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Pound v. Stereotaxis, Inc.

United States District Court, E.D. Missouri, Eastern Division

March 18, 2014

KEVIN POUND, on Behalf of Himself and All Others Similarly Situated, Plaintiff,
v.
STEREOTAXIS, INC., MICHAEL P. KAMINSKI, and DANIEL J. JOHNSTON, Defendants

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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For Kevin Pound, Plaintiff: Laurie Largent, ROBBINS AND GELLER, LLP, San Diego, CA; James J. Rosemergy, CAREY AND DANIS, Clayton, MO.

For Local 522 Pension Fund, Plaintiff: Craig W. Smith, Julia M. Williams, LEAD ATTORNEYS, ROBBINS ARROYO LLP, San Diego, CA; Laurie Largent, ROBBINS AND GELLER, LLP, San Diego, CA; James J. Rosemergy, CAREY AND DANIS, Clayton, MO.

For Stereotaxis, Inc., Daniel J. Johnston, Michael P. Kaminski, Defendants: Brandon K. Crase, Michael J. Faris, LATHAM AND WATKINS, LLP, Chicago, IL; John C. Tang, PRO HAC VICE, LATHAM & WATKINS LLP, Menlo Park, CA; Peter A. Wald, PRO HAC VICE, LATHAM & WATKINS LLP, San Francisco, CA.

For Local 522 Pension Fund, Movant: James J. Rosemergy, LEAD ATTORNEY, CAREY AND DANIS, Clayton, MO; Laurie Largent, ROBBINS AND GELLER, LLP, San Diego, CA.

OPINION

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OPINION, MEMORANDUM AND ORDER

HENRY EDWARD AUTREY, UNITED STATES DISTRICT JUDGE.

This matter has now come before the court on Defendants' Motion to Dismiss Plaintiff's First Consolidated Amended Class Action Complaint. [Doc. #31]. Plaintiff has filed a response in opposition to the motion. [Doc. #48]. Defendants has filed a reply. [Doc. #49]. The parties have also had the opportunity to supplement their authorities in their memoranda. For the reasons set forth herein the Motion to Dismiss will be granted.

Factual Background[1]

Plaintiff has filed his complaint against Stereotaxis, its Chief Executive Officer (" CEO" ), Michael P. Kaminski (" Kaminski" ) and its former Chief Financial Officer (" CFO" ), 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 during the alleged class period between February 28, 2011 and August 8, 2011.

Stereotaxis designs, manufactures, and markets robotic devices for use in complex cardiac interventions to treat arrhythmias and other coronary artery disease. Stereotaxis's flagship product has been its Niobe system. This system allows doctors to navigate a catheter (or other device) through blood vessels and into the chambers of the heart using computer-controlled externally applied magnetic fields. Because these products require dedicated rooms, the sales cycle for Stereotaxis products can be lengthy and subject to contingencies outside of Stereotaxis's control. Additionally, Stereotaxis developed the Odyssey Enterprise Solution, which consolidates all laboratory information into one source for optimum efficiency. Finally, Stereotaxis receives revenue from the sale of proprietary disposable devices, ongoing license and service contracts, and catheters.

Plaintiff has alleged further that defendants misled investors by claiming the Niobe system 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

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million of backlog, consisting of outstanding 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. They assert that by the same token Defendants knew that the Niobe System would never achieve broad clinical adoption because most customers were demanding " fundamental product improvements."

Plaintiff alleges that Defendants knew or recklessly disregarded the softening backlog would be accelerated by the strategy to address the fundamental problem of the Niobe System.

Stereotaxis's February 2011 Statements.

On February 28, 2011, Stereotaxis issued a press release announcing year-end and fourth-quarter 2010 financial results. That release was followed by a same-day conference call with investors. On March 11, 2011, Stereotaxis filed its Form 10-K. Although Niobe-based revenue in 2010 was lower than expected, Stereotaxis experienced an increase in orders and completed sales, and decreased expenses. Looking forward, Stereotaxis provided the following guidance for 2011:

o New capital order growth expected to be in the mid-30% range

o Total revenue growth expected to be in the 20%-30% range

o Gross margins expected to be in the high-60% range
o Operating expenses expected to be in the $62-$63 million range

In addition, Stereotaxis noted (1) its progress toward widespread clinical adoption of the Niobe system, and (2) its " backlog" of " outstanding purchase orders and other commitments that management believes will result in recognition of revenue."

At the same time, Stereotaxis advised investors that these statements were " forward-looking," and " inherently involve risks and uncertainties" that " could cause actual results to differ materially" - such as the " ability and willingness of customers to purchase our systems and the timing of such purchases." With respect to its " backlog," the Company advised that " these purchase orders and other commitments are subject to contingencies that are outside of the Company's control . . . and . . . may be revised, modified, delayed or canceled . . ." and warned that " [t]here can be no assurance that the Company will recognize revenue related to its purchase orders and other commitments in any particular period or at all. . . ." In addition, each of these statements ...


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