Stereotaxis, Inc. Q2 FY2023 Earnings Call

Good morning. Thank you for joining us for Stereotaxis' Second Quarter 2023 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 in a listen-only mode. The floor will 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.

Thank you, operator, and good morning, everyone. We are pleased to return to robust double-digit growth in the second quarter with a 28% year-over-year increase in revenue. System revenue in the quarter reflects partial revenue recognition on two Genesis systems, both of which are being installed this summer at hospitals in the US and Europe. During the second quarter, we received orders for two Genesis systems, one from a new greenfield hospital in Europe and the second as an upgrade of an AOB system to Genesis in the US. The net effect of the orders we received and the revenue recognized led to a slight increase in system backlog, which as of quarter end stands at $16 million. We expect similar or increased levels of system revenue in the upcoming quarters as our backlog is converted into revenue. We also continue to see a healthy pipeline of replacement cycle and greenfield hospitals interested in our robotic technology, which is expected to continue to contribute to backlog and provide confidence in sustained year-over-year revenue growth. Genesis Systems sales remain the primary driver of our growth as we work towards advancing a robust innovation strategy towards commercialization. Our recurring revenue in the quarter was impacted by the loss of royalty payments that we no longer receive from Johnson & Johnson, as well as J&J catheter production shortages, which pressured procedure volumes. Each individually presented a high single-digit headwind to recurring revenue. The J&J catheter production shortages which pressured procedure volumes throughout the first half of this year seem to have been resolved in July, and we expect procedures to rebound to more normal levels in the third quarter. On our last call, we hinted at a special announcement we have planned for the Heart Rhythm Society Conference. A highlight of the last quarter was the announcement at that conference of a global strategic collaboration with Abbott to integrate Abbott's latest insight X mapping system with Stereotaxis' robots. The integration of our technologies makes the use of Abbott's leading mapping system an attractive option for the community of robotic electrophysiologists who have long desired increased choice in mapping. It enhances the overall physician experience, streamlines procedural workflow and supports the improved treatment of patients who have come to lexarrhythmias. From a strategic perspective, this was a major leap forward in our effort to build an open ecosystem where the benefits of robotics can be paired with a broad range of diagnostic and therapeutic technologies. It will also significantly support the launch and more rapid adoption of our proprietary next-generation ablation catheter MAGIC. There was significant excitement at HRS around our integration announcement, we had an opportunity to educate the broader Abbott commercial leadership team on our technology and Abbott dedicated its space in their booth to showcase our collaboration. Abbott Software is currently released in Europe, and last month, we celebrated the first integrated insight robotic procedures at Erasmus Medical Center in the Netherlands and Marine House St. Elisabeth Hospital in Germany. These sites continue to do integrated procedures and other sites are moving through the adoption process. We expect the integration to be available in the US late this year as Abbott software and connectivity cable are approved in the US. The main drive for significant joint adoption of our technologies will take place concurrent with the MAGIC launch, but we anticipate a continued shift and diversification towards Abbot's Insight system until then. We had expected to receive CE Mark and launched the MAGIC Catheter in Europe this summer. While our regulatory submission was in line with multiple historical precedents, and direct verbal feedback we had received from the European notified body, the notified body's interpretation of the new MDR regulations led them to request first-in-human data prior to approval. We were surprised by the decision but have responded rapidly in designing a clinical protocol and putting together all the clinical trial documentation needed for submission to hospital ethics committees and relevant national authorities. Acute data in a couple of dozen patients from one single center should be sufficient. To reduce dependency or risk of delays at any individual site, we have engaged and begun spinning documentation to multiple sites, several of which have first-in-human trial experience. We expect to start patient enrollment in the trial in the fourth quarter and complete the acute data collection on the couple of dozen patients rapidly, allowing a restart of the MAGIC CE Mark review early next year. The availability of this clinical data will ultimately support a more robust launch for MAGIC in Europe, as we plan to use the trial to gain experience, data and materials to support the launch. In the US, we are progressing with the submission of our IDE application. In parallel, we are exploring with the FDA the possibility of an alternative regulatory route, which would accelerate our path to bring MAGIC to US physicians and patients. Beyond MAGIC, we continued to meaningfully advance our multipronged robust innovation strategy. These innovation efforts include a smaller self-shielding robot that frees us from the extensive planning and construction currently necessary to adopt robotics, a family of interventional guidewires and guide catheters that expand the benefits of our robots into new endovascular indications, a digital surgery, hardware and software offering, enabling broad operating room connectivity and a full electrophysiology product ecosystem being built in collaboration with MicroPort for the Chinese market. Development and refinement of the smaller self-shielding robot has gone well and is near completion. Commercial launch of the robot is predicated, however, on either the MAGIC catheter or our magnetic guidewire achieving regulatory clearance. We therefore want to balance pursuing regulatory approval for the robot early enough such that we de-risk regulatory approval and ensure it is available when those interventional devices come to the market, but not too early, such that we lose the ability to create an exciting launch for the robot. We plan to now submit the robot for 510(k) clearance and CE Mark at year-end at a similar time to when we expect to submit for the robotic Magnetic Guidewire. That should allow for approval and launch of our new robot with a Guidewire for vascular indications in 2024. Availability of the new robot paired with MAGiC will occur as soon as MAGiC gains its first regulatory approval, which we believe should be possible in mid-2024. In China, MicroPort is making significant progress in bringing together our joint product ecosystems and preparing for commercial launch. MicroPort continues to expect Genesis NMPA approval in early 2024. Mapping integration with our Columbus mapping system is complete and waiting for the availability of a Magnetic ablation catheter, which will be submitted for regulatory approval before year-end. MicroPort expects availability of this comprehensive product ecosystem in mid-2024 and starting to build awareness and excitement for what we will be launching together. The Asia Pacific Heart Rhythm Society Conference is taking place this year in early September in Hong Kong. Stereotaxis technology will be prominently showcased at the conference. The Society for Cardiac Robotic Navigation received an extensive session at the conference during which our robotic technology will be showcased in three live-streamed cases, including long-distance telerobotic procedures performed from the podium to hospitals hundreds and thousands of miles away. During the conference, MicroPort will also showcase for the first time its new Magnetic ablation catheter being navigated by Genesis, integrated with its mapping system. This activity and the growing excitement we see in the market, bode well for a strong launch next year. I recognize our past hasn't been easy and that progress on our strategic innovation efforts has been slower than originally anticipated. There have been various external factors serving as headwinds including changing regulatory goal posts, supply chain difficulties and personnel challenges across the industry that impact contract manufacturing partners. Internally, we have also been doing things that are new to us as an organization, such as focusing on disposable interventional devices. We are advancing multiple very significant and innovative projects with lean teams. I take responsibility for providing optimistic expectations. That said, my excitement for what we are building has not waned. I see ourselves as being on the cusp of the strategic transformation as we advance a new foundational product ecosystem that makes robotics broadly accessible and impactful across endovascular surgery. We have clear line of sight to a near-term future with strategic independence, an attractive revenue model, broad robot accessibility and multi-indication opportunity.

Thank you, David, and good morning, everyone. Revenue for the second quarter of 2023 totaled $7.9 million, growth of 28% from $6.2 million in the prior year second quarter. This growth was primarily due to higher revenue recognition on Genesis robotic system sales, partially offset by discontinued royalties from Johnson & Johnson. System revenue of $3.3 million reflects revenue recognition on the delivery of two Genesis Systems. Recurring revenue for the quarter of $4.6 million was predominantly impacted by both the absence of the J&J royalty and J&J catheter production shortages which pressured procedure volume. The J&J catheter shortage has been largely resolved, and we expect procedures to rebound to normal levels in the third quarter. Gross margin for the second quarter of 2023 was 53% of revenue with recurring revenue gross margin of 39% and system gross margin of 18%. Recurring revenue gross margin remains consistent with recent quarters and system gross margin continues to reflect significant allocation of overhead expenses over low manufacturing volume. Operating expenses in the quarter of $9.5 million includes $2.6 million in non-cash stock compensation expense. Excluding noncash stock compensation expense, adjusted operating expenses were $6.9 million compared to the prior year's adjusted operating expenses of $7.2 million. We continue to spend significant amounts on our research and development efforts and are working in a focused fashion to reduce operating expenses, where doing so won't compromise our progress. Operating loss and net loss in the second quarter were $5.3 million and $5 million compared to approximately $5.2 million for both in the previous year. Adjusted operating loss and net loss for the second quarter, excluding non-cash stock compensation expense, were $2.7 million and $2.4 million. Negative free cash flow for the second quarter was $2.9 million. At the end of the second quarter, we had cash and cash equivalents of $23.9 million and no debt. We expect a significant reduction in cash use in the second half of this year, particularly as we slow investment in inventory. We expect to end the year with between $22 million and $24 million in cash with no debt.

Thank you, Kim. We are aware of the importance of maintaining financial strength and ensuring our existing balance sheet is capable of advancing our innovations to market and funding their commercialization. We've invested significantly over the last several quarters in our new headquarters and on inventory for both Genesis and the next-generation robot. Those investments are largely behind us. We're balancing an overall posture of financial discipline with continued investment in the key drivers of technological progress and revenue growth. Our backlog and continued capital sales activity give us confidence in sustained momentum and in ending the year with double-digit annual revenue growth and a strong cash position. As our innovation pipeline comes to market, we expect that growth to accelerate from those launches. We look forward to now taking your questions. Operator, can you please open the line to Q&A?

Great. Thanks for taking the questions. I wanted to start with one on second half placement expectations. I think, David, you mentioned you expect a similar level of system revenues for Q2 and Q3 going forward. I was hoping you could speak a little bit more around that? What kind of visibility do you have into that? Is this planned? Is there any construction that could hold it up? I'm just trying to understand where we should be setting the models for system revenues in the second half?

Hey, Frank, good morning. So we've kind of gone into a pace where I think we feel very comfortable with two systems and being recorded as revenue, as a type of lower bound of what we would expect in any given quarter. And it is very hard still to estimate in any quarter exactly how many will go through; there is a lot outside of our control on that. And obviously, the volatility between two or three or four makes a big difference in the numbers, even though it's kind of individual units that are kind of driving all of that. And so we think that kind of modeling to that as a lower bound is the same thing. And we will have quarters where we're obviously above that, but that's kind of how we're looking at things right now.

Okay. That's helpful. And then, for my follow-up, I was just hoping to get a little more color on the Abbott partnership. Any immediate impact you're seeing in the field? And if there's anything you can help with quantification on how impactful this could be, maybe how much share Abbott has in the market? How frequently Abbott integration was brought up throughout the adoption process for new users? And any other color you could provide to really exemplify, the Abbott partnership?

The Abbott partnership was a highly strategic move for us, and we are thrilled to have announced it after many years of development. In the Electrophysiology field, particularly regarding mapping systems, there is primarily a duopoly between Johnson & Johnson and Abbott. While there are other mapping systems available, such as those from EnSite, Boston Scientific, and Medtronic, the market share in the US and Europe is predominantly held by Johnson & Johnson and Abbott. Historically, Stereotaxis has only been integrated with Johnson & Johnson's mapping system, and the absence of integration with Abbott was seen as a limitation for many physicians who preferred Abbott's system. This situation has important clinical implications, as providing more options to physicians allows them to utilize the robot without having to sacrifice the tools they prefer. We are now also integrated with the latest version of Abbott Software, enhancing the mapping functionality of our robotic system, which is a positive development. Strategically, this partnership will greatly benefit the launch of the MAGiC catheter, ensuring its entry into the market is aligned with the latest innovations, thereby facilitating its adoption. Financially, this announcement has a psychological impact that could reassure hospitals considering robotics adoption. Some physicians might choose to transition to the Abbott mapping environment and increase their procedural volume there. However, I don't anticipate a dramatic shift that would significantly alter adoption numbers. In the short term, we expect that the integration will notably accelerate the adoption of the MAGiC catheter.

Perfect. That's good color. I'll stop there. Thanks for taking the questions.

Thanks a lot, Frank.

Hi, David. Hi, Kim. Good morning and thank you for taking the questions. I wanted to start on the MAGiC catheter, and just I guess trying to better understand timelines in Europe. So it sounds like you're going to start the enrollment in the human study in Q4, and the review process from the regulatory body restarts early next year. Is midyear, or Q3 2024, just a reasonable assumption for approval and launch? So that's question one. And then question two would be, just maybe you can flesh out the alternative regulatory route that you referenced for MAGiC when we're talking about the US pathway? And then I had one follow-up. Thanks.

Good morning, Adam. In Europe, as mentioned earlier, we had a lot to do after receiving feedback from the notified body. We needed to organize a clinical trial protocol that aligned with the expectations of the notified body and was feasible for physicians to enroll in effectively within a hospital environment. There were numerous documents required to obtain ethics committee and national approvals to support this process. Our team worked diligently to prepare and submit the necessary documentation to hospitals in Europe. We believed that data from a single site would suffice for the notified body, but we preferred not to rely solely on one site. Therefore, we engaged with many of our users and received very positive feedback from them about participating in the trial, several of whom have experience with first-in-human studies in cardiac ablation. We have begun submitting documentation to various sites in Europe, and from what we understand, the review process typically takes a couple of months, around three months. We expect the enrollment for this trial, which involves all comer arrhythmias and focuses on acute data, to be quite swift, likely within a month for full enrollment. We anticipate having that data in the fourth quarter, along with approvals from the relevant authorities and ethics committees in Europe. Enrolling patients and gathering acute data within that same quarter seems reasonable as well. Afterward, we will promptly submit the data to the notified body to resume the review of our CE Mark. Given the thorough nature of the previous CE Mark review and the question rounds we went through, I believe this review should be shorter and more streamlined. However, the timing of the regulatory review is beyond our control, so while a summer timeline for next year seems reasonable, we can't guarantee it and hope it may even occur earlier. Does that clarify the European path for MAGiC?

It does, David. Thank you. That's great color. And would love additional thoughts on the path forward for MAGiC in the US; I think you referred to an alternative regulatory pathway. So we'd love to hear a little bit more about that. And then I have one follow-up. Thanks.

The traditional approach in the US involves filing for an IDE trial, conducting a pivotal US study, and ultimately submitting a PMA application to the FDA. We have completed most of the necessary work to prepare for that submission. Based on our activities in Europe and various discussions, we think there might be a potential alternative path that could be appealing. It is crucial for us, the physician community that relies on robotics, and the patients they treat that MAGiC is made available to US physicians and patients as soon as possible. We understand the significance of this and appreciate the meaningful discussions we've had with the FDA. At this stage, there isn't much more I can share, but I expect to provide clearer guidance on our progress in the US at the next quarterly earnings call.

Okay. Great. Totally understand. And then for the follow-up, I wanted to pivot over to the mobile robotics system. And I guess the genesis of the question is just trying to better understand the strategy and timing here. I think I heard you say the plan now is to submit for 510(k) and CE Mark at year-end, so a little bit of a push out there. I guess my question is, why not submit earlier for approval, get across the regulatory goal line, but just not launch it until you have approval for the MAGiC catheter in hand? So hopefully, that makes sense. And would love any color there. Thank you.

No pun intended on the genesis of the question comment there, right? We feel good about our development and testing process for the next-generation system. There's a balancing act where, as we pursue approval for the first system, we often continue to make improvements even after receiving approval in a robotic system. This differs from something like an interventional device, and we've consistently enhanced the Genesis system over time. Thus, we must find a balance between when to pursue regulatory approval and when to continue refining the product before seeking approval. Our team has been focused on the MAGiC regulatory process in recent weeks. There isn't much value in obtaining approval for the robot before either MAGiC or Guidewire is on the market. We're taking a balanced approach, aiming to secure approval for the robot before the interventional devices are available to minimize risks and ensure availability. We are confident in the regulatory pathway for the robot, especially given our recent discussions with regulators in both regions. We want to avoid getting approval for a robot six or nine months before it is operational while still making iterative improvements during that time. This is the careful consideration we are undertaking. I believe this approach is reasonable, and we will remain flexible if we notice any acceleration in the program, allowing us to expedite our decisions.

That’s helpful color. Thank you.

Thank you.

Hey great. Good morning everyone. David, I wanted to push a little bit more around the alternative paths. And I know you don't want to rebuild too much of the game plan, but if I'm just hearing you correctly, it sounds like it could potentially use the European data in the PMA submission, and maybe you could bypass some of the workflow that is needed for a PMA if you just were solely doing in the US?

Hi Alex, it is obviously an important topic and an important question. I don't want to go into great detail on that now. I don't think it's appropriate to do so. I think that it is obviously the MAGiC catheter is a highly important product in terms of ensuring that physicians that use our technology and the patients that they treat have access to robotics and the latest generation of robotics in the best fashion possible. I'm grateful that that kind of the regulators understand that importance. And we are being creative in how we're thinking about collecting data to ensure that MAGiC is clearly kind of an efficacious and safe device. We've been fortunate to have the opportunity to explore various ideas in a collaborative fashion. I will know more in the coming weeks. And so I believe by the next call, we'll be in a position to be able to share much more. Again, kind of our baseline path, which we are advancing and committed to is that submitting an IDE application in the near-term, but there may be opportunities for an improved timeline there that would provide MAGiC to US physicians and patients in an accelerated path.

Okay. Understood. Well, I look forward to that update there next quarter. Sounds very interesting. Maybe on utilization, if you back out some of the one-time items here with regards to, I guess, maybe not one-time, but the royalty, the catheter shortages, how is underlying usage and utilization with Niobe and Genesis going this quarter?

So, obviously, from a recurring revenue perspective, you see the hit because of the loss of the royalty that has nothing to do with utilization. That's purely a kind of a dollar hit per procedure. And on the utilization side, we were hamstrung by the shortages of J&J catheters, which did impact volumes in the second quarter. They also did impact in the first quarter before that and overall, that high single-digit impact to recurring revenue, the shortage of catheters and the impact on utilization. I'd say we expect, given what we've seen in live the commentary we've received, it seems like the shortages on catheters are largely over. And so we'd expect to bounce back to more normal volumes in the third quarter. And overall, we still see utilization at Genesis accounts being higher than at Niobe accounts. And so we see kind of the benefit of new technology and what new technology brings to the marketplace. And so that has been kind of good to see.

Okay. Excellent. And then maybe just lastly, just how is the overall hospital environment in recent months? It might seem like based on the commentary, things are starting to break free a little bit. New placements and new orders are starting to flow in, maybe a little bit easier than it has been during the pandemic.

Yes, it's a combination of factors. As I have mentioned in the past, we remain a relatively small player in the industry, which makes it difficult to draw broad conclusions from our experiences. Generally, what you mentioned is accurate. We are engaging with multiple hospitals, and some are progressing with their projects. We've observed tenders occurring in Europe, which feels encouraging. However, there are also hospitals facing significant financial pressure, leading to tight controls on spending and projects. We are experiencing a variety of situations among our hospital customers. Nevertheless, our commercial team is becoming more mature and effective in engaging with sites. This gradual improvement from our prior efforts is starting to yield positive results, and we will begin to see more consistency in the capabilities of our team. Although the environment is still challenging, with more headwinds than tailwinds, we are making overall progress despite these challenges.

That's good to hear. Well, I appreciate the update. Thank you.

Thank you very much.

Hi. Good morning, David and Kim. Thanks. Wanted to just get a refresher on the status of the US and Europe capital sales teams? And any plans to build them out and stability is a near-term plan? And what would you need to see to change that strategy? Would it just be expansion of the sales funnel and just increasing levels of demand or any other triggers? Then I have one follow-up on China.

Good morning, Josh. We have previously discussed our strategy for the European sales team. Overall, our commercial teams in the US, Europe, and Asia are appropriately sized, and we believe we have a capable team in place. We have been gradually strengthening the team in Europe in preparation for the MAGiC launch. We are confident that the MAGiC catheter can be successfully launched at our current sites in Europe with our team. Additionally, we believe we have the capacity to launch the new robot, which will simplify the efforts our existing team has been making on the capital side. Our technologies can be effectively introduced to the market with our current teams. The chance to expand our team alongside an improved revenue model and a significant increase in disposable revenue per procedure is a compelling opportunity. We intend to reinvest much of the additional gross profit from the MAGiC catheter and the growth in revenue from these new technologies back into our team and the company. During the MAGiC launch, I expect us to adopt a model similar to other companies in the field, where there is one dedicated salesperson per hospital. Currently, we have one salesperson for every three or four hospitals, which puts us at a commercial disadvantage compared to our competition. Once the MAGiC catheter is available, we can shift towards a more comparable model to our competitors in a financially responsible way. This transition will occur as we execute the MAGiC launch.

Understood. And then just wanted to just better understand the dynamics in China in front of MicroPort kind of finalizing the build-out of the EP ecosystem and incorporating robotic magnetic navigation technology. Is there a holding period here in China just for new customers? I think you've described kind of sales funnel or pipeline of potential customers in a dozen-plus range in China. But do we need to see Genesis approval before those that pipeline converts to contracts? And just maybe just to help us think through the next 12 months in front of that full build-out. And then just a follow-up to that. Are there any other countries in Asia Pac? You have this HRS, I think Asia Pac meeting coming up in September in Hong Kong. Any other opportunities you see in Japan or other Asia Pac countries that are intriguing for Stereotaxis? Thank you.

Thanks, Josh. So yes, the EP HRS, Asia-Pacific HRS conference that's coming up in the beginning of September, I was very pleasantly surprised by how good of a program was arranged by the Society for Cardiac Robotic Navigation in collaboration with EP to HRS. They are showcasing some amazing procedures and some amazing capabilities of our technology. So I think that is reflective of the type of pre-commercialization work in some ways that is taking place there to build up interest and to grow the visibility of our technology there overall. There's some opportunity potentially to commercialize new robots prior to that ecosystem coming into play next year. But I'd say that that is not the biggest focus. The real focus is how to make sure that as you have this full ecosystem available, you can have a very successful launch and you can together in partnership with MicroPort, take multiple percentage points of market share in a country like China, which is a significant existing market. This is really kind of the primary strategic focus and the big way that's out there. I think kind of as we said before, right, we expect Genesis approval in the earlier parts of next year, given the submission that had taken place already at the end of last year and then some of the additional requests for information that took place in the first half of this year. MicroPort will be submitting its kind of the next-generation ablation catheter that works combined with their Columbus mapping system and our robot later this year. Overall, we're looking at a kind of a nice launch probably around this time next year. I think that we do have other accounts in the Asia Pacific region outside of China that still do procedures that are great users of robotics. At APH RS, we will be engaging with those accounts and we'll be engaging with potential accounts in other countries in the Asia Pacific region. But I'd say that from a focus perspective, we see a very clear line of sight to building a substantial business with MicroPort in China. That really is kind of the biggest strategic focus and that's where I'd expect to see the biggest change to our overall corporate trajectory from there.

Appreciate that. Thanks, Dave.

Thank you.

Good morning. Thank you for taking my question. Many of my questions have already been answered, but I would like an update on the preclinical studies with PFA generators. Do you have any information on the development for MAGiC and PFA?

Sure. Hi, Neil, we have discussed this before. We conducted an animal study using the MAGiC catheter variant with PFA generators and achieved positive results. There is strong rationale for utilizing the advantages of robotic magnetic navigation along with pulse field energy. While pulse field energy can be very effective, it requires direct contact with the tissue during its brief therapeutic burst. Manual catheters are less stable on a beating heart, which supports the need for improved lesion formation when combined with PFA. Overall, we have been pursuing several collaborations with different companies that have PFA generators and technology. We are exploring how to leverage these collaborations and our technology work to establish a regulatory pathway that would enable us to transition from preclinical studies to actual clinical trials for a PFA product. The development of the MAGIC catheter has provided us with a solid foundation since we now own our own ablation catheter. This ownership has been beneficial, allowing us to use a variant with PFA and enabling other companies to create their own catheter variants for collaborative use in a robotic setting. We are currently working with various parties to explore how these products can be brought to market.

Great. Thanks. Maybe just a follow-up just on OpEx. I guess with the kind of the ongoing work you have and kind of the plan work, how should we think about kind of R&D expense kind of in the back half and into 2024 and then maybe additionally, just on the pipeline, any update on your kind of work and development in connectivity?

In terms of R&D expense, I expect it to remain relatively stable. Some projects have completed most of their spending and now require mostly internal work with minimal external expenses needed for their completion. However, other initiatives, such as running clinical studies, naturally increase costs. Considering the various projects, overall spending is likely to stay flat, although certain studies may be more expensive. Depending on developments next year, we might see an increase in R&D expenses. For the second half of this year, I anticipate it to be similar to the first half. From an operational expense perspective, we are at a reasonable level and are implementing targeted reductions where they don’t hinder our technological progress or commercial capabilities. It's important to note that operational expenses and GAAP earnings differ from cash flow. Our cash flow has been slower than expected, particularly due to inventory investments for both Genesis and the next-generation robot. We have procured most components for several Genesis Systems and the next-generation robot, which has put a strain on cash resources to mitigate supply chain delays. We plan to continue investing in both products, although at a lower level. Given the revenue and cash inflows from the Genesis system, I expect these to be under the cash inflows. Our guidance of $22 million to $24 million in cash at the end of this year reflects an anticipated improvement in cash flow as we won’t need to invest as heavily in inventory. What was your second question? I apologize, I didn’t catch it, Neil.

Yes. Can you provide any update on the OR connectivity? Thanks.

We are currently in the early stages of a limited internal market release for our connectivity software, which will be available as a full product in production environments and downloadable from both iOS and Android app stores. Initially, we'll work with our internal team and select existing customers to ensure functionality, identify any bugs, and confirm that the features meet our customers' expectations for peer-to-peer connections between physicians, as well as for providing remote technical and clinical support. We plan to start this rollout in about a month. Following the limited market release, we will determine an appropriate time for an official public launch, which we anticipate will be a few months later. We have begun collaborating with hospitals on their approval processes, and our experience with cybersecurity and hospital IT groups will facilitate this due diligence for connected technologies in medical settings. Currently, approximately 80% of our hospitals connect with us via VPNs, enabling remote support and real-time data access from our robots. This new solution offers a more streamlined and scalable connectivity approach for individual sites, designed specifically for the hospital environment with our cybersecurity expertise in mind. However, we still need to complete the review process for this innovation. We are already in the initial phases of this process with select hospitals, which will likely take a few months. We have initiated some work on the limited market release, and as we gather feedback from participating hospitals, we will prepare for a full launch.

Great. Thanks a lot. That’s it for me.

Thank you, Neil. We have no further questions in queue. I would like to turn the call back over to David Fischel for closing remarks. Okay. Thank you very much for all your questions. We appreciate your continued support, and we look forward to working hard on your behalf in the coming months, and we'll speak again next quarter. Thank you very much.

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