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Operator: Good morning. Thank you for joining us for Stereotaxis Fourth Quarter and Full Year 2022 Earnings Conference Call. Certain statements during the conference call and question-and-answer period to follow may relate to future events, expectations and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the company in the future to be materially different from the statements that the company’s executives may make today These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q.

We assume no duty to update these statements. At this time, all participants have been placed on a listen only mode. The floor will be open for questions and comments following the presentation. As a reminder, today’s call is being recorded. It is now my pleasure to turn the floor over to your host David Fischel, Chairman and CEO of Stereotaxis.

David Fischel: Thank you, operator, and good morning, everyone. I’m joined today by Kim Peery, our Chief Financial Officer. My prepared remarks today will be a bit longer than normal. As I use the occasion of our annual call to provide broader context on Stereotaxis, our technology and our path to building a highly impactful company. I will then review our recent results, as well as the key goals and expectations for the coming year. Stereotaxis is the pioneer and leader of robotics for endovascular surgery. We have developed an innovative suite of technologies that address the inherent limitations, risks and challenges posed by manual handheld catheters. Our mission is to make minimally invasive endovascular surgery more broadly available to improve its safety and outcomes and to modernize it with the benefits of digitization and robotics.

Endovascular surgery is a broad and growing field of medicine where small interventional devices are navigated through a patient’s vascular system. Endovascular procedures positively impact millions of patients annually with the mechanism of action of manual handheld catheters as fundamental flaws. During the procedure, therapy takes place at the catheter tip, but a manual catheter is held and manipulated several feet away at the handle. It’s like holding a pencil from its eraser. Is not precise, not stable and there is limited reach. Manual catheters need to be rigid to allow for any control of the tip, increasing the risk of patient injury. Procedures are complex and operator dependent and visualization of a catheter exposes patients and physicians to X-ray radiation.

Stereotaxis’s robotic technology addresses the inherent limitations, risks and challenges of traditional endovascular surgery by allowing for direct control of a catheter tip using precise computer controlled magnetic fields. This allows for unpresidented precision and stability, enables reaching areas previously unreachable and enhances patient and physician safety. Physicians upgrade our robot from a computer cockpit, seated and protected from radiation with full control over the procedure and with an ability to focus on the cognitive aspects of their profession. These benefits are not theoretical, as hundreds of physicians at over 100 leading hospitals globally have treated nearly 150,000 patients with our technology and there are over 400 scientific publications documenting our clinical value.

A highly differentiated platform technology that confers meaningful clinical value in a large field of medicine serves as the perfect foundation on which to build a preeminent surgical robotics company. We are the best suited and see a clear path towards positively transforming the broad field of endovascular surgery in a fashion similar to how laparoscopic and orthopedic surgeries are being transformed. But while our technology has significant clinical and commercial validation, our ability to grow a flourishing business has been constrained by several structural limitations. We are clear eyed on these challenges and well on the way to addressing them. Our product ecosystem has three primary structural limitations. First, our robotic system can only be adopted as part of a construction process.

It requires architects and contractors, room modifications and significant planning. It can obviously be done if effort is significant and leads to multiyear sales cycles with significant attrition in the sales pipeline. Second, our existing procedural focus, cardiac ablation procedures to treat heart arrhythmias, was built with significant dependencies on another company. Stereotaxis’s robotic technology is highly differentiated and sophisticated, confirming significant benefits in the EP field. However, in every procedure the actual ablation catheter used is owned, manufactured and sold by another company. Our users were also made largely dependent on that company’s diagnostic mapping technology. That dependency creates various challenges for our customers, led to extended periods of limited innovation and creates operational, financial and strategic hurdles for Stereotaxis.

Third, and the last structural limitation is that, Stereotaxis’s robot has remained a single application technology. Despite the technology having the ability and even the regulatory clearances to serve as a broader platform for robotic endovascular surgery, the company has not made the interventional tools to turn potential clinical applications like neuro, coronary and peripheral surgery into a reality. This limited scope reduces our market opportunity and the attraction of our technology to hospital purchasers. A clear eye diagnosis allows for strategic focus. With focus, creativity and effort we have developed and advanced an elegant strategy that addresses each of these limitations. Simultaneously addressing multiple significant structural limitations involving sophisticated technologies in a complex highly regulated environment is not done easily or rapidly.

For several years now, we’ve been working energetically to make that strategic transformation of our product ecosystem a reality. This year, 2023, is poised to be an exciting year for us as we expect multiple technologies that address each of these limitations to achieve major regulatory and commercial milestones. Let me review the cornerstones of that new product ecosystem along with the status and expected progress of each. Stereotaxis’s proprietary robotically-navigated ablation catheter MAGiC is the closest to commercialization. It improves upon the aging catheter technology our current users are limited to and addresses the operational, financial and strategic challenges posed by our dependency in the EP field. We were pleased last summer to submit MAGiC for European CE Mark in line with the timeline we shared on this same call a year ago.

In the fourth quarter, we updated you that our submission successfully passed the completeness check of the EU regulator. The next step in the review process involves us receiving questions on the submission in three distinct categories; technical, clinical and microbiology. We received our technical questions in December and responded to them early this year. We have not yet received any feedback on our response, but view the technical questions as un-concerning. We just received the clinical questions two days ago and are reviewing them and preparing a response. We are eager to receive the microbiology questions, but so far have not received them. The slow pace of the regulatory review process is frustrating as we are eager to launch the technology, but ultimately that timeline is outside of our control.

We will do our part to speed this process by responding to questions rapidly and thoughtfully. We will use this time to set the stage for robust commercialization. We expect European CE Mark and launch of MAGiC as most likely to occur later in the second quarter or in the summertime. There’s a substantial interest from our physician customers to start using MAGiC and we’re excited for the impact of the launch. In the U.S. our IDE submission remains dependent on successfully completing a few preclinical survival studies. We establishing an official institutional animal care and use program of GLP level quality in November and ran several pilot studies to ensure the new facility and processes worked well. The development of that internal infrastructure and capability was a significant undertaking, but we have done it successfully and will do our first pivotal on the record studies this weekend.

We expect to complete all the pivotal studies in the second quarter, submit our IDE application to FDA in the third quarter and initiate the human IDE trial before year end. We continue to see U.S. FDA approval of the MAGiC catheter approximately two years after CE Mark as a reasonable timer. Our second major innovation effort is a smaller self-shielding robot that frees us from the extensive architectural planning and construction currently necessary to adopt our technology. It makes our robotic technology more accessible to many physicians and customers that have wanted to adopt or try it, but were unable to navigate the logistic and economic hurdles. We are methodically advancing through mechanical and electrical and software development in line with the previously shared timelines.

We expect regulatory clearance in Europe in the third quarter of this year, an initial limited launch of the system concurrent with that regulatory approval and a broader launch of the new robot in both Europe and the U.S. in 2024. The robot itself is a transformative innovation for Stereotaxis and the accessibility of our technology that along with this technological innovation, we will also be innovating our site assessment, installation, integration and sales efforts to take full advantage of what is now possible. Our third significant innovation is a family of interventional guidewires and guide catheters that expand the benefits of our robot into new endovascular indications. We’ve previously shared specific — five specific clinical indications we’re navigating tortuous anatomy is challenging and we believe we can improve patient care.

Neuro interventions, coronary angioplasty, peripheral intervention, tumor embolization and abdominal aortic aneurysm grafts. The first guidewire in this family is fully designed and we have been grinding through the process of improving the manufacturing process. We believe we are nearing the end of that effort and that we will be able to begin formal testing within the next few months, allowing for regulatory submissions in the U.S. and Europe before year end. This is a 510(k) product with a relatively streamlined regulatory review timeline. Behind this first guidewire, we expect a broader family of guide catheters and wires to steadily advance to market. We have shared these devices in our strategy with several prominent physicians in multiple clinical specialties.

Their excited by what we are building and view the technology as very practical and capable in addressing serious unmet medical needs. Once we have made a regulatory submission for the first guidewire we will host an innovation date to allow several of these conditions share their perspective and experience. These three innovations, the MAGiC catheter, newer mobile robot and endovascular devices are our strategic response to the three structural limitations described earlier. We have line of sight to each of them reaching significant regulatory and commercial milestones this year with growing commercial impact next year. Beyond these big three innovations, we were fortunate to nurture two additional opportunistic growth drivers that are synergistic and additive to our core strategic innovation effort.

In China, we entered into a strategic collaboration MicroPort to establish a China specific EP product ecosystem and internally we are developing a digital platform for broad operating room connectivity. MicroPort submitted Genesis for Chinese NMPA approval late last year and has been working on some additional documentation and testing to supplement that submission. In parallel, they have completed the software efforts to integrate their mapping system with our robots and are preparing MAGiC and an additional ablation catheter for near term regulatory submissions. Given extended review time lines we have seen at China’s NMPA, they now expect this whole product ecosystem to be available on the market in approximately a year from now in the first half of 2024.

They are investing in a capital sales team, training and commercial infrastructure in anticipation of that launch and we already see a pipeline of engaged future customers. We are impressed with these preparatory commercial efforts and anticipated translating into a very robust launch soon after that ecosystem gains Chinese regulatory clearance. Our connectivity platform involves both a cloud based connectivity app called (ph) and a next generation version of a large integrated display called Synchrony. Sync has been released internally for initial testing by our team to simulate an external release. We expect to continue to refine the app in the coming weeks such that it is ready for an external release to select physicians in summer. The large screen display is on track for regulatory submission in the fourth quarter and full launch early next year.

The combination of Synchrony and Sync should be an attractive solution enabling streamlined workflow, connectivity and collaboration broadly in any operating environment. The Synchrony hardware will provide us an incremental upfront capital sales opportunity, while Sync will be available with a premium SaaS business model with premium subscriptions for hospitals, medical device sales forces and physician users. Each of these innovations individually serve as substantial growth drivers that dwarfs our existing business, they value being advanced independently but are also synergistic and complement each other. Collectively, they serve as our core product ecosystem as we look to transform endovascular surgery with robotics. We are confident these technologies serve as the foundation for preeminent high growth, high value medical robotics company.

While driving this multiyear strategic transformation, we’ve attempted to navigate the transitory years with three primary goals, show that we can restart revenue growth, put in place the infrastructure that will be needed to grow an order of magnitude larger and become financially self-sufficient. Overall, we have made significant progress here. So our results last year demonstrate the challenges as well in navigating that path. From an infrastructure perspective, the highlight of the last year was moving into a new custom built headquarters and manufacturing facility. It was a significant effort and expense but will serve us well for many years. It enhances our operations, was financially prudent and facilitates the robust growth we anticipate.

We’ve continued to refine and improve other aspects of our infrastructure across the company, including IT systems, quality processes and commercial capabilities. Revenue in 2022 was more challenged. On the heels of 2021, when we were able to demonstrate significant revenue growth and a restart in meaningful capital sales, we were disappointed by the reported revenue in 2022. Recurring revenue remained relatively stable and attractive with a slight decline attributed predominantly to reduce procedures in China during COVID lockdown and lower service revenue as various hospitals approach or undergo replacement cycles. System revenue, however, was down in 2022 compared to 2021. In some ways, the reported system revenue is not reflective of the actual progress we have been making in capital sales, nor the context for our efforts.

In 2021, Stereotaxis demonstrated it can meaningfully restart capital store sales after many years of minimal activity. We recognized revenue of $11 million on seven systems sold that year. In 2022, we received purchase orders for eight robotic systems, a slight increase over the previous year. Three of those orders were for greenfield systems and five orders came from the United States. We only recognized revenue, however, on four systems as hospital construction delays have pushed out timelines for when we can ship and install systems. That has driven our backlog entering this year of $14.8 million in capital orders that have not been recognized as revenue. As we look at 2023, this backlog supports an expectation of double digit overall revenue growth.

We expect to continue to grow orders for new robots above the eight system high watermark from last year and expect to recognize revenue in a portion of those orders, as well as a substantial majority of our backlog. Financially, 2022 was a departure from several years of maintaining a very low near breakeven financial posture. From 2019 through 2021, we were able to maintain free cash flow utilization of just about $1 million per quarter, despite substantial investments in R&D. In 2022, our cash utilization was approximately double that with cash use of approximately $10 million for the year. About half of the cash utilization was spending on the new headquarters, as well as increased spending on robot inventory beyond the cash inflows that would correspond with that inventory.

We start 2023 with approximately $30 million of cash and no debt. That is a strong and comforting balance sheet given our history of financial prudence. We expect a lower burn rate in 2023 compared to 2022 with overall revenue growth, a lack of spending on the new facility and tapering inventory purchasing counteracting increased R&D spending and a lack of royalty income. We are comfortable with our balance sheet, allowing us to bring our transformative product ecosystem to market, to fund commercialization of that ecosystem and to carry Stereotaxis to profitability. Kim will now provide some commentary on our financial results and then I will make a few financial comments as well before opening the call to Q&A.

Kimberly Peery: Thank you, David, and good morning, everyone. Revenue for the fourth quarter of 2022 totaled $7.3 million compared to $8.2 million in the prior year fourth quarter. System revenue was $2.2 million and recurring revenue was $5.1 million compared to $2.3 million and $5.7 million in the prior year fourth quarter. Revenue for the full year 2022 totaled $28.1 million compared to $35 million in 2021. Full year system revenue was $6.8 million, compared to $11.2 million in the prior year as hospital construction delays impacted the timing of order conversion. We started 2023 with system backlog of $14.8 million. Full year recurring revenue was $21.3 million compared to $22.9 million, reflecting continued procedure volatility and the timing of service renewal.

Gross margin for the fourth quarter and full year 2022 were approximately 59% and 66% of revenue. For the full year 2022, we reported gross margins of 82% on recurring revenue and 15% for system revenue. System gross margins reflect significant allocations of fixed overhead expenses. Operating expenses in the fourth quarter were $8.8 million, excluding $2.6 million in non-cash stock compensation expense, adjusted operating expenses in the current quarter were $6.2 million, down from the prior year adjusted operating expenses of $6.7 million. Adjusted operating expenses the full year 2022 were $26.8 million consistent with $26.9 million in the prior year. Operating loss and net loss for the fourth quarter of 2022 were $4.5 million and $4.2 million respectively, compared to the approximately $3.4 million for both from the previous year.

Adjusted operating loss and adjusted net loss for the quarter excluding non-cash stock compensation expense were $1.9 million and $1.6 million compared to $0.8 million for both in the previous year. For the full year 2022, adjusted operating loss of $8.3 million and adjusted net loss of $7.8 million compared to an adjusted operating loss of $3.6 million and an adjusted net loss of $1.4 million in the prior year. Net loss from the prior year included a favorable $2.2 million adjustment for the forgiveness of the Paycheck Protection Loan. Negative free cash flow for the full year 2022 was $10.8 million compared to $4.3 million for the full year 2021 and reflects the $2.4 million onetime facility investment and approximately $3 million increase in inventory.

At December 31, we had cash and investments of $29.7 million and no debt. I will now hand the call back to David.

David Fischel: Thank you, Kim. I discussed our outlook for 2023 earlier in the prepared remarks. As mentioned there, we have confidence in double digit revenue growth for the year, driven by revenue recognition of our backlog and new system orders. We also expect more system orders in 2023 compared to 2022, which will support continued growth expectations. These revenue expectations do not incorporate any material contributions from a bolus of innovations that are nearing the market, but we do expect these to play a decisive role in driving significant acceleration in both system and recurring revenue adoption for many years to come. Stereotaxis may not be a young company, but in many ways we are just approaching the real start of our journey.

I view Stereotaxis as a derisk startup that stands upon the shoulders of the significant developments accomplished previously, but is rebuilding itself onto a new technological and strategic foundation. That new foundation is more structurally sound, operationally, financially and strategically and designed to enable mass adoption. We are fortunate to have a strong balance sheet to be able to execute this transformation successfully without the need for external funding. Multiple green shoots of that strategy are starting to emerge and we anticipate and we are excited for the multiple regulatory and commercial milestones we expect this year. I have no doubt that the broad field of endovascular intervention encompassing many millions of annual procedures and tens of billions in medical device sales will be transformed by robotics just as laparoscopic and orthopedic surgery.

Stereotaxis is the pioneer and leader best suited to make that transformational reality. We have a clear strategy in place and look forward to the impact we will have improving medicine and building a preeminent company. We’ll now take your questions. Operator, can you please open the line.

Operator: Your first question today comes from the line of Alex Nowak from Craig Hallum. Your line is open.

Chase Knickerbocker: Good morning, everyone. This is Chase on for Alex. Thanks for all that color there David. Maybe digging in a little bit on the guidance. No contribution from new innovations. How should we be thinking about MAGiC in Europe? How do you think existing customers will adopt? I guess, what are you hearing there? Do you expect pretty widespread adoption upon launch? Something that customers have been waiting for and then replacing some older technology there, maybe a couple of switching costs in their mind. Just kind of talk about what kind of penetration you have customers in the first 12 month of launch?

David Fischel: Sure. So I think kind of overall thanks for the question and good morning first of all. And obviously the MAGiC launch is the upcoming launch that we are most focused on and excited about. So there’s definitely been a lot of not given to that internally and a lot of work already being done in anticipation of the CE Mark. And when I think kind of generally at the launch, I’d say that you’re correct that all of the physicians in Europe that use our technology are aware that MAGiC is coming. They’re aware of how we improved robotic navigation with the catheter and why it’s clinically relevant and an improvement over the nearly now 20 year old technology that they’re currently using. And so overall, I’d say that the excitement is very strong for that catheter coming to market.

And with that said, and so, I would expect generally a relatively rapid switchover of a substantial portion of the volume or majority of that volume over to MAGiC in a relatively tight timeline. What I’d say are kind of the two factors that we should kind of keep in mind as generally kind of — just kind of making things somewhat more gradual is that: first, when you launch any complex in psychology, you don’t want to go out to all and say we have about 35 hospitals in Europe that use our robot. You don’t want to go to all 35 of them very quickly. You want to do a limited market release to a few of the kind of leading sites and make sure that still there is an aspect of art and workflow to every catheter when it comes to the power settings and how long you stay at any individual part of tissue before moving on and while we have all sorts of data from the preclinical testing to guide that type of decision making.

There is kind of a field that emerges among the physician community with use and there will be differences in workflow and best practices for how you navigate a catheter. And so, there is value to a limited market release initially for probably a couple months or so as you get kind of initial exposure across a range of arrhythmias by some of the leading sites in Europe and they can really kind of — get kind of their experience out there and become kind of sites that can also become reference sites for the rest of the users. And so, that’s kind of one thing that definitely we will be doing. We want to make sure that the launch goes smoothly. The experience is kind of a fantastic initial experience for every user. And so, you don’t want to just kind of throw the catheter out there and let everyone do what they want with it without any head holding.

And the second kind of thing that just we should keep in mind is that that in some countries in Europe there are tender processes. And so in certain countries like the U.S. where as soon as you get regulatory approval you can kind of negotiate a price with the hospital and within a couple of weeks it can be on the shelf and be used. In other countries, you do have to go through local or regional tender processes. And so, you can usually get some usage kind of through — kind of that carve out clauses, but those are relatively limited to get actual consistent usage beyond a handful or a dozen or so catheters you need to go through these tender properties and those can take anywhere between six months to a year depending on the country. And so there is an aspect also of that that in certain countries predominantly Scandinavian ones and countries like France, there is kind of some limitation on how much adoption you can do as you’re going through that kind of process.

Chase Knickerbocker: That all makes sense. Yes. No, that’s pretty thoroughly. Thanks. And then moving to kind of systems revenue. I just want to check my assumptions based on all that commentary. It sounds like systems revenue should grow nicely over 2021 and 2023, now given you expect more shipments year over year into 2023 from 2022 and to realize revenue on the majority there. Also realize most of that backlog you’re entering the year with. And then just checking that assumption and just qualitatively, are you seeing some of these construction delays at new customers maybe just enter the pipeline starting to ease? Or is it mainly a function on the back block of those orders being in there firm-up time or you work through the delays?

David Fischel: So kind of — I think kind of your — kind of the way you rehashed what we kind of said in the prepared remarks is correct. Generally of our backlog, we would expect not all of it, but a majority of it to turn into revenue recognition this year. And then we do expect some orders this year will end up being also revenue this year. And overall, the construction timelines remain very, I’d say, volatile and unpredictable at hospital accounts. And so, we actually do see — we just are finishing installing one system that was — the revenue was recognized actually last year with the shipment of the system, but we just are completing installation this week. And we’re starting up another one next week. So there are kind of definitely several installations going on in the first half of this year.

But there remains hospitals that have been talking about installations and consistently get things pushed out. We have orders that we have been expecting, but their own timelines are getting pushed out. And so the orders have also been — like, we’re still waiting for those to be received given their own kind of timelines for when their doing construction being pushed out. So it’s generally still I’d say volatile. I don’t sense any major changes in the macro environment.

Chase Knickerbocker: Got it. on the mobile robot. Help us with the launch. By the end of the year you had said a limited market launch? Is that a couple of units to a couple of customers? And then 2024 the right way to think about it as that will be pretty normal availability from a standpoint of you can supply demand as it comes in pretty normally as you do now with Genesis?

David Fischel: That’s generally a reasonable way to think about it. We want to get some actual experience in the real world with the robot out there. And then you want to use also that period to refine your manufacturing capabilities, supply chain and make sure that it’s working well in the real world before you launch in more aggressive fashion.

Chase Knickerbocker: Got it. Thanks, David.

David Fischel: Thank you. Your next question comes from the line of Frank Teckenin from Lake Street Capital Markets. Your line is open.

Frank Takkinen: Hey, thanks for taking the questions. I wanted to start with the MAGiC catheter as well. Can you remind us just what portion of your, call it, approximate 10,000 annual procedures are within CE Mark qualified regions? And then two, how do you think about commercial investments on the heels of that clearance?

David Fischel: Hi, Frank. Good morning. Sure. So about 40% or so of our procedure volume comes from Europe. And so, that’s kind of the one that we have kind of laser focused on as we get CE Mark to make sure the launch goes well. And there are other — some other Asian regions, for example, in China, actually submission of the MAGiC catheter to NMPA is predicated on getting CE Mark. As once you get CE Mark, you have a much easier path to go through NMPA. And so there are kind of some other regions that make up, let’s say, roughly 15% or so that will be and — that kind of their regulatory paths will be streamlined once you have CE Mark. But the core market the European kind of market, which is depending on CE Mark is about 40% of the procedure volume.

Frank Takkinen: Okay. And then the second part of that, the commercial investment expectations on the heels of the launch?

David Fischel: So we have been kind of — obviously, we mentioned late last year that, Frank, joined as the leader a commercial organization in Europe. Overall, he’s been doing very nicely in organizing the team in such a way where you can better envision how to grow and build and hire within that new structure and kind of — and build a much more robust sales team. We have a couple open positions that we’ve been looking to hire now in anticipation of that launch. And I think that what you’re going to see is, I think kind of we’ve discussed it a little bit in the past that one of the commercial challenges and weaknesses that Stereotaxis has when competing vis-a-vis the larger players in this field is that, most larger companies in this field have a model of hiring roughly one clinical sales rep per hospital account and that clinical rep deals with that account.

And when — that’s a viable business model when you make $4,000 a procedure or $5,000 a procedure, it’s not a viable business model or it’s not a financially prudent business model or something that can really find a business in a sustainable fashion when you’re making $1,000 per procedure. And so I think kind of as you see us start to gain adoption at individual hospitals, there is definitely the concept of using the incremental revenue, the incremental gross profit that comes with MAGiC catheter which is fairly substantial and allowing that to fund individual reps that are much more laser focused on individual accounts. And I think our new structure allows for that type of model in a much more organic way.

Frank Takkinen: Okay, great. I’ll stop there. Thanks for taking the questions.

David Fischel: Thank you very much, Frank.

Operator: Your next question comes from the line of Adam Maeder from Piper Sandler. Your line is open.

Adam Maeder: Hi, David. Hi, Kim. Thank you taking the questions and good morning. I wanted to start with 2023 outlook and just maybe try and piece it all together. I was hoping you could just flush out in a little bit more detail what you mean by double digit revenue growth or give us some tighter guideposts there. Walk us through system and disposable expectations just more broadly. I guess one way that I’m potentially thinking about it is, if you’re recognizing the majority of the system backlog you have some incremental contribution from new system orders and you assume relatively stable procedure volumes you kind of shake out in that $35 million to $40 million range without even really any contribution from new products. So is that a reasonable way to think about things? Maybe just talk about kind of some key puts and takes? Thanks.

David Fischel: Hey, Adam, good morning. So your back in the envelope math in the way that you just described it sounds very — sounds actually very good. So I think that’s kind of a very reasonable way to think about it. And from this — we’re obviously somewhat burned by the experience of trying to give precise guidance last year and, obviously, that didn’t play out particularly well. And so, I think kind of then we feel confident in the guidance that we provided, but we didn’t provide a much more specific guidance specifically because it is challenging to know and because at this stage still when we’re talking about single digit overall, more high single digit and numbers of systems, the movement of one in this year or out this year makes a fairly big difference, right?

Each system is nearly $2 million of recognized revenue. And so, that kind of makes it difficult to have huge confidence in a tight band. And so, I think kind of with high confidence in the guidance that we provided and the way that you described it generally from the system perspective sounds right, that kind of the systems will be the main driver of overall revenue and kind of in that, let’s say, $35 million $40 million range feels very reasonable. And from the recurring revenue side, we expect procedures to increase this year versus last year predominantly as China bounces back from the COVID closures of last year. So that’s been kind of our general expectation on procedures. On the service side, the headwinds that we have been facing for a few years as hospitals approach or undergo replacement cycles and get up service as a result of that.

It’s starting to become more balanced as we start to get kind of some of the first installs annualizing past their warranty period. And I think that probably as we get later into the year, you’re going to start to actually see that flip or we start to see modest actually grow in the service line. But — so, that’s kind of going through its process, there’s kind of a delayed action there. Obviously, as we start to get more and more of these installs actually annualizing after one year warranty, then you start to get the benefit of service contracts kind of returning. And that expected growth in procedure and service though will be counteracted by the loss of royalties that we’ve been receiving from J&J, but don’t expect to receive during the tail years of their supply agreement.

And so that’s kind of the way I think about recurring revenue overall.

Adam Maeder: That’s really helpful color David. Thank you for all of that. And maybe just a couple more questions as it relates to expectations for this year. I guess the first one is on gross margin. I was hoping you could just kind of give us some framework, how to think about gross margin. And then on the new orders that you’re referencing, it sounds like you expect more orders in 2023 than 2022? Any sense for whether those are replacement versus de novo? Thanks again for taking the questions.

David Fischel: Let me give maybe Kim to answer the first one and then I’ll take the second one.

Kimberly Peery: Yes, that works. So on the question of gross margins, I would say that we’re looking with what you saw in Q3 and Q4 would be pretty consistent for this year. We would expect some improvement on the system gross margins overall, but we’re still a relatively small manufacturer with a relatively large fixed overhead allocation. So they’re not — next year still won’t be a year where you have amazing system margins, but there should be some improvement.

David Fischel: If I maybe switch to just kind of your second question — does that answer kind of the first question on the gross margin side well, Adam?

Adam Maeder: Yes, that’s great. Thank you, Kim.

David Fischel: And on the — kind of on the orders this coming year. And so, generally when I look at kind of our order book, I’d say that we have approximately kind of last year we talked about how we implemented a new kind of infrastructure and process that allows to better track the capital pipeline. And that has been very helpful and kind of it allows us to be a little bit smarter to — it makes it less likely that deals fall through the cracks that opens our eyes to earlier opportunities and risks. And so kind of overall that has been kind of nice. When I look at kind of overall that kind of deal book for the potential deals that we could get this year and kind of that we’re engaging with and that we think we believe should be, could be orders this year.

There’s about kind of two dozen of those in the U.S., one dozen in Europe and then about a handful of those in China. And obviously, some of those will slip, some of those we will lose, but it’s a relatively healthy pipeline. I’d say about in the U.S. and Europe, it’s relatively similar or about, let’s say, over 50% maybe even near 70% or so percent of those are replacement cycle orders across the two geographies and the rest are greenfield. In China, everything is greenfield. And so that’s — that’s how I kind of outline our pipeline right now.

Adam Maeder: That’s great color. Thank you.

Operator: Your next question comes from the line of Josh Jennings from TD — Cowen. Your line is open.

Joshua Jennings: Hi, good morning. Thanks for taking the questions. Dave, just follow-up — Thank you. Good morning. Follow-up on the pipeline answer you just gave. And what — hoping you could maybe just quantify qualitatively just how the sales funnel stands today versus the beginning of 2022? And I’m assuming that there’s been nice growth in the pipeline opportunities or just the funnel as you’ve done some work on the sales organization. And just as you’ve — we’ve been moving a little bit out of the storm of the pandemic, wanted to get an update there.

David Fischel: Sure. Hi, Josh. Good morning. I look forward to seeing you on Monday. And so I see that we have much more transparency and clarity on how the pipeline actually looks now versus a year ago, because a year ago, we were still going off. If you remember, I would mention that I would like top sheet list of top 12 potential accounts in each region and kind of it was really working off of those types of anecdote lists rather than kind of a formal pipeline process. As I said, there’s much more transparency that change now to this new infrastructure doesn’t make it really easy to judge in an apples to apples way with how the pipeline looks like a year ago. Anecdotally, I feel better about our pipeline this year than I do a year ago.

I’d say that the primary challenge and kind of, obviously, I think the numbers that I just gave of roughly 20 some accounts in North America and that roughly does in Europe. I think that is higher than what we have typically said. And I’d say that the primary challenge from an order perspective still though is — it’s not that we’re a lasting opportunity, but it’s the ability to create customer urgency and actually drive timelines. So I think we’re still very much dependent on the customer’s timeline. And I don’t think we still found the MAGiC bullet for how to influence that timeline in a meaningful fashion. And so, I think that’s kind of the challenge that’s kind of in front of us. And that’s kind of what we as an organization have to become better at.

And then, obviously, that’s also something that is in various ways made much easier as we structurally improve the product ecosystem. But so, that’s kind of how to kind of think about our overall pipeline and kind of the puts and takes there.

Joshua Jennings: That’s helpful. Thank you. I just wanted to ask about just replacement penetration. I mean, our math suggests that the replacement opportunity with Genesis is only maybe sub-10% penetrated. But just wanted to clarify that and also ask about any strategies with that 70:30 replacement versus greenfield kind of put opportunities in the pipeline and any strategies to attack new customers greenfield?

David Fischel: Yes, both very, very good questions. So on the replacement side, I’d say that, yes, correct, that approximately since then launching Genesis, we have announced about 20, I believe, orders to date, of which about — it’s been about 50:50 greenfield and replacement. So we’ve announced 10 about orders on the replacement side. And so, we do have kind of still a very substantial installed base of Niobe system out there, of which probably — I don’t have actually the exact number here, but my guess is that, 50% of that installed base is roughly, let’s say, eight, nine, 10 plus years old. And probably more than 50% is eight, nine, 10 years old. I wouldn’t be surprised if even 50% is 10 plus years old. And so that’s kind of — that is a good book to kind of to go after from the replacement side.

I guess what’s interesting though is that, still X-rays while the historical wisdom has been a 10 year life for an X-ray definitely we are seeing that being pushed out. We have hospitals that even have 14 year old X-rays now that are not yet doing replacement of their X-rays and will very much be holding to that type of timeline for our projects. And that’s what’s been interesting is watching hospital that had a 12 year old X-ray and said, oh, we’re planning to do a replacement cycle and engaging with us. And then 12 years becomes 13 years, 13 years becomes 14 years, we’re still engaging with them. They’re going to change at some point, but really we have not been able to impact their project schedules and that just seems to be kind of beholden on when naturally the hospital decides that it’s going to change X-rays across the labs.

And so kind of that’s how, I guess, I think about the replacement cycle side, I think that’s still going to constitute the majority of our orders and installs probably this year and probably maybe the next year. And the greenfield side of things is where the real fun comes into play, because that’s where we are a tiny, tiny player in a big, big ocean. And that’s where all the significant opportunity for growth comes from. I think that kind of one of the big things, we’ve done all sorts of things there to try to better engage, to try to kind of approach the market overall and to create broader awareness of our technology. And the fact that Stereotaxis is not the same company as it was 15 years ago, which is kind of still and many physicians they have this historical perception of the company.

I think that kind of something that will help a lot is that, we’ve been conservative in building robust capital sales team, given the knowledge that there is still a very significant and kind of effort to actually make a capital sales takeout, play out and actually make them that capital order turn into an installation. And so, that kind of extended timeline does not make it very enticing to hire 20 capital reps and to send them out there. And then you really aren’t able to even judge their performance for an extended period of time. And I think that as you start to see these structural innovations come to market, that makes it much more attractive to think about the growth of the capital sales team in a much more aggressive way. And so I think you’ll see us kind of start to do that.

Obviously, it’s going to be region dependent as the next generation robot and kind of it’s predicated on MAGiC or the vascular devices being available in each geography in order to be actually applicable. So kind of that will be geography dependent and clinical application dependent as those interventional tools come out in each geography. But I think that, as you see the mobile robot out there, we’re going to be much more aggressive from capital sales force perspectives.

Joshua Jennings: Thanks for that. Maybe just one last question. You’ve talked about the demand that’s building for the MAGiC catheter. Just wanted to kind of understand how you’re thinking about that launch just on the system side. Do you think that launch could increase system demand, other clinicians out there that just don’t like the thermal coal RMT catheter because it’s — there has been no innovation for a decade plus? And then simply on the mobile system side, could you just talk about the buzz or the demand that you’re hearing from the potential customers? And whether that’s limiting orders in 2023 because some centers may be waiting for the mobile system if they’re interested either in the greenfield channel or the replacement side? Thanks a lot.

David Fischel: Yes, sure. And so on the MAGiC catheter side, definitely that is the case. I’d say that the two biggest pushbacks we get on adoption of our robot by new potential customers that are interested generally in it. One is the whole complexity of getting the system installed and all of kind of that work and that complexity. And then the second one is the fact that the catheter that they would have to actually use with the robot is somewhat old by now a catheter and that there’s really no choice around that catheter and that also from a diagnostic mapping perspective, the integration has been limited historically. And so I think kind of as we transform the EP side of that, there’s definitely a good tailwind that should help also on the robot capital side of it.

And it probably doesn’t happen and capital customers are aware that we have developed the MAGiC catheter. They’re aware in Europe that we’ve filed for CE Mark. So it’s not that we are hiding that and that suddenly is getting approval, changes the dynamic in a day, but it obviously makes it much more tangible when they can see the catheter in use. They know that it’s available and they know that when they adopt the robot that it will be there for them. So that’s definitely the case. On the mobile robot in Europe. I’d say that we’ve still been relatively cautious in who we approach with that and how we communicate it. And so it’s been done really on a selective case by case basis. When we see that could be the early adopters. That’s where we kind of have a discussion to make them aware of our general innovation pipeline more fully and we do not communicate that innovation pipeline broadly to the physician, the healthcare community.

Joshua Jennings: Thank you so much, David.

David Fischel: Thank you.

Operator: And your next question comes from the line of Neil Chatterji from B. Riley. Your line is open.

Neil Chatterji: Hi, David and Kim. Good morning and thanks for taking the questions. I mean, I guess, we spent a lot of time already talking about the order funnel. So I was just curious, I understood kind of the construction kind of delay influence for hospitals. Just curious on the capital spending side, what kind of environment you’re seeing there in terms of just the general headwinds that you are seen with staffing shortages how much is that influencing orders?

David Fischel: Hey, Neil, good morning. So I’d say that kind of things haven’t changed I think in any meaningful way from kind of the commentary we provided before. Generally, it feels like you’re operating in a headwind style environment. So there’s definitely no tailwind of hospitals or rich and full of profits, excess profits and they’re looking to buy something fun and exciting. You definitely are working relatively in a capital strained environment, in an environment where hospitals are still distracted by a range of kind of operational challenges and macro concerns. And with that though, there is reasonableness and there is logic. So it’s not that it is a frozen environment. It is kind of that style of, I’d say, balanced environment that generally has probably more of a macro headwind than a macro tailwind.

And so, kind of we’ve had the great pleasure of operating in an environment that it was either much worse than that immediately when we got approval for Genesis and started the launch or kind of very similar to that for the last three years. And it would be fantastic to have a tailwind like environment, but we’re not betting on that anytime soon. And again, I don’t think that that’s necessary for us to become a much more successful company. So we’ll assume that things stay that way from a macro perspective and focus on what we can focus on.

Neil Chatterji: Great. Thanks for that update. Maybe just anything new in terms of the development of your health system and IDN strategy and the potential for that to kind of help speed up the sales cycle?

David Fischel: Sure. So yes, we’ve talked about it a bit in the past. We have a few large IDNs that currently use our technology and have very good experiences with our technology like HCA, like Kaiser, Intermountain. So kind of those are natural parties by which to engage more broadly. I’d say that kind of this — I’ve always had in my mind a model like, I believe, it was Mako at the time where they kind of got a fairly substantial purchase of multiple systems kind of from the top down corporate level and then kind of — that kind of collaboration partnership from the top down to corporate side and kind of spread out kind of below and those systems got deployed across multiple hospitals. I’d say the fact that we perfected an IDN to not execute something like that from the top down and just buy systems without knowing where exactly they’re going to go, but don’t figure it out after the fact.

And because of the construction aspect, that is not kind of really a viable model. And so, that obviously makes some difficulty in executing something now before our new product ecosystem comes into action. I’d say that the engagement that we have with IDNs does oftentimes help things kind of — that are percolating from the bottom up get kind of move in a nicer fashion through the whole system. And so obviously, we announced I think it was in either the second quarter call or third quarter call, I think second quarter call I believe in summer. We announced that order from Overland Park Regional Medical Center in Kansas City. That was the first and second robotic system being installed at the same hospital. And so that kind of was — that hospital is part of the HCA network.

I’d say that there was definitely some kind of benefits from kind of the relationship in that. And so I think kind of what you’ll probably see is more of that style of a benefit rather than kind of a large pens or guns and plus system order from one IDN until we get the new ecosystem in place.

Neil Chatterji: Got it. Thanks for that. And then just one last question here. On the OR connectivity platforms with Sync and Synchrony, just curious if you could maybe just help frame that up in terms of how we should think about that as a revenue opportunity maybe longer term?

David Fischel: Sure. Thanks for asking. I am pretty excited actually by that. I think it’s kind of — like I described on the call, it’s synergistic and in some ways opportunistic that Stereotaxis had developed the Odyssey Cinema platform rework and kind of aware that that is a core kind of attractive part of the robotic experience as a whole. And so, we made structural decisions in how to design the next generation version to make it much more applicable broadly and to really kind of make it an elegant solution, not just for the robotic labs, but really kind of broadly across all labs. And so that’s kind of — it’s been a fun project. I’d say that there’s a capital opportunity to sell large integrated displays generally into interventional apps and operating rooms.

And that’s probably not an insignificant opportunity, I’d probably peg it in the low mid hundreds of millions of dollars a year of those types of displays. And though it’s purely a capital revenue, there’s no disposable that comes with it. So that’s kind of relatively — from a revenue model, it’s relatively less attractive. And I don’t think that what you’re going to see us doing is building a large capital sales team to start selling those displays across non robotic labs. That’s just probably not the right strategic focus for us to do. And I think what is more likely to happen is that there are a range of organizations out there that have substantial sales forces and could view a product like this as synergistic to their other products in their bag.

And so, kind of building non-exclusive distributor networks with also kind of meaningful brand name medical device companies. I think that’s a very viable model and something that you’ll probably see as we do the initial launch and so that it’s working. I think you’ll see a few of those actually sign up to distribute the product more broadly. And we’ll see how that kind of is able to impact broader option. What kind of attracts me overall to this whole Synchrony and Sync project is much more the recurring software-as-a-service business model that exists. And so, I think kind of by gaining real estate of Synchrony, you have the opportunity to have many users using this app, the Sync app that has been developed. And I’d look at the Sync app like there’s many examples in the tech world of kind of these freemium software-as-a-service that model and (ph) medical device that people wear.

So kind of freemium in case it’s not a familiar term, it means when the app generally is provided for free but — and so the basic connectivity capability being able to communicate video, audio, see the lab remotely, being able to talk with the operator that is doing the procedure, that will all be kind of available for free. That’s to encourage widespread adoption and usage of the app to really allow it to become a platform broadly for operating room connectivity. But then there’s many features that you can envision and overlay it onto the app that will be premium features. And just example like that is, recording capabilities. So like a ring, a doorbell that we use or kind of cameras that we use for home security, right? Those types of models exist where you have premium services that are very much in demand by hospitals or other medical device companies if they want to provide a remote support and clinical and technical support for labs.

Or physicians themselves, they can envision certain of that premium services that they would like. And so, I think as you kind of — our main goal at the beginning is to get the hardware out there, to allow the hardware to start to penetrate, that will provide some capital sales. We kind of generally — I view that as kind of incremental to our business. I think it can be probably in the millions. I mean, I would expect that we’d have millions of dollars of sales and probably not into tens of millions in the first year or two, but kind of it can definitely grow into the tens of millions, particularly if we can get some of these distribution networks in place. And then I think the real business value comes from as you build that network you have a really, really awesome user base and install base on which to build a very interesting high value SaaS business volume.

And I think we’ll see how that goes, but I think there is opportunity. If it goes as we think it can to even spin that kind of off as a completely a separate company that shareholders can own as a separate standalone company.

Neil Chatterji: Great. Thank you for all that color. Last question — that was the last question from me.

David Fischel: Okay. Thanks a lot, Neil.

Operator: And there are no further questions at this time. Mr. David Fischel, I turn the call back over to you for some final closing remarks.

David Fischel: Okay. Thank you very much for all the thoughtful questions, that was really appreciated. We appreciate your continued support. We look forward to working hard on your behalf and speaking again in a couple of months. Thank you.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.