Stereotaxis, Inc. (STXS)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included
in this report on Form 10-K. Operating results are not necessarily indicative of results that may occur in future periods.

This
report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control.
Our actual results could differ materially from those anticipated in these forward- looking statements as a result of various factors,
including those set forth in Item 1A. “Risk Factors,” as well as various impacts related to our previously announced acquisition
of Access Point Technologies EP, Inc. (“APT”). Forward-looking statements discuss matters that are not historical facts.
Forward-looking statements include, but are not limited to, discussions regarding our operating strategy, sales and marketing strategy,
regulatory strategy, industry, economic conditions, financial condition, liquidity, capital resources, results of operations, the impact
of, and our response to the coronavirus (“COVID-19”) pandemic pandemics similar to the coronavirus (“COVID-19”)
pandemic (or COVID-19 resurgences), and statements relating to our recent acquisition of APT including any benefits expected from the
acquisition, potential strategic implications as a result of the acquisition, and the potential for achievement of the regulatory and
commercial milestones that would trigger contingent payments in the transaction. Such statements include, but are not limited to, statements
preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,”
“intends,” “estimates,” “projects,” “can,” “could,” “may,” “will,”
“would,” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which
speak only as of the date on which they were made. They give our expectations regarding the future but are not guarantees. We undertake
no obligation to update publicly or revise forward-looking statements, whether because of new information, future events or otherwise,
unless required by law.

Overview

Stereotaxis
designs, manufactures and markets robotic systems, instruments and information systems for the interventional laboratory. Our proprietary
robotic technology, Robotic Magnetic Navigation, fundamentally transforms endovascular interventions using precise computer-controlled
magnetic fields to directly control the tip of flexible interventional catheters or devices. Direct control of the tip of an interventional
device, in contrast to all manual hand-held devices that are controlled from their handle, can improve the precision, stability, reach
and safety of these devices during procedures.

Our
primary clinical focus has been electrophysiology, specifically cardiac ablation procedures for the treatment of arrhythmias. Cardiac
ablation has become a well-accepted therapy for arrhythmias and a multi-billion-dollar medical device market with expectations for substantial
long-term growth. We have shared our aspiration and a product strategy to expand the clinical focus of our technology to several additional
endovascular indications including coronary, neuro, and peripheral interventions.

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There
is substantial real-world evidence and clinical literature for Robotic Magnetic Navigation in electrophysiology. Hundreds of electrophysiologists
at over one hundred hospitals globally have treated over 150,000 arrhythmia patients with our robotic technology. Clinical use of our
technology has been documented in over 500 clinical publications. Robotic Magnetic Navigation is designed to enable physicians to complete
more complex interventional procedures with greater success and safety by providing image-guided delivery of catheters through the blood
vessels and chambers of the heart to treatment sites. This is achieved using externally applied computer-controlled magnetic fields that
govern the motion of the working tip of the catheter, resulting in improved navigation. The more flexible atraumatic design of catheters
driven using magnetic fields may reduce the risk of patient harm and other adverse events. Performing the procedure from a control cockpit
enables physicians to complete procedures in a safe location protected from x-ray exposure, with greater ergonomics, and improved efficiency.
We believe these benefits can be applicable in other endovascular indications where navigation through complex vasculature is often challenging
or unsuccessful and generates significant x-ray exposure, and we are investing in research and development in these areas.

Our
primary products include the Genesis RMN System, the GenesisX RMN System, the Odyssey Solution, and other related
devices. Through our strategic relationships with fluoroscopy system manufacturers, providers of catheters and electrophysiology mapping
systems, and other parties, we offer our customers x-ray systems and other accessory devices.

The
Genesis RMN System is designed to enable physicians to complete more complex interventional procedures by providing image-guided
delivery of catheters through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied
magnetic fields that govern the motion of the working tip of the catheter, resulting in improved navigation, efficient procedures, and
reduced x-ray exposure. The GenesisX RMN System, the latest generation of the Genesis RMN System, is designed to significantly
enhance the accessibility of Robotic Magnetic Navigation by eliminating the lengthy construction cycle necessary to install prior generation
RMN systems.

The
Odyssey Solution consolidates lab information onto one large integrated display, enabling physicians to view and control all the
key information in the operating room. This is designed to improve lab layout and procedure efficiency. The system also features a remote
viewing and recording capability called Odyssey Cinema, which is an innovative solution that delivers synchronized content for
optimized workflow, advanced care, and improved productivity. This tool includes an archiving capability that allows clinicians to store
and replay entire procedures or segments of procedures. This information can be accessed from locations throughout the hospital local
area network and over the global Odyssey Network providing physicians with a tool for clinical collaboration, remote consultation, and
training. We are actively developing the next generation imaging and collaboration solutions with Synchrony and SynX.

We
pursue arrangements with fluoroscopy system manufacturers to provide such systems in a bundled purchase offer for hospitals establishing
robotic interventional operating rooms. An integrated x-ray system is critical for customer adoption of RMN systems, and when offered
as a bundled purchase offer with the RMN System, may reduce the cost of acquisition, the ongoing cost of ownership, and the complexity
of installation of a robotic electrophysiology practice.

We
promote our full suite of products necessary for a typical hospital implementation, subject to regulatory approvals or clearances. This
implementation requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically
includes equipment and installation charges. The recurring payments typically include disposable costs for each procedure, equipment
service costs beyond the warranty period, and ongoing software updates. In hospitals where our full suite of products has not been implemented,
equipment upgrade or expansion can be implemented upon purchasing of the necessary upgrade or expansion.

We
have received regulatory clearances and approvals necessary for us to market the Genesis RMN System in the U.S., Europe, and China,
and we are in the process of obtaining necessary registrations for extending our markets in other countries. The GenesisX RMN System,
the latest generation of the Genesis RMN System has received regulatory clearances and approvals in Europe, and we are in the process
of obtaining necessary registrations in the US and other countries, The Niobe System, our prior generation robotic magnetic navigation
system, the Odyssey Solution, Cardiodrive, e-Contact, and various disposable interventional devices, including the Map-iT
family of devices, have received regulatory clearances and approvals in the U.S., Europe, Canada, China, Japan and various other countries.
We have regulatory clearances and approvals that allow us to market the Vdrive and Vdrive Duo Systems with the V-CAS
device in the U.S., Canada, and Europe. We have obtained the CE marking for us to market the Stereotaxis MAGiC catheter in Europe
and are pursuing regulatory approval in the U.S. and various other global geographies. Approval processes can be lengthy and uncertain,
submissions may require revised or additional non-clinical and clinical data, and regulatory applications could be denied.

Not
all products have and/or require regulatory clearance in all the markets we serve. Please refer to “Regulatory Approval”
in Item 1 for a description of the regulatory clearance, licensing, and/or approvals we currently have or are pursuing.

As
of December 31, 2024, we had approximately $15.2 million of backlog, consisting of outstanding purchase orders and other commitments
for these systems. Of the December 31, 2024 backlog, we expect approximately 70% to be recognized as revenue over the course of 2025.
We had backlog of approximately $14.7 million as of December 31, 2023. There can be no assurance that we will recognize such revenue
in any period or at all because some of our purchase orders and other commitments are subject to contingencies that are outside our control.
These orders and commitments may be revised, modified or canceled, either by their express terms, because of negotiations or by project
changes or delays. In addition, the sales cycle for the robotic magnetic navigation system is lengthy and generally involves construction
or renovation activities at customer sites. Consequently, revenues and/or orders resulting from sales of our robotic magnetic navigation
system can vary significantly from one reporting period to the next.

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We
have strategic relationships with technology leaders and innovators in the global interventional market. Through these strategic relationships
we provide compatibility with our robotic magnetic navigation system, integrated x-ray systems, digital imaging and 3D catheter location
sensing technology, and compatible disposable interventional devices. The maintenance of these strategic relationships, or the establishment
of equivalent alternatives, is critical to our commercialization efforts. There are no guarantees that any existing strategic relationships
will continue, and efforts are ongoing to ensure the availability of compatible systems and devices and/or equivalent alternatives. We
cannot provide assurance as to the timeline of the ongoing availability of such compatible systems or our ability to obtain equivalent
alternatives on competitive terms or at all.

Corporate
Developments

On
July 31, 2024, the Company completed its acquisition of all the shares of capital stock of Access Point Technologies EP, Inc., a Minnesota
corporation (“APT”), from APT Holding Company, Inc., a Minnesota corporation. APT, based in Rogers, Minnesota, designs, manufactures,
and commercializes a portfolio of differentiated high-quality diagnostic catheters, branded as Map-iT catheters, used during cardiac
ablation procedures that are commercially available across key global geographies.

The
transaction was concluded pursuant to that certain Share Purchase Agreement, dated May 11, 2024. The transaction consideration included
an upfront payment of 1,486,620 shares of Company common stock issued at closing, as well as additional contingent payments of Company
common stock based upon the achievement of specified product revenue and regulatory approval milestones through September 30, 2029. All
consideration is payable in Stereotaxis common stock.

The
integration with APT provides in-house catheter development, manufacturing expertise and specialized knowledge that will further Stereotaxis’
innovation efforts in developing a broad family of interventional devices navigated by our robots within electrophysiology and across
a range of endovascular procedures.

In
addition to the integration with APT, Stereotaxis has made other advancements in robotically enabled interventional devices. The Stereotaxis
MAGiC catheter, a robotically navigated magnetic ablation catheter designed to perform minimally invasive cardiac ablation procedures,
obtained the CE marking in Europe in the first quarter, 2025, and we are in the process of obtaining necessary approvals in the U.S.
and other countries. We are also currently seeking FDA clearances for other devices including the MAGiC Sweep™ catheter, the first
high-density EP mapping catheter developed to be robotically navigated using Stereotaxis’ Robotic Magnetic Navigation system, and
the EMAGIN 5F catheter guide designed to robotically navigate tortuous venous and arterial vasculature.

Beyond
interventional devices, we continue to drive our broad-based innovation plan with ongoing regulatory and development efforts for our
RMN systems. In the third quarter of 2024, we attained CE Mark for the GenesisX RMN System and are working towards FDA 510(k)
regulatory clearance within the United States. This latest generation of the RMN System is designed to significantly enhance the accessibility
of Robotic Magnetic Navigation by eliminating the lengthy construction cycle necessary to install prior generation RMN systems. In November
2024, the Genesis RMN system, our current generation system, received regulatory approval from China’s National Medical
Products Administration (NMPA), and our partner MicroPort received the regulatory clearances and for their integrated mapping system
and novel ablation catheter making available the most current advances minimally-invasive robotic technology to physicians and patients
in China.

Risks
and Uncertainties

Future
results of operations could be materially adversely impacted by macroeconomic and geopolitical factors. The Company continues to experience
difficulties with periodic worldwide supply chain disruptions, including shortages and inflationary pressures, tariffs or other trade
restrictions, and logistics delays which make it difficult for us to source parts and ship our products. We have generally been able
to conduct normal business activities albeit in a more deliberate manner than prior to the COVID-19 pandemic, including taking action
to increase inventory levels and engaging in discussions with our vendors on contractual obligations, but we cannot guarantee that they
will not be impacted more severely in the future. Our suppliers and contract manufacturers have experienced, and may continue to experience,
similar difficulties. If our manufacturing operations or supply chains are materially interrupted, it may not be possible for us to timely
manufacture or service our products at required levels, or at all. Changes in economic conditions and supply chain constraints could
lead to higher inflation than previously experienced or expected, which could, in turn, lead to an increase in costs. We may be unable
to raise the prices of our products sufficiently to keep up with the rate of inflation. A material reduction or interruption in any of
our manufacturing processes or a substantial increase in costs would have a material adverse effect on our business, operating results,
and financial condition.

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Many
of our hospital customers, for whom the purchase of our system involves a significant capital purchase which may be part of a larger
construction project at the customer site (typically the construction of a new building), may themselves be under economic pressures.
Hospitals continue to experience challenges with staffing and cost pressures as supply chain constraints and inflation drive up operating
costs. This may cause delays or cancellations of current purchase orders and other commitments and may exacerbate the long and variable
sales and installation cycles for our robotic magnetic navigation systems. Our hospital customers have also experienced challenges in
sourcing supplies, such as catheters, needed to perform procedures. Such shortages have, and may continue to, put pressure on procedures
and our disposable revenue.

Any
disruption to the capital markets could negatively impact our ability to raise capital. If the capital markets are disrupted for an extended
period and we need to raise additional capital, such capital may not be available on acceptable terms, or at all. Disruptions to the
capital markets and other financing sources could also negatively impact our hospital customers’ ability to raise capital or otherwise
obtain financing to fund their operations and capital projects. Such could result in delayed spending on current projects, a longer sales
cycle for new projects where a large capital commitment is required, and decreased demand for our disposable products as well as an increased
risk of customer defaults or delays in payments for our system installations, service contracts and disposable products.

In
addition to the aforementioned macroeconomic factors, the COVID-19 pandemic or similar occurrences may negatively affect demand for both
our systems and our disposable products. In the past, we have experienced business disruptions, including travel restrictions on us and
our third-party distributors, which negatively affected our complex sales, marketing, installation, distribution and service network
relating to our products and services. We also experienced reductions in demand for our disposable products as our healthcare customers
(physicians and hospitals) re-prioritized the treatment of patients and diverted resources away from non-pandemic areas, leading to the
performance of fewer procedures in which our disposable products are used. The impact varied widely over time by individual geography.
For instance, in 2022, procedure volumes were challenged by periodic resurgences of COVID-19, ongoing hospital staffing issues and other
factors. In the first quarter of 2023, COVID-19 resurgences in China continued to negatively impact our procedure volumes in that region,
but as infections and hospitalization decreased, we saw a recovery of procedure volumes with no further impacts in the current year.
Significant decreases to our capital or recurring revenues could have a material adverse effect on our business, operating results, and
financial condition. We continue to anticipate periodic disruptions to our manufacturing operations, supply chains, procedures volumes,
service activities, and capital system orders and placements relating to new or ongoing periodic resurgences of pandemic-related issues,
any of which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.

As
a result of the acquisition, we will be managing APT’s ongoing business of manufacturing, commercializing, development and sales
of APT’s catheters and related products and services. The manufacturing process of catheters is complex, highly technical, and
our prior experience in this field is dated. The process can be subject to periodic worldwide supply chain disruptions, including labor
shortages and inflationary pressures, tariffs or other trade restrictions, and logistics delays which make it difficult for us to source
parts and ship our products. We may require a higher level of overhead than currently anticipated. Our ability to successfully manage
this new aspect of our business will depend, in part, upon management’s ability to design and implement strategic initiatives that
address not only the integration of APT into us, but also the increased scope of the combined business with its associated increased
costs and complexity. We are still integrating the businesses and implementing safeguards to minimize any negative impacts on our financial
position, results of operations and cash flows post-acquisition.

Concentration
of Credit Risk

Financial
instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents and marketable securities.
Our investments may include, at any time, a diversified portfolio of cash equivalents and short-term and long-term investments in a variety
of high-quality securities, including money market funds, U.S. treasury and U.S. government agency securities, corporate notes and bonds,
commercial paper, non-U.S. government agency securities, and municipal notes. The Company’s exposure to any individual corporate
entity is limited by policy. Deposits may exceed federally insured limits, and the Company is exposed to credit risk on deposits in the
event of default by the financial institutions to the extent account balances exceed the amount insured by the Federal Deposit Insurance
Corporation (FDIC). The Company closely monitors events involving limited liquidity, defaults, non-performance or other adverse developments
that affect financial institutions or other companies in the financial services industry or the financial services industry generally,
including Silicon Valley Bank. On March 10, 2023, Silicon Valley Bank (“SVB”), where the Company maintained accounts with
a cash balance of less than 6% of the Company’s total cash, cash equivalents and marketable securities, was closed by the California
Department of Financial Protection and Innovation and the FDIC was appointed as receiver. On March 12, 2023, the U.S. Department of the
Treasury, Federal Reserve Board, and FDIC released a joint statement announcing that the FDIC would complete its resolution of SVB in
a manner that fully protected all depositors at SVB and that depositors would have access to all of their money starting March 13, 2023.
On March 26, 2023, it was announced that First-Citizens Bank & Trust Company would assume all of SVB’s deposits and loans as
of March 27, 2023. During the periods presented, the Company has not experienced any losses on its deposits of cash, cash equivalents
or marketable securities.

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Critical
Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses
and related disclosures. We review our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from
these estimates. We believe the following accounting policies are critical to the judgments and estimates we use in preparing our consolidated
financial statements.

Revenue
Recognition

The
Company accounts for revenue in accordance with Accounting Standards Codification Topic 606 (“ASC 606”), Revenue from
Contracts with Customers.

We
generate revenue from the initial capital sales of systems as well as recurring revenue from the sale of our proprietary disposable devices,
from royalties paid to the Company on the sale of various devices as provided by co-development and co-placement arrangements, and from
other recurring revenue including ongoing software updates and service contracts.

In
accordance with Accounting Standards Codification Topic 606 (“ASC 606”), “Revenue from Contracts with Customers,”
we account for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights
of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. We
record our revenue based on consideration specified in the contract with each customer, net of any taxes collected from customers that
are remitted to government authorities.

For
contracts containing multiple products and services the Company accounts for individual products and services as separate performance
obligations if they are distinct, which is if a product or service is separately identifiable from other items in the bundled package,
and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company recognizes
revenues as the performance obligations are satisfied by transferring control of the product or service to a customer.

For
arrangements with multiple performance obligations, revenue is allocated to each performance obligation based on its relative standalone
selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services.
If a standalone selling price is not directly observable, then the Company estimates the standalone selling price considering market
conditions and entity-specific factors including, but not limited to, features and functionality of the products and services and market
conditions. The Company regularly reviews standalone selling prices and updates these estimates as necessary.

Our
revenue recognition policy affects the following revenue streams in our business as follows:

Systems:

Disposables:

Royalty:

Other
Recurring Revenue:

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The
Company invoices its customers based on the billing schedules in its sales arrangements. Contract assets primarily represent the difference
between the revenue that was earned but not billed on service contracts and revenue from system contracts that was recognized based on
the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Customer deposits
primarily relate to future system sales but can also include deposits on disposable sales. Deferred revenue is primarily related to service
contracts, for which the service fees are billed up-front, generally quarterly or annually, and for amounts billed in advance for system
contracts for which some performance obligations remain outstanding. For service contracts, the associated deferred revenue is generally
recognized ratably over the service period. For system contracts, the associated deferred revenue is recognized when the remaining performance
obligations are satisfied. See Note 2 to the consolidated financial statements for additional details on deferred revenue. The Company
did not have any impairment losses on its contract assets for the periods presented.

Assets
Recognized from the Costs to Obtain a Contract with a Customer

The
Company has determined that sales incentive programs for the Company’s sales team meet the requirements to be capitalized as the
Company expects to generate future economic benefits from the related revenue generating contracts after the initial capital sales transaction.
The costs capitalized as contract acquisition costs included in prepaid expenses and other assets in the Company’s balance sheets
were approximately $0.1 million as of December 31, 2024 and 2023. respectively. The Company did not incur any impairment losses during
any of the periods presented.

Cost
of Contracts

Costs
of systems revenue include direct product costs, installation labor and other costs, estimated warranty costs, initial training costs
and product maintenance costs. These costs are recorded at the time of sale. Costs of disposable revenue include direct product costs
and estimated warranty costs and are recorded at the time of sale. Cost of revenue from services and license fees are recorded when incurred.

Goodwill
and Intangible Assets

Goodwill
represents the excess of the purchase price over the fair value of the net assets acquired in business combinations and is allocated
to the appropriate reporting unit when acquired. Other acquired intangible assets are stated at the fair value acquired. Goodwill is
not amortized; rather, it is evaluated for impairment annually and whenever events or changes in circumstances indicate that the value
of the asset may be impaired. Definite-lived intangible assets are considered long-lived assets and are amortized on a straight-line
basis over the periods that expected economic benefits will be provided. See Note 3, Acquisitions for further discussion of the
goodwill and intangible assets recorded as of the acquisition date and as of December 31, 2024.

Contingent
Liabilities- Earnout Consideration

The
Company has determined that the contingent consideration due under the terms of its July 31, 2024, acquisition agreement with APT Holding
Company, Inc. represents a contingent liability in accordance with the provisions of Accounting Standard 805, Business Combinations.
The Company has established short-term and long-term contingent liabilities for the net present fair value of contingent payments which
are both probable of occurrence and reasonably estimable. The initial fair value of the contingent consideration was determined by a
third-party valuation firm using both a Monte Carlo simulation and probability based approaches. The contingent consideration is remeasured
to fair value at each reporting date until the contingency is resolved. Changes in fair value are recognized in the Company’s earnings
as a charge to General and Administrative expenses. See Note 3, Acquisitions for further discussion of the contingent consideration
recorded as of the acquisition date and as of December 31, 2024.

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Stock-based
Compensation

Stock
compensation expense, which is a non-cash charge, results from stock option, non-qualified stock options, stock appreciation rights,
and restricted share grants made to employees, directors, and third-party consultants at the fair value of the grants. For time-based
awards, the fair value of options and stock appreciation rights granted was determined using the Black-Scholes valuation method which
gives consideration to the estimated value of the underlying stock at the date of grant, the exercise price of the option, the expected
dividend yield and volatility of the underlying stock, the expected life of the option and the corresponding risk-free interest rate.
The fair value of the grants of restricted shares and units was determined based on the closing price of our stock on the date of grant.
Stock compensation expense for options, stock appreciation rights and for time-based restricted share grants and units is amortized on
a straight-line basis over the vesting period of the underlying issue, generally over four years except for grants to directors which
are generally earned over a period of six months. Stock compensation expense for performance-based restricted shares, if any, is amortized
on a straight-line basis over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives.
Compensation expense is recognized only for those options expected to vest, net of actual forfeitures. Estimates of the expected life
of options have been based on the average of the vesting and expiration periods, which is the simplified method under general accounting
principles for share-based payments. Estimates of volatility utilized in calculating stock-based compensation have been prepared based
on historical data. Actual experience to date has been consistent with these estimates.

For
market-based awards, stock-based compensation expense is recognized over the minimum service period regardless of whether the market
target is probable of being achieved. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.

The
amount of compensation expense to be recorded in future periods may increase if we make additional grants of options, stock appreciation
rights or restricted shares. The amount of expense to be recorded in future periods may decrease if the requisite service periods are
not completed.

Valuation
of Inventory

We
value our inventory at the lower of: (1) the actual cost of our inventory, determined using the first-in, first-out (FIFO) method, or
(2) its net realizable value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and
reserve accordingly. Our reserve estimate for excess and obsolete is based on expected future use. Excess manufacturing overhead costs
attributable to idle facility expenses or abnormally low production volumes are excluded from inventory and recorded as an expense in
the period incurred.

Income
Taxes

Deferred
tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets
and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We have established a
valuation allowance against the entire amount of our deferred tax assets net of liabilities because we are not able to conclude, due
to our history of operating losses, that it is more likely than not that we will be able to realize any portion of the deferred tax assets.

In
assessing whether and to what extent deferred tax assets are realizable, we consider whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable
income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, limitations imposed
by Section 382 of the Internal Revenue Code and projections for future losses over periods which the deferred tax assets are deductible,
we determined that a 100% valuation allowance of deferred tax assets net of liabilities was appropriate.

Results
of Operations

Comparison
of the Years ended December 31, 2024 and 2023

Revenue.
Revenue increased from $26.8 million for the year ended December 31, 2023, to $26.9 million for the year ended December 31, 2024, an
increase of less than 1%. Revenue from sales of systems decreased from $8.7 million for the year ended December 31, 2023, to $8.6 million
for the year ended December 31, 2024, a decrease of approximately 1%, driven by decreased system sales volumes in the current year period.
Revenue from sales of disposable interventional devices, service and accessories increased to $18.3 million for the year ended December
31, 2024, from $18.0 million for the year ended December 31, 2023, an increase of approximately 1%. The increase was primarily driven
by the contributions from our recent acquisition of APT partially offset by decreased service revenue in the current year period.

Cost
of Revenue. Cost of revenue increased from $11.9 million for the year ended December 31, 2023, to $12.3 million for the year ended
December 31, 2024, an increase of approximately 3%. As a percentage of our total revenue, overall gross margin was 54% and 56% for the
years ended December 31, 2024, and December 31, 2023, respectively. The decrease was primarily due to changes in product mix. Cost of
revenue for systems sold decreased from $8.1 million for the year ended December 31, 2023, to $6.9 million for the year ended December
31, 2024, primarily due to decreased system sales volume and changes in product mix in the current year period. Gross margin for systems
increased from $0.7 million for the year ended December 31, 2023, to $1.8 million for the year ended December 31, 2024. Cost of revenue
for disposables, service, and accessories increased from $3.9 million for the year ended December 31, 2023, to $5.4 million for the year
ended December 31, 2024. Gross margin for disposables, service and accessories was 70% for the current year period compared to 79% for
the year ended December 31, 2023, primarily driven by acquisition related accounting which required the valuation of acquired finished
good inventory to fair value.

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Research
and Development Expense. Research and development expenses decreased from $10.3 million for the year ended December 31, 2023, to
$9.8 million for the year ended December 31, 2024, a decrease of approximately 5%. This decrease was primarily driven by the reversal
of an accrued regulatory license fee.

Sales
and Marketing Expense. Sales and marketing expenses remained consistent at $12.4 million for the years ended December 31, 2024 and
2023.

General
and Administrative Expense. General and administrative expenses include finance, information systems, legal, and general management
expenses, amortization of acquisition related intangible assets, and the gain or loss associated with the remeasurement of the acquisition
related contingent consideration. General and administrative expenses increased from $14.1 million for the year ended December 31, 2023,
to $17.2 million for the year ended December 31, 2024, an increase of approximately 22%. This increase was primarily driven by the remeasurement
of the contingent consideration, higher administrative expenses and professional service fees in the current year period, and amortization
of the acquisition related intangible assets.

Interest
Income. Net interest income was $0.7 million for the year ended December 31, 2024, and $1.1 million for the year ended December 31,
2023. The decrease was driven by lower invested balances and declining interest rates in the current year period.

Income
Taxes

Realization
of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, net deferred tax
assets have been fully offset by valuation allowances as of December 31, 2024, and December 31, 2023, to reflect these uncertainties.
As of December 31, 2024, we had gross federal net operating loss carryforwards arising from our operations of approximately $134.9 million.
The federal net operating loss carryforwards reflect accumulated book losses reduced for the 2013 IRC Section 382 ownership change limitation
of $188.0 million, book/tax differences and expiration of carryforwards. The federal net operating loss carryforwards generated prior
to the 2018 tax year of approximately $98.8 million will expire between 2030 and 2037. The federal net operating losses generated in
2018 and thereafter will be carried forward indefinitely as a result of changes in the tax law following the Tax Cuts and Jobs Act (“TCJA”).
As of December 31, 2024, we had gross state net operating loss carryforward of approximately $38.1 million which will expire at various
dates between 2025 and 2043 if not utilized.

In
addition to the net operating loss carryovers related to our operations, in connection with our acquisition of APT as discussed in
Note 3, we acquired federal and state net operating loss and tax credit carryovers of APT. Our ability to utilize those carryovers
and credits will be limited under IRC Section 382. The Section 382 limited net operating loss carryovers total approximately $9.1
million, of which $0.6 million was incurred prior to the 2018 effective date of the TCJA and will expire between 2035 and 2037 with
the remainder available for indefinite carryforward. The applicable state net operating loss carryforwards related to APT are
approximately $9.6 million with $9.1 million expiring at various dates between 2030-2038 with the remaining carried forward
indefinitely. The acquired tax credit carryovers total $0.2 million for federal income tax purposes, which expire between 2036 and
2043, and state credit carryovers of $0.3 million, which expire between 2031 and 2038. Consistent with our conclusion with respect
the need for valuation allowances associated with our other deferred tax assets, the net deferred tax assets related to APT of $1.6
million at the acquisition date as well as those at December 31, 2024 were fully included in our valuation allowance.

Liquidity
and Capital Resources

Liquidity
refers to the liquid financial assets available to fund our business operations and pay for near-term obligations. These liquid financial
assets consist of cash, cash equivalents, and investments.

As
of December 31, 2024, our accumulated deficit was $561.7 million with cash and cash equivalents of $12.4 million, inclusive of restricted
cash. Since inception, we have financed our operations primarily through cash generated by operations and proceeds from our debt and
stock offerings.

Capital
Resources

As
of December 31, 2024 and 2023, the Company did not have any debt.

Liquidity

The
following table summarizes our cash flow by operating, investing and financing activities for years ended December 31, 2024 and 2023
(in thousands):

Net
cash used in operating activities. We used approximately $8.5 million and $9.1 million of cash in operating activities during the
years ended December 31, 2024 and 2023, respectively. The decrease in cash used in operating activities was driven by the increased operating loss partially offset by changes in working capital.

46

Net cash provided by investing activities.
Cash provided by investing activities for the year ended December 31, 2024, consisted of $0.1 million. The cash generated during the year
ended December 31, 2024, was primarily from cash acquired in the APT business acquisition. Cash
provided by investing activities for the year ended December 31, 2023, consisted of 19.8 million. The cash generated during the year ended
December 31, 2023, was from proceeds received from the maturity of short-term investments of $20.1 million, partially offset by $0.4 million
of cash paid for equipment, construction and design costs associated with our new facility.

Net cash provided by financing
activities. We generated approximately $0.3 million and $0.1 million of cash for the years ended December 31, 2024 and 2023, respectively.
The cash generated in both periods was driven by the exercise of stock options, net of issuance costs, and our employee stock purchase
program.

At December 31, 2024, we had working
capital of approximately $4.8 million, compared to a working capital of approximately $20.0 million at December 31, 2023. The decrease
in working capital was primarily driven by the net loss incurred and acquisition of APT during the year ended December 31, 2024.

Our principal source of liquidity
is cash provided by operations and by the issuance of common stock through the exercise of stock options and our employee stock purchase
program as well as cash received from past equity raises. In addition, the Company filed a universal shelf registration statement on Form
S-3 with the SEC in May 2023, which was declared effective by the SEC on June 6, 2023, registering for sale up to $100.0 million of any
combination of our common stock, preferred stock, debt securities, warrants, rights and/or units from time to time and at prices and on
terms that we may determine. The net proceeds of any securities we sell under our shelf registration statement may be used for general
corporate purposes, including among other possible uses, the acquisition of companies or businesses, repayment and refinancing of debt,
working capital and capital expenditures.

The Company believes the cash,
and cash equivalents on hand as of December 31, 2024, will be sufficient to meet its obligations as they become due in the ordinary course
of business for at least 12 months following the date of the consolidated financial statements included in this Annual Report on Form
10-K, as well as for periods beyond that 12-month period. Our cash requirements depend on numerous factors, including success of clinical
adoption within the installed base of robotic magnetic systems, new placements of capital systems, the resources we devote to developing
and supporting our products, and other factors. We expect to continue to fund our operations with cash resources primarily generated from
the proceeds of our past equity raises and from our working capital. In the future, we may finance cash needs through the sale of other
equity securities or non-core assets, strategic collaboration agreements, debt financings or through distribution rights.

Off-Balance Sheet Arrangements

We do not currently have, nor
have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.
As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could have arisen if we had engaged
in these relationships.

47

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this report
on Form 10-K. Operating results are not necessarily indicative of results that may occur in future periods.

This
report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control.
Our actual results could differ materially from those anticipated in these forward looking statements as a result of various factors,
including those set forth in Item 1A. “Risk Factors.” Forward-looking statements discuss matters that are not historical
facts. Forward-looking statements include, but are not limited to, discussions regarding our operating strategy, sales and marketing
strategy, regulatory strategy, our industry generally, overall economic conditions, our financial condition, liquidity and capital resources,
our results of operations, and the impact of the ongoing coronavirus (“COVID-19”) pandemic and our responses to it. Such
statements include, but are not limited to, statements preceded by, followed by or that otherwise include the words “believes,”
“expects,” “anticipates,” “intends,” “estimates,” “projects,” “can,”
“could,” “may,” “will,” “would,” or similar expressions. For those statements, we claim
the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You
should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations
regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, unless required by law.

Overview

Stereotaxis
designs, manufactures and markets robotic systems, instruments and information systems for the interventional laboratory. Our proprietary
robotic technology, Robotic Magnetic Navigation, fundamentally transforms endovascular interventions using precise computer-controlled
magnetic fields to directly control the tip of flexible interventional catheters or devices. Direct control of the tip of an interventional
device, in contrast to all manual hand-held devices that are controlled from their handle, can improve the precision, stability, reach
and safety of these devices during procedures.

Our
primary clinical focus has been electrophysiology, specifically cardiac ablation procedures for the treatment of arrhythmias. Cardiac
ablation has become a well-accepted therapy for arrhythmias and a multi-billion-dollar medical device market with expectations for substantial
long-term growth. We have shared our aspiration and a product strategy to expand the clinical focus of our technology to several additional
endovascular indications including coronary, neuro, and peripheral interventions.

There
is substantial real-world evidence and clinical literature for Robotic Magnetic Navigation in electrophysiology. Hundreds of electrophysiologists
at over one hundred hospitals globally have treated over 100,000 arrhythmia patients with our robotic technology. Clinical use of our
technology has been documented in over 400 clinical publications. Robotic Magnetic Navigation is designed to enable physicians to complete
more complex interventional procedures with greater success and safety by providing image-guided delivery of catheters through the blood
vessels and chambers of the heart to treatment sites. This is achieved using externally applied computer-controlled magnetic fields that
govern the motion of the working tip of the catheter, resulting in improved navigation. The more flexible atraumatic design of catheters
driven using magnetic fields may reduce the risk of patient harm and other adverse events. Performing the procedure from a control cockpit
enables physicians to complete procedures in a safe location protected from x-ray exposure, with greater ergonomics, and improved efficiency.
We believe these benefits can be applicable in other endovascular indications where navigation through complex vasculature is often challenging
or unsuccessful and generates significant x-ray exposure, and we are investing in research and development in these areas.

Our
primary products include the Genesis RMN System, the Odyssey Solution, and other related devices. Through our strategic
relationships with fluoroscopy system manufacturers, providers of catheters and electrophysiology mapping systems, and other parties,
we offer our customers magnetically compatible x-ray systems and other accessory devices.

The
Genesis RMN System is designed to enable physicians to complete more complex interventional procedures by providing image-guided
delivery of catheters through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied
magnetic fields that govern the motion of the working tip of the catheter, resulting in improved navigation, efficient procedures, and
reduced x-ray exposure.

The
Odyssey Solution consolidates lab information onto one large integrated display, enabling physicians to view and control all the
key information in the operating room. This is designed to improve lab layout and procedure efficiency. The system also features a remote
viewing and recording capability called Odyssey Cinema, which is an innovative solution that delivers synchronized content for
optimized workflow, advanced care, and improved productivity. This tool includes an archiving capability that allows clinicians to store
and replay entire procedures or segments of procedures. This information can be accessed from locations throughout the hospital local
area network and over the global Odyssey Network providing physicians with a tool for clinical collaboration, remote consultation, and
training.

35

We
have arrangements with fluoroscopy system manufacturers to provide such
systems in a bundled purchase offer for hospitals establishing robotic interventional operating rooms. These are single-plane, full-power
x-ray systems and include the c-arm and powered table. The combination of RMN Systems with our partnered x-ray systems reduces the cost
of acquisition, the ongoing cost of ownership, and the complexity of installation of a robotic electrophysiology practice.

We
promote our full suite of products in a typical hospital implementation, subject to regulatory approvals or clearances. This implementation
requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically includes equipment
and installation charges. The recurring payments typically include disposable costs for each procedure, equipment service costs beyond
the warranty period, and ongoing software updates. In hospitals where our full suite of products has not been implemented, equipment
upgrade or expansion can be implemented upon purchasing of the necessary upgrade or expansion.

We
have received regulatory clearances and approvals necessary for us to market the Genesis RMN System in the U.S. and Europe,
and we are in the process of obtaining necessary registrations for extending our markets in other countries. The Niobe
System, our prior generation robotic magnetic navigation system, the Odyssey Solution, Cardiodrive, e-Contact, and
various disposable interventional devices have received regulatory clearances and approvals in the U.S., Europe, Canada, China,
Japan and various other countries. We have received the regulatory clearances and approvals that allow us to market the Vdrive
and Vdrive Duo Systems with the V-CAS device in the U.S. and Canada. We are pursuing regulatory approvals for the
Stereotaxis MAGiC catheter, a robotically-navigated magnetic ablation catheter designed to perform minimally invasive cardiac
ablation procedures, in various global geographies. Approval processes can be lengthy and uncertain, submissions may require revised
or additional non-clinical and clinical data, and regulatory applications could be denied.

Not
all products have and/or require regulatory clearance in all of the markets we serve. Please refer to “Regulatory Approval”
in Item 1 for a description of the regulatory clearance, licensing, and/or approvals we currently have or are pursuing.

As
of December 31, 2023, we had approximately $14.7 million of backlog, consisting of outstanding purchase orders and other commitments
for these systems. Of the December 31, 2023 backlog, we expect approximately 81% to be recognized as revenue over the course of 2024.
We had backlog of approximately $14.8 million as of December 31, 2022. There can be no assurance that we will recognize such revenue
in any particular period or at all because some of our purchase orders and other commitments are subject to contingencies that are outside
our control. These orders and commitments may be revised, modified or canceled, either by their express terms, as a result of negotiations
or by project changes or delays. In addition, the sales cycle for the robotic magnetic navigation system is lengthy and generally involves
construction or renovation activities at customer sites. Consequently, revenues and/or orders resulting from sales of our robotic magnetic
navigation system can vary significantly from one reporting period to the next.

We
have strategic relationships with technology leaders and innovators in the global interventional market. Through these strategic relationships
we provide compatibility between our robotic magnetic navigation system, x-ray systems, and digital imaging and 3D catheter location
sensing technology, as well as disposable interventional devices. The maintenance of these strategic relationships, or the establishment
of equivalent alternatives, is critical to our commercialization efforts. There are no guarantees that any existing strategic relationships
will continue, and efforts are ongoing to ensure the availability of compatible systems and devices and/or equivalent alternatives. For example, prior to the expiration of our agreement Biosense Webster
on December 31. 2022, we received quarterly royalty payments based on net revenues from sales of co-developed catheters with Biosense
Webster. Such royalty payments represented 7% of revenue for the year ended December 31, 2022. We
cannot provide assurance as to the timeline of the ongoing availability of such compatible systems or our ability to obtain equivalent
alternatives on competitive terms or at all.

Risks
and Uncertainties

Future
results of operations could be materially adversely impacted by macroeconomic and geopolitical factors. The Company continues to
experience difficulties with periodic worldwide supply chain disruptions, including shortages and inflationary pressures, and
logistics delays which make it difficult for us to source parts and ship our products. We have generally been able to conduct normal
business activities albeit in a more deliberate manner than prior to the pandemic, including taking action to increase inventory
levels and engaging in discussions with our vendors on contractual obligations, but we cannot guarantee that they will not be impacted more severely in the future. Our suppliers and contract
manufacturers have experienced, and may continue to experience, similar difficulties. If our manufacturing operations or supply
chains are materially interrupted, it may not be possible for us to timely manufacture or service our products at required levels,
or at all. Changes in economic conditions and supply chain constraints could lead to higher inflation than previously experienced or
expected, which could, in turn, lead to an increase in costs. We may be unable to raise the prices of our products sufficiently to
keep up with the rate of inflation. A material reduction or interruption in any of our manufacturing processes or a substantial
increase in costs would have a material adverse effect on our business, operating results, and financial condition.

Many
of our hospital customers, for whom the purchase of our system involves a significant capital purchase which may be part of a larger
construction project at the customer site (typically the construction of a new building), may themselves be under economic pressures.
Hospitals continue to experience challenges with staffing and cost pressures as supply chain constraints and inflation drive up operating
costs. This may cause delays or cancellations of current purchase orders and other commitments and may exacerbate the long and variable
sales and installation cycles for our robotic magnetic navigation systems. Our hospital customers have also experienced challenges in
sourcing supplies, such as catheters, needed to perform procedures. Such shortages have, and may continue to, put pressure on procedures
and our disposable revenue.

36

Any
disruption to the capital markets could negatively impact our ability to raise capital. If the capital markets are disrupted for an extended
period of time and we need to raise additional capital, such capital may not be available on acceptable terms, or at all. Disruptions
to the capital markets and other financing sources could also negatively impact our hospital customers’ ability to raise capital
or otherwise obtain financing to fund their operations and capital projects. Such could result in delayed spending on current projects,
a longer sales cycle for new projects where a large capital commitment is required, and decreased demand for our disposable products
as well as an increased risk of customer defaults or delays in payments for our system installations, service contracts and disposable
products.

In
addition to the aforementioned macroeconomic factors, the COVID-19 pandemic or similar occurrences may continue to negatively affect
demand for both our systems and our disposable products. In the past, we have experienced business disruptions, including travel restrictions
on us and our third-party distributors, which negatively affected our complex sales, marketing, installation, distribution and service
network relating to our products and services. We also experienced reductions in demand for our disposable products as our healthcare
customers (physicians and hospitals) re-prioritized the treatment of patients and diverted resources away from non-coronavirus areas,
leading to the performance of fewer procedures in which our disposable products are used. Significant decreases to our capital or recurring
revenues could have a material adverse effect on our business, operating results, and financial condition. While we cannot reliably estimate
the ultimate duration of the impact or the severity of ongoing periodic resurgences of pandemic-related issues, we continue to anticipate
periodic disruptions to our manufacturing operations, supply chains, procedures volumes, service activities, and capital system orders
and placements, any of which could have a material adverse effect on our business, financial condition, results of operations, or cash
flows. The impact has varied widely over time by individual geography. In 2022, procedure volumes were challenged by periodic resurgences
of COVID-19, ongoing hospital staffing issues and other factors. In the first quarter of 2023, the most recent COVID-19 resurgences in
China continued to negatively impact our procedure volumes in that region, but as infections and hospitalization decreased, we saw a
recovery of procedure volumes.

Concentration
of Credit Risk

Financial
instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents and marketable securities.
Our investments may include, at any time, a diversified portfolio of cash equivalents and short- and long-term investments in a variety
of high-quality securities, including money market funds, U.S. treasury and U.S. government agency securities, corporate notes and bonds,
commercial paper, non-U.S. government agency securities, and municipal notes. The Company’s exposure to any individual corporate
entity is limited by policy. Deposits may exceed federally insured limits, and the Company is exposed to credit risk on deposits in the
event of default by the financial institutions to the extent account balances exceed the amount insured by the Federal Deposit Insurance
Corporation (FDIC). The Company closely monitors events involving limited liquidity, defaults, non-performance or other
adverse developments that affect financial institutions or other companies in the financial services industry or the financial services
industry generally, including Silicon Valley Bank. On March 10, 2023, Silicon Valley Bank (“SVB”), where the Company maintained
accounts with a cash balance of less than 6% of the Company’s total cash, cash equivalents and marketable securities, was closed
by the California Department of Financial Protection and Innovation and the FDIC was appointed as receiver. On March 12, 2023, the U.S.
Department of the Treasury, Federal Reserve Board, and FDIC released a joint statement announcing that the FDIC would complete its resolution
of SVB in a manner that fully protected all depositors at SVB and that depositors would have access to all of their money starting March
13, 2023. On March 26, 2023, it was announced that First-Citizens Bank & Trust Company would assume all of SVB’s deposits and
loans as of March 27, 2023. During the periods presented, the Company has not experienced any losses on its deposits of cash, cash equivalents
or marketable securities.

Critical
Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared
in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. We review our estimates
and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe the following accounting
policies are critical to the judgments and estimates we use in preparing our financial statements.

Investments
Valuation

Our
investments may include, at any time, a diversified portfolio of cash equivalents and short- and long-term investments in a variety of
high-quality securities, including money market funds, U.S. treasury and U.S. government agency securities, corporate notes and bonds,
commercial paper, non-U.S. government agency securities, and municipal notes. The assessment of the fair value of investments can be
difficult and subjective. Generally accepted accounting principles for fair value measurement establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets and liabilities (“Level 1”) and the lowest priority to unobservable inputs
(“Level 3”). The three levels of the fair value hierarchy are described below:

37

Each
level of input has different levels of subjectivity and difficulty involved in determining fair value. Valuation of Level 1 and 2 instruments
generally do not require significant management judgment, and the estimation is not difficult. Level 3 instruments include unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The
determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. There were no Level 3 securities
for the periods presented.

Revenue
Recognition

The
Company accounts for revenue in accordance with Accounting Standards Codification Topic 606 (“ASC 606”), Revenue from
Contracts with Customers.

We
generate revenue from the initial capital sales of systems as well as recurring revenue from the sale of our proprietary disposable devices,
from royalties paid to the Company on the sale of various devices as provided by co-development and co-placement arrangements, and from
other recurring revenue including ongoing software updates and service contracts.

In
accordance with Accounting Standards Codification Topic 606 (“ASC 606”), “Revenue from Contracts with Customers,”
we account for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights
of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. We
record our revenue based on consideration specified in the contract with each customer, net of any taxes collected from customers that
are remitted to government authorities.

For
contracts containing multiple products and services the Company accounts for individual products and services as separate performance
obligations if they are distinct, which is if a product or service is separately identifiable from other items in the bundled package,
and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company recognizes
revenues as the performance obligations are satisfied by transferring control of the product or service to a customer.

For
arrangements with multiple performance obligations, revenue is allocated to each performance obligation based on its relative standalone
selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services.
If a standalone selling price is not directly observable, then the Company estimates the standalone selling price considering market
conditions and entity-specific factors including, but not limited to, features and functionality of the products and services and market
conditions. The Company regularly reviews standalone selling prices and updates these estimates as necessary.

Our
revenue recognition policy affects the following revenue streams in our business as follows:

Systems:

Disposables:

Royalty:

Other
Recurring Revenue:

38

The
Company invoices its customers based on the billing schedules in its sales arrangements. Contract assets primarily represent the difference
between the revenue that was earned but not billed on service contracts and revenue from system contracts that was recognized based on
the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Customer deposits
primarily relate to future system sales but can also include deposits on disposable sales. Deferred revenue is primarily related to service
contracts, for which the service fees are billed up-front, generally quarterly or annually, and for amounts billed in advance for system
contracts for which some performance obligations remain outstanding. For service contracts, the associated deferred revenue is generally
recognized ratably over the service period. For system contracts, the associated deferred revenue is recognized when the remaining performance
obligations are satisfied. See Note 2 to the financial statements for additional details on deferred revenue. The Company did not have
any impairment losses on its contract assets for the periods presented.

Assets
Recognized from the Costs to Obtain a Contract with a Customer

The
Company has determined that sales incentive programs for the Company’s sales team meet the requirements to be capitalized as the
Company expects to generate future economic benefits from the related revenue generating contracts after the initial capital sales transaction.
The costs capitalized as contract acquisition costs included in prepaid expenses and other assets in the Company’s balance sheets
were $0.1 million and $0.2 million as of December 31, 2023 and 2022, respectively. The Company did not incur any impairment losses during
any of the periods presented.

Cost
of Contracts

Costs
of systems revenue include direct product costs, installation labor and other costs, estimated warranty costs, initial training costs
and product maintenance costs. These costs are recorded at the time of sale. Costs of disposable revenue include direct product costs
and estimated warranty costs and are recorded at the time of sale. Cost of revenue from services and license fees are recorded when incurred.

Stock-based
Compensation

Stock
compensation expense, which is a non-cash charge, results from stock option, non-qualified stock options, stock appreciation rights,
and restricted share grants made to employees, directors, and third-party consultants at the fair value of the grants. For time-based
awards, the fair value of options and stock appreciation rights granted was determined using the Black-Scholes valuation method which
gives consideration to the estimated value of the underlying stock at the date of grant, the exercise price of the option, the expected
dividend yield and volatility of the underlying stock, the expected life of the option and the corresponding risk-free interest rate.
The fair value of the grants of restricted shares and units was determined based on the closing price of our stock on the date of grant.
Stock compensation expense for options, stock appreciation rights and for time-based restricted share grants and units is amortized on
a straight-line basis over the vesting period of the underlying issue, generally over four years except for grants to directors which
are generally earned over a period of six months. Stock compensation expense for performance-based restricted shares, if any, is amortized
on a straight-line basis over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives.
Compensation expense is recognized only for those options expected to vest, net of actual forfeitures. Estimates of the expected life
of options have been based on the average of the vesting and expiration periods, which is the simplified method under general accounting
principles for share-based payments. Estimates of volatility utilized in calculating stock-based compensation have been prepared based
on historical data. Actual experience to date has been consistent with these estimates.

For
market-based awards, stock-based compensation expense is recognized over the minimum service period regardless of whether or not the
market target is probable of being achieved. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.

The
amount of compensation expense to be recorded in future periods may increase if we make additional grants of options, stock appreciation
rights or restricted shares. The amount of expense to be recorded in future periods may decrease if the requisite service periods are
not completed.

Valuation
of Inventory

We
value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out (FIFO) method, or its
current net realizable value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and
reserve accordingly. Our reserve estimate for excess and obsolete is based on expected future use. Excess manufacturing overhead costs
attributable to idle facility expenses or abnormally low production volumes are excluded from inventory and recorded as an expense in
the period incurred.

Income
Taxes

Deferred
tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities
using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We have established a valuation
allowance against the entire amount of our deferred tax assets net of liabilities because we are not able to conclude, due to our history
of operating losses, that it is more likely than not that we will be able to realize any portion of the deferred tax assets.

In
assessing whether and to what extent deferred tax assets are realizable, we consider whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable
income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, limitations imposed
by Section 382 of the Internal Revenue Code and projections for future losses over periods which the deferred tax assets are deductible,
we determined that a 100% valuation allowance of deferred tax assets net of liabilities was appropriate.

Results
of Operations

Comparison
of the Years ended December 31, 2023 and 2022

Revenue.
Revenue decreased from $28.1 million for the year ended December 31, 2022, to $26.8 million for the year ended December 31, 2023, a decrease
of approximately 5%. Revenue from sales of systems increased from $6.8 million for the year ended December 31, 2022, to $8.7 million
for the year ended December 31, 2023, an increase of approximately 28%, driven by increased system sales volumes in the current year
period. Revenue from sales of disposable interventional devices, service and accessories decreased to $18.0 million for the year ended
December 31, 2023, from $21.3 million for the year ended December 31, 2022, a decrease of approximately 15%. The decrease was primarily
driven by prior period royalties paid to the Company by Biosense Webster on the sale of co-developed catheters during the term of the
agreement and by lower procedure volumes related to Biosense Webster catheter shortages.

Cost
of Revenue. Cost of revenue increased from $9.7 million for the year ended December 31, 2022, to $11.9 million for the year
ended December 31, 2023, an increase of approximately 23%. As a percentage of our total revenue, overall gross margin was 56% and
66% for the years ended December 31, 2023, and December 31, 2022, respectively. The decrease was primarily due to changes in product mix. Cost of
revenue for systems sold increased from $5.8 million for the year ended December 31, 2022, to $8.1 million for the year ended
December 31, 2023, primarily due to increased system sales volumes and period costs in the current year period. Gross margin for
systems decreased from $1.0 million for the year ended December 31, 2022, to $0.7 million for the year ended December 31, 2023. Cost
of revenue for disposables, service, and accessories remained consistent at $3.9 million for years ended December 31, 2022, and
2023. Gross margin for disposables, service and accessories was 79% for the current year period compared to 82% for the year ended
December 31, 2022, driven by changes in product mix and higher costs under service contracts in the current year period.

Research
and Development Expense. Research and development expenses decreased from $10.6 million for the year ended December 31, 2022, to
$10.3 million for the year ended December 31, 2023, a decrease of approximately 3%. This decrease
was primarily due to project timing in the current year period.

Sales
and Marketing Expense. Sales and marketing expenses remained consistent with $12.4 million for the year ended December 31, 2023,
as compared to $12.3 million for the year ended December 31, 2022, an increase of less than 1%.

General
and Administrative Expense. General and administrative expenses include finance, information systems, legal, and general management
expenses. General and administrative expenses decreased from $14.4 million for the year ended December 31, 2022, to $14.1 million for
the year ended December 31, 2023, a decrease of approximately 2%. This decrease was primarily driven
by lower administrative expenses, professional
service fees and reduced currency loss in the current year period.

Interest
Income. Net interest income was $1.1 million for the year ended December 31, 2023, and
$0.5 million for the year ended December 31, 2022. The increase was driven by increased interest rates and higher return on invested
balances in the current year period.

Income
Taxes

Realization
of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, net deferred
tax assets have been fully offset by valuation allowances as of December 31, 2023, and December 31, 2022, to reflect these
uncertainties. As of December 31, 2023, we had gross federal net operating loss carryforwards of approximately $127.4 million. The
federal net operating loss carryforwards reflect accumulated book losses reduced for the 2013 IRC Section 382 ownership change
limitation of $213.7 million, book/tax differences and expiration of unused carryforwards. The federal net operating loss
carryforwards generated prior to the 2018 tax year of approximately $98.8 million will expire between 2030 and 2037. The federal net
operating losses generated in 2018 and thereafter will be carried forward indefinitely as a result to changes in the tax law
following the Tax Cuts and Jobs Act. As of December 31, 2023, we had gross state net operating loss carryforward of approximately
$40.2 million which will expire at various dates between 2024 and 2042 if not utilized.

Liquidity
and Capital Resources

Liquidity
refers to the liquid financial assets available to fund our business operations and pay for near-term obligations. These liquid financial
assets consist of cash, cash equivalents, and investments.

39

As
of December 31, 2023, our accumulated deficit was $537.7 million with cash and cash equivalents of $20.6 million, inclusive of restricted
cash. Since inception, we have financed our operations primarily through cash generated by operations and proceeds from our debt and
stock offerings.

Capital
Resources

As
of December 31, 2023 and 2022, the Company did not have any debt.

Liquidity

The
following table summarizes our cash flow by operating, investing and financing activities for years ended December 31, 2023 and 2022
(in thousands):

Net
cash used in operating activities. We used approximately $9.1 million and $8.4 million of cash in operating activities during the
years ended December 31, 2023 and 2022, respectively. The increase in cash used in operating activities was driven by the increased operating
loss offset by changes in working capital in the current year period.

Net
cash provided by (used in) investing activities. Cash provided by investing activities for the year ended December 31, 2023,
consisted of $19.8 million. The cash generated during the year
ended December 31, 2023, was from proceeds received from the maturity of short-term investments of $20.1 million, partially offset
by $0.4 million of cash paid for equipment, construction and design costs associated with our new facility. Cash
used in investing activities for the year ended December 31, 2022, consisted primarily of purchases of investments of $19.7 million
and $2.4 million paid for equipment, design and construction costs associated with our new facility.

Net
cash provided by financing activities. We generated approximately $0.1 million and $0.2 million of cash for the years ended December
31, 2023 and 2022, respectively. The cash generated in both periods was driven by the exercise of stock options and our employee stock
purchase program.

At
December 31, 2023, we had working capital of approximately $20.0 million, compared to a working capital of approximately $29.0 million
at December 31, 2022. The decrease in working capital was primarily driven by the net loss incurred during the year ended December 31,
2023.

Our
principal source of liquidity is cash provided by operations and by the issuance of common stock through the exercise of stock
options and our employee stock purchase program as well as cash received from past equity raises. In addition, the Company filed a
universal shelf registration statement on Form S-3 with the SEC in May 2023, which was declared effective by the SEC on June 6,
2023, registering for sale up to $100.0 million of any combination of our common stock, preferred stock, debt securities, warrants,
rights and/or units from time to time and at prices and on terms that we may determine. The net proceeds of any securities we sell
under our shelf registration statement may be used for general corporate purposes, including among other possible uses, the
acquisition of companies or businesses, repayment and refinancing of debt, working capital and capital expenditures. At this time,
we have no plans to sell any such securities under our shelf registration statement.

The
Company believes the cash, and cash equivalents on hand as of December 31, 2023, will be sufficient to meet its obligations as they become
due in the ordinary course of business for at least 12 months following the date of the financial statements included in this Annual
Report on Form 10-K, as well as for periods beyond that 12-month period. Our cash requirements depend on numerous factors, including
success of clinical adoption within the installed base of robotic magnetic systems, new placements of capital systems, the resources
we devote to developing and supporting our products, and other factors. We expect to continue to fund our operations with cash resources
primarily generated from the proceeds of our past equity raises and from our working capital. In the future, we may finance cash needs
through the sale of other equity securities or non-core assets, strategic collaboration agreements, debt financings or through distribution
rights.

Off-Balance
Sheet Arrangements

We
do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities
involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk
that could have arisen if we had engaged in these relationships.

40

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this report
on Form 10-K. Operating results are not necessarily indicative of results that may occur in future periods.

This
report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control.
Our actual results could differ materially from those anticipated in these forward looking statements as a result of various factors,
including those set forth in Item 1A. “Risk Factors.” Forward-looking statements discuss matters that are not historical
facts. Forward-looking statements include, but are not limited to, discussions regarding our operating strategy, sales and marketing
strategy, regulatory strategy, our industry generally, overall economic conditions, our financial condition, liquidity and capital resources,
our results of operations, and the impact of the ongoing coronavirus (“COVID-19”) pandemic and our responses to it. Such
statements include, but are not limited to, statements preceded by, followed by or that otherwise include the words “believes,”
“expects,” “anticipates,” “intends,” “estimates,” “projects,” “can,”
“could,” “may,” “will,” “would,” or similar expressions. For those statements, we claim
the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You
should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations
regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, unless required by law.

Overview

Stereotaxis
is a pioneer and global leader in surgical robotics for minimally invasive endovascular intervention. We design, manufacture and
market robotic systems, instruments and information systems for the interventional laboratory. Our proprietary robotic technology,
Robotic Magnetic Navigation (RMN), fundamentally transforms endovascular interventions using precise computer-controlled magnetic fields
to directly control the tip of flexible interventional catheters or devices. Direct control of the tip of an interventional device,
in contrast to all manual hand-held devices that are controlled from their handle, can improve the precision, stability, reach and
safety of these devices during procedures.

34

Our
primary clinical focus has been electrophysiology, specifically cardiac ablation procedures for the treatment of arrhythmias. Cardiac
ablation has become a well-accepted therapy for arrhythmias and a multi-billion-dollar medical device market with expectations for substantial
long-term growth. We have shared our aspiration and a product strategy to expand the clinical focus of our technology to several additional
endovascular indications including coronary, neuro, and peripheral interventions.

There
is substantial real-world evidence and clinical literature for Robotic Magnetic Navigation in electrophysiology. Hundreds of electrophysiologists
at over one hundred hospitals globally have treated over 100,000 arrhythmia patients with our robotic technology. Clinical use of our
technology has been documented in over 400 clinical publications. Robotic Magnetic Navigation is designed to enable physicians to complete
more complex interventional procedures with greater success and safety by providing image-guided delivery of catheters through the blood
vessels and chambers of the heart to treatment sites. This is achieved using externally applied computer-controlled magnetic fields that
govern the motion of the working tip of the catheter, resulting in improved navigation. The more flexible atraumatic design of catheters
driven using magnetic fields may reduce the risk of patient harm and other adverse events. Performing the procedure from a control cockpit
enables physicians to complete procedures in a safe location protected from x-ray exposure, with greater ergonomics, and improved efficiency.
We believe these benefits can be applicable in other endovascular indications where navigation through complex vasculature is often challenging
or unsuccessful and generates significant x-ray exposure.

Our
primary products include the Genesis RMN System, the Odyssey Solution, and other related devices. We also offer to our
customers the Stereotaxis Imaging Model S x-ray System and other accessory devices.

The
Genesis RMN System is designed to enable physicians to complete more complex interventional procedures by providing image-guided
delivery of catheters through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied
magnetic fields that govern the motion of the working tip of the catheter, resulting in improved navigation, efficient procedures, and
reduced x-ray exposure.

The
Odyssey Solution consolidates lab information onto one large integrated display, enabling physicians to view and control all the
key information in the operating room. This is designed to improve lab layout and procedure efficiency. The system also features a remote
viewing and recording capability called Odyssey Cinema, which is an innovative solution that delivers synchronized content for
optimized workflow, advanced care, and improved productivity. This tool includes an archiving capability that allows clinicians to store
and replay entire procedures or segments of procedures. This information can be accessed from locations throughout the hospital local
area network and over the global Odyssey Network providing physicians with a tool for clinical collaboration, remote consultation, and
training.

The
Stereotaxis Imaging Model S provides an integrated complete solution for a robotic interventional operating room. It is a
single-plane, full-power x-ray system and includes the c-arm, powered table, motorized boom, and large high-definition monitors. The
Stereotaxis Imaging Model S x-ray System incorporates modern fluoroscopy technology to support high quality imaging while minimizing
radiation exposure for patients and physicians. The combination of RMN Systems with Stereotaxis Imaging Model S is designed to
reduce the cost of acquisition, the ongoing cost of ownership, and the complexity of installation of a robotic electrophysiology
practice.

We
promote our full suite of products in a typical hospital implementation, subject to regulatory approvals or clearances. This implementation
requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically includes equipment
and installation charges. The recurring payments typically include disposable costs for each procedure, equipment service costs beyond
the warranty period, and ongoing software updates. In hospitals where our full suite of products has not been implemented, equipment
upgrade or expansion can be implemented upon purchasing of the necessary upgrade or expansion.

We
have received regulatory clearances and registration necessary for us to market the Genesis RMN System in the U.S. and Europe,
and we are in the process of obtaining necessary registrations for extending our markets in other countries. Our prior generation robotic
magnetic navigation system, the Niobe System, and the Odyssey Solution, Cardiodrive, and various disposable interventional
devices have received regulatory clearance in the U.S., Europe, Canada, China, Japan and various other countries. We have received the
regulatory clearance, licensing and/or CE Mark approvals that allow us to market the Vdrive and Vdrive Duo Systems with
the V-CAS, V-Loop and V-Sono devices in the U.S., Canada and Europe. The Stereotaxis Imaging Model S x-ray System
is CE marked and cleared by the FDA.

Not
all products have and/or require regulatory clearance in all of the markets we serve. Please refer to “Regulatory Approval”
in Item 1 for a description of the regulatory clearance, licensing, and/or approvals we currently have or are pursuing.

As
of December 31, 2022, we had approximately $14.8 million of backlog, consisting of outstanding purchase orders and other commitments
for these systems. Of the December 31, 2022 backlog, we expect approximately 89% to be recognized as revenue over the course of 2023.
We had backlog of approximately $10.1 million as of December 31, 2021. There can be no assurance that we will recognize such revenue
in any particular period or at all because some of our purchase orders and other commitments are subject to contingencies that are outside
our control. These orders and commitments may be revised, modified or canceled, either by their express terms, as a result of negotiations
or by project changes or delays. In addition, the sales cycle for the robotic magnetic navigation system is lengthy and generally involves
construction or renovation activities at customer sites. Consequently, revenues and/or orders resulting from sales of our robotic magnetic
navigation system can vary significantly from one reporting period to the next.

35

We
have strategic relationships with technology leaders in the global interventional market. Through these strategic relationships we provide
compatibility between our robotic magnetic navigation system and digital imaging and 3D catheter location sensing technology, as well
as disposable interventional devices. The maintenance of these strategic relationships, or the establishment of equivalent alternatives,
is critical to our commercialization efforts. There are no guarantees that any existing strategic relationships will continue, and efforts
are ongoing to ensure the availability of integrated systems and devices and/or equivalent alternatives. We cannot provide assurance
as to the timeline of the ongoing availability of such compatible systems or our ability to obtain equivalent alternatives on competitive
terms or at all.

COVID-19
Pandemic

The
impact of the COVID-19 pandemic has varied widely over time by individual geography. In 2021, resurgences of COVID-19 as well as hospital
staffing shortages depressed procedure volumes at various times throughout the year. After such resurgences procedure volumes would generally
stabilize or recover. Similarly, in 2022, procedure volumes continued to be challenged by periodic resurgences of COVID-19, ongoing hospital
staffing issues and other factors.

We
have experienced challenges and disruptions due to the pandemic such as worldwide supply chain disruptions, including shortages and inflationary
pressures, and logistics delays which makes it difficult for us to source parts and ship our products. Our customers have also experienced
similar supply chain issues as well as labor shortages, both of which have contributed to delayed hospital construction project timelines.
To-date, we have been generally able to conduct normal business activities albeit in a more deliberate manner than prior to the pandemic,
including taking action to increase inventory levels, but we cannot guarantee that they will not be impacted more severely in the future.

The
global healthcare system is continuing to respond to the unprecedented challenges posed by the COVID-19 pandemic. While
we cannot reliably estimate the ultimate duration of the impact or the severity of ongoing periodic resurgences thereof, we continue
to anticipate periodic disruptions to our manufacturing operations, supply chains, procedures volumes, service activities, and capital
system orders and placements, any of which could have a material adverse effect on our business, financial condition, results of operations,
or cash flows.

Critical
Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared
in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. We review our estimates
and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe the following accounting
policies are critical to the judgments and estimates we use in preparing our financial statements.

Investments
Valuation

Our
investments may include, at any time, a diversified portfolio of cash equivalents and short- and long-term investments in a variety of
high-quality securities, including money market funds, U.S. treasury and U.S. government agency securities, corporate notes and bonds,
commercial paper, non-U.S. government agency securities, and municipal notes. The assessment of the fair value of investments can be
difficult and subjective. Generally accepted accounting principles for fair value measurement establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets and liabilities (“Level 1”) and the lowest priority to unobservable inputs
(“Level 3”). The three levels of the fair value hierarchy are described below:

Each
level of input has different levels of subjectivity and difficulty involved in determining fair value. Valuation of Level 1 and 2 instruments
generally do not require significant management judgment, and the estimation is not difficult. Level 3 instruments include unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The
determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. There were no Level 3 securities
for the periods presented.

Revenue
Recognition

The
Company accounts for revenue in accordance with Accounting Standards Codification Topic 606 (“ASC 606”), Revenue from
Contracts with Customers.

36

We
generate revenue from the initial capital sales of systems as well as recurring revenue from the sale of our proprietary disposable devices,
from royalties paid to the Company on the sale of various devices as provided by co-development and co-placement arrangements, and from
other recurring revenue including ongoing software updates and service contracts.

In
accordance with Accounting Standards Codification Topic 606 (“ASC 606”), “Revenue from Contracts with Customers,”
we account for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights
of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. We
record our revenue based on consideration specified in the contract with each customer, net of any taxes collected from customers that
are remitted to government authorities.

For
contracts containing multiple products and services the Company accounts for individual products and services as separate performance
obligations if they are distinct, which is if a product or service is separately identifiable from other items in the bundled package,
and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company recognizes
revenues as the performance obligations are satisfied by transferring control of the product or service to a customer.

For
arrangements with multiple performance obligations, revenue is allocated to each performance obligation based on its relative standalone
selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services.
If a standalone selling price is not directly observable, then the Company estimates the standalone selling price considering market
conditions and entity-specific factors including, but not limited to, features and functionality of the products and services and market
conditions. The Company regularly reviews standalone selling prices and updates these estimates as necessary.

Our
revenue recognition policy affects the following revenue streams in our business as follows:

Systems:

Disposables:

Royalty:

Other
Recurring Revenue:

Sublease
Revenue:

The
Company invoices its customers based on the billing schedules in its sales arrangements. Contract assets primarily represent the difference
between the revenue that was recognized based on the relative selling price of the related performance obligations and the contractual
billing terms in the arrangements. Customer deposits primarily relate to future system sales but can also include deposits on disposable
sales. Deferred revenue is primarily related to service contracts, for which the service fees are billed up-front, generally quarterly
or annually, and for amounts billed in advance for system contracts for which some performance obligations remain outstanding. For service
contracts, the associated deferred revenue is generally recognized ratably over the service period. For system contracts, the associated
deferred revenue is recognized when the remaining performance obligations are satisfied. See Note 2 to the financial statements for additional
detail on deferred revenue. The Company did not have any impairment losses on its contract assets for the periods presented.

37

Assets
Recognized from the Costs to Obtain a Contract with a Customer

The
Company has determined that sales incentive programs for the Company’s sales team meet the requirements to be capitalized as the
Company expects to generate future economic benefits from the related revenue generating contracts after the initial capital sales transaction.
The costs capitalized as contract acquisition costs included in prepaid expenses and other assets in the Company’s balance sheets
were $0.2 million as of December 31, 2022 and 2021. The Company did not incur any impairment losses during any of the periods presented.

Leases

The
Company accounts for leases in accordance with ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified
Topic 842. A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property,
plant or equipment for a period of time in exchange for consideration. The Company determines if a contract contains a lease at inception.
For contracts where the Company is the lessee, operating leases are included in operating lease right-of-use (“ROU”) assets
and operating lease liability on the Company’s balance sheet. The Company currently does not have any finance leases.

Operating
lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over
the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before
the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information
available at the commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit
rate. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised.
Lease expense is recognized on a straight-line basis over the lease term.

The
Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate
non-lease components from lease components for the Company’s operating leases. Additionally, the Company applies the short-term
lease measurement and recognition exemption in which right of use assets and lease liabilities are not recognized for leases less than
twelve months.

As
disclosed in Note 7, on March 1, 2021, the Company entered into an office lease agreement (the “Lease”) with Globe Building
Company (the “Landlord”), under which the Company is leasing executive office space and manufacturing facilities of approximately
43,100 square feet of rentable space located at 710 N. Tucker Boulevard, St. Louis, Missouri (the “Premises”) that serves
as the Company’s new principal executive and administrative offices and manufacturing facility. Lease payments commenced on January
1, 2022 and the lease has a term of ten years, with two renewal options of five years each. The minimum annual rent under the terms of
the Lease ranges from approximately $0.8 million in 2022 to $1.0 million in 2031.

The
Company gained access to the Premises in the third quarter 2021 to begin constructing leasehold improvements. In accordance with ASC
842, the Company recorded a ROU asset and lease liability. The initial recognition of the ROU asset and lease liability was $5.9 million.
In the fourth quarter of 2021, the Company received an occupancy permit and relocated its operations
to the new leased space.

Cost
of Contracts

Costs
of systems revenue include direct product costs, installation labor and other costs, estimated warranty costs, and initial training and
product maintenance costs. These costs are recorded at the time of sale. Costs of disposable revenue include direct product costs and
estimated warranty costs and are recorded at the time of sale. Cost of revenue from services and license fees are recorded when incurred.
Cost of sublease revenue is recorded on a straight-line basis.

Stock-based
Compensation

Stock
compensation expense, which is a non-cash charge, results from stock option, non-qualified stock options, stock appreciation rights,
and restricted share grants made to employees, directors, and third-party consultants at the fair value of the grants. For time-based
awards, the fair value of options and stock appreciation rights granted was determined using the Black-Scholes valuation method which
gives consideration to the estimated value of the underlying stock at the date of grant, the exercise price of the option, the expected
dividend yield and volatility of the underlying stock, the expected life of the option and the corresponding risk-free interest rate.
The fair value of the grants of restricted shares and units was determined based on the closing price of our stock on the date of grant.
Stock compensation expense for options, stock appreciation rights and for time-based restricted share grants and units is amortized on
a straight-line basis over the vesting period of the underlying issue, generally over four years except for grants to directors which
are generally earned over a period of six months. Stock compensation expense for performance-based restricted shares, if any, is amortized
on a straight-line basis over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives. Compensation expense is
recognized only for those options expected to vest, net of actual forfeitures. Estimates of the expected life of options have been based
on the average of the vesting and expiration periods, which is the simplified method under general accounting principles for share-based
payments. Estimates of volatility utilized in calculating stock-based compensation have been prepared based on historical data. Actual
experience to date has been consistent with these estimates.

38

For
market-based awards, stock-based compensation expense is recognized over the minimum service period regardless of whether or not the
market target is probable of being achieved. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.

The
amount of compensation expense to be recorded in future periods may increase if we make additional grants of options, stock appreciation
rights or restricted shares. The amount of expense to be recorded in future periods may decrease if the requisite service periods are
not completed.

Valuation
of Inventory

We
value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out (FIFO) method, or its
current net realizable value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and
reserve accordingly. Our reserve estimate for excess and obsolete is based on expected future use. Excess manufacturing overhead costs
attributable to idle facility expenses or abnormally low production volumes are excluded from inventory and recorded as an expense in
the period incurred.

Income
Taxes

Deferred
tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities
using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We have established a valuation
allowance against the entire amount of our deferred tax assets net of liabilities because we are not able to conclude, due to our history
of operating losses, that it is more likely than not that we will be able to realize any portion of the deferred tax assets.

In
assessing whether and to what extent deferred tax assets are realizable, we consider whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable
income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, limitations imposed
by Section 382 of the Internal Revenue Code and projections for future losses over periods which the deferred tax assets are deductible,
we determined that a 100% valuation allowance of deferred tax assets net of liabilities was appropriate.

Results
of Operations

Comparison
of the Years ended December 31, 2022 and 2021

Revenue.
Revenue decreased from $35.0 million for the year ended December 31, 2021, to $28.1 million for the year ended December 31, 2022, a decrease
of approximately 20%. Revenue from sales of systems decreased from $11.2 million for the year ended December 31, 2021, to $6.8 million
for the year ended December 31, 2022, a decrease of approximately 39%, driven by decreased system sales volumes in the current year period.
Revenue from sales of disposable interventional devices, service and accessories decreased to $21.3 million for the year ended December
31, 2022, from $22.9 million for the year ended December 31, 2021, a decrease of approximately 7%, driven
by timing of service contract revenue, lower procedure volumes, and the strengthening of the U.S. dollar during the current year period.
Sublease revenue was $1.0 million for the year ended December 31, 2021. The sublease ended
December 31, 2021.

Cost
of Revenue. Cost of revenue decreased from $11.8 million for the year ended December 31, 2021, to $9.7 million for the year ended
December 31, 2022, a decrease of approximately 18%. As a percentage of our total revenue, overall gross margin remained consistent at
66% for the years ended December 31, 2022 and December 31, 2021. Cost of revenue for systems sold decreased from $7.5 million for the
year ended December 31, 2021 to $5.8 million for the year ended December 31, 2022, primarily due to decreased system sales volumes in
the current year period. Gross margin for systems decreased from $3.6 million for the year ended December 31, 2021 to $1.0 million for
the year ended December 31, 2022. Cost of revenue for disposables, service, and accessories increased to $3.9 million for the year ended
December 31, 2022 from $3.3 million for year ended December 31, 2021, driven by higher expenses incurred under service contracts in the
current year period. Gross margin for disposables, service and accessories was 82% for the current year period compared to 86% for the
year ended December 31, 2021. Cost of sublease revenue was $1.0 million the year ended December 31, 2021. The
sublease ended December 31, 2021.

Research
and Development Expense. Research and development expense increased from $10.2 million for the year ended December 31, 2021, to $10.6
million for the year ended December 31, 2022, an increase of approximately 4%. This increase was
primarily due to higher project spending and measured hiring in the current year period.

39

Sales
and Marketing Expense. Sales and marketing expense increased from $11.9 million for the year ended December 31, 2021 to $12.3 million
for the year ended December 31, 2022, an increase of approximately 3%. This increase was primarily
due to higher travel expenses in the current year period.

General
and Administrative Expense. General and administrative expenses include finance, information systems, legal, and general management
expenses. General and administrative expenses increased from $14.0 million for the year ended December 31, 2021 to $14.4 million for
the year ended December 31, 2022, an increase of approximately 3%. This increase was primarily
driven by higher stock-based compensation expense for the previously announced CEO Performance Award partially offset by lower professional
service fees in the current year period.

Interest
Income (Expense). Net interest income was $0.5 million for the year ended December 31, 2022,
and net interest expense was less than $0.1 million for the year ended December 31, 2021. The increase for the year ended December 31,
2022 was driven by interest earned from investments.

Income
Taxes

Realization
of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, net deferred tax
assets have been fully offset by valuation allowances as of December 31, 2022 and December 31, 2021 to reflect these uncertainties. As of December 31, 2022, we had gross federal net
operating loss carryforwards of approximately $121.7 million. We may not be able to utilize all of these loss carryforwards prior to
their expiration. The federal net operating loss carryforwards reflect accumulated book losses
reduced for the 2013 IRC Section 382 ownership change limitation of $236.4 million and approximately $159.2 million of book/tax differences
and expiration of unused carryforwards. The federal net operating loss carryforwards generated prior to the 2018 tax year will expire
between 2030 and 2037. The federal net operating losses generated in 2018 and thereafter will be carried forward indefinitely as a result
of changes in the tax law following the Tax Cuts and Jobs Act. As of December 31, 2022, we had gross state net operating loss carryforward
of approximately $32.8 million which will expire at various dates between 2023 and 2042 if not utilized.

Liquidity
and Capital Resources

Liquidity
refers to the liquid financial assets available to fund our business operations and pay for near-term obligations. These liquid financial
assets consist of cash, cash equivalents, and investments.

As
of December 31, 2022, our accumulated deficit was $517.0 million with cash and cash equivalents of $9.9 million, inclusive of restricted
cash, and $19.8 million in short-term investments. Since inception, we have financed our operations primarily through cash generated
by operations and proceeds from our debt and stock offerings.

Capital
Resources

As
of December 31, 2022, and 2021, the Company did not have any debt.

Paycheck
Protection Program

The
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. Among
the provisions contained in the CARES Act was the creation of the Paycheck Protection Program that provides for Small Business Administration
(“SBA”) Section 7(a) loans for qualified small businesses. In general, the loan could be forgiven as long as the funds were
used for payroll related expenses as well as rent and utilities paid during the twenty-four-week period from the date of the loan and
as long as certain headcount and salary/wage levels were maintained. On April 10, 2020, the Company was informed by its lender, Midwest
BankCentre (the “Bank”), that the Bank received approval from the SBA to fund the Company’s request for a loan under
the SBA’s Paycheck Protection Program (“PPP Loan”). Per the terms of the PPP Loan, the Company received total proceeds
of approximately $2.2 million from the Bank on April 20, 2020. In accordance with the loan forgiveness requirements of the CARES Act,
the Company used the full proceeds from the PPP Loan primarily for payroll costs, rent and utilities. In March 2021, the Company applied
for loan forgiveness and in June 2021 full loan forgiveness was granted by the SBA. The Company recognized a net gain from debt extinguishment
of approximately $2.2 million.

Liquidity

The
following table summarizes our cash flow by operating, investing and financing activities for years ended December 31, 2022 and 2021
(in thousands):

40

Net
cash used in operating activities. We used approximately $8.4 million and $2.9 million of cash in operating activities during the
years ended December 31, 2022 and 2021, respectively. The increase in cash used in operating activities was driven by the increased operating
loss and use of working capital in the current year period.

Net
cash used in investing activities. Cash used in investing activities for the year ended December 31, 2022, consisted primarily of
purchases of investments of $19.7 million and $2.4 million paid for equipment, design and construction costs associated with our new
facility. We used less than $1.4 million of cash in investing activities during the year ended December 31, 2021 for the
purchase of equipment, design and construction costs associated with our new facility.

Net
cash provided by financing activities. We generated approximately $0.2 million and $0.5 million of cash for the years ended December
31, 2022 and 2021, respectively. The cash generated in both periods was driven by the exercise of stock options and our employee stock purchase program.

At
December 31, 2022, we had working capital of approximately $29.0 million, compared to a working capital of approximately $38.1 million
at December 31, 2021. The decrease in working capital was primarily driven by the net loss incurred during the year ended December 31,
2022.

Our
principal source of liquidity is cash provided by operations and by the issuance of common stock through the exercise of stock options
and our employee stock purchase program as well as cash received from past equity raises. The Company believes the cash, cash equivalents,
and investments on hand as of December 31, 2022, will be sufficient to meet its obligations as they become due in the ordinary course
of business for at least 12 months following the date of the financial statements included in this Annual Report on Form 10-K, as well
as for periods beyond that 12-month period. Our cash requirements depend on numerous factors, including success of clinical adoption
within the installed base of robotic magnetic systems, new placements of capital systems, the resources we devote to developing and supporting
our products, and other factors. We expect to continue to fund our operations with cash resources primarily generated from the proceeds
of our past equity raises and from our working capital. In the future, we may finance cash needs through the sale of other equity securities
or non-core assets, strategic collaboration agreements, debt financings or through distribution rights.

Off-Balance
Sheet Arrangements

We
do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities
involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk
that could have arisen if we had engaged in these relationships.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this report
on Form 10-K. Operating results are not necessarily indicative of results that may occur in future periods.

34

This
report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control.
Our actual results could differ materially from those anticipated in these forward looking statements as a result of various factors,
including those set forth in Item 1A. “Risk Factors.” Forward-looking statements discuss matters that are not historical
facts. Forward-looking statements include, but are not limited to, discussions regarding our operating strategy, sales and marketing
strategy, regulatory strategy, our industry generally, overall economic conditions, our financial condition, liquidity and capital resources,
our results of operations, and the impact of the ongoing coronavirus (“COVID-19”) pandemic and our responses to it. Such
statements include, but are not limited to, statements preceded by, followed by or that otherwise include the words “believes,”
“expects,” “anticipates,” “intends,” “estimates,” “projects,” “can,”
“could,” “may,” “will,” “would,” or similar expressions. For those statements, we claim
the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You
should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations
regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, unless required by law.

Overview

Stereotaxis
is a pioneer and global leader in surgical robotics for minimally invasive endovascular intervention. We design, manufacture and market
robotic systems, instruments and information systems for the interventional laboratory. Our proprietary robotic technology, Robotic Magnetic
Navigation, fundamentally transforms endovascular interventions using precise computer-controlled magnetic fields to directly control
the tip of flexible interventional catheters or devices. Direct control of the tip of an interventional device, in contrast to all manual
hand-held devices that are controlled from their handle, can improve the precision, stability, reach and safety of these devices during
procedures.

Our
primary clinical focus has been electrophysiology, specifically cardiac ablation procedures for the treatment of arrhythmias. Cardiac
ablation has become a well-accepted therapy for arrhythmias and a multi-billion-dollar medical device market with expectations for substantial
long-term growth. We have shared our aspiration and a product strategy to expand the clinical focus of our technology to several additional
endovascular indications including coronary, neuro, and peripheral interventions.

There
is substantial real-world evidence and clinical literature for Robotic Magnetic Navigation in electrophysiology. Hundreds of electrophysiologists
at over one hundred hospitals globally have treated over 100,000 arrhythmia patients with our robotic technology. Clinical use of our
technology has been documented in over 400 clinical publications. Robotic Magnetic Navigation is designed to enable physicians to complete
more complex interventional procedures with greater success and safety by providing image-guided delivery of catheters through the blood
vessels and chambers of the heart to treatment sites. This is achieved using externally applied computer-controlled magnetic fields that
govern the motion of the working tip of the catheter, resulting in improved navigation. The more flexible atraumatic design of catheters
driven using magnetic fields may reduce the risk of patient harm and other adverse events. Performing the procedure from a control cockpit
enables physicians to complete procedures in a safe location protected from x-ray exposure, with greater ergonomics, and improved efficiency.
We believe these benefits can be applicable in other endovascular indications where navigation through complex vasculature is often challenging
or unsuccessful and generates significant x-ray exposure.

Our
primary products include the Genesis RMN System, the Odyssey Solution, and other related devices. We also offer to our
customers the Stereotaxis Imaging Model S x-ray System and other accessory devices.

The
Genesis RMN System is designed to enable physicians to complete more complex interventional procedures by providing image-guided
delivery of catheters through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied
magnetic fields that govern the motion of the working tip of the catheter, resulting in improved navigation, efficient procedures, and
reduced x-ray exposure.

The
Odyssey Solution consolidates lab information onto one large integrated display, enabling physicians to view and control all the
key information in the operating room. This is designed to improve lab layout and procedure efficiency. The system also features a remote
viewing and recording capability called Odyssey Cinema, which is an innovative solution that delivers synchronized content for
optimized workflow, advanced care, and improved productivity. This tool includes an archiving capability that allows clinicians to store
and replay entire procedures or segments of procedures. This information can be accessed from locations throughout the hospital local
area network and over the global Odyssey Network providing physicians with a tool for clinical collaboration, remote consultation, and
training.

We
promote our full suite of products in a typical hospital implementation, subject to regulatory approvals or clearances. This implementation
requires a hospital to agree to an upfront capital payment and recurring payments. The upfront capital payment typically includes equipment
and installation charges. The recurring payments typically include disposable costs for each procedure, equipment service costs beyond
the warranty period, and ongoing software updates. In hospitals where our full suite of products has not been implemented, equipment
upgrade or expansion can be implemented upon purchasing of the necessary upgrade or expansion.

We
have received regulatory clearances and registration necessary for us to market the Genesis RMN System in the U.S. and Europe,
and we are in the process of obtaining necessary registrations for extending our markets in other countries. Our prior generation robotic
magnetic navigation system, the Niobe System, and the Odyssey Solution, Cardiodrive, and various disposable interventional
devices have received regulatory clearance in the U.S., Europe, Canada, China, Japan and various other countries. We have received the
regulatory clearance, licensing and/or CE Mark approvals that allow us to market the Vdrive and Vdrive Duo Systems with
the V-CAS, V-Loop and V-Sono devices in the U.S., Canada and Europe. Stereotaxis Imaging Model S x-ray System is
CE marked and cleared by the FDA.

Not
all products have and/or require regulatory clearance in all of the markets we serve. Please refer to “Regulatory Approval”
in Item 1 for a description of the regulatory clearance, licensing, and/or approvals we currently have or are pursuing.

35

As
of December 31, 2021, we had approximately $10.1 million of backlog, consisting of outstanding purchase orders and other commitments
for these systems. Of the December 31, 2021 backlog, we expect approximately 78% to be recognized as revenue over the course of 2022.
We had backlog of approximately $6.9 million as of December 31, 2020. There can be no assurance that we will recognize such revenue in
any particular period or at all because some of our purchase orders and other commitments are subject to contingencies that are outside
our control. These orders and commitments may be revised, modified or canceled, either by their express terms, as a result of negotiations
or by project changes or delays. In addition, the sales cycle for the robotic magnetic navigation system is lengthy and generally involves
construction or renovation activities at customer sites. Consequently, revenues and/or orders resulting from sales of our robotic magnetic
navigation system can vary significantly from one reporting period to the next.

We
have strategic relationships with technology leaders in the global interventional market. Through these strategic relationships we provide
compatibility between our robotic magnetic navigation system and digital imaging and 3D catheter location sensing technology, as well
as disposable interventional devices. The maintenance of these strategic relationships, or the establishment of equivalent alternatives,
is critical to our commercialization efforts. There are no guarantees that any existing strategic relationships will continue, and efforts
are ongoing to ensure the availability of integrated systems and devices and/or equivalent alternatives. We cannot provide assurance
as to the timeline of the ongoing availability of such compatible systems or our ability to obtain equivalent alternatives on competitive
terms or at all.

COVID-19
Pandemic

Prior
to the spread of COVID-19, we were experiencing procedure trends consistent with the fourth quarter of 2019. We also saw strength in
new capital orders. Beginning in January 2020, we saw a substantial reduction in robotic procedures in Asia Pacific, especially in
China. By the height of the pandemic in that region, weekly procedures decreased to approximately 40% of the average rate
experienced in the fourth quarter. As the COVID-19 pandemic subsided in China in March 2020, procedure volume began to recover and,
by the end of the first quarter of 2020, we were seeing weekly procedures in the Asia Pacific region approach 70% of the fourth
quarter average rates. Procedure disruption in other geographies was not significant until the middle of March 2020, when the
worldwide impact of COVID-19 intensified. By the end of March, procedures in the U.S and Europe, which represent the majority of our
procedures, declined to approximately 70% of the weekly procedure rate experienced in the fourth quarter of 2019. As the pandemic
spread throughout the first quarter of 2020, various local restrictions on travel, mandatory closures, social distancing protocols
and shelter-in-place orders negatively impacted our ability to complete installation and service activities, which resulted in
declines in system and service revenue in the first quarter. Our supply-chain also experienced some impact as some suppliers
struggled to source sub-components in February when most factories in China were seemingly closed. These issues were mostly
alleviated by the end of the first quarter with the opening of the Chinese economy. During the first quarter, we also took proactive
actions to reduce the risk that a prolonged future reduction in Chinese manufacturing might have on us. During the early portion of
the second quarter, weekly procedures in the United States and Europe continued to decline, reaching approximately 40% of fourth
quarter 2019 levels by the middle of April. In May, with the reopening of various regions, procedures in both geographies began to
recover and by the end of June, procedures were approximating the level seen before the pandemic. During the second quarter of 2020,
weekly procedure rates in Asia Pacific continued to improve, eventually reaching the pre-pandemic weekly procedure rate. During the
third quarter of 2020, weekly procedures continued to recover and approached the levels seen before the pandemic. During the fourth
quarter of 2020, periodic resurgence of COVID-19 caused hospitals and patients in some areas to again postpone procedures. Overall,
weekly procedures during the fourth quarter remained generally consistent with the recovery seen in the third quarter.

During
the first quarter of 2021, periodic resurgences of COVID-19 and the delayed rollout of vaccines in some geographies continued to impact
our procedure volumes. Overall, procedure volumes improved slightly compared to the fourth quarter 2020 and were approximately 5% higher
than the first quarter of 2020. While procedures in the Asia Pacific region had recovered to pre-pandemic levels, procedures in other
geographies remained impacted with total procedures approximately 15% below those seen in the first quarter of 2019. During the second
quarter of 2021, as the rollout of vaccines continued in the US and were varied in other geographies, overall procedure volumes for the
second quarter 2021 remained fairly consistent with the first quarter of 2021 and were nearly 40% higher than the second quarter of 2020.
During the third and fourth quarters of 2021, a resurgence of COVID and hospital staffing shortages depressed procedure volumes.
Overall procedure volumes fell in the third quarter of 2021 by approximately 9% as compared to the third quarter of 2020 and
overall procedure volumes in the fourth quarter of 2021 fell by approximately 8% as compared to the fourth quarter of 2020.

We
have experienced some challenges and disruptions due to the pandemic such as worldwide supply chain disruptions, including shortages
and inflationary pressures, and logistics delays which makes it difficult for us to source parts and ship our products. Our customers
have also experienced similar supply chain issues as well as labor shortages, both of which have contributed to delayed hospital construction
project timelines. While concerns remain, we are
generally able to conduct normal business activities albeit in a more deliberate manner than prior to the pandemic.

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Ongoing

Even
with the rollout of effective vaccines, we do not expect all markets to recover at the same pace. The ongoing impact that the pandemic
will have on our business will likely continue to vary by individual geography based on the extent of the outbreak in each area, the
timing of vaccine distribution, specific governmental restrictions and the availability of testing capabilities, personal protective
equipment, and hospital facilities, as well as decisions by our vendors, suppliers, customers and, ultimately, patients in response to
the pandemic, none of which we are able to currently and accurately predict. While we cannot reliably estimate the depth or length of
the impact, we continue to anticipate significant, periodic disruptions to our procedures volumes, service activities and system placements
in 2022. In addition, we would expect that capital system orders will continue to experience some delay.

Capital
markets and worldwide economies continue to be significantly impacted by the COVID-19 pandemic, and the outlook for 2022 depends on future
developments, including but not limited to: the length and severity of ongoing outbreaks (including further new variants beyond Delta
and Omicron, which may be more contagious, more severe or less responsive to treatment or vaccines), the effectiveness of containment
actions, and the timing of vaccinations and achievement of herd immunity. The impact on local and/or global economies is uncertain, including
ongoing risk of recession. Such economic disruptions, including a recession, could have a material adverse effect on our long-term business
as hospitals continue to monitor and adjust capital and overall spending or redirect such spending to treatments related directly to
the pandemic. To date, our manufacturing operations and supply chains have been manageably impacted, but we cannot guarantee that
such will not be impacted further in the future. If our manufacturing operations or supply chains are materially interrupted,
it may not be possible for us to timely manufacture relevant products at required levels, or at all. A material reduction or interruption
to any of our manufacturing processes could have a material adverse effect on our business, operating results, and financial condition.
Further, the COVID-19 pandemic and local actions, such as “shelter-in-place” orders and restrictions on our ability to travel
and access our customers or temporary closures of our facilities or the facilities of our suppliers and their contract manufacturers,
could also significantly impact our sales and our ability to ship our products and supply our customers. Any of these events could negatively
impact the number of procedures performed and the number of system placements and have a material adverse effect on our business, financial
condition, results of operations, or cash flows.

Critical
Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared
in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. We review our estimates
and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe the following accounting
policies are critical to the judgments and estimates we use in preparing our financial statements.

Revenue
Recognition

The
Company accounts for revenue in accordance with Accounting Standards Codification Topic 606 (“ASC 606”), Revenue from
Contracts with Customers.

We
generate revenue from the initial capital sales of systems as well as recurring revenue from the sale of our proprietary disposable devices,
from royalties paid to the Company on the sale by Biosense Webster of co-developed catheters, and from other recurring revenue including
ongoing software updates and service contracts.

In
accordance with Accounting Standards Codification Topic 606 (“ASC 606”), “Revenue from Contracts with Customers,”
we account for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights
of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. We
record our revenue based on consideration specified in the contract with each customer, net of any taxes collected from customers that
are remitted to government authorities.

For
contracts containing multiple products and services the Company accounts for individual products and services as separate performance
obligations if they are distinct, which is if a product or service is separately identifiable from other items in the bundled package,
and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company recognizes
revenues as the performance obligations are satisfied by transferring control of the product or service to a customer.

For
arrangements with multiple performance obligations, revenue is allocated to each performance obligation based on its relative standalone
selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services.
If a standalone selling price is not directly observable, then the Company estimates the standalone selling price considering market
conditions and entity-specific factors including, but not limited to, features and functionality of the products and services and market
conditions. The Company regularly reviews standalone selling prices and updates these estimates as necessary.

37

Our
revenue recognition policy affects the following revenue streams in our business as follows:

Systems:

Disposables:

Royalty:

Other
Recurring Revenue:

Sublease
Revenue:

The
Company invoices its customers based on the billing schedules in its sales arrangements. Contract assets primarily represent the difference
between the revenue that was recognized based on the relative selling price of the related performance obligations and the contractual
billing terms in the arrangements. Customer deposits primarily relate to future system sales but can also include deposits on disposable
sales. Deferred revenue is primarily related to service contracts, for which the service fees are billed up-front, generally quarterly
or annually, and for amounts billed in advance for system contracts for which some performance obligations remain outstanding. For service
contracts, the associated deferred revenue is generally recognized ratably over the service period. For system contracts, the associated
deferred revenue is recognized when the remaining performance obligations are satisfied. See Note 2 to the financial statements for additional
detail on deferred revenue. The Company did not have any impairment losses on its contract assets for the periods presented.

Assets
Recognized from the Costs to Obtain a Contract with a Customer

The
Company has determined that sales incentive programs for the Company’s sales team meet the requirements to be capitalized as the
Company expects to generate future economic benefits from the related revenue generating contracts after the initial capital sales transaction.
The costs capitalized as contract acquisition costs included in prepaid expenses and other assets in the Company’s balance sheets
were $0.2 million and $0.3 million as of December 31, 2021 and 2020, respectively. The Company did not incur any impairment losses during
any of the periods presented.

38

Leases

The
Company accounts for leases in accordance with ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified
Topic 842. A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property,
plant or equipment for a period of time in exchange for consideration. The Company determines if a contract contains a lease at inception.
For contracts where the Company is the lessee, operating leases are included in operating lease right-of-use (“ROU”) assets
and operating lease liability on the Company’s balance sheet. The Company currently does not have any finance leases.

Operating
lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over
the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before
the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information
available at the commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit
rate. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised.
Lease expense is recognized on a straight-line basis over the lease term.

The
Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate
non-lease components from lease components for the Company’s operating leases. Additionally, the Company applies the short-term
lease measurement and recognition exemption in which right of use assets and lease liabilities are not recognized for leases less than
twelve months.

As
disclosed in Note 6, on March 1, 2021, the Company entered into an office lease agreement (the “Lease”) with Globe Building
Company (the “Landlord”), under which the Company is leasing executive office space and manufacturing facilities of approximately
43,100 square feet of rentable space located at 710 N. Tucker Boulevard, St. Louis, Missouri (the “Premises”) that serves
as the Company’s new principal executive and administrative offices and manufacturing facility. Lease payments commenced on January
1, 2022 and the lease has a term of ten years, with two renewal options of five years each. The minimum annual rent under the terms of
the Lease ranges from approximately $0.8 million in 2022 to $1.0 million in 2031.

The
Company gained access to the Premises in the third quarter 2021 to begin constructing leasehold improvements. In accordance with ASC
842, the Company recorded a ROU asset and lease liability. The initial recognition of the ROU asset and lease liability was $5.9 million.
In the fourth quarter of 2021, the Company received an occupancy permit and relocated its operations
to the new leased space.

Cost
of Contracts

Costs
of systems revenue include direct product costs, installation labor and other costs, estimated warranty costs, and initial training and
product maintenance costs. These costs are recorded at the time of sale. Costs of disposable revenue include direct product costs and
estimated warranty costs and are recorded at the time of sale. Cost of revenue from services and license fees are recorded when incurred.
Cost of sublease revenue is recorded on a straight-line basis.

Stock-based
Compensation

Stock
compensation expense, which is a non-cash charge, results from stock option, non-qualified stock options, stock appreciation rights,
and restricted share grants made to employees, directors, and third-party consultants at the fair value of the grants. For time-based
awards, the fair value of options and stock appreciation rights granted was determined using the Black-Scholes valuation method which
gives consideration to the estimated value of the underlying stock at the date of grant, the exercise price of the option, the expected
dividend yield and volatility of the underlying stock, the expected life of the option and the corresponding risk-free interest rate.
The fair value of the grants of restricted shares and units was determined based on the closing price of our stock on the date of grant.
Stock compensation expense for options, stock appreciation rights and for time-based restricted share grants and units is amortized on
a straight-line basis over the vesting period of the underlying issue, generally over four years except for grants to directors which
are generally earned over a period of six months. Stock compensation expense for performance-based restricted shares, if any, is amortized
on a straight-line basis over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives.
Compensation expenses related to grants to non-employees are re-measured quarterly through the vesting date. Compensation expense is
recognized only for those options expected to vest, net of actual forfeitures. Estimates of the expected life of options have been based
on the average of the vesting and expiration periods, which is the simplified method under general accounting principles for share-based
payments. Estimates of volatility utilized in calculating stock-based compensation have been prepared based on historical data. Actual
experience to date has been consistent with these estimates.

For
market-based awards, stock-based compensation expense is recognized over the minimum service period regardless of whether or not the
market target is probable of being achieved. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.

The
amount of compensation expense to be recorded in future periods may increase if we make additional grants of options, stock appreciation
rights or restricted shares. The amount of expense to be recorded in future periods may decrease if the requisite service periods are
not completed.

39

Valuation
of Inventory

We
value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out (FIFO) method, or its
current net realizable value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and
reserve accordingly. Our reserve estimate for excess and obsolete is based on expected future use. Excess manufacturing overhead costs
attributable to idle facility expenses or abnormally low production volumes are excluded from inventory and recorded as an expense in
the period incurred.

Income
Taxes

Deferred
tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities
using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We have established a valuation
allowance against the entire amount of our deferred tax assets net of liabilities because we are not able to conclude, due to our history
of operating losses, that it is more likely than not that we will be able to realize any portion of the deferred tax assets.

In
assessing whether and to what extent deferred tax assets are realizable, we consider whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable
income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, limitations imposed
by Section 382 of the Internal Revenue Code and projections for future losses over periods which the deferred tax assets are deductible,
we determined that a 100% valuation allowance of deferred tax assets net of liabilities was appropriate.

Results
of Operations

Comparison
of the Years ended December 31, 2021 and 2020

Revenue.
Revenue increased from $26.6 million for the year ended December 31, 2020, to $35.0 million for the year ended December 31, 2021, an
increase of approximately 32%. Revenue from sales of systems increased from $3.6 million for the year ended December 31, 2020, to $11.2
million for the year ended December 31, 2021, an increase of approximately 208%, driven by increased system sales volumes in the current
year period. Revenue from sales of disposable interventional devices, service and accessories increased to $22.9 million for the year
ended December 31, 2021, from $22.0 million for the year ended December 31, 2020, an increase of approximately 4%, driven by higher procedure
volumes partially offset by slightly lower service revenue. Sublease revenue was $1.0 million for the years ended December 31, 2021 and
2020.

Cost
of Revenue. Cost of revenue increased from $7.7 million for the year ended December 31, 2020, to $11.8 million for the year ended
December 31, 2021, an increase of approximately 54%. As a percentage of our total revenue, overall gross margin decreased to 66% for
the year ended December 31, 2021, from 71% for the year ended December 31, 2020 driven by changes in product mix. Cost of revenue for
systems sold increased from $3.7 million for the year ended December 31, 2020 to $7.5 million for the year ended December 31, 2021, primarily
due to increased system sales volumes in the current year period. Gross margin for systems increased from less than negative $0.1 million
for the year ended December 31, 2020 to positive $3.6 million for the year ended December 31, 2021. Cost of revenue for disposables,
service, and accessories increased to $3.3 million for the year ended December 31, 2021 from $3.0 million for year ended December 31,
2020 driven by increased disposable sales volumes and higher expenses incurred under service contracts in the current year period. Gross
margin for disposables, service and accessories was 86% for the current year period compared to 87% for the year ended December 31, 2020.
Cost of sublease revenue was $1.0 million for both the years ended December 31, 2021 and 2020.

Research
and Development Expense. Research and development expense increased from $8.1 million for the year ended December 31, 2020, to $10.2
million for the year ended December 31, 2021, an increase of approximately 25%. This increase was
primarily due to higher project spending and measured hiring in the current year period.

Sales
and Marketing Expense. Sales and marketing expense increased from $11.2 million for the year ended December 31, 2020 to $11.9 million
for the year ended December 31, 2021, an increase of approximately 7%. This increase was primarily
due to increased sales and marketing activities as normal activities resume following the height of the pandemic as well as higher compensation
related costs.

General
and Administrative Expense. General and administrative expenses include finance, information systems, legal, and general management
expenses. General and administrative expense increased from $6.4 million for the year ended December 31, 2020 to $14.0 million for the
year ended December 31, 2021, an increase of approximately 120%. This increase was primarily driven
by higher stock-based compensation expense for the previously announced CEO Performance Award and the appreciating stock price as well
as higher professional service fees in the current year period.

Interest
Income (Expense). Net interest expense was less than $0.1 million for the year ended December
31, 2021, and net interest income was less than $0.1 million for the year ended December 31. 2020.

40

Income
Taxes

Realization
of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, net deferred tax
assets have been fully offset by valuation allowances as of December 31, 2021, and December 31, 2020 to reflect these uncertainties.
We may not be able to utilize all of these loss carryforwards prior to their expiration. As of December 31, 2021, we had gross federal
net operating loss carryforwards of approximately $120.1 million. The federal net operating loss carryforwards reflect accumulated book
losses reduced for the 2013 IRC Section 382 ownership change limitation of $255.6 million and approximately $123.3 million of book/tax
differences and expiration of unused carryforwards. The federal net operating loss carryforwards generated prior to the 2018 tax year
will expire between 2030 and 2037. The federal net operating loss generated during and beyond 2018 will be carried forward indefinitely
as a result of changes in the tax law following the Tax Cuts and Jobs Act. As of December 31, 2021, we had gross state net operating
loss carryforward of approximately $37.6 million which will expire at various dates between 2022 and 2041 if not utilized.

Liquidity
and Capital Resources

Liquidity
refers to the liquid financial assets available to fund our business operations and pay for near-term obligations. These liquid financial
assets consist of cash and cash equivalents. We are continuously and critically reviewing our liquidity and anticipated capital requirements
in light of the significant uncertainty created by the COVID-19 pandemic.

As
of December 31, 2021, our accumulated deficit was $498.7 million with cash and cash equivalents of $40.1 million, inclusive of
restricted cash. Since inception, we have financed our operations primarily through cash generated by operations and proceeds from our
debt and stock offerings.

Capital
Resources

As
of December 31, 2021, the Company did not have any debt.

Revolving
Line of Credit

The
Company had a working capital line of credit with its primary lender, Silicon Valley Bank that matured on June 30, 2020 and was not renewed.

Paycheck
Protection Program

The
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. Among
the provisions contained in the CARES Act was the creation of the Paycheck Protection Program that provides for Small Business Administration
(“SBA”) Section 7(a) loans for qualified small businesses. In general, the loan could be forgiven as long as the funds were
used for payroll related expenses as well as rent and utilities paid during the twenty-four-week period from the date of the loan and
as long as certain headcount and salary/wage levels were maintained. On April 10, 2020, the Company was informed by its lender, Midwest
BankCentre (the “Bank”), that the Bank received approval from the SBA to fund the Company’s request for a loan under
the SBA’s Paycheck Protection Program (“PPP Loan”). Per the terms of the PPP Loan, the Company received total proceeds
of approximately $2.2 million from the Bank on April 20, 2020. In accordance with the loan forgiveness requirements of the CARES Act,
the Company used the full proceeds from the PPP Loan primarily for payroll costs, rent and utilities. In March 2021, the Company applied
for loan forgiveness and in June 2021, full loan forgiveness was granted by the SBA. The Company recognized a net gain from debt extinguishment
of approximately $2.2 million upon forgiveness.

2020
Equity Financing

As
disclosed in Note 9, on May 25, 2020, the Company entered into a Securities Purchase Agreement with certain accredited investors, whereby
it, in a direct registered offering, agreed to issue and sell to the investors an aggregate of 3,658,537 shares of the Company’s
common stock, $0.001 par value per share, at a price of $4.10 per share. The Company received net proceeds of approximately $15.0 million,
after offering expenses.

Liquidity

The
following table summarizes our cash flow by operating, investing and financing activities for years ended December 31, 2021 and 2020
(in thousands):

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Net
cash used in operating activities. We used approximately $2.9 million and $3.5 million of cash in operating activities during the
years ended December 31, 2021 and 2020, respectively. The decrease in cash used in operating activities was driven
by lower working capital requirements during the current year period.

Net
cash used in investing activities. We used $1.4 million and less than $0.1 million of cash in investing activities during the
years ended December 31, 2021 and 2020, respectively. The increase in cash used in investing activities was driven
by the purchases of equipment and design and build-out costs associated with our new facility.

Net
cash provided by financing activities. We generated approximately $0.5 million and 17.3 million of cash for the years ended December
31, 2021 and 2020, respectively. The cash generated in the current year period was driven by the proceeds from issuance of stock from
exercises of stock options, net of issuance costs, and proceeds from our employee stock purchase program. The cash generated
in the year ended December 31, 2020 was primarily driven by the net proceeds of $15.0 million received from the May 2020 Securities Purchase
Agreement and $2.2 million of proceeds received from the Paycheck Protection Program loan.

At
December 31, 2021, we had working capital of approximately $38.1 million, compared to a working capital of approximately $39.1 million
at December 31, 2020. The decrease in working capital was primarily driven by the net loss incurred during the year ended December 31,
2021.

The
Company had a working capital line of credit with its primary lender, Silicon Valley Bank that matured on June 30, 2020 and was not renewed.

Our
principal source of liquidity is cash provided by operations and by the issuance of common stock through the exercise of stock options
and our employee stock purchase program as well as cash received from past equity raises. The Company believes the cash and cash equivalents
on hand as of December 31, 2021 will be sufficient to meet its obligations as they become due in the ordinary course of business for
at least 12 months following the date of the financial statements included in this Annual Report on Form 10-K, as well as for periods
beyond that 12-month period. Our cash requirements depend on numerous factors, including success of clinical adoption within the installed
base of robotic magnetic systems, new placements of capital systems, the resources we devote to developing and supporting our products,
and other factors. We expect to continue to fund our operations with cash resources primarily generated from the proceeds of our past
equity raises and from our working capital. In the future, we may finance cash needs through the sale of other equity securities
or non-core assets, strategic collaboration agreements, debt financings or through distribution rights.

Off-Balance
Sheet Arrangements

We
do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities
involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk
that could have arisen if we had engaged in these relationships.

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