the Niobe System.
E. Stereotaxis' Deceptive Backlog Reporting
45. Throughout the Class Period, Defendants touted ever-growing backlogs for the Niobe
System and maintained that this specific measure was a "significant indicator of future performance"
for the Company. Defendants repeatedly pointed to the " strength in global new capital orders " and
increasing "backlog," which they claimed consisted of "outstanding purchase orders and other
commitments that management believes will result in recognition of revenue upon delivery or
installation of [the] systems." Defendants touted " $43 million of backlog, consisting ofoutstanding
purchase orders and other commitments for these systems " as of December 31, 2010. Defendants
touted such an aggressive figure while repeatedly acknowledging the fact that investors considered
the Niobe System backlog a "significant indicator of future performance " for the Company.
46. Order backlog can be an important indicator of future revenues of a company
resulting from already recognized new orders, but only where standard procedures for calculating
backlog are followed. Stereotaxis' stated policy was to include in backlog "those outstanding
purchase orders and other commitments that management believes will result in recognition of
revenue upon delivery or installation of our systems." The Company caused investors to believe that
their new orders were determined principally as estimated revenue of accepted purchases.
47. The truth, however, was that the Company treated nonbinding letters of intent as
orders in its reported backlog of Niobe Systems. These letters of intent contained no commitment
from the customers to actually buy a Niobe System or Stereotaxis to tender a Niobe System.
Moreover, Defendants claimed that the backlog reflected orders that "management believes will
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result in recognition of revenue," without disclosing the facts that problems with Niobe System
stymied broad clinical adoption and that the introduction of the Epoch Platform would materially
undercut orders in the backlog. As a result of the multiple contingencies existing at the time a letter
of intent was signed, it is not surprising that less than half of these letters of intent actually turned
into completed purchase orders.
48. Over the course of the Class Period and the period immediately following,
Defendants were forced to remove over 62% of capital orders out of the reported backlog. At the
very least, as admitted by Defendants and depicted by the following chart, two Niobe Systems were
removed from backlog in the first quarter of 2011, seven Niobe Systems were removed from backlog
in the second quarter of 2011, three Niobe Systems were removed from backlog in the third quarter
of 2011, and five Niobe Systems were removed from backlog in the fourth quarter of 2011:
Value Niobe Systems N lobe System (Total Backlog
QuarterEnded Removed Units in Backlog ForAllProducts) 2/3/200 -2 27 $43 M11 1ci 3/31/2011 -2 - $44 Million 6/30/201 -7 20 $33 M11 ion 9/30/2011 -3 16 $29 Million
12/31/2011 -5 10 $20M1H[on
49. Defendant Johnston discussed the two Niobe Systems that were removed from
backlog in the first quarter of 2011 in the May 2, 2011 conference call, stating:
We actually canceled two NIOBE labs. One was in Korea, it was an old order that's been around for over four years and just isn't progressing, so we've taken that out of backlog. Then we also took a system in Madrid. The hospital is having some financial issues, so we are -- we decided to go ahead and take that out of backlog as well. So we canceled two.
50. Defendant Kaminski discussed the seven Niobe Systems that were removed from
backlog in the second quarter of 2011 in the August 8, 2011 conference call, stating:
Turning now to the NIOBE backlog, we've conducted a thorough review to identify orders that are not projected to come to revenue in a reasonable amount of time. We've reduced our backlog by 7 systems to a total of 20 systems that we expect to
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go to revenue in the next 18 months. Thus, to summarize the Epoch platform, the early reaction among key opinion leaders is extremely positive. Epoch is designed to enable a faster, more efficient and dynamic control for all devices of robotic assisted EP procedures while maintaining the NIOBE's recognized benefits of safety, radiation reduction and clinical outcomes.
51. During the November 7, 2011 conference call, the Company's new CFO after
defendant Johnston resigned, Duggan, discussed the three Niobe Systems that were removed from
backlog in the third quarter of 2011, stating:
Let's move on to backlog, which consists of orders that we anticipate will go to revenue in the next 18 months. We conducted a comprehensive evaluation and identified four projects where there is low likelihood that this hurdle will be met and removed these systems from active backlog. Three of these were Niobe projects .
52. Finally, during the March 5, 2012 conference call, Duggan explained that the new
backlog included only ten systems in its entirety, explaining that the Company "removed five
projects from active backlog valued at $7.3 million."
53. Defendants were responsible for Stereotaxis' backlog reports and knew they were
misleading during the Class Period. CW2 confirms that the Company's misleading backlog figures
were brought directly to the attention of defendant Kaminski. According to CW2, Pierre Rivaux
("Rivaux"), Vice President, Europe, Middle East, Africa, discovered that many of the Company's
reported orders were not in fact "real orders." CW2 was responsible for leading the global sales
training efforts for all vice presidents, and as such, had a close working relationship with Rivaux.
Rivaux told CW2 about his discovery of the "fake backlog orders" and his communications
regarding this issue with defendant Kaminski.
54. According to CW2, Rivaux hired Olivier Tintorini ("Tintorini") in or around
December 2010 and shortly after, asked Tintorini to look into the backlog and determine the status of
the purchase orders. CW2 confirmed that Tintorini's investigation into the backlog occurred
between December 2010 and February 2011. CW2 stated that Rivaux told her/him that Tintorini
discovered that "none" of the purchase orders in backlog were in fact "real purchase orders." Rivaux
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also discovered that sales managers, including at least Michael Heuer ("Heuer") and Magnus Holm
("Holm"), were paid bonuses and/or commissions on the fake backlog purchase orders that never
materialized into sales. Rivaux told CW2 he reported the backlog and commission issue directly to
defendant Kaminski and the Board of Directors (the "Board"). CW2 confirmed that Kaminski and
the Board knew about the results of the investigation and had spoken with Rivaux by at least May
2011. CW2 also confirmed that Rivaux told Kaminski he would refuse to accept a "Q1 bonus based
on 'purchase orders' in backlog."
II. DEFENDANTS' MATERIALLY FALSE AND/OR MISLEADING STATEMENTS DURING THE CLASS PERIOD REGARDING STEREOTAXIS' CLINICAL ADOPTION, BACKLOG, AND FINANCIAL GUIDANCE
A. Misleading Statements Regarding Clinical Adoption and Demand for the Niobe System
55. Throughout the Class Period, Defendants touted the efficacy, growing rate of clinical
adoption, and growth potential of the Niobe System. Specifically, on February 28, 2011, Stereotaxis
issued an earnings press release in which defendant Kaminski stated that the Company had made
significant progress in establishing the Niobe System "as a new standard of care." The release stated
in part:
"In 2010 we achieved significant progress toward our goal of establishing our Niobe robotic platform as a new standard of care for [electrophysiology] interventional medicine that we believe offers improved safety, efficacy and cost of care ," said Michael P. Kaminski, President and Chief Executive Officer of Stereotaxis. " The strength in global new capital orders confirms that we continue to make progress in our key initiatives of driving stronger Niobe reference sites and expanding our Odyssey business into standard EP labs."
56. After releasing its 2010 financial results on February 28, 2011, defendants Kaminski
and Johnston hosted an earnings conference call with investors, media representatives, and analysts,
during which Kaminski represented the following:
As we enter 2011 we are more optimistic than ever about our platforms' ability to drive value in [electrophysiology] ablations .
* * *
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This past year we have published and discussed our value for [ventricular tachycardia] procedures and why the distal tip control provides superior safety, efficacy and efficiency . We believe slide seven demonstrates that the market agrees with us. The same kind of pre-and post-2007 installs demonstrates that our [ventricular tachycardia] procedures grew 38% in 2010 , or two to three times the market growth. We are even more pleased that, as seen by these two charts, utilization grew in both groups and significantly (technical difficulty) faster than the (inaudible). This fact and the general market feedback gives us confidence that we are poised to make our technology the standard of care for [ventricular tachycardia] .
* * *
So we continue to see a robust market, obviously, driven by the market growing.
57. Defendants' representations in the February 28, 2011 press release and the conference
call that followed about significant progress towards establishing the Niobe System as the new
standard of care and positive "market feedback" enabling Stereotaxis to take advantage of the
"robust market" for robotic ablation technology were materially false and misleading. Defendants
knew and failed to disclose that market feedback from users of the Niobe System technology was
decidedly "mixed"; that 30% or more accounts were stalled due to the cost, complexity, and the
enormous time investment required to achieve the level of proficiency in magnetic catheter control
that was critical to clinical adoption; and that the Niobe System's users were demanding
"fundamental product improvements," resulting in declining sales, softening backlog, and falling
revenues. Defendants had no basis to tout "confidence that [the Company was] poised to make [its]
technology the standard of care." Defendants knew that broad clinical adoption had in fact stalled
because of the serious product deficiencies in the Niobe System, including the fact that it took
physicians longer to complete procedures with the Niobe System than it did if the physicians
performed the procedure manually; that the design of the user interface was not user-friendly,
causing the actual navigation of the catheter to be very difficult to master for the doctors; that there
was a steep learning curve associated with the technical aspects of the Niobe System which caused a
lack of commitment to the product; that many doctors were not willing to complete the extensive
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training process associated with becoming proficient in using the Niobe System, a process that took
as long as six months; that efficacy of the Niobe System was questionable due to issues relating to
catheter contact force; and that there was a low level of technical support from Stereotaxis. In fact,
Defendants pushed development and introduction of the Epoch Platform upgrades to address the
Niobe System's fundamental flaws since 2010, and Stereotaxis marketed the Epoch Platform on this
basis.
58. Defendants' statement that "strength in global new capital orders confirms that we
continue to make progress in our key initiatives of driving stronger the Niobe System reference
sites" also was fundamentally misleading in light of these facts – deception that was compounded by
Defendants' misleading reporting of order backlog for the Niobe System. Stereotaxis' claimed order
backlog did not represent revenues the Company could reasonably expect to realize. The truth was
that most of the "capital orders" in the reported backlog were nothing more than signed letters of
intent that carried no obligation to actually complete the purchase of a Niobe System. Over the
course of the Class Period and the period immediately following, Defendants were forced to move
over 62% of capital orders out of the reported backlog.
59. During the February 28, 2011 conference call, defendant Kaminski falsely touted the
Company's "predictable ramp to [Niobe System] usage and clinical adoption":
Our top operating initiative continues to be driving adoption of the NIOBE platform in our installed base. As we look at our Company today we believe we have crossed the chasm into the early majority and are now entering a much more predictable ramp to NIOBE usage and clinical adoption.
* * *
To summarize, we believe we are near the tipping point for our technology to be widely adopted, led by sites installed after 2010 .
60. In fact, however, the Company had not "crossed the chasm" of user resistance and
was nowhere near reaching a tipping point that would lead to a predictable ramp to Niobe System
usage and clinical adoption. As confirmed by CW1, doctors, clinicians, and electrophysiologists
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familiar with the Niobe System agreed that it was not being broadly clinically adopted primarily
because of the high cost and very steep learning curve associated with the technical aspects of the
machinery. The main reason CW1 was hired in the first place was to implement a training program
to try to "bring the doctors back on board" and decrease the growing number of stalled accounts.
The majority of calls CW2's team received while fielding the call center were complaints from
physicians regarding the Niobe System's fundamental deficiencies that stymied clinical adoption. As
confirmed by CW4, the product flaws that led physicians to use the system "passively" and
prevented clinical adoption were problems Defendants knew for years, even prior to the Class
Period. Moreover, as admitted by defendant Kaminski in his August 8, 2011 disclosures, the
Company was experiencing "a slowdown in Niobe II momentum" "due to the market's demand for a
more efficient solution for complex ablation procedures."
61. Kaminski ended the February 28, 2011 conference call by reassuring investors that
the Company's 2011 "sales pipeline of prospective customers" provided the Company "comfort that
the [Niobe System] will continue to grow in orders and revenue." Kaminski stated, in relevant part:
Next, let's look at our capital part of our business model. While we are disappointed with the NIOBE revenue in 2010, we believe it reflect the softness of incoming orders in 2009 and a one-time event with an imaging partner. Conversely, the incoming orders in 2010 reflect a growing interest and adoption of the NIOBE platform , fueled by the excitement in the installed base .
* * *
Importantly, our sales pipeline of prospective customers continues to strengthen. At the beginning of 2011 our pipeline has over 200 accounts which are moving through a decision process in the next two years, which provides us comfort that the NIOBE will continue to grow in orders and revenue. Additionally, the NIOBE interest has grown in all geographic markets, especially in Asia, as we are just entering this fast-growing market. I'm happy to announce that last week our partner received regulatory approval for the magnetic ThermaCool catheter in China. We have seven systems installed in China awaiting this product introduction. This milestone is critical to driving success in the installed base and to capitalizing on the tremendous growth in [electrophysiology] procedures forecasted over the next 10 years.
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62. Kaminski's statements in the February 28, 2011 conference call regarding the
"growing interest and adoption of the [Niobe System] platform," and especially his statement that
this was "fueled by the excitement in the installed base," were false and misleading. As confirmed
by CW1, doctors, clinicians, and electrophysiologists all complained about the very steep learning
curve associated with mastering the Niobe System. CW1 also confirmed that these doctors,
clinicians, and electrophysiologists, "the installed based," reiterated that this learning curve was
debilitating and was the prime reason why the Company would not be able to achieve adoption of
the Niobe System. Defendants knew about the lack of clinical adoption of the Niobe System as
demonstrated by the fact that they hired CW1 to "bring the doctors back on board" at a time when
stalled accounts were growing and reaching at least 30% of all Niobe System purchases. CW2
confirmed that it was not "excitement" she/he heard from the "installed base" when fielding the call
center for user feedback. Instead, CW2 confirmed that her/his team continuously received
complaints from doctors regarding the Niobe System's fundamental deficiencies. Contrary to the
"growing interest and adoption of the [Niobe System]," touted by Kaminski in the February 28, 2011
conference call, his August 8, 2011 disclosures proved that the Company was actually experiencing
"a slowdown in Niobe II momentum" "due to the market's demand for a more efficient solution for
complex ablation procedures." Even as Defendants claimed that the Niobe System set the new
standard for care and would achieve broad clinical adoption, they were preparing to introduce within
three quarters a new system designed to address the known fundamental deficiencies that had
plagued the Niobe System from its inception and had stalled clinical adoption and completed sales.
Defendants knew but failed to disclose that problems with Niobe System clinical adoption and the
introduction of the Epoch Platform would materially stymie future sales of the Niobe System before
the Epoch Platform could fill the gap.
63. On April 27, 2011, Stereotaxis issued a press release announcing the introduction of
its upgraded technology, the Epoch Platform. This press release disclosed for the first time
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Stereotaxis' introduction of a "new standard of care." Defendants failed to address the immediate
materially negative impact the introduction of the Epoch Platform would have on the Company's
2011 financial results. The release stated in part:
Stereotaxis, Inc. (Nasdaq: STXS) today announces the introduction of its new Stereotaxis Epoch(TM) platform, a comprehensive solution for any electrophysiology lab which combines the recognized benefits of remote magnetic catheter control, the efficiency of remote robotic device manipulation, and the power of the Odyssey platform, enabling highly sophisticated procedural data integration and transmission. The Epoch (TM) platform will be unveiled at the annual Heart Rhythm Society meeting May 5-7, 2011 in San Francisco, CA.
The Stereotaxis Epoch solution is the beginning of a new modular platform designed to meet the broad range of clinical needs physicians face today and in the future. Building on the strength of Magnetic Navigation's exceptional safety profile and significant radiation reduction, the Epoch platform features the latest technological breakthroughs in Magnetic Navigation, which will lead to faster, more efficient, and dynamic magnetic catheter control . In addition, the Epoch platform will seamlessly integrate Stereotaxis' Vdrive(TM) mechanical robotic platform for remote manipulation of a growing array of devices, such as loop diagnostic catheter and sheath.
The Epoch solution delivers value well beyond the lab with the power of Stereotaxis' Odyssey(TM) solution-an unprecedented offering which integrates the complex array of clinical data into synchronized, high-definition view delivering real-time clinical information anywhere at physicians' fingertips. The Odyssey solution empowers hospital executives to drive initiatives which improve care, enhance performance, and increase referrals and market services throughout global communities.
"We are excited to introduce our Epoch solutions to the EP market as we are committed to developing solutions that meet the most critical needs of our customers, while supporting any preferred clinical treatment technique," said Michael P. Kaminski, President and Chief Executive Officer of Stereotaxis. "Early feedback from key opinion leaders suggests that the Epoch platform enables us to deliver a much more efficient and enhanced EP workflow while maintaining our excellent profile in safety, radiation reduction and clinical outcome."
64. Stereotaxis' May 2, 2011 press release also reiterated the Company's introduction of
the Epoch Platform. Defendants reiterated that the Epoch Platform would address the problems with
catheter control and efficiency that made the Niobe System so time intensive to master, but failed to
address the negative impact its introduction would have on the Company's short-term financial
results, primarily Niobe System sales and backlog:
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Product Advancements to be Featured at Heart Rhythm Society's 32nd Annual Scientific Sessions
Stereotaxis announced that its new Stereotaxis EpochTM platform, which enhances the efficiency and versatility of the Niobe system, will be unveiled at the Heart Rhythm Society's (HRS) 32nd Annual Scientific Sessions in San Francisco during May 5-7, 2011. The Stereotaxis Epoch solution is designed to meet the broad range of clinical needs physicians face today and in the future. Building on the strength of Magnetic Navigation's exceptional safety profile and significant radiation reduction, the Epoch platform features the latest technological breakthroughs in Magnetic Navigation, which will lead to faster, more efficient, and dynamic magnetic catheter control .
"We remain focused on developing solutions that meet the most critical needs of our customers, while supporting any preferred clinical treatment technique . Epoch is designed to significantly reduce procedure time for all types of robotic-assisted EP procedures, especially for complex ablation procedures. We believe the Epoch platform will enable a much more efficient and enhanced EP workflow while maintaining our excellent profile in safety, radiation reduction and clinical outcomes," stated Mr. Kaminski.
65. Defendants' representations in the April 27, 2011 and May 2, 2011 press releases
were materially false and misleading because Defendants knew and failed to disclose to investors
that the Company's transition away from the Niobe System and into the Epoch Platform would have
dire consequences on the Company's financial prospects in the short term. Defendants knew that
interest in the Niobe System was faltering due to difficulties and inefficiencies in using the
technology, and that Stereotaxis' own, long-planned new technology introduction would soon render
the Niobe System obsolete. While the announcement of the Epoch Platform's release crushed
already-weak Niobe System sales, the manufacture, installation, and training of the Epoch Platform
would not be completed until well into 2012, creating a three quarter revenue gap. The first round of
Epoch Platforms was not slated to be shipped until December 2011. New customer training on the
Epoch Platform would take as long as six months. Stereotaxis' August 8, 2011 press release
regarding Stereotaxis' second quarter results was the first time Defendants disclosed to the public the
impact of the Company's transition. Defendants admitted that revenue had declined over 22% and
net losses had doubled from the second quarter of 2010. The introduction of the Epoch Platform's
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adverse effect on the short-term financial health of the Company was foreseeable because
Defendants knew of the problems plaguing the Niobe System and understood that customers would
not invest money in the old system when the new system addressed these issues, including user
interface design and procedure time.
B. False Statements about Stereotaxis' Backlog
66. Defendants further deceived investors by encouraging them to believe that the Niobe
System had moved to a predictable ramp in "clinical adoption" by touting the "strength in global new
capital orders" and a backlog that purportedly included "those outstanding purchase orders and other
commitments that management believes will result in recognition of revenue upon delivery or
installation of [the] systems." Throughout the Class Period, Defendants repeatedly trumpeted the
ever-growing backlog for the Niobe System and acknowledged that investors rely on this metric as a
"significant indicator of future performance." Stereotaxis' improper system of determining and
reporting their alleged backlog of orders, however, provided no reasonable basis for fairly
representing future revenue the Company expected to recognize, however, because it was comprised
of nothing more than non-binding letters of intent. Over the course of the Class Period and the
period immediately following, Defendants were forced to move over 62% of capital orders out of the
reported backlog.
67. On February 28, 2011, Stereotaxis issued a press release touting continued
momentum in new capital orders. The release stated in part:
"In 2010 we achieved significant progress toward our goal of establishing our Niobe robotic platform as a new standard of care for EP interventional medicine that we believe offers improved safety, efficacy and cost of care," said Michael P. Kaminski, President and Chief Executive Officer of Stereotaxis. " The strength in global new capital orders confirms that we continue to make progress in our key initiatives of driving stronger Niobe reference sites and expanding our Odyssey business into standard [electrophysiology] labs ."
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68. After releasing its press release on February 28, 2011, defendants Kaminski and
Johnston hosted an earnings conference call with investors, media representatives, and analysts,
during which Johnston published the following projections for Niobe System sales for 2011:
Finally, I'd like to give you our first look at 2011. I would like to break this down by product line as growth characteristics and the predictability of each of these product groups varies. From a base of about $21.9 million (technical difficulty) in [ 2010], we expect the midpoint of our range for NIOBE to be around $26 million. NIOBE will grow in the high-teen percentage for 2011. We recognized revenue on 21 systems in 2010, and we expect to place between 23 and 25 systems in 2011. This increase reflects the increase in our current backlog of NIOBEs which stands at 27 systems versus 23 a year ago. The forecasted revenue per system for 2011 is about the same as 2010. The largest variable in how many systems go to revenue is the nature of today's backlog versus 2010 beginning backlog . At 30%, our NIOBE backlog is an Asia-Pacific region today. At the beginning of 2010 that number was about 10%. Variability in construction cycles in Asia-Pacific is greater. However, we do have a potential upside of we have success with our expanded distributor strategy in Europe and if accelerated worldwide adoption occurs.
69. On March 11, 2011, in its Form 10-K, signed by defendants Kaminski and Johnston,
Stereotaxis again claimed that the backlog reflected orders that "management believes will result in
recognition of revenue," without disclosing the facts that problems with Niobe System clinical
adoption and the introduction of the Epoch Platform would materially undercut orders in the backlog
and stymie future sales of the Niobe System before the Epoch Platform would be ready to fill the
gap. Worse, Defendants acknowledge that investors understand backlog to be a "significant
indicator of future performance," and do not debunk this perception. The Form 10-K stated in part:
As of December 31, 2010, we had approximately $43 million of backlog, consisting of
outstanding purchase orders and other commitments for these systems. We had backlog of
approximately $37 million and $45 million as of December 31, 2009 and 2008, respectively,
using the same active backlog criteria. Of the December 31, 2010 backlog, we expect
approximately 67% to be recognized as revenue over the course of 2011.
* * *
If we are unable to fulfill our current purchase orders and other commitments on a timely basis or at all, we may not be able to achieve future sales growth.
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Our backlog, which consists of purchase orders and other commitments, is considered by some investors to be a significant indicator of future performance. Consequently, negative changes to this backlog or its failure to grow commensurate with expectations could negatively impact our future operating results or our share price. Our backlog includes those outstanding purchase orders and other commitments that management believes will result in recognition of revenue upon delivery or installation of our systems.
70. Along with signing the Form 10-K for fiscal year 2010, defendants Kaminski and
Johnston signed required certifications pursuant to the Sarbanes-Oxley Act of 2002 that falsely
attested to the purported accuracy and completeness of its disclosures and effectiveness of the
Company's internal controls. The certification stated in pertinent part, as follows:
Certification of Principal Executive Officer
I, Michael P. Kaminski, certify that:
1. I have reviewed this annual report on Form 10-K of Stereotaxis, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
* * *
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 11, 2011 /s/ MICHAEL P. KAMINSKI
Michael P. Kaminski President & Chief Executive Officer Stereotaxis, Inc.
(Principal Executive Officer)
* * *
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Certification of Principal Financial Officer
I, Daniel J. Johnston, 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
* * *
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 11, 2011 /s/ DANIEL J. JOHNSTON
Daniel J. Johnston Chief Financial Officer
Stereotaxis, Inc. (Principal Financial
Officer)
71. Defendants Kaminski's and Johnston's representations in the Company's February 28,
2011 press release, and the conference call that followed, and the Form 10-K filed on March 11,
2011 were materially and knowingly false and misleading. Defendants knew and failed to disclose
that the "strength in global new capital orders" and the reported backlog were not genuine indicators
of progress or future performance. Stereotaxis did not wait until it entered into a contract that was
considered legally effective and compulsory to recognize a new order. Instead, Stereotaxis included
letters of intent as orders in their reported backlog of Niobe Systems. These letters of intent
contained no commitment from the customers to actually buy a Niobe System or Stereotaxis to
tender a Niobe System. Defendants exacerbated the misleading impact of these statements by failing
to disclose that the Company was planning to introduce an upgrade that would address many of the
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inefficiencies and quality issues experienced by users of the Niobe System, rendering Niobe Systems
obsolete in the eyes of its current and potential customers, including customers who had made non-
binding "capital orders." As a result of the multiple contingencies existing at the time a letter of
intent was signed, less than half of these letters of intent actually turned into completed purchase
orders – a fact Defendants withheld from investors until the end of the Class Period. Between the
beginning of the second quarter of 2011 and the end of 2011, Stereotaxis removed at least fifteen
Niobe Systems out of its active backlog. This was over a 62% reduction and only related to
removals not linked to recognized revenue base upon completed orders.
72. Defendants took care to try to protect themselves by issuing general warnings that
"some of our purchase orders and other commitments are subject to contingencies that are outside
our control," and that "these orders and commitments may be revised, modified or cancelled, either
by their express terms, as a result of negotiations or by project changes or delays[.]" The Form 10-K
stated:
We cannot assure you that we will recognize revenue in any particular period or at all because some of our purchase orders and other commitments are subject to contingencies that are outside our control . In addition, these orders and commitments may be revised, modified or cancelled, either by their express terms, as a result of negotiations or by project changes or delays. System installation is by its nature subject to the interventional lab construction or renovation process which comprises multiple stages, all of which are outside of our control. Although the actual installation of our Niobe system requires only a few weeks, and can be accomplished by either our staff or by subcontractors, successful installation of our system can be subjected to delays related to the overall construction or renovation process. If we experience any failures or delays in completing the installation of these systems, our reputation would suffer and we may not be able to sell additional systems. We have experienced situations in which our purchase orders and other commitments did not result in recognizing revenue from placement of a system with a customer. In addition to construction delays, there are risks that an institution will attempt to cancel a purchase order as a result of subsequent project review by the institution or the departure from the institution of physicians or physician groups who have expressed an interest in the Niobe or Odyssey system.
73. Defendants, however, omitted to disclose the known facts that the backlog of Niobe
System "orders" was made up largely of signed letters of intent that customers were likely to walk
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away from after experiencing the problems Defendants knew most would have in achieving clinical
adoption, and especially after introducing the Epoch Platform designed to address those problems.
As noted, Stereotaxis subsequently removed over 62% worth of capital orders from its reported
backlog.
C. False and Misleading 2011 Financial Guidance
74. During the Class Period, Defendants issued false and misleading projections about
Stereotaxis' 2011 financial performance knowing that the projections lacked a reasonable basis and
aware of undisclosed facts that seriously undermined the accuracy of the projections.
75. On February 28, 2011, Stereotaxis issued a press release announcing its fiscal full
year and fourth quarter 2010 financial results, and issuing an aggressive 2011 business outlook.
Defendants forecast that Stereotaxis would achieve new capital order growth in the mid-30% range,
total revenue growth in the range of 20% to 30%, gross margins in the high-60% range, and
operating expenses in the range of $62-63 million.
76. Defendants' aggressive forecasts were material to investors and had the desired effect.
Analysts immediately responded to the positive forecasts and announcements by reaffirming their
"Buy" ratings and issuing price targets of $4.50 and $5 per Stereotaxis share, well above Stereotaxis'
$3.79 share price. Madison Williams and Company's March 1, 2011 report, entitled "4Q10 Review:
Odyssey Reviving Growth and Paving the Way to Profitability," stated "We reiterate out Buy rating
and $5 price target," noting that its analysts were impressed by both the Niobe System and Odyssey
Systems' alleged "growth" in the market. Collins Stewart's March 1, 2011 report, entitled "Trends
Continue to Improve; Reiterate Buy" stated "4Q results and outlook should quell investor concerns."
77. On May 2, 2011, Stereotaxis issued a press release announcing its first quarter 2011
financial results largely reiterating their reckless forecasts. Defendants announced that first quarter
results missed expectations, but stated that continued strong momentum in new capital orders,
revenue for the Company's Odyssey System, and growth in recurring revenues would enable
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Stereotaxis to meets its prior guidance. The Company again projected 2011 new capital order
growth in the mid-30% range, total revenue growth in the range of 20% to 30%, gross margins in the
high-60% range, and operating expenses in the range of $64 million to $65 million. The only change
was a mere $2 million increase for operating expenses. Stereotaxis refused to admit that the
financial expectations it provided to the market earlier in the year could not and would not be
achieved based on what they knew about stalled clinical adoption of the Niobe System, softening
backlog orders, and the immediate materially negative impact the introduction of the Epoch Platform
would have on the Niobe System sales before the Epoch Platform revenues would fill the gap.
78. Less than three months later, Defendants not only withdrew these projections, but
suspended all guidance for the remainder of 2011. Defendants had no reasonable basis for these
forecasts when they were made. At the same time that Defendants published this guidance, the
Company had only two primary sources of capital growth: Niobe System and Odyssey System sales.
Niobe System and Odyssey System sales accounted for over 44% of revenues. Defendants
Kaminski's and Johnston's forecasts in the February 28, 2011 press release were materially false and
misleading because they knew and failed to disclose that market feedback from users of the Niobe
System technology was "mixed," demanding "fundamental product improvements." Defendants
were fully aware of clinicians' complaints regarding the Niobe System long before February 28,
2011, and acted on them, devoting significant resources over the course of 2010 to the development
of the Epoch Platform upgrades that addressed the Niobe System's need for "fundamental product
improvements." The several well-understood problems with the Niobe System included that it took
physicians longer to complete procedures with the Niobe System than it did to performed the
procedures manually; that the design of the user interface was not user-friendly causing the actual
navigation of the catheter to be very difficult for the doctors to master; that there was a steep
learning curve associated with the technical aspects of the Niobe System, which caused a lack of
commitment to the product; that many doctors were not willing to complete the extensive training
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process associated with becoming proficient in using the Niobe System, a process that took as long
as six months; that efficacy of the Niobe System was questionable due to issues relating to catheter
contact force; and that there was a low level of technical support from Stereotaxis.
79. Defendants knew and failed to disclose and account for the fact that the Niobe System
was not being clinically adopted primarily because there was a very steep learning curve associated
with the technical aspects of the machinery. CW1 was hired to implement a training program to try
to "bring the doctors back on board." CW1 witnessed a number of stalled accounts where customers
that had acquired the technology were not using it or were using it in a very limited way, such as
only having five cases performed per year, "if that." CW1's conservative estimate was that at least
30% of the accounts in the United States were completely stalled. CW1 explained that the Company
would see usage during the first month of a new client purchasing the Niobe System, and then usage
would completely stop. CW1 stated that there were very few accounts that were actually using the
technology, were proficient, and clinically adopting the technology to perform procedures. As
confirmed by CW2, the majority of the calls her/his team received while fielding the call center were
complaints from physicians regarding the Niobe System's fundamental deficiencies that stymied
clinical adoption. Moreover, as admitted by defendant Kaminski in his August 8, 2011 disclosures,
the market demanded "a more efficient solution for complex ablation procedures."
80. Defendants' projections also failed to account for the immediate and material negative
impact their introduction of the Epoch Platform would have on Niobe System sales before Epoch
Platform sales could make up for the lost revenues. Defendants were well aware that interest in the
Niobe System was faltering due to difficulties and inefficiencies in using the technology, and that
Stereotaxis' own, long-planned new technology introduction would soon render the Niobe System
obsolete and materially undercut sales, as well as backlog "orders." Defendants knew and failed to
disclose to investors that the Company's transition away from the Niobe System and into the Epoch
Platform would have dire consequences for the Company's financial prospects in the short term.
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While the announcement of the Epoch Platform's release crushed already-weak Niobe System sales,
the manufacture, installation, and training of the Epoch Platform would not be completed until well
into 2012, creating a three-quarter revenue gap. The first round of Epoch Platforms was not even
slated to be shipped until December 2011. The introduction of the Epoch Platform's adverse effect
on the short-term financial health of the Company was foreseeable because Defendants knew of the
problems plaguing the Niobe System and understood that customers would not invest money in the
old system when the new system addressed these issues, including user interface design and
procedure time. This was a material omission that misled investors and their assessment of the
financial health and business prospects of Stereotaxis.
THE TRUTH IS REVEALED
81. On August 8, 2011, after the market closed, Stereotaxis issued a press release
announcing disappointing second quarter fiscal 2011 financial results, including a larger than
expected net loss of $9.7 million, or $0.18 diluted earnings per share, and a 22% decline in net
revenue for the second quarter ended June 30, 2011. Citing "corporate developments and an
uncertain business environment," Defendants' bullish statements about growth based on the
predictable ramp to broad clinical adoption of the Niobe System were abruptly withdrawn along with
Stereotaxis' 2011 financial guidance. Defendants announced that they would provide no further
guidance "until there is more predictability to the Company's magnetic platform business."
Stereotaxis also announced that its CFO, defendant Johnston, would resign effective August 15,
2011.
82. Defendant Kaminski revealed that the rosy picture the Company had painted for rapid
and predictable growth in Niobe System sales did not reflect reality. Kaminski admitted that the
Company's falling revenue was directly attributable to the "market's demand for a more efficient
solution to complex ablation procedures" than the Niobe System provided – facts Defendants knew
throughout the Class Period, but only now openly admitted. Kaminski further admitted that the
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Epoch Platform would replace the Niobe System and establish a "new standard of care." Defendants
also acknowledged for the first time the materially negative impact on Niobe System sales, backlog,
and Company revenues "as the market awaits the availability of Epoch." The press release stated in
relevant part:
"Our revenue and new capital order performance is being impacted by a slowdown in Niobe II momentum and the related impact on the Odyssey business due to delays of Odyssey installations in Niobe labs," said Michael P. Kaminski, President and Chief Executive Officer of Stereotaxis. "The slowdown in Niobe is due to the market's demand for a more efficient solution for complex ablation procedures. We successfully introduced our new Epoch platform, the Niobe II replacement , at our industry's most widely attended event, the Heart Rhythm Society annual meeting. The significant interest in Epoch's dramatically enhanced efficiency in electrophysiology (EP) procedures has intensified the market shift away from the current Niobe II. "
Kaminski continued, "Epoch's technological improvements over Niobe II provide the foundation to accelerate broad adoption of our technology. We are encouraged by the significant market interest that Epoch is generating as a new potential standard of care for EP interventional medicine. Since Epoch's release, we have scheduled 36 site visits with Niobe customers and potential customers to review the next generation system. The early, very positive reaction among key opinion leaders suggests that Epoch enables a faster, more efficient and dynamic magnetic catheter control for all types of robotic-assisted EP procedures while maintaining Niobe's recognized benefits in safety, radiation reduction and clinical outcome. We are focused on converting the strong interest into orders as quickly as possible, and plan for initial shipments to customers in the fourth quarter 2011. "
The Company generated global new capital orders of $4.4 million in the second quarter, which were comprised of two Niobe systems, as well as $1.7 million in orders related to Odyssey. Capital orders in the second quarter 2010 were $10.2 million.
Epoch and Odyssey Commercial Plan
In order to ensure successful commercialization of Epoch and Odyssey platforms, as well as conserve resources, Stereotaxis is implementing a wide ranging plan that includes rebalancing and reducing operating expenses by approximately 15 to 20 percent. This plan is designed to minimize the Company's cash burn, while continuing to fund R&D investment in key growth areas. In addition, Stereotaxis is working on several options to raise cash with minimal or no dilution to shareholders. The Company expects the impact of these initiatives on operating expenses will begin to occur in the fourth quarter of 2011.
"We are committed to taking the necessary actions to improve our operating performance, enhance our competitive position and strengthen the business for the
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long term," Kaminski said. "We need to take difficult but prudent actions to significantly reduce our costs as the market awaits the availability of Epoch , and we are immediately implementing overhead cost-reduction initiatives that will significantly realign and reduce operating expenses and minimize cash burn, while maintaining R&D investments to fund high growth opportunities like the continued advancement of our robotic technology platform."
83. After releasing its second quarter fiscal 2011 financial results on August 8, 2011,
defendants Kaminski and Johnston hosted an earnings conference call with investors, media
representatives, and analysts, during which Kaminski finally admitted the full extent of the long-
known fundamental problems with the Niobe System that had stymied clinical adoption, slowed
sales, and undercut reported backlog and revenues:
There are two factors impacting NIOBE II revenue. First, the market's demand for a more efficient solution for complex ablation procedures has caused mixed and sometimes negative reviews in our install base, the slowing of the sales momentum of the current NIOBE product. Second, the introduction of the Epoch and the positive market reaction is causing a rapid shift away from the current NIOBE II. We clearly underestimated the rate of market shift and forecasted a slower transition and although the shift ultimately is very positive to the Company, in the near term it will cause a disruption to our system orders and revenue expectations.
Let's start with NIOBE II trends. The market feedback from users has been mixed even after we have invested in developing the scientific proof regarding safety and efficacy, revising our training, improving customer site support and expanding our physician peer-to-peer education . It became apparent that the NIOBE product needed fundamental product improvements. After multiple discussions with users, we determined that the primary barrier in driving adoption was the inefficiency of the remote case and the long learning curve. Our new Epoch platform is designed to address these barriers and thus far the market response suggests we have succeeded.
* * *
Additionally, the new Epoch interface is designed to shorten the learning curve for physicians . The exact impact will vary by physician, but early testing supports efficiency improvements up to 30 minutes shorter for an AF case . We're very pleased with the significant level of interest in recent symposiums and at our exhibit booths with physicians clearly interested in understanding how this platform can meet their needs. We're focused on converting their strong interest into orders as quickly as possible and are aggressively following up on the high level of physician interest at HRS and EUROPACE to generate new leads for system placements and refocus on improved utilization that -- with accounts that have historically been under performers.
* * *
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Turning now to the NIOBE backlog, we've conducted a thorough review to identify orders that are not projected to come to revenue in a reasonable amount of time. We've reduced our backlog by 7 systems to a total of 20 systems that we expect to go to revenue in the next 18 months. Thus, to summarize the Epoch platform, the early reaction among key opinion leaders is extremely positive. Epoch is designed to enable a faster, more efficient and dynamic control for all devices of robotic assisted EP procedures while maintaining the NIOBE's recognized benefits of safety, radiation reduction and clinical outcomes.
* * *
In summary, the NIOBE II adoption is continuing based on strong scientific evidence. The positive utilization trends gives us confidence that the foundation of science, along with our Epoch improvements and efficiency, will position us well to become the standard of care for complex ablations .
* * *
Regarding financial guidance, we announced on our press release that we've withdrawn previous financial guidance for 2011 and are temporarily suspending providing financial guidance until we have more predictability to the ramp in our magnetic platform business.
84. These fundamental problems with the Niobe System and their impact on clinical
adoption and future sales were not, in fact, news to Defendants. As the Confidential Witnesses made
clear, these problems were well-understood when Defendants published in February 2011 and re-
published in March 2011 their wildly aggressive financial projections. For years, both during and
before the Class Period, Defendants were aware of the fundamental problems plaguing the Niobe
System. Defendants admitted that they had implemented new training programs, customer site
support, and physician peer-to-peer education programs to reverse stalled clinical adoption of the
Niobe System's costly, slow, overly complex, and difficult to use magnetic navigation system. In
this context, Defendants' claim to have merely under-estimated the impact introduction of the Epoch
Platform would have rings hollow. The Niobe System's problems were not only well-understood,
but they were among the key reasons for Defendants' substantial investment in the development of
the Epoch Platform.
85. When the true state of market acceptance of the Niobe System became public,
Stereotaxis' shares sank from a closing pricing of $2.85 on August 8, 2011, to a closing price of - 42 -
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$1.19 at the end of the day on August 9, 2011. As depicted by the graph below, this amounted to a
single-day decline of 58% on volume of over 55 million shares:
86. Analysts immediately understood the impact the Epoch Platform-induced revenue gap
would have on Stereotaxis' financial performance. On August 8, 2011, Oppenheimer & Co. Inc.
("Oppenheimer") issued a report entitled, "Disappointing 2Q/Outlook; Lowering Rating to Perform,"
that succinctly reported that previous price targets would have to be re-evaluated as analysts' models
had assumed the truth of Defendants' representations that the Niobe System had turned the corner
toward a predictable ramp to broad clinical acceptance:
We are lowering our rating on [Stereotaxis] to Perform from Outperform and removing our $5 price target. [Stereotaxis] reported a disappointing 2Q and rescinded guidance. [Stereotaxis] continues to struggle with Niobe system placements and believes the impact of the improved Epoch platform will take time .
* * *
However, with uncertainty high and the path to improved performance now longer, we lower our rating.
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87. Following the August 8, 2011 disclosures, ThinkEquity LLC downgraded the
Company's stock from "Buy" to "Hold" and cut its price target from $6 to $2 per share. Specifically
highlighting the reduced backlog, analyst Sameer Harish ("Harish") openly questioned the credibility
of Defendants' reported backlog: "Backlog reductions and withdrawn guidance also call into
question the quality of system orders in backlog." Mr. Harish also noted the serious revenue gap
induced by the Company's Epoch Platform transition, a material fact that was known but omitted by
Defendants throughout the Class Period:
We lower our 2011 and 2012 revenues to reflect uncertainty regarding the timing of revenue recognition as well as delays in orders as hospitals elect to wait for the new Epoch system. While we expect the Epoch system advancements to significantly benefit the physician experience with the Stereotaxis magnetic robotic system, we cautiously remove Epoch revenue benefits from our estimate until 2H2012.
88. Stereotaxis filed a Form 10-Q on August 9, 2011, that explained in detail the facts
Defendants had previously withheld regarding the reasons behind falling Niobe System sales, the
materially negative impact of the Epoch Platform introduction, and the true state of the Company's
unreliable backlog. The Form 10-Q stated in part:
Revenue decreased from $15.0 million for the three months ended June 30, 2010 to $11.6 million for the three months ended June 30, 2011, a decrease of approximately 23%. Revenue from the sale of systems decreased from $9.4 million to $5.0 million, a decrease of approximately 47%, primarily due to a decrease in the number of NIOBE systems sold. We recognized revenue on three NIOBE systems and a total of $1.6 million for ODYSSEY and CINEMA systems during the 2011 period, versus seven NIOBE systems and a total of $2.5 million for ODYSSEY and CINEMA systems during the 2010 period.
* * *
We expect to have negative cash flow from operations in 2011 . Throughout 2011, we expect to continue the development and commercialization of our existing products and, to a lesser extent, our research and development programs and the advancement of new products into clinical development. We expect that our sales and marketing expenditures and our general and administrative expenses will increase in 2011 in order to support our product commercialization efforts. During a recent review of our backlog, we identified certain sales in which revenue recognition is uncertain due to factors including the migration from Niobe II to Niobe ES. As a result, we have removed systems from our backlog which could negatively impact future revenue recognition. Until we can generate significant cash
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flow from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of our public offerings, private sales of our equity securities and working capital and equipment financing loans. In the future, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financings. We cannot accurately predict the timing and amount of our utilization of capital, which will depend on a number of factors outside of our control.
POST CLASS PERIOD REVELATIONS AND ADMISSIONS
89. As further revelations clarified the magnitude of the impact of the Niobe System's
failure to attain broad clinical adoption, the Epoch Platform's introduction, and Stereotaxis'
unreliable backlog, the Company's shares were hammered by massive selling, dropping the price by
over 71% from the Class Period high by September 2011.
90. After releasing its financial results for the fourth quarter of fiscal year 2011 and the
year ended December 31, 2011, on March 5, 2012, defendant Kaminski and the Company's new
CFO, Duggan, hosted an earnings conference call with investors, media representatives, and
analysts. In this conference call, Kaminski finally explained to investors what he should have
disclosed during the Class Period: 2011 was going to be "a challenging year" for the Company due
to the impact of the "robotic platform transition." " Niobe system orders and revenue stalled as
customers waited to see the upgraded technology. " This was a material omission that should have
been disclosed to investors during the Class Period, and especially when the Epoch Platform was
introduced in late April 2011. Kaminski stated, in relevant part:
Clearly, 2011 was a challenging year for us, in which we experienced both successes and setbacks. During 2011, as we recognized the impact of our robotic platform transition on our financial results, we took immediate actions, including significantly reducing operating expenses, raising capital, and executing on the Epoch platform commercial launch. While we're confident these actions will lead to improved operating performance beginning in 2012, we know we have much work to do. We're determined to lead this company to profitability and will continue to take the necessary steps to improve on our financial position as we execute on our current business plan and growth strategies. To that end, our immediate priority is to address the capital needs of the company.
* * *
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Third, we reduced our operating expenses, the run rate by 20% by the end of 2011 to align costs to the revenue growth. Operating expenses are at our lowest level since 2005. Offsetting these successes we experienced some setbacks. While we are excited about the potential of the Epoch platform, the platform transition had a negative impact on 2011 financial results. Following the introduction of the Epoch product at the HRS meeting in May, Niobe system orders and revenue stalled as customers waited to see the upgraded technology. The Odyssey business was also negatively impacted as Odyssey orders and installations -- at installations in Niobe lab slowed . At the same time, while we had significant interest in Odyssey from standard labs, the anticipated larger deals did not materialize.
91. During the March 5, 2012 conference call, defendant Kaminski further exposed the
truth behind the Company's admittedly unreliable backlog, but only under pressure from analysts:
[ANALYST:] Let's see here. Let's talk a little bit about the backlog. I think you mentioned a couple of moving parts, or a $7 million taken off of the backlog last quarter and you added $3 million. Has anything changed, while we're talking about numbers, has anything changed in terms of how you think about or qualify these large projects?
I'm just trying to figure out that $10 million that you have in the backlog. Has the criteria by which you were judging those and including them in the probability of them being completed in 18 months changed over the last six months or so? In other words, should we, perhaps, look to see that number to be above the core predictables as we had in the 2012?
[KAMINSKI:] Jose, let me -- Sam can address the puts and takes of the backlog. Let me address the overarching question you asked first. If you look at the backlog today, there is 10 systems in backlog. I think we believe 8 of the 10 should be in a position to go to revenue this year . Two are sitting right on the beginning of next year in the 18-month window.
We've taken everything outside of that, out of the backlog. And then, the 10 we're confident will go to be an Epoch system in that period of time , the next 18 months . All right? So, and we think that we're now in a position to make that a very predictable part of how we look at revenue roll forward in the Company's business model.
92. Duggan, the Company's new CFO who had replaced defendant Johnston, confirmed
Kaminski's statements and added his own thoughts about the Company's new more "predictable"
backlog:
[WJe are attempting to make the backlog more predictable as we move forward. And by that I mean we are trying to make sure that as new items come into backlog, that we have a very -- a high level of confidence that they will turn to revenue.
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93. Between the beginning of the second quarter of 2011 and the end of 2011, Stereotaxis
removed at least fifteen Niobe Systems out of its active backlog. This was over a 62% reduction and
only related to removals not linked to recognized revenue based upon completed orders. Kaminski
and Duggan's carefully guarded statements about the Company's new, higher confidence approach to
backlog reporting confirmed the loose and deceptive nature of the Company's backlog during the
Class Period. Kaminski's and Duggan's statements also confirmed what Defendants had known all
along: against the backdrop of the Niobe System's well-understood problems, high cost, and stalled
clinical adoption, the introduction of the Epoch Platform was the death-knell for the Niobe System.
All ten units in Stereotaxis' new, reliable backlog were Epoch Platforms.
ADDITIONAL FACTS EVIDENCING DEFENDANTS' SCIENTER
94. Stereotaxis is a relatively small company with approximately 200 employees during
the Class Period. According to the Company's filed Form 10-K for FY2010, "as of December 31,
2010, [Stereotaxis] had 204 employees, 41 of whom were engaged directly in research and
development, 92 in sales and marketing activities, 27 in manufacturing and service, 9 in regulatory,
clinical affairs and quality activities, 10 in training activities and 25 in general administrative and
accounting activities." CW2 estimated that only 100 employees worked at the St. Louis, Missouri
headquarters. Defendants Kaminski and Johnston were close to and directly involved in the
Company's operations, sales, and financial reporting. CW2 confirmed that Kaminski "knew every
customer, every sale, and was acutely aware" of the status of each purchase order.
95. During the Class Period, the Company's business was almost entirely derived from
the sale of its flagship Niobe System and Odyssey Cinema Portfolio to a limited number of
customers, along with limited additional sales of disposable catheters to existing Niobe System
customers/users. During each quarter of the Class Period, the Company sold less than a handful of
Niobe Systems. During the entire Class Period, approximately half of the Company's revenues were
derived from the sale of only five Niobe Systems and $5.3 million worth of Odyssey Cinema
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Portfolio sales. Given the outsized impact each individual order and sale of a Niobe System would
have on quarterly revenues, Defendants Kaminski and Johnston were acutely aware of the actual
status of orders in backlog, the myriad of problems customers and employees reported in qualifying
physicians for clinical adoption, and the urgent need for a fundamentally upgraded system to replace
the Niobe System.
96. CW2 confirmed that Stereotaxis used the Salesforce.com software system to track all
information for customer accounts, including backlog orders, sales, service claims, warranty claims,
and other related data for each Niobe System. The information was kept up-to-date and was
accessed by Stereotaxis' small and centralized executive management team. According to the
Company's website, the Company lists only six people under the section entitled, "Executive
Management Team." During the Class Period, both defendants Kaminski and Johnston were a part
of this executive management team and therefore had access to the real-time order, sales, and
backlog data on the Company's Salesforce.com software system.
97. Further, defendants Kaminski and Johnston were members of the centralized
executive management team with Bruce. As Stereotaxis' CTO, Bruce was responsible for
communicating critical issues impacting development and sales of the Company's core products'
(Niobe System and Odyssey System) technical issues to the rest of the executive management team.
As confirmed by CW1, Bruce attended executive meetings on a weekly basis with Kaminski and
Johnston, in which they discussed the Company's core operations, including the performance and
sales of the Niobe System, and the development, trials, and plans for rolling out the Epoch Platform.
98. The foregoing facts support a strong inference that, throughout the Class Period,
Defendants knew the extent of the product deficiencies plaguing the Niobe System, the timing and
inevitable impact of the Epoch Platform rollout on Niobe System backlog, sales, and revenue, the
true state of the Company's backlog, and the effect the combination of these factors would have on
the Company's 2011 financial results. Defendants had hoped that they could conceal the truth about
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the Niobe System in part because they knew that the Company was entering a critical transition
period to the new Epoch Platform, and was in desperate need of capital to finance. Defendants knew
that the Company could not afford to lose its ability to raise capital to fund necessary expenditures
during this transition period, including, but not limited to research and development of the Epoch
Platform to address the collapse in clinical adoption, customer support, backlog and sales of the
failed Niobe System; marketing of the Epoch Platform to new customers and the Company's existing
customer base; and training efforts to facilitate clinical adoption of the Epoch Platform. As revealed
in the Company's Form 10-K for fiscal 2011, filed on March 15, 2012, the Company's ability to raise
capital during and after the Class Period was in serious jeopardy:
In addition, as of the date of the filing of this Form 10-K, our public float is below $75 million. As a result, we are limited in our ability to file new shelf registration statements on SEC Form S-3 and/or to fully use the remaining capacity on our existing registration statements on SEC Form S-3. We have relied significantly on shelf registration statements on SEC Form S-3 for most of our financings in recent years, so any such limitations may harm our ability to raise the capital we need . In addition, if we are unable to remain compliant with our bank financing covenants, or if we are not able to timely file and make effective registration statements prior to the dates required under the federal securities laws, we would be ineligible to use Form S-3 for a 12-month period. Under those circumstances, until we are again eligible to use Form S-3, we would be required to use a registration statement on Form S-1 to register securities with the SEC or issue such securities in a private placement, which could increase the cost of raising capital.
99. Defendants decided that Stereotaxis could not afford to publish the truth about the
Niobe System's failure and the financial implications of the impending multi-quarter revenue gap
that would follow introduction of the Epoch Platform. Instead, Defendants continuously touted a
strong backlog of orders and bullish 2011 financial guidance to maintain their façade of continued
growth and preserve the artificially high stock price for Stereotaxis common stock as long as
possible before their house of cards collapsed, and published the truth only after the collapse of the
backlog, new orders, and revenues forced their hand.
LOSS CAUSATION
100. As detailed above, Defendants' false and misleading statements caused Stereotaxis'
stock to trade at artificially inflated prices and operated as a fraud and deceit upon Class Period
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purchasers of Stereotaxis securities. From February 28, 2011 until August 8, 2011, Stereotaxis'
stock price traded at inflated prices between $2.67 and $4.24 per share. After the market closed on
August 8, 2011, Stereotaxis revealed the truth about its business health and prospects, resulting in an
immediate and statistically significant decline in the aftermath of the August 8, 2011 disclosure.
Class members who had purchased Stereotaxis stock during the Class Period suffered economic loss
as a result of the revelation of material facts that contradicted and corrected Defendants' earlier
misleading statements and omissions.
101. On August 8, 2011, the Company announced financial results for the second quarter
of 2011, which had plummeted from second quarter 2010 levels and fell drastically below
expectations, and rescinded their guidance for the full year 2011. On the poor results, defendant
Kaminski commented that Stereotaxis' "revenue and new capital order performance is being
impacted by a slowdown in Niobe II momentum." Indeed, systems sales contracted sharply in the
second quarter of 2011, falling 47% versus the second quarter of 2010, "primarily due to a decrease
in the number of Niobe Systems sold" due to the fact that (a) "the [Niobe System] needed
fundamental product improvements"; (b) the "primary barrier" to adoption was "the inefficacy of the
remote case and the long learning curve" of the [Niobe System]; and (c) customers would wait for
the Epoch Platform before investing millions of dollar in purchasing and thousands of man-hours in
trying to master the Niobe System. Contrary to Defendants' assertion that the Niobe System had
achieved a predictable ramp toward clinical acceptance and forecasts of significant revenue growth,
Stereotaxis experienced a revenue gap, withdrew its previous financial guidance, and suspended all
future guidance.
102. Defendants also corrected their false and misleading statements made during the
Class Period regarding a metric that they knew and acknowledged in Stereotaxis' March 11, 2011
Form 10-K was particularly important to investors, backlog. During the August 8, 2011 conference
call, Stereotaxis announced that it dramatically slashed its Niobe System backlog by over 25% for
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the second quarter of 2011 alone. Over the course of the Class Period and the period immediately
following, however, Defendants were forced to remove over 62% of capital orders out of the
reported backlog.
103. The market quickly acknowledged the materiality of these new facts. Following the
August 8, 2011 disclosures, analyst Harish issued a report in which he downgraded the Company's
stock from $6 to $2 per share. Specifically highlighting the reduced backlog and rescinded
guidance, Harish wrote in his report: "Backlog reductions and withdrawn guidance also call into
question the quality of system orders in backlog."
104. Oppenheimer removed its $5 price target for the Company and lowered its rating to
"perform" from "outperform," blaming the Company's continuing "struggle with the Niobe system
placement."
105. The August 8, 2011 announcement removed the artificial inflation in Stereotaxis'
stock. When the market opened for trading the day after this corrective disclosure, the Company's
stock price fell from $2.85 to close at $1.19 on August 9, 2011, a drop of over 58%.
106. Stereotaxis' stock price declined significantly more than the changes in its peer group
and the S&P 500. As a result, the price decline following this disclosure provides a measurement of
Class members' economic losses. The declines in the Company's stock price following the
Company's disclosures compared to the changes in the peer group and S&P 500 negate any inference
that the losses suffered by Class members were caused by changed market or industry conditions or
Company-specific facts unrelated to the fraudulent conduct. The following chart illustrates the
changes in Stereotaxis' stock price during the Class Period compared to the S&P 500 and the Russell
2000 Medical Equipment Growth Index 4 :
4 The Russell 2000 Medical Equipment Growth Index measures the performance of the small-cap growth segment of medical equipment manufacturers and marketers in the U.S. equity universe. It includes companies with higher price-to-value ratios and higher forecasted growth values
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Time After 8/8/11 STXS % S&P 500 Index Russell 2000 Disclosure Change % Change Medical % Change
One Day - 8/9/2011 -58.2% 4.7% 6.6%
One Week - 8/15/2011 -59.3% 7.6% 7.5%
FRAUD-ON-THE-MARKET DOCTRINE
107. At all relevant times, the market for Stereotaxis securities was an efficient market for
the following reasons, among others:
(a) Stereotaxis securities met the requirements for listing, and was listed and
actively traded on the NASDAQ, a highly efficient and automated market;
(b) Stereotaxis filed periodic public reports with the SEC and the NASDAQ;
(c) Stereotaxis regularly communicated with public investors via established
market communication mechanisms, including regular disseminations of press releases on the
national circuits of major newswire services and other wide-ranging public disclosures, such as
communications with the financial press and other similar reporting services;
(d) Stereotaxis was followed by several leading securities analysts, including
Madison Williams and Company, Collins Stewart, JMP Securities, and Oppenheimer, and the
business press;
(e) Numerous National Association of Securities Dealers member firms,
including Morgan Stanley, Goldman Sachs, and Merrill Lynch, were active market-makers in
Stereotaxis stock at all times during the Class Period, confirming that investors were able to trade
continuously during market hours in an orderly, liquid, and efficient market; and
(f) According to the Company’s Form 10-Q filed with the SEC on August 9,
2011, as of August 1, 2011, there were over 55.4 million shares of Stereotaxis common stock
outstanding. During the Class Period, on average, over 1.7 million shares, or greater than 3% of the
outstanding shares of Stereotaxis stock were traded on a weekly basis, demonstrating a very active
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and broad market for Stereotaxis stock and permitting a very strong presumption of an efficient
market.
108. As a result of the foregoing, the market for Stereotaxis securities promptly digested
current information regarding Stereotaxis from all publicly available sources and reflected such
information in the prices of the securities. Under these circumstances, all purchasers of Stereotaxis
securities during the Class Period suffered similar injury through their purchase of Stereotaxis
securities at artificially inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
109. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. The
safe harbor does not apply to the false and misleading statements of current facts alleged herein. As
to the misleading forward looking statements challenged herein, the published cautionary statements
failed to address known risks that had already materialized and that could cause actual results to
differ materially from those in the purportedly forward-looking statements. Moreover, to the extent
that the statutory safe harbor is determined to apply to any forward-looking statements pleaded
herein, Defendants are liable for those false forward-looking statements because at the time each of
those forward-looking statements was made, the speaker had actual knowledge of information
demonstrating that the forward-looking statement was materially false or misleading, and/or the
forward-looking statement was authorized or approved by an executive officer of Stereotaxis who
knew that the statement was false when made.
CLASS ACTION ALLEGATIONS
110. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules
of Civil Procedure on behalf of all persons who purchased or otherwise acquired Stereotaxis
securities during the Class Period. Excluded from the Class are Defendants and their families, the
officers and directors of the Company, at all relevant times, members of their immediate families and
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their legal representatives, heirs, successors, or assigns, and any entity in which Defendants have or
had a controlling interest.
111. The members of the Class are so numerous that joinder of all members is
impracticable. The disposition of their claims in a class action will provide substantial benefits to
the parties and the Court. Stereotaxis has over 55 million shares of stock outstanding, owned by
hundreds if not thousands of persons.
112. There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class which
predominate over questions which may affect individual Class members include:
(a) whether the Exchange Act was violated by Defendants;
(b) whether Defendants omitted and/or misrepresented material facts;
(c) whether Defendants' statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they were made, not misleading;
(d) whether Defendants knew or deliberately disregarded that their statements
were false and misleading;
(e) whether the price of Stereotaxis securities was artificially inflated; and
(f) the extent of damage sustained by Class members and the appropriate measure
of damages.
113. Plaintiff's claims are typical of those of the Class because Plaintiff and the Class
sustained damages from Defendants' wrongful conduct.
114. Plaintiff will adequately protect the interests of the Class and has retained counsels
who are experienced in class action securities litigation. Plaintiff has no interests which conflict
with those of the Class.
115. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy.
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COUNT I
Against Defendants for Violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5
116. Plaintiff incorporates by reference and realleges each and every allegation contained
above, as though fully set forth herein.
117. During the Class Period, Defendants disseminated or approved the false statements
specified above, which they knew or deliberately disregarded were misleading in that they contained
misrepresentations and failed to disclose material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading.
118. Defendants violated section 10(b) of the Exchange Act and SEC Rule 10b-5 in that
they:
(a) employed devices, schemes, and artifices to defraud;
(b) made untrue statements of material facts or omitted to state material facts
necessary in order to make the statements made, in light of the circumstances under which they were
made, not misleading; or
(c) engaged in acts, practices, and a course of business that operated as a fraud or
deceit upon Plaintiff and others similarly situated in connection with their purchases of Stereotaxis
securities during the Class Period.
119. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of
the market, they paid artificially inflated prices for Stereotaxis securities. Plaintiff and the Class
would not have purchased Stereotaxis securities at the prices they paid, or at all, if they had been
aware that the market prices had been artificially and falsely inflated by Defendants' misleading
statements.
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COUNT II
Against Defendants for Violation of Section 20(a) of the Exchange Act
120. Plaintiff incorporates by reference and realleges each and every allegation contained
above, as though fully set forth herein.
121. Defendants acted as controlling persons of Stereotaxis within the meaning of section
20(a) of the Exchange Act. By reason of their positions with the Company, Defendants had the
power and authority to cause Stereotaxis to engage in the wrongful conduct complained of herein.
Defendants controlled Stereotaxis and all of its employees. By reason of such conduct, Defendants
are liable pursuant to section 20(a) of the Exchange Act.
122. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and
members of the Class suffered damages in connection with their respective purchases and sales of
the Company's securities during the Class Period.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff prays for judgment as follows:
A. Declaring this action to be a proper class action pursuant to Rule 23 of the Federal
Rules of Civil Procedure and certifying Plaintiff as a representative of the Class;
B. Awarding Plaintiff and the members of the Class damages, including interest;
C. Awarding Plaintiff reasonable costs and attorneys' fees; and
D. Awarding such equitable/injunctive or other relief as the Court may deem just and
proper.
Dated: March 19, 2012 CAREY, DANIS & LOWE JAMES J. ROSEMERGY
s/James J. Rosemergy JAMES J. ROSEMERGY (#50166MO)
8235 Forsyth Boulevard, Suite 1100 St. Louis, Missouri 63105 Telephone: (314) 725-7700 Facsimile: (314) 721-0905 E-mail: [email protected]
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Liaison Counsel for Plaintiff
ROBBINS UMEDA LLP BRIAN J. ROBBINS CRAIG W. SMITH JULIA M. WILLIAMS KEVIN S. KIM 600 B Street, Suite 1900 San Diego, CA 92101 Telephone: (619) 525-3990 Facsimile: (619) 525-3991 E-mail: [email protected]
[email protected] [email protected] [email protected]
ROBBINS GELLER RUDMAN & DOWD LLP
TRICIA MCCORMICK 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: (619) 231-1058 Facsimile: (619) 231-7423 E-mail: [email protected]
Co-Lead Counsel for Plaintiff
698303
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Case: Case: 4:1-cv-01752-HEA 4: 1 1-cv-01752-HEA Doc. Doc. #: #: 18 12-1 Filed: Filed: 03/912 1 2/09/11 Page: Page: 58 2 of of 62 4 ID Page ID : # : 72 266
CERTIFICATION OF NAMED PLAINTIFF PURSUANT TO FEDERAL SECURITIES LAWS
LOCAL 522 PENSION FUND ("Plaintiff') declares:
1. Plaintiff has reviewed a complaint and authorized the filing of a motion
for lead plaintiff in this action
2. Plaintiff did not acquire the security that is the subject of this action at the
direction of plaintiff's counsel or in order to participate in this private action or any
other litigation under the federal securities laws,
3. Plaintiff is willing to serve as a representative party on behalf of the
class, including providing testimony at deposition and trial !, if necessary.
4. Plaintiff has made the following transaction(s) during the Class Period in
the securities that are the subject of this action:
Security Transaction Date Price Per Share
See attached Schedule A.
5. Plaintiff has not sought to serve or served as a representative party in a
class action that was filed under the federal securities laws within the three-year
period prior to the date of this Certification except as detailed below:
6. The Plaintiff will not accept any payment for serving as a representative
party on behalf of the class beyond the Plaintiff's pro rata share of any recovery,
Si iRIOiXS
Case: Case: 4:1-cv-01752-HEA 4: 1 1-cv-01752-HEA Doc. Doc. #: #: 18 12-1 Filed: Filed: 03/912 1 2/09/11 Page: Page: 59 3 of of 624 ID Page ID : # : 73 267
except such reasonable costs and expenses (including lost wages) directly relating to
the representation of the class as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this 7 day ofcç2Ol1,
LOCAL 522 PENSION FUND
By:___
Its:
S.! ER}OTAX!S
Case: Case: 4:1-cv-01752-HEA 4: 1 1-cv-01752-HEA Doc. Doc. #: #: 18 12-1 Filed: Filed: 03/912 1 2/09/11 Page: Page: 60 4 of of 62 4 ID Page ID : # : 74 268
SCHEDULE A
SECURITIES TRANSACTIONS
Acquisitions
Date Type/Amount of Acquired Securities Acquired Price
04/05/2011 4,850 $4.11 06/2212011 500 $3.45 06/2212011 5,950 $3.48
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Case: 4:11-cv-01752-HEA Doc. #: 18 Filed: 03/19/12 Page: 62 of 62 PageID #: 270
CERTIFICATE OF SERVICE
I hereby certify that on March 19, 2012, I electronically filed the foregoing with the
Clerk of the Court using the CM/ECF system which will send notification of such filing to
the e-mail addresses denoted on the Court's electronic mail notice list.
I certify under penalty of perjury under the laws of the United States of America
that the foregoing is true and correct. Executed March 19, 2012.
s/James J. Rosemergy JAMES J. ROSEMERGY