Stereotaxis, Inc.
Q2 2018 Earnings Call Transcript

Published: 7 Aug 2018

[Operator:]

Good morning. Thank you for joining us for the Stereotaxis Second Quarter 2018 Earnings Conference Call. Certain statements during the conference call and question-and-answer period to follow may relate to future events, expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the company in the future to be materially different from the statements that the company's executives may make today. These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q. We assume no duty to update these statements. [Operator Instructions]. 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. Good morning, everyone. I'm joined today by Marty Stammer, our Chief Financial Officer. I stated on our last call that we are deep in execution mode at Stereotaxis. That remains the case. We have seen some of that execution during the second quarter, and I'm pleased with our progress. In the second quarter, we were excited to announce 2 important strategic agreements. In June, we announced an extension to our development alliance and supply agreement will Johnson & Johnson's Biosense Webster. Biosense Webster is the undisputed leader in the cardiac ablation market, and our long-term collaboration with Biosense has been key to Stereotaxis' development. The extension agreement ensures the continued global availability through the end of 2022 of the family of magnetic ablation catheters currently manufactured and commercialized by Biosense. The agreement also extends, without modification, the financial arrangement under which Stereotaxis receives a royalty on the sale of those catheters and the current nonexclusive nature of the collaboration. The Stereotaxis and Biosense teams work together on a daily basis to support hundreds of our joint physician customers globally. We appreciate and look forward to our continued collaboration with Biosense. In May, we announced a new collaboration with Acutus Medical, a San Diego-based private company that has developed a highly innovative cardiac mapping system. The system is unique and aligned for contactless rapid acquisition of high-resolution anatomical and electrical maps of the heart chamber. This is particularly useful for complex atrial fibrillation patients. It is expected to enable improved diagnosis of such arrhythmias and more rapid and effective procedures. Our collaboration was announced just prior to the Heart Rhythm Society's annual conference. I was pleasantly surprised by the significant positive feedback we received from physicians to this announcement, with many physicians visiting our booth, asking to be introduced to Acutus and seeking to be among the first to use the technologies together once integration is complete. Both companies are working diligently to integrate our technologies. Integration will allow for improved physician workflow and enhance Stereotaxis' automated navigation capabilities. Stereotaxis is implementing this integration using a novel open mapping application programming interface, which reflects our commitment to expanding physician choice and allowing the benefits of robotics to be paired with a broad range of innovative technologies in the electrophysiology field. This strategy is good for patients, it's good for physicians, it's good for providers and it's the path our industry should pursue. We are excited to be working with the Acutus team and look forward to introducing our integrated technologies to the market in the coming months. These two collaborations are key pieces in our strategic innovation plan. They also represent only the tip of the iceberg. Stereotaxis' commitment to internal innovation and external collaboration is strong. We are confident in our broader innovation strategy. Our strategy addresses each of the 5 core technologies utilized in a robotic cardiac ablation procedure and has the guiding goals of improving patient care, physician choice and technology availability. It provides these benefits to patients, physicians and hospitals while also improving Stereotaxis' opportunity. While execution of this plan requires investment of capital and resources in advance of any financial benefit, we believe the return on investment is attractive and that this will become evident in 2019 and beyond. I look forward to sharing additional updates as appropriate. Shifting to commercialization. We recorded another quarter of recurring revenue growth and are on track to meet our guidance of $28 million of recurring revenue for the year. This level would be the highest Stereotaxis has ever recorded in its history. While still modest, this is now the fourth quarter in a row of recurring revenue growth, which is in stark contrast to our previous history and reflects entirely what in retail would be described as same-store sales growth. Our overarching commercial strategy is to put in place the institutional infrastructure and processes to ensure that our physician customers have successful, growing robotic ablation practices. Our strategy is multipronged, and on previous calls, I described the category and various initiatives being worked on. We recently launched a patient-friendly Web page, roboticarrhythmiacare.com, as our first step in building a more informative and impactful Web presence. We also cleaned and organized our YouTube account. These follow the resurrection of our other social media accounts last year. I encourage you to visit these pages. We are working to complete several additional foundational components of commercial infrastructure. That infrastructure should enable robotic practices to effectively attract patients, capture market share in their regions and showcase the clinical and commercial benefits of adopting robotics. Successful robotic practices that do so create the environment for significant adoption of our technology. We believe our focus on building a solid commercialization infrastructure, addressing our existing customers and growing recurring revenue is appropriate at this time. We do envision a period in the coming quarters where the environment will be conducive to an effort to expand the community of robotic ablation practices and reinvigorate system sales. The market opportunity remains very significant for new robotic ablation practices. We have advanced our innovation and commercial initiatives while being financially disciplined and attentive to shareholder value. In the second quarter, we had positive free cash flow of $400,000. This increase matches what we guided for on our last quarterly call and was driven by the partial reversal of the increase in accounts receivable witnessed in the first quarter. In the first half of the year, we used $1.6 million of cash. A significant amount of this was spent on discrete innovation projects, and this amount is almost $2 million lower than the cash used in the first half of 2017. We have and continue to find ways to reduce expenses while being much more active, nimble and effective. We have a healthy organization and a good team. I expect our operating expenses to modestly increase in the second half of 2018, but I'm comfortable that with continued vigilance, we'll maintain a relatively low burn rate. Our strong balance sheet will allow us to advance our initiatives and achieve profitability without the need for additional financings. I have attempted to keep my comments brief and focused on this call. On our 2017 year-end earnings call earlier this year, I provided a broader overview on Stereotaxis, our technology, clinical value, vision and goals. I encourage you to revisit that transcript for the broader context. Before handing the call over to Marty, though, I do want to touch upon the growing body of clinical literature that supports our technology. Revisiting the clinical literature is important as the principal purpose of Stereotaxis and all innovation in our industry is ultimately to reduce the burden of disease, to reduce human suffering and to save lives. I am proud that Stereotaxis' technology consistently shows great benefits to patient care. The benefits of robotic cardiac ablation have been demonstrated in the real-world experience of over 100,000 patients treated globally and with scientific rigor in over 350 peer-reviewed publications. I want to share the results of a publication that recently came to my attention from Dr. Jin and the electrophysiology team at Ruijin Hospital in Shanghai, China. The publication assessed ablation outcomes for 152 patients suffering from a type of arrhythmia called premature ventricular contractions or PVC. 64 patients were treated utilizing robotic magnetic navigation, and 88 were treated with manual ablation catheters. No complications occurred in the patients treated robotically. In stark contrast, those treated with manual catheters had a 4.5% rate of major adverse events, primarily cardiac perforation. In addition to this reduction in adverse events, from 4.5% to 0%, patients treated robotically were exposed to 69% less radiation than those treated with a manual catheter, 3.7 minutes versus 12 minutes. Looking at efficacy, there was a trend towards increased acute procedure success, with an 88% acute success rate in the robotic arm compared to 84% in the manual arm. The breadth and strength of the clinical data supporting robotic cardiac ablation is undisputable. We are working on ways to ensure the dramatic data in this and similar clinical publications is more readily available to patients, physicians and the broader community. I will now pass the call over to Marty to discuss our financial results in more detail.

[Martin Stammer:]

Thanks, David, and good morning, everyone. Revenue for the second quarter of 2018 totaled $7.6 million. Recurring revenue was $7.2 million in the second quarter, up 9% from $6.6 million in the prior year quarter. Recurring revenue for the first half of 2018 of $14.2 million was up 6% from the first half of 2017. System revenue in the second quarter was $300,000, down from $1.8 million in the prior year quarter. System revenue in the prior year quarter primarily reflected the shipment of a Niobe system to an international distributor. Gross margin in the quarter was $6.2 million or 82% of revenue compared to $6.3 million and 74% of revenue in the second quarter of 2017. Operating expenses in the second quarter were $6.8 million, up from $6.7 million in the prior year quarter. The change in operating expenses primarily reflects increased investment in research and development. Operating expenses for the first half of 2018 were $13.6 million, down from $14.3 million in the first half of 2017. Operating loss and net loss in the second quarter were $600,000. Free cash flow in the second quarter was positive $400,000. This compares to negative free cash flow of $700,000 in the second -- in the year-ago second quarter and $2 million in the first quarter of 2018. Free cash flow in the second quarter was positively impacted by the timing of receivable collection, which negatively impacted the first quarter 2018. Negative free cash flow for the first half of 2018 was $1.6 million compared to $3.4 million in the first half of 2017. At June 30, 2018, Stereotaxis had cash and cash equivalents of $12 million, no debt and $3.1 million in unused borrowing capacity on its revolving credit facility, for total net liquidity of $15.1 million. I will now hand the call back to David.

[David Fischel:]

Thank you, Marty. As detailed in our press release, we expect to show continued year-over-year recurring revenue growth in the coming quarters and are reaffirming our full year 2018 guidance of approximately $28 million in recurring revenue. This amount will represent the highest annual level of recurring revenue the company has achieved in its history. Operating expenses are expected to moderately increase in the back half of 2018 as we ramp up our investment in several strategic innovation initiatives. Stereotaxis' balance sheet will allow the company to deliver on its commercial and innovation initiatives over the coming years and reach profitability without the need for additional financings. That concludes our prepared remarks. Operator, can you please open the line to questions?

[Operator:]

[Operator Instructions]. We'll take our first question from John Morganelli [ph], Investor.

[Unidentified Analyst:]

In the last call, there was some discussion or some mention about a reverse stock split. Is that off the table now? I know some of the people on the call had expressed concern from a stockholder's point of view, and I believe David had indicated it wasn't in the plans at that time. I was just curious as to where that's at.

[David Fischel:]

Thanks for the question. So yes, if you remember, the question -- a similar question was asked also last call. Shareholders did approve the authorization for the board to do a reverse split if that was deemed in the best interest of the company. As I described on the last call, we have no plan to do so in the coming months, and really, the only reason that we would do so would be to uplist on NASDAQ. That remains the main barrier. Our share price remains the main barrier to uplisting on NASDAQ. I think there would be fundamental benefits to being listed on NASDAQ, but obviously, we can also try to wait for the stock to improve fundamentally. And we're not going to do a reverse stock split unless it's paired with some very positive fundamental improvements to the company, which would drown out any negativity seen from such a reverse split. But there's nothing in the plan and nothing expected in the near term.

[Operator:]

[Operator Instructions]. Speakers, we do not have any questions in queue at this time.

[David Fischel:]

Okay. If no more questions come up, thank you for the continued support and interest in Stereotaxis. We look forward to working hard on your behalf over the coming months and speaking again at our next quarterly call. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.