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Stereotaxis, Inc. (NASDAQ:STXS)

Q4 2011 Earnings Call

March 5, 2012 04:30 pm ET

Executives

Gregory Gin - Vice President, EVC Group

Michael P. Kaminski – Chief Executive Officer

Samuel W. Duggan II – Chief Financial Officer

Analyst

Jose Haresco – JMP Securities

Steve M. Lichtman – Oppenheimer Securities

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2011 Stereotaxis Inc’s Earnings Conference Call. My name is Keith and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later on, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded for replay purposes.

And I would now like to turn the conference over to your host for today Mr. Greg Gin of EVC Group. Please go ahead, sir.

Greg Gin

Thank you, Keith, and good afternoon, everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the fourth quarter and full-year 2011, which ended on December 31, 2011.

Before we get started, we’d like to remind you that during the course of this conference call, the company may make projections and other forward-looking statements regarding future events or the future financial performance of the company, including, without limitation, statements regarding future operating results, growth opportunities and other statements that reflect Stereotaxis’ plans, prospects, expectations, strategies, intentions and beliefs. These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

For a detailed discussion of the risks and uncertainties that affect the company’s business and that qualify the forward-looking statements made on this call, we refer you to the company’s periodic and other public filings filed with the SEC, including the Form 10-K for the fiscal year ended December 31, 2010 and the quarterly filings for 2011. The company’s projections and forward-looking statements are based on factors that are subject to change and therefore these statements speak only as of the date they are given. The company assumes no obligation to update any projections or forward-looking statements.

In addition, regarding orders and backlog, there can be no assurance that the company will recognize revenue related to its purchase orders and other commitments in any particular period or at all, because some of these purchase orders and other commitments are subject to contingencies that are outside of our control. In addition, these orders and commitments maybe revised, modified, or canceled either by their express terms, as a result of negotiations or by project changes or delays.

Now, I’d like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis.

Michael P. Kaminski

Thank you, Greg. Good afternoon, everyone, and thank you for joining us for the review of our fourth quarter and full year 2011 performance. With me today is our Chief Financial Officer, Sam Duggan. Following our prepared remarks, we will open up the call for your questions.

Before we begin a more detailed discussion of our 2011 performance and strategic priorities for 2012, I’d like to address some broader topics. Clearly, 2011 was a challenging year for us in which we experienced both successes and set backs.

During 2011 as we recognized the impact of our robotic platform transition on our financial results, we took immediate actions including significantly reducing operating expenses, raising capital, and executing on the Epoch platform commercial launch, while we’re confident these actions will lead to improved operating performance beginning in 2012, we know we have much work to do.

We’re determined to lead this company to profitability and we’ll continue to take the necessary steps to improve on our financial position as we execute on our current business plan and growth strategies. To that end, our immediate priority is to address the capital needs of the company. Specifically, we’re working to first extend our debt facility with Silicon Valley Bank, which we expect in the upcoming weeks and second, to secure additional capital through one of several options we’re considering.

As Sam will discuss later, these steps are fundamental to our continuing to be able to drive our business model forward. We’re optimistic that we’ll be able to complete both of these in the relative near-term. However, we’re limited in what we can disclose at this time as to both the nature of these transactions for the specific timetable. We’ll keep everyone informed when we’re able to report more.

Now, let me discuss our performance in 2011. Among our successes was the introduction of the fourth generation magnetic robotic system, the Niobe ES or Epoch system in mid-December. Niobe ES provides exceptional advancements and operational response time and a shorter learning curve along with expanded capabilities that position the product to address the needs of the large community hospital market, which often has a single physician operator performing complex ablations.

We’re encouraged by the early very favorable response, which we believe indicates that our new robotic platform meets the needs and provides us strong competitive advantage in terms of safety and now efficiency.

Secondly, utilization continues to increase as evidenced by 15% growth in recurring revenue in 2011 over 2010 and we achieved a record high $7.4 million in the fourth quarter. This performance reflects a strong growth we continue to see in clinical procedures on the magnetic platform, which drives disposable sales and service contracts. Company-wide nearly 10,000 procedures were performed in 2011, an increase of a 11% over the prior year.

Complex procedures for atrial fib and VT were up 23%, evidence of the fundamental value for complex ablations. Last year we began reporting on those sites installed after 2007 are performing at a much different rate of adoption that no sites installed prior to that time. The primary reason is that our early installations did not meet the needs of physicians for complex ablations and we therefore lost their interest and commitment.

At sites installed after 2007, our utilization and complex procedures grew 48% last year. This level of growth demonstrates the value we’re brining to address the needs of these patients. Additionally, we’re making progress in the entire installed base as evidenced by the fact that our top 90 sites are now averaging two procedures per week.

Third, we reduced our operating expenses, the run rate by 20% by the end of 2011 to align cost to the revenue growth. Operating expense are at our lowest level since 2005. Offsetting these successes, we experienced some setbacks.

While we’re excited about the potential of the Epoch platform, the platform transition had a negative impact on 2011 financial results. Following the introduction of the Epoch product at the HRS meeting in May, Niobe system orders and revenue installed as customers waited to see the upgraded technology. The Odyssey business was also negatively impacted as Odyssey orders and installations in Niobe lab slowed.

At the same time, while we had significant interest in Odyssey from standard labs, the anticipated larger deals did not materialize. Our experience has been that the larger deals led to more decision makers and resulted in a more complex sales cycle. For example, several customers pulled us into broad discussions and how Odyssey could become the point of integration for procedure room data.

Due to the growing interest and a handful of reference sites, we forecasted, so we could close some of these deals in the second half of 2011. However, what we experienced was that the clinical champion at the institution had less influence when the CIO became more involved in the purchase decision.

At that point, Odyssey became a lower priority among the other initiatives of the organization. As a result, we’ve adjusted our sales strategy to focus on smaller integration projects where the institutions clinical champion can drive the value discussions.

Now, let me discuss how we view 2012. With the release of Niobe ES, we expect renewed growth in system revenue and new capital orders during the year. Most likely this growth will unfold as the year progresses with the upgrade of the installed base first, leading to the increased Epoch utilization, and strengthening of reference sites, which will then translate to increased system orders. We gain momentum in the fourth quarter and to-date have upgraded 21 sites to the Niobe ES with extremely positive clinical results. The first 386 Epoch procedures, 70% which were AF demonstrated a 25-minute improvement in average ablation time over Niobe II.

In surveys of Niobe ES new software features, operators noted greater procedural efficiency in 92% of cases. And anecdotally, physicians have described the Niobe ES as one of the most important innovations for the EP practice to-date. We expect the Niobe ES the significantly improved procedure volume during 2012, average utilization in the initial sites is up 51% over prior year and in the nine sites with both Niobe ES and Vdrive, usage is up an additional 16% from those, which is Niobe ES alone.

Released in Europe in early 2011 the Vdrive, which allows robotic manipulation of traditional manual catheters, recently surpassed 500 clinical procedures. Early feedback indicates that Vdrive can save up to 30 minutes in robotic producer time and multiple physician users have confirmed it significant clinical value.

With regulatory clearance to market that Vdrive in Europe and Canada and striving to obtain commercial release in the U.S. by the end of the year, the device will be a significant part of our robotic offering.

We expect the recovery of the robotic business to have a positive impact on Odyssey products, given that approximately, 75% of magnetic platforms, include Odyssey product sales. In addition, we believe our strategy to pursue smaller standard lab deals will allow us to quickly penetrate the market and provide a longer-term opportunity to become a preferred standard in these labs.

Furthermore, Odyssey sales will benefit from our Biosense Webster distribution agreement. We’ve invested significant time and effort to develop this collaboration and we are beginning to see the initial results. This [following] the first quarter of 2012, we booked two orders from Biosense Webster and expect more in the upcoming months.

We believe the anticipated rebound of capital sales in 2012, a stronger foundation of recurring revenue, and our lower operating costs better position us to generate improved financial performance going forward.

At this point, I’ll turn the call over to Sam to provide further details on the quarterly and full financial year results. Sam?

Samuel W. Duggan II

Thanks, Mike, and good afternoon, everyone. In the fourth quarter 2011, revenue was $11.6 million, compared to $14.5 million in the 2010 fourth quarter and $8.5 million in the third quarter 2011. We posted revenue of $2.3 million on two Niobe systems and Odyssey revenue was $1.8 million.

With the release of Niobe ES, we realized sequential improvement in system revenue and new capital orders in the quarter. System revenue grew to $4.2 million in Q4 compared to $2 million in Q3 and new capital orders increased to $3.6 million versus $2.2 million in the prior quarter.

Recurring revenue reached a record high $7.4 million in the fourth quarter, an 80% improvement over the prior year quarter. The rise in recurring revenue was attributable to an increase in utilization, which drove higher disposable revenue along with improved pricing and advanced purchases of disposables related to Niobe ES upgrades. We valued our active backlog to approximately $20 million, which included 10 Niobe system orders. This is a decrease of $9 million from our active backlog at the beginning of the fourth quarter, which we weighted at approximately $29 million and which included 60 Niobe systems.

During the quarter, we added $3.6 million of new orders, converted $4.2 million in system revenues, reversed $0.9 million in deferral revenue and other adjustments, and removed five projects from active backlog valued at $7.3 million. While it is possible that one or more of these projects could convert to revenue in the next 18 months, we have not included them in our plans for 2012.

Gross margin was $8.3 million, or 71.4% in Q4, compared to a margin of 73.4% in the year ago quarter. This was a result of higher cost absorption with fewer Niobe sales, as well as weaker Odyssey pricing. Excluding a $0.2 million charge related to the under-absorption of overhead, based on normal production levels, gross margin was 73.2% in the fourth quarter.

Operating expenses in the fourth quarter were $12.9 million, down $1.2 million from the year ago period. The decrease was principally related to reduced headcount impacting sales and marketing, and general administrative. We have successfully managed operating expenses to their lowest run rate since 2005. The net loss for the fourth quarter was $5.5 million or $0.10 per share, compared to a net loss of $2.5 million or $0.05 per share reported for the fourth quarter of 2010 and $7.3 million or $0.13 per share in the third quarter 2011.

In the fourth quarter, cash burn was $14.8 million, compared to $6.4 million in the third quarter. The increase was due to $3.1 million of remaining debt to Biosense Webster and working capital use of $7.5 million, $6.6 million of which related to growth and accounts receivable. This was that we expected given the turnaround of business that began in the fourth quarter. In other words, as our business improved, our working capital increased, principally due to higher than normal shipments at the end of the quarter that drove accounts receivable.

The third quarter also benefited from high collection near at the end of the quarter. Revenue for the full year 2011 was $42 million compared to $54.1 million reported in 2010. As Mike stated, the transition to the new Epoch platform resulted in lower system revenue for both the Niobe and Odyssey businesses.

During the year, we recognized revenue of $7.8 million on Niobe compared to $21.9 million in 2010. Odyssey system revenue was $7.4 million, down 20.3% from a year ago. Conversely, recurring revenue grew to $26.4 million in 2011 from $22.9 million in 2010. For the full year 2011, gross margin was 70.2% of net revenue positively impacted by higher mix of recurring revenue. Excluding $0.6 million charge related to the absorption of overhead, there is some normal production levels. Gross margin was 71.7% for the full year 2011.

Operating expenses were $61.4 million for the full year 2011, an increase of $4 million from the year ago period. The rise relates to the development of Niobe ES and Odyssey system upgrades, headcount to support higher utilization rates and increased spending on registrations in Japan as Niobe ES approaches the end of clinical trials. The net loss for full year 2011 was $32 million, or $0.58 per share, compared to a net loss of $19.9 million, or $0.39 per share, reported for 2010.

At December 31, 2011, we had cash and cash equivalents of $14 million, compared to $35.2 million at the prior year end. Outstanding debt was $38.5 million versus $28.9 million a year ago and included $15.2 million from the Cowen transaction completed in the fourth quarter.

As a reminder of the terms of the deal, we received $15 million or net $14.3 million on December 5, with a potential additional availability of $5 million, if we achieve the following milestones. We’ll receive $2.5 million beginning July 1, 2012 with the sale of six Niobe ES systems for the nine months ended June 30, 2012.

We’ll receive an additional $2.5 million beginning December 31, 2012 with the sale of ten Niobe ES systems for the 2012 fiscal year. If we do not complete the first milestone, but achieve the second, we will still receive all $5 million. The financing care is a 16% interest rate and matures December 31, 2018. Under the terms, the facility debt is paid down through royalty payments from Biosense Webster.

Looking to 2012, we expect system level to substantially improve and to grow at a faster pace than recurring revenue as we experience higher system sales through Niobe ES and Odyssey. While this will allow for an improved cost absorption and system margins, total gross margin percentage in 2012 is expected to be slightly lower giving a smaller margin of systems revenue compared to recurring.

In terms of recurring revenue, the fourth quarter record results benefited from a sharp increase in disposable revenue in December with high volume sites performing a large number of cases following their upgrade to Niobe ES. We do not anticipate seeing a repeat of the fourth quarter record high results in the first quarter of 2012, as the disposable revenue was exceptionally high in December.

We believe the fourth quarter cash burn represented a high point and expect a significant reduction beginning in 2012 as we continue to benefit from lower operating expenses and only a slight rise in working capital. In the first quarter, which typically carries the highest cash burn, we’re expecting to use approximately $5 million in cash resources. We believe our lower cost structure and expected rebound revenue will improve cash flow and lower capital requirements in 2012.

However, as Mike discussed at the top of the call, in addition to the expected lower capital requirements in 2012 I just mentioned, we’re also taking steps to address the ongoing capital needs of the company.

Following the market close today, we issued an 8-K announcing receipt of a debt waiver from Silicon Valley Bank related to the liquidity ratio of financial covenant as of February 29, 2012. Silicon Valley Bank has been a great partner and has worked with us closely over the past several months. We’re in the process of finalizing extension of our credit agreements with Silicon Valley Bank, which we currently expect sometime in the next few weeks.

In addition, we’re working to secure additional financing and are actively looking at and considering a number of potential alternatives. Addressing those capital needs is our immediate priority and successfully completing these steps as fundamental for our ability to drive our business model forward is currently planned. While we’re optimistic and we will be able to complete both the Silicon Valley Bank extension and the additional capital transaction in the relative near-term, we can assure that we will be able to do so on that timetable or at all.

Consistent with our policy with respect to any transaction that we might be contemplating or discussing, we do not comment publicly on those transactions. At the present time, I cannot give you anymore details as to what we are discussing or the timeframe on which it might be completed.

In summary, 2011 was certainly a challenging year for our company, but we’re encouraged by the progress we made as the year progressed. We believe the actions we’ve taken to lower our cost structure and to increase sales positions us significantly improved financial results in 2012.

Witt that, I’ll turn the call back to Mike.

Michael P. Kaminski

Thanks, Sam. We have several positive trends on which to build in 2012. We’ve outlined the following milestones to achieve for the year. First, extend our credit facility with Silicon Valley Bank, as well as securing the necessary additional financing to ensure that we have adequate capital for our planned ongoing. Second, achieve at least ten new Niobe ES system sales. Third, complete 40 Epoch ES upgrades during the first half of the year.

The demonstrated value of our technology solutions is further enhanced with the introduction of the Epoch platform. We’ll continue to innovate and advance our platform towards our vision that robotic interventional medicine becomes a standard of care by providing a consistent and superior approach to patient care, at the same taking the necessary steps to strengthen shareholder returns.

Thank you for joining us on the call today and your continued support. With that operator, let’s open it up to any questions.

Question-and-Answer Session

Operator

All right. (Operator instructions) And your first question is from the line of Jose Haresco with JMP Securities. Please proceed.

Jose Haresco – JMP Securities

Hi, guys, good afternoon.

Michael P. Kaminski

Hi, Jose.

Samuel W. Duggan II

Hi, Jose

Jose Haresco – JMP Securities

Let’s see, let’s talk a little bit about the backlog, I think you mentioned a couple of moving parts or a $7 million taken off of the backlog last quarter and you added $3 million. Has anything changed, (inaudible) number, but does anything change in terms of how you just think about or qualify these large projects? And I guess, we’re just trying to figure out that $10 million you’ve got in the backlog, how the criteria by which you were judging those and you including them in the probability of that will be completed in 18 months changed over the last six months or so? In other words, should we have to look to see that number be about the more predictable as we had in the 2012?

Michael P. Kaminski

Jose, let me, Sam, can address the puts and takes of the backlog. Let me address kind of the overurging question you asked first. The, if you look at the backlog today, there is ten systems in backlog, I think we believe eight of the ten should be in a position to go to revenue this year, two are sitting right on the beginning of next year in the 18-month window. We’ve taken everything outside of that out of the backlog and then the ten, we’re confident will go to be an Epoch system in that period of time, the next 18 months, all right? So and we think that we’re now in a position to make that a very predictable part of how we look at revenue go forward in the company’s business model.

Samuel W. Duggan II

Yeah, I would say Jose; we are attempting to make the backlog more predictable as we move forward. And by that I mean we are trying to make sure that as new items come into backlog that we have a very high level of confidence that they will turn to revenue. Some of which could turn to revenue relatively quickly depending upon whether it’s something with as building of a new hospital, which could take longer but some of them we may wait till later in the process to actually allow them to go in a backlog which will create more predictability for the investment community in terms of the ability of that backlog to turn to revenue, hopefully in a shorter period of time.

Relative to the items that were taken out of backlog, there were five Niobe systems that came out. With them there was four Vision and three Cinema that came out along with them, because usually when we make a sale, they get bundled with part of our Odyssey products as well.

Jose Haresco – JMP Securities

Okay. Was the removable of those items tied to hospitals pulling back on the project? And conversely, the senses that you have now, how much, how many of the systems coming I guess has at least quality of something new, the availability of Niobe ES?

Michael P. Kaminski

The removal was generated because, Sam, and I were not confident that they would come to revenue in a predictable timeframe, that 18 months Sam mentioned. As far as systems coming in as Sam mentioned, we’re going to make sure that as we interim in there is a high level of confidence that they will translate to revenue in that window or else we want interim as a new capital order until they do have the ability to translate in that timeframe.

Samuel W. Duggan II

And to put it differently Jose, as I indicated in some of my remarks even though these items had been removed from backlog as we don’t have confidence, they’re going to term and then – and they’re going to convert to revenue in the near term that doesn’t mean that all these items have been removed from our sales pipeline these things may in fact come back in the backlog somewhere down the line where we’re more comfortable that its predictable that they will in fact convert to revenue.

Jose Haresco - JMP Securities

Okay. Could you share some color on the straightening of the disposables in the fourth quarter, you mentioned to do a tied to a couple of upgrades into Niobe gas. So you said the Q1 was going to be, wasn’t going to reflect that again. Is that type of dynamic reflective, what might happen when we see other upgrades in Q3 and Q4?

Samuel W. Duggan II

As we look to our disposable revenue, we actually, we have a record quarter obviously for all recurring revenue. And we had a large increase in disposable sales we believe a lot of that was a pull forward for some initial high volume sites that uses disposables and anticipation of the ES upgrade and even if we had used a more normalized level, of what disposable of revenue it look like it still what been a record quarter in a record year for recurring revenue. So we do not believe that we would see the same level of recurring revenue when we did and want the investment community to use $7.4 million is the starting off point from which to look at Q1, 2012. We think that disposable revenue could be lower few $100,000 or so from where it was at this level. And that’s why we disappointed out, so that‘s Epoch if we received another Epoch from some of the other upgrades, that would be great but we're not anticipating at this time.

Michael P. Kaminski

Yeah, let me add a little bit to do that, what Sam mentioned is, there is a normal increase, which would have made it a record quarter. There is a little bit of lumpiness due to the Epoch coming into the system, and that will even out as the year progresses.

Jose Haresco – JMP Securities

Okay, how many sales people you have at this point, small changes in the organization and number two, with Niobe ES and Vdrive coming on later you just give a sense of a what clinical activities you will be working on track next 12 months to, so we kind restart the – that interest in the combined product.

Michael P. Kaminski

Yeah, so to your first question as you know we break our sales group into account management, which is the sales force who drives clinical adoption into the installed based so after a site installed they take over and drive through in adoption process. And then a capital sales which is a different obviously, different process there is roughly worldwide 30 account management and 15 capital.

They are in the sales force in the field, obviously in capital we use distributors as well, so if you start looking outside of Western Europe and the U.S we have a large number of distributors work with us is well. The second question on there was how the plan is for the year so the Epoch rollout, the strategy around the Epoch rollout was around upgrading the sites that we can leverage early in the year so you’ll see the first six or the sites we have three in Europe and three in the U.S which allowed us to, to get it up and running and some of the early real innovative sites and then the next wave of sites for the once we think, we can build the reference basis from.

After that we start getting into – later in the year we’ll get into sites that we traditionally have called not all the way through the adoption process or stalled accounts, if you listen to it, common language were used and those will take us a longer period of time to get transformed into an adopted customer. So we’ll begin to work on those as we get to mid-year with the resources we have. So what we’re doing now is prioritizing obviously the first sites, so that we can create the most positive wave of excitement prior to HRS, which comes up in May.

Jose Haresco – JMP Securities

Okay, great. Thank you very much.

Michael P. Kaminski

Thank you, Jose.

Operator

Your next question comes from the line of Steven Lichtman with Oppenheimer. Please proceed.

Steve M. Lichtman – Oppenheimer Securities

Thank you. Hi, guys.

Michael P. Kaminski

Hi, Steve.

Samuel W. Duggan

How are you doing Steve?

Steve M. Lichtman – Oppenheimer Securities

Mike, I apologize if I missed this, but update on the U.S. timing for Vdrive is that still back half of this year?

Michael P. Kaminski

Well, Steve, we’re going right now in the process with the FDA. We’re still optimistic we can get it by the end of this year and what is have to update everybody as the quarters unfold, because it’s a 510-K process, which will require some clinicals. And then as that emerges, we’ll keep everybody, we’ll inform of that, but we’re optimistic and working hard to get it released in the U.S. this year. Obviously I think Canada and Europe and we’ll get very positive Vdrive feedback so far.

Steve M. Lichtman – Oppenheimer Securities

Okay, got it. And in terms of the total installed base out there today, the potential for upgrade, can you remind us what that is as you’re talking about midyear, hopefully 61 upgrades, what’s the denominator again?

Samuel W. Duggan

It’s roughly a 162 in the install base as of year end and of that number, roughly a 152 of them are Niobe II’s that could be upgraded to Niobe ES.

Steve M. Lichtman – Oppenheimer Securities

Okay. And your hit rate so far in terms of who you guys have approached from an upgrade has been very high obviously, is that right, has there been anybody who says no, and if so, I mean what kind of feedback you get on that front?

Michael P. Kaminski

It’s been very positive, obviously with even better than our salesmen showing up as the word they’re hearing from other accounts that have been upgraded. So the references they are getting from their peers is making it easier for us to sell. But obviously the capital sale, it takes sometime to go through it. So, I think as you noted the mid-year goal is to upgrade 40 accounts by the end of the second quarter, we think we (inaudible) to get that done. I think that will create the real trajectory that we needed to drive both the utilization and the reference sites.

Steve M. Lichtman – Oppenheimer Securities

Okay, got it. I guess we may had the first quarter call before HRS, I’m not sure, but just early look at HRS, will there be any sort of larger type of datasets that we can expect from you guys there?

Michael P. Kaminski

I think our first call, right, we’ll try to do it at the right around HRS that...

Steve M. Lichtman – Oppenheimer Securities

Right.

Michael P. Kaminski

And then we’ll update everybody on the latest data and from all the sites.

Steve M. Lichtman – Oppenheimer Securities

Okay. But will there any presentation at HRS that we should be looking forward too?

Michael P. Kaminski

There we have several podiums and posters, I think the latest count was north of 20. So I know some of those will come from these sites, yes, and we’ll point those out as we get closer.

Steve M. Lichtman – Oppenheimer Securities

Got it. And then lastly just I apologize I just want to make sure clear on the backlog. So in terms of how many system sales are or systems are in the backlog or Epoch are in the backlog, is it one at this point or how many are Epoch?

Samuel W. Duggan

All of that will be Epoch, so there is 10 of them.

Steve M. Lichtman – Oppenheimer Securities

Okay.

Michael P. Kaminski

Okay. The backlog is all Epoch now. 10, there is 10 systems of which we believe eight will go to revenue this year.

Steve M. Lichtman – Oppenheimer Securities

Okay, got it. Perfect, thanks guys.

Michael P. Kaminski

Sure.

Operator

Your next question is from line of [Albores] with Deutsche Bank. Please proceed.

Unidentified Analyst

Hi, Mike.

Michael P. Kaminski

Hi, Al.

Unidentified Analyst

A couple of questions, kind of back to the Epoch upgrade, can you give us an idea of what kind of time is involved to just update a Niobe II versus put a whole system in there, and back a little bit to the idea of that further update China coming, you got the more time it takes. How does that differ from, that time differ from us, whole system sale versus an upgrade? And sort of secondly, can you talk a little bit more about the shorter learning curve with the Epoch?

Michael P. Kaminski

Sure. Al, the time for an upgrade, and that is from a Niobe II to an Epoch, it can take two to three days. We’re trying to do it, we’re trying to accommodate it obviously that some of challenges with juggling lab time. So in many cases, they want us to do in weekends.

Unidentified Analyst

And you are effectively upgrading software putting some new motors in and then putting some new covers over the magnet, so it’s not a very difficult process.

Michael P. Kaminski

But it does take the lab down, and obviously that’s a conflict to them trying to do more procedures. So we are juggling schedules and that’s some of the pace of what we can get done. As far as a full new Epoch system, the time is the same as the Niobe II, so it traditionally has taken us about a week. So what we did is we installed for a week, then the x-ray partner would come in, install their system, and then we come back together and calibrate. So it was largely a little over two weeks to get all room up and running and that’s the same with Epoch as it was with Niobe II.

Unidentified Analyst

Okay.

Michael P. Kaminski

All right. The capital sale cycle for the upgrade, now the upgrade itself, there was a couple of different forms out that were right now. There is obviously a capital upgrade that we’re marketing just to go from a Niobe II to an ES. That goes through the normal capital budgets can take. It usually doesn’t go through a whole budgeting process obviously because we’ve just released it, but and then there’s many sites doing it, but it can take months to quarters to get that done. We’re also looking at some flexibility and financing that we’re doing, just recognizing that there is an advantage of usage and utilization and reference sites if we can get them up and running faster. So we get some flexibility in how we put those packages together.

Samuel W. Duggan

Yeah, we’ve clearly gone down several different models. One is of share capital sale, if that sale able to be done. If not, we’re looking for other forms of commitment for utilization and financial commitments either through a number of cases and or through our service contracts and things of that nature. It’s obviously more important for us to get the ES upgraded to develop the reference sites to drive utilization drive recurring revenue in terms of what that can bring. The capital loss nice to have, it’s not a huge amount of money we’re talking about so.

Unidentified Analyst

And what about the learning curve?

Michael P. Kaminski

The – thank you, the learning curve, I don’t believe we have pure data on this because most of the people we’re upgrading are users, right? So they’re not going back through a learning curve from the start. But thus far we’ve got very, very positive feedback on a couple of features. One of them that I heard about continually is the, that called, it’s a feature called Click and Go on which you no longer have to learn how to move magnetic vectors, you just basically click on the screen and we take care of all that behind the scenes and take the capital direct to that spot. It’s very simple to navigate and it’s much more intuitive to how they want to move a catheter in a heart. So, we anticipate it’ll be a shorten learning curve. We haven’t measured that not as you had and we’ll do that as the quarters unfold.

Samuel W. Duggan II

Overall, the feedback has been very positive. User interface is much easier to use and the response time is what the biggest feature that we’re hearing from, an user takes six seconds for the catheter to move and not moves in about 125 milliseconds. So, the feedback we’re getting is very good in terms of the, how quickly it’s able to move and how much easier it is for the initial users to be able to learn on from.

Unidentified Analyst

Great. Okay. That’s it from me. Thank you.

Michael P. Kaminski

Thanks, Al.

Samuel W. Duggan II

Thank you.

Operator

Ladies and gentlemen that’s all the time we have today for the question-and-answer portion. I would like to turn the call back over to management.

Michael P. Kaminski

Well, thank you everybody for participation the call and we look forward to talking again in early May and showing you the results and talking about the results of the Epoch rollout. So thank you very much.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. A replay of this conference will be available one hour after this. The replay dial number is 1-888-286-8010 with access code 14422617. And with that you may all disconnect the lines and have a great rest of your day.

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