Stereotaxis, Inc.
Q2 2021 Earnings Call Transcript

Published: 10 Aug 2021

[Operator:]

Good morning. Thank you for joining us for The Stereotaxis Second Quarter 2021 Earnings Conference Call. Certain statements during the conference call and question-and-answer period to follow may relate to future events, expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company in the future to be materially different from the statements that the company's executives may make today. These risks are described in detail in our public filings within the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q. We assume no duty to update these statements. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. As a reminder, today's call is being recorded. It is now my pleasure to turn the floor over to your host, David Fischel, Chairman and CEO of Stereotaxis.

[David Fischel:]

Thank you, operator, and good morning everyone. I’m joined today by Kim Peery, our Chief Financial Officer. In the second quarter, we delivered robust growth and our strongest absolute revenues since 2015. As we continue to benefit from a return of robotic system sales. Year-over-year comparisons are inflated by a particularly depressed second quarter of 2020 but current quarter revenue was up approximately 70% year-over-year, up 5% sequentially and up 33% from the second quarter of 2019. Renewed adoption of robotic systems is the first significant wave of revenue growth in our strategic innovation plan. We are pleased to read the initial proofs of that strategy and are confident the strategy will lead to a multi-year period of sustained robust growth. System revenue reported in the quarter reflect shipments of Genesis and Model S system to a hospital establishing a new robotic electrophysiology program in the United States, as well as in Niobe system to a hospital establishing a new rail robotic electrophysiology program in China. As discussed on prior calls, partial revenue recognition is often triggered upon shipment of systems and the revenue reported reflects a portion of the overall contract value from these two deals. During the second quarter, we received two orders for robotic systems. One as previously discussed to U.S. hospital, and other to one of the most prestigious medical centers in China, Zhuhai Beijing. Zhuhai Beijing is a very large cardiovascular hospital with 17 cath labs performing over 50,000 interventional procedures a year. They're establishing a new robotic electrophysiology program, after observing our success in other practices and conducting a head-to-head study that show significantly lower rates of silent strokes in robotic versus manual inhalation procedures. This was our second order from China this year. And these two orders will be the first new robotic systems in China in nearly 10 years. This is a reflection of the renewed interest and acceptance that we are experiencing globally and a specific high level of customer and strategic interest we are seeing in China. Thus, China is emerging as a third geographic pillar for our business. We believe that emerging relationships with strong strategic partners from China may allow for broad adoption of our technology in that geography. We will enter into any relationship in a prudent fashion that enhances our long-term opportunity and look forward to sharing additional details when appropriate. I recognize the uneven pace of orders announced on any individual quarterly call makes projections difficult, but we continue to see significant interest in Genesis. During the quarter, we hosted 35 separate TeleRobotic visits 13 of which were to new potential customers. Over the last nine months, we received seven orders for robotic systems, five of which were from greenfield customers establishing new robotic programs. We're now seeing increased activity from multiple hospitals that delayed lab replacement projects during the depths of the pandemic. We expect 2022 to reflect a near normalized level of replacement cycle projects. Orders received in the remainder of 2021 and early 2022 are expected to result in approximately a doubling of system revenue next year and contribute to robust double-digit revenue growth in 2022. As we grow our business, we are investing in establishing the commercial, operational and technological foundations that will allow for long-term growth. Commercially and operationally, we continue to expand our fellows program, are pleased to welcome several experienced new leaders across various roles in our organization and are on track to move into an expanded new headquarters at year end. Two weeks ago, we were particularly excited to announce the addition of Dr. Myriam Curet as an independent Board member. For long-term experience in executive leadership and Intuitive Surgical is highly beneficial as we look to possibly transform interventional medicine with robotic as intuitive has done across laparoscopic surgeries. Technologically, we are aggressively advancing the second and third wave in our strategic innovation plan. Stereotaxis advanced robotically navigated and magnetic ablation catheter represents the second wave in our strategic innovation plan. The catheter has been progressing through the manufacturing and testing processes necessary for submissions for European approval and the U.S. IDE study. Supply chain challenges, however, have caused some manufacturing delays at our partner Osypka. Most recently, in July, Osypka received a force majeure letter from a supplier of a specific epoxy glue, delaying previously confirmed shipments. This seems to be a global phenomenon. And we've been addressing disruptions like this with grit and creativity, but they have a disruptive impact. We now expect to complete manufacturing and testing of the hundreds of catheters needed for our regulatory submissions and complete those submissions for European approval and the U.S. pivotal trial early next year. We believe that will allow for revenue contribution from the catheter in Europe in 2022, and a potential U.S. regulatory approval in 2023. We continue to work energetically on the third wave of innovations, both independently and with new partners that will accelerate our adoption in electrophysiology and expand our robotic technology into new adjacent markets. We believe we will be in a position to present several of these in more detail at the end of this year. And given our progress. This should lead to several regulatory filings and product launches in 2022. We are confident in the positive impact these innovations will have on patients, physicians, providers, and then stereotaxis financial institution foundation. Kim will now provide some commentary on our financial results, and then I'll make a few financial comment as well before opening the call to Q&A.

[Kim Peery:]

Thank you, David, and good morning everyone. Revenue for the second quarter of 2021 totaled 9.1 million and approximately 70% increase from the prior year second quarter, a 5% increase sequentially, and a 33% increase from the second quarter of 2019. System revenue of 2.7 million includes the delivery of a Genesis system in the U.S. and the delivery of a Niobe system to China. Recurring revenue for the quarter was 6.1 million, compared to 5.1 million in the prior year second quarter. The increase in recurring revenue reflects the rebound in procedure volumes from the depths of the pandemic and last year second quarter. Gross margin for the second quarter of 2021 was 72% of revenue, with system gross margin of 48% and recurring revenue gross margin of 86%. Operating expenses in the quarter of 9.9 million included 2.8 million a non-cash stock compensation expense. This increase non-cash stock compensation does not reflect increasing numbers of securities granted, but it's driven by an increasing stock price and accounting for the previously announced CEO long-term performance plan. Excluding stock compensation expense adjusted operating expenses were 7.2 million. This compares to 5.3 million in the prior year second quarter and is up from 6.2 million sequentially. The increase in adjusted operating expenses primarily reflects measured hiring across key functions in the company and R&D project spending. Operating loss and net loss for the second quarter of 2021 were 3.4 million and 1.2 million compared to 1.9 million in the prior year. Net loss in the current quarter reflects a favorable 2.2 million adjustment for the forgiveness of the paycheck protection loans. Adjusted operating loss and adjusted net income, excluding non-cash stock compensation expense were negative 0.6 million and positive 1.6 million for the quarter, both compared to the prior year adjusted operating and net loss of negative 1 million. Negative free cash flow for the second quarter was 0.1 million compared to 1.2 million in the prior year, second quarter. At June 30, we had cash and cash equivalents of 44.2 million consistent with the beginning of the year. I will now hand the call back to David.

[David Fischel:]

Thank you, Kim. As mentioned in today’s press release, we now expect robotic system revenue of approximately $11 million for 2021 based on the orders we have received to-date. We expect orders received during the remainder of 2021 and in early 2022, to result in approximately a doubling of system revenue in 2022 compared to 2021 and contribute to robust double-digit overall revenue growth in 2022. Stereotaxis remain in the early phases of a multi-year turnaround, as we established the foundations for significant adoption of robotics in electrophysiology and across interventional medicine. We are advancing our strategy in a methodical fashion and are pleased that we are able to advance multiple fronts in tandem while maintaining financial discipline. We are and expect to continue increasing our investment in our team infrastructure and technology but have been able to do so while continuing to run the company near breakeven. This is best reflected in the essentially identical cash position we have maintained over the last four quarters. A robust balance sheet allows us to continue these investments and reach profitability without the need for additional financings. We look forward to now taking your questions. Operator, can you please open the line to Q&A?

[Operator:]

Thank you. We take the first question from Adam Maeder at Piper Sandler.

[Adam Maeder:]

Congrats on the solid quarter. First, just wanted to start with the system guidance and the commentary on 2022. So first, David, can you just bridge us to the 11 million in system sales for this year, it sounds like those orders have been executed. And we affirm installed base in the back half of the year but wanted to confirm that. And then, second, as we think about 2022, you expect roughly a double in system revenues, maybe just talk a little bit more about the visibility there and the capital funnel and what kind of gives you the confidence that revenue should double next year. And then had a follow up?

[David Fischel:]

So when we look at the revenue guidance for this year, the capital system revenue guidance for this year, that is reflective of the orders that we have received to-date and that we're confident will be recognized as revenue to-date, then the proportion of those systems that will be recognized as revenue today, this year still. And so that gives us kind of the confidence in that number. There's some potential for upside to that number. But again, given kind of that we're already in August, the likelihood of having significant upside to that number is low. As the confidence in the 2022 guidance, or the preliminary guidance for 2022 is that there is, we do have significant activity with multiple sites. And we do have confidence from that activity that next year should be a more or less normalized level of replacement cycle revenue. This year, we're having very little replacement cycle revenue. And then, just from the delta between what we have this year and what would be a more normalized level would amount to several systems and high single digit, low double digit system revenue just from the replacement cycle. And so that along with the continued pace of discussions with new potential customers, gives us confidence that we should be able to have quarters like the ones we announced last March in the coming quarters and that shouldn't be a surprise to us. And again, that should lead to kind of nice revenue trajectory as we go into next year.

[Adam Maeder:]

Got it. That's very helpful. Thanks, David. And for the follow up maybe just wanted to ask a little bit about how you see the back half of the year playing out from a top line perspective. Just any color around quarterly cadence or progression of sales, both on the system side in terms of revenue recognition and then on the disposable side where, AF volumes have snapped back nicely here in Q2, but then we also have delta and potentially some seasonality in Q3. So just any broad strokes, around how you're thinking about the back half the year and thanks so much for taking the questions.

[David Fischel:]

Sure. So if we look at the last two quarters of the year, I would kind of think that system revenues should be relatively similar between the third quarter and fourth quarter. And getting us to that 11 million guidance and procedure, disposable revenue, it is tough to estimate how that's going to go. Overall, we see the rebound, the gradual rebound that towards normality that you described, we have heard incrementally some pressure, particularly a few southern states over the last few weeks with the rebounding Delta. Generally, it seems like hospitals are well prepared and that that shouldn't have a big disruptive impact. But there's definitely a little bit of disruption out there in the world, it probably shouldn't have a big impact on our overall recurring revenue. But, it's very hard, kind of to estimate exactly what to see and so generally, I would kind of think of numbers that are similar to what we've reported just now as kind of fair for the back half of the year.

[Operator:]

We will take the next question from Josh Jennings at Cowen.

[Josh Jennings:]

I was hoping to start off with the third wave of innovation because the updated comments you provided or outlook on new indications, filings and then even product launches in 2022 disclose exactly what these new indications will be. But can you help us just bridge but it seems like an accelerated timeline, but what type of clinical data do you need, if any, for these filings and for these approvals? But also to drive commercial traction? And should we be expecting data for these new indications in the coming months or before these filings?

[David Fischel:]

Sure, great question. And so I guess, maybe one preliminary comment is that the discussion of the next wave of innovations will not be exclusively a discussion of new indications. So there will be an aspect of that about how we're expanding into adjacencies to the electrophysiology space and starting to address new clinical applications. But there will also be multiple updates related to electrophysiology or more general technology updates. And so I think kind of you have to think about it broader than just expanded indications. Then on the specific questions of clinical data, for most of the technologies that we're talking about, there is not a requirement for clinical data in the way that you would typically think about it in a larger study in humans, in order to pursue regulatory approval. And so you should not expect that we're going to have a press release announcing some clinical data in the next few months. And related to those, I think you're right that, particularly as you think about new indications, building up clinical literature is important as you go through the adoption phase. And so that will be something that we do focus on with initial adopters who are really the kind of leaders in that adoption field. But that will be something that will happen kind of during the course of the initial launch.

[Josh Jennings:]

Understood. Thanks for that help there. And but thinking about the high-level commentary on system revenues doubling in 2022. There's that assumption baked in potential demand from these new indications or this third wave of innovation that's kind of tack on next year.

[David Fischel:]

No. That does not. So the revenue guidance and commentaries is based on our existing business electrophysiology business. We expect as kind of mentioned in the call, we expect regulatory submissions and initial revenue from this third wave of innovation, but that would not be something that we would include in guidance at this point.

[Josh Jennings:]

Understood. And then, lastly, you commented about this Beijing center, and the order for Niobe, after they performed a study that I believe you stated, the demonstrated a reduction in asymptomatic, cerebral emboli events is robotic, magnetic navigation ablation versus manual ablation. Is that some data that has been published? And can Stereotaxis build on that? It seems like if that can be proven in, it could be a big deal in terms of sparking even further demand in the electrophysiology community. Thanks for taking the questions.

[David Fischel:]

Sure. I agree that it's dramatic data and pairs nicely with all the other safety benefits that we've shown over time. The study has not yet been published. So I have to be somewhat careful in not sharing too much details that we've seen all the data and the abstract of it, and it's been submitted for publication by the authors. But it showed a very dramatic difference between the rates of silent strokes in manual ablation versus in robotic ablation. And it was a nicely designed study, every patient had pre-op MRI or post-op MRI, they looked for the differences between those two images to kind of discern the rate and severity of the silent strokes. And again, it was kind of very, very dramatic differences between the two arms that are in a relatively large number of patients. So I hope that it gets published in the near term. And we can, point the investment community to, and obviously, more importantly, to our customers and physician community to that data. But what we have to wait until it gets published.

[Josh Jennings:]

I mean, we just one quick follow up because I would just mechanistically -- and I think it makes sense why he couldn't see that reduction in silent strokes or asymptomatic cerebral emboli. But can you just give us a refresher on why robotic magnetic navigation catheters and maybe continuous contact with the myocardium could deliver a lower rate of emboli? Thanks a lot.

[David Fischel:]

Authors that will discuss that better than I can in their publication. But I think kind of a couple things that you can think about. One is kind of the stability of the ablation against the wall. And kind of the reduced risk of knocking off emboli as you're navigating, those seem to be kind of two of the drivers. And again, that's kind of driven by the mechanistic design of a magnetically driven ablation catheter, gives it that stability against the beating heart and gives it kind of the softer shop, which makes it less likely to cause harm.

[Operator:]

The next question comes from Frank Takkinen at Lake Street Capital Markets.

[Frank Takkinen:]

Just wanted to start with fiscal year '22 system guidance, I wanted to ask a little bit more specifically, how many orders do you have in hand right now to be recognized in 2022. And then, if you could just bridge us to that double of how many more additional orders you need between now and call it mid-2022 to get to the double in system sales in fiscal year 22?

[David Fischel:]

So we've announced to-date, this year seven orders for robotic systems, all of which will have at least their initial revenue recognition in 2021. So there will be a portion of that revenue that gets recognized in 2022. But the predominant amount for each of those seven systems will be in 2021. And so it's orders that we expect to come in, in the coming months from, let's say, now through the middle of next year, that will generate the 2022 guidance. And we don't obviously have any of those orders yet. Those are ones that will take place now through the middle of 2022. And so that's the way we're looking at things. And if you look at kind of roughly than the math, you're looking at low to mid double-digit systems in order to get to that type of revenue.

[Frank Takkinen:]

Got it. Okay, that makes sense. And then I just wanted to ask a little bit more on the mix of greenfield versus new systems expected in fiscal year '22. I heard your comments about getting back to a more normalized replacement cycle in 2022. To me, that sounds like almost the entire fiscal year '22 guidance. So I just wanted to understand kind of how you're thinking about new versus greenfield more specifically in fiscal year '22?

[David Fischel:]

Sure, So if you look at -- let's say a low to mid teens at system number next year. And you look at that, let’s say this year, we've had as an income five out of the seven systems have been greenfield systems. If you'd look at roughly looking at it, if you look at let's say similar numbers of greenfield systems, and then a replacement cycle that is in the mid to high single digits, number of systems replacement cycle, that would get you to a low teens number of systems for next year. And that feels overall like a reasonable assumption. Again, we're going to work hard on trying to increase the number of greenfield systems, we recognized the long-term value from that. But kind of when we look through both from the bottom up and from the top down what feels reasonable, that feels like a reasonable way to project.

[Frank Takkinen:]

Perfect, crystal clear. Last one for me, just wanted to ask on the margin profile of the third or the second and third innovations. Looking at your current recurring revenue margin 80% plus consistently, do you feel the both the catheter as well as the broader innovation strategy are going to provide products with similar gross margins if they're in the disposable side of the business?

[David Fischel:]

The disposable -- the new disposable that we developed will be top tier medical device gross margin products. I'm not sure if they will always be 85%, they might be tiny bit self of that at least at lower volumes at initial volumes, but they will be top tier gross margin medical device products and so I wouldn't expect significant gross margin.

[Operator:]

We'll take the next question from Jason Wittes at Northland.

[Jason Wittes:]

First off just a clarification. I think you mentioned 2023, was that for U.S. approval or was that for U.S. IDE, if you could just clarify?

[David Fischel:]

That was for a potential U.S. approval.

[Jason Wittes:]

So what does that, can you walk us through kind of the timing in terms of IDE submission and review, et cetera that's assumed in that 2023 number?

[David Fischel:]

Sure. So if we submit a U.S. IDE application in the beginning of 2022, and start a trial -- started enrolling patients, let's say in the middle of the year and it should be a relatively rapid enrollment, relatively rapid follow up. You can have data, let's say six to nine months later, with then submission for PMA approval kind of immediately on the heels of the last follow up. And that would be kind of the time when that gets you into a 2023 submission to the FDA and potential approval.

[Jason Wittes:]

Okay, very helpful. Also, it sounds like you've made some recent hires, you're building -- beefing up the organization, is this to support the current business or is this anticipation of sort of the expansion that you've mentioned in terms of -- for 2022?

[David Fischel:]

It's really kind of looking out as we think about a business and wanting to build a business that can do much more. And that can grow to much more sizable scale, you want to have the infrastructure to do that growth and part of infrastructure is having the team and that is kind of capable and competent and works well together. And so obviously, on the commercial side, we're looking at how can we build a commercial team that can really scale both as new innovations come out and as we have increased system sales, and to help drive new system sales. On the R&D side, we have a team that has been able to do amazing amounts with relatively -- in a relatively lean fashion. And so any ways to accelerate the various innovations that are taking place is I think, a good use of shareholder capital. And then, operationally, we want to modernize and really set the foundation for a company that can be in order of magnitude larger. And so that explains things like our move to the new office and across operations, this desire to modernize and improve things. And we've been fortunate to find some individuals who have joined us recently and that we think will play a good role in that.

[Jason Wittes:]

Okay. That's a lot of helpful color there. Does that imply that you're willing to sort of increase the burn somewhat? Or is it still going to -- you've kind of had a philosophy to kind of keep it relatively breakeven kind of follow revenues in terms of your spending? It sounds like you're getting a bit more aggressive next year, am I summarizing that correctly? Your thinking or how would you think about your spending profile next year?

[David Fischel:]

Yes. I would think that generally, we're going to -- we feel comfortable investing in drivers of growth and kind of drivers of an improved business. And so we're really looking at it over a longer term period, what's the right thing for the overall business. We're not going to be the type of company that burns significant amounts of money in any way where there's concern over our financing position. But as you see, over the last year, we've been flat, we've had no burn rate now, essentially, for four quarters in a row. That's while we've been both growing the business and increasing our investment in operations. And so I think kind of we will try to do something similar. I don't want kind of anyone to hold us to any specific quarter, that we're always going to maintain exact breakeven because we're not managing the business in that way. If we find opportunities to invest more, in something that's a positive ROI for the business, will do that. And if that leads to a quarter where we have a small burn, so be it. We'll keep managing things from a macro perspective. We're Stereotaxis in a very stable financial position. And we're all of these investments are prudent investments that actually have a meaningful impact on long-term growth.

[Jason Wittes:]

Okay, that's very helpful. And then maybe just a quick follow up. I know, you mentioned, you're going to look for -- some launches into some adjacencies outside of EP. It's probably hard to project since. But is there a possibility that we'll see some contribution, meaningful contribution even in 2022? Or how should we be thinking about these launches and how they play a part in Stereotaxis performance next year?

[David Fischel:]

I wouldn't want to guide for meaningful revenue. And so that's why I think in the revenue guidance, we have kind of anticipated meaningful revenue from these launches in 2022. But we should expect some initial revenue, some initial real-world experience.

[Operator:]

It appears there are no further questions at this time. Mr. Fischel, I'd like to turn a call back to you.

[David Fischel:]

Okay. Thank you very much for your questions and your continued support. We look forward to working hard on your behalf in the coming months and speaking again next quarter. Thank you very much.

[Operator:]

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