Stereotaxis, Inc.
Q1 2017 Earnings Call Transcript

Published: 8 May 2017

[Operator:]

Good morning. Thank you for joining us for the Stereotaxis’ First Quarter 2017 Earnings Conference Call. During the 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 Private Security Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performances or achievements of the Company in the future to be materially different from the statements that the Company's executives may make today. These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q. We assume no duty to update these statements. At this time, all participants have been placed on a listen-only mode. The floor will be opened for questions and comments following the presentation. As a reminder, today’s call is being recorded. At this time it is my pleasure to turn the floor over to your host, David Fischel, Chairman and Acting CEO of Stereotaxis. Please go ahead sir.

[David Fischel:]

Thank you operator. Good morning everyone. I’m joined today by Marty Stammer, our Chief Financial Officer. As this is my first opportunity to speak with you following my appointment to role of CEO in February, and given that there may be new investors on the call, I want to take the occasion to provide an overview of the company and my view of the opportunity ahead of us. Marty will then walk through the first quarter financial results. I will then provide brief additional commentary on the financial results and expectations for the remainder of the year before opening the call for questions. Stereotaxis has developed and is commercializing a suite of robotic technologies that enables better treatment of cardiac arrhythmia. Today I will focus exclusively on the current business and opportunity in cardiac ablation but it is important to remember that robotic magnetic navigation is a platform technology that can be developed and employed in a wide range of other clinical applications. Our products include, Robotic Magnetic Navigation System, composed of two magnets next to the operating table on which the patient lies. During the procedure, a physician sits behind a large screen, computer controlled station and using a mouse and very intuitive interface, manipulates those magnets to adjust the magnetic field around the patient. This allows the physician to precisely direct and street a cardiac ablation catheter that has a magnet at its tip. This differs significantly from traditional non-robotic procedures where physician stands at the patient bedside and manipulates a catheter by making very fine movements of his or her fingers and wrists at the catheter base in order to manipulate the catheter tip. These physicians are amazingly skilled but the technique to manipulate manual catheters is a kin to gardening delicate flowers by holding a hose from its face. The manual catheter needs rigidity and internal wires to allow the movements at the base to translate into movement at the tip. In contrast, our robotic magnetic technology controls gentler catheter from the tip allowing for unmatched, precision reach and stability. The removal of pull wires and structural rigidity from the catheter, shaft makes the magnetic catheter exceptionally safe for patients, reducing perforations and other adverse events. In addition for physician a robotic procedure is performed deeded, un-scrubbed and protected from radiation exposure. A recent publication demonstrated that 90% of brain tumors in interventionist physicians were found the left side of the brain as opposed to the right side, as they usually stand with their left side closer to the x-ray machine. I had a chance to speak with dozens of physicians that use our products and have been encouraged by the large group of passionate physicians that find significant value in our technology. That passion comes from the way our products enable them to effectively and efficiently perform a wide range of procedures that otherwise will be not be done as well or cannot be done at all. I’ve spoken with leading university hospitals that perform all of their ventricular procedures robotically and the tread of ventricular procedures being scheduled when the robotic lab is already in use. I’ve spoken with global leaders in pediatric and congenital cardiac ablation who describe being able to treat patients that otherwise could not be treated with manual catheters. On the other end of the spectrum, in less complicated and more common atrial fibrillation procedures, I’ve spoken with physicians who are able to do pulmonary vein isolation as quickly as balloon ablation with better and more individualized therapy. They do all these procedures with improved safety for patients, given our first in class safety profile and with improved safety and comfort for themselves and their professional staff, given the reduced radiation and orthopedic burden. Physician passion and interest in robotics has led to just recently establishment of the physician-led society dedicated to advancing clinical science and awareness of robotics in electrophysiology. The inaugural meeting of the Society European Chapter of the Society took place last fall and inaugural meeting of the North American Chapter will be taking place tomorrow in Chicago in advance of the Heart Rhythm Society conference with a live case being performed by Dr. William Spear, Advocate Christ Medical Center. Looking at where we stand from a broader strategic perspective, we are in a great situation with a highly differentiated product in a large growing market. The cardiac ablation market is among the most proactive medical device markets both in terms of size and growth. There will be an estimated $4 billion in sales this year of products used in cardiac ablation procedures. And the market has grown consistently at a double-digit annual rate. This growth is being driven by the increased incidence of arrhythmias with age and an aging population, along with increased clinical evidence and improved technologies. We have an extremely small share of this market and even with limited market share, could have a very significant and successful business. Our product is a differentiated competitor in this interactive market. It is robust and has been used in nearly 100,000 procedures globally. It has been clinically validated with hundreds of peer reviewed publications, it is the most effective and sometimes only option for the most complex ablation cases, it is the safest product for both patients and physicians, and it is the only product with opportunity to be fully automated and thus provide efficient individualized therapies for the left complex ablation cases. For companies operating in this attractive endovascular cardiac ablation market the challenge over the next few years will be maintaining differentiation and avoiding commoditization of their products. This risk is becoming clear by the convergence of features of mapping system and ablation catheters. In such a market the underlying technology of Stereotaxis provide significant advantages. First, the improvement in manual ablation technology can be added in a synergistic fashion to the robotic platform. The combination of technologies would allow for the respective clinical benefit to be provided to patients and physicians in an additive fashion. Second, our proprietary robotic technology has a differentiated mechanism of action. We have no robotic competition in the cardiac ablation field and stand head and shoulders above any other robotic technology for endovascular procedures in terms of elegance, capability, clinical value and real world validation. In a broader sense the tide of history is in our favor as robotics and automation are currently transforming a wide range of industries, including several surgical specialties. So I describe this as having a highly sophisticated and differentiated robotic product that has been validated in nearly 100,000 procedures and hundreds of peer reviewed publications and that provides clinical benefits to patients and physicians in a very large, growing market. But despite that amazing setup, Stereotaxis has not been a successful company for the past several years. It still has very little market share of the cardiac ablation market and in its current stock price of approximately $0.60 is roughly a fully diluted enterprise value of 30 million or about one time sales. Understanding the cause of this lack of progress would be a perfect business school case study. But in a bridged form, it was due to several factors. When the product was initially launched in the 2004 to 2009 timeframe, it saw rapid adoption but the device with slow like a computer reached when the mouse was moved there was a lag time of several seconds. The premature launch of the technology disappointed many users and was exacerbated by disproportionate focus on selling new systems rather than training physicians and helping them build successful robotic practices. That black cloud of the initial wave of disappointed users has haunted the company ever since. The company also poorly managed its relationships with strategic partners. These dynamics led to a vicious cycle of reducing system placements, internal restructuring and reductions in sales force size, as well as diluted financings and valuation destruction. The challenge now is one of perception. Despite having a very robust and efficacious system there are many physicians and industry participants who perceive the product with the negative connotation of the initial launch. They also misinterpret the business struggles of Stereotaxis as a reflection of limited physician interest and clinical utility. Overcoming negative momentum and changing perception is difficult. But every employee and Board member of Stereotaxis is committed to rebuilding the company in a way that will allow for the achievement of our potential. We intend to pursue the following in a determined fashion. First, we want to build a more customer-oriented business. We're working to improve every aspect of our interaction with physicians and hospitals. In training we are using new simulators that allow for more opportunities to train physicians. We have a responsive training team and we will explore mechanisms by which we can more quickly ascertain when a physician or operating room staff could benefit from additional training. By supporting the activities of physician society we can help ensure increased clinical literature and peer-to-peer learning of best practices takes place. We are also conducting a well-designed clinical trial to demonstrate superiority of robotic ablation versus manual ablation in ischemic ventricular tachycardia and enrolled more patients this quarter than in all of last year. Our field clinical support team is augmented by a remote clinical support team that provides greater capability to proactively support procedures in real time when our field team is unavailable. We are also developing tools by which robotic ablation practices can better promote their technological and clinical leadership to attract referral physicians, patients and ultimately grow their practices. The second broad area of focus that we are pursuing is that we want to improve our technology with significant innovation. Our e-Contact™ module will be launched in Europe momentarily. It provides physicians with continuous intraoperative feedback during the ablation procedure if the ablation catheter is in contact with the heart tissue. We are working on the clinical and regulatory requirement to bring e-Contact™ to the U.S. We intend to release software and hardware upgrades to our existing customers late this year and will provide – and that will provide some of the initial software modules, as well as the computing processing power that lays the foundation for our progress towards full automation. At described earlier, a robotic technology can be combined in an additive fashion to the technological advances found in manual ablation catheters and cardiac mapping technologies. We are exploring the best way forward to combine these technologies. Our longer term aspiration is it to provide physicians the ability to do automated procedures, allowing physicians to focus on individualized design and treatment of patients with arrhythmias, rather than on the manipulation of catheters. With that overview provided, Marty will now discuss the first quarter in more detail.

[Marty Stammer:]

Thanks David. And good morning everyone. Revenue for the first quarter, totaled $7 million, down from $8.6 million in the year ago quarter and $7.3 million in the fourth quarter. Recurring revenue in the quarter was $6.8 million, up from $6.6 million in the prior year quarter and $6.5 million in the fourth quarter. System revenue was $200,000 all related to Odyssey Solution sales and down from $2.1 million in the first quarter of 2016 and from $800,000 in the fourth quarter. At quarter end, our backlog was $4.1 million. Recurring revenue growth benefited from robust March procedure volume with the company recording the highest monthly global procedure volume in over two years and highest North American procedure volume in over four years. Due to some revenue weakness was caused by lack of any Niobe system sales and the expiration of an Odyssey distribution agreement in 2016. Gross margin, in the first quarter, was $5.7 million or 82% of revenue, compared to $6.5 million or 75% of revenue in the year ago first quarter and $5.3 million or 73% of revenue in the fourth quarter of 2016. Operating expenses in the first quarter were $7.6 million, compared $8 million in the year ago quarter and $7.4 million in the fourth quarter. Operating loss was $1.9 million in the 2017 first quarter, compared to $1.5 million in the prior year first quarter and $2.1 million fourth quarter. Interest expense was less than $100,000 in the first quarter and prior year fourth quarter, down from $800,000 in the year-ago quarter as a result of the extinguishment of the Healthcare Royalty Partners debt in Q3 of 2016. Net income for the first quarter was $1.2 million, compared to a net loss of $2.3 million reported for the first quarter of 2016. Excluding mark-to-market warrant revaluation, we would have reported a net loss of $2 million for the 2017 first quarter, compared to a net loss of $2.3 million for the 2016 first quarter. The weighted average diluted shares outstanding for the first quarters of 2017 and 2016 totaled 22.3 million and 21.6 million, respectively. Cash burn for the first quarter was $2.7 million, compared to $3.9 million in the year-ago first quarter, and $500,000 in the preceding fourth quarter. Cash used in the first quarter was impacted by approximately $1.2 million in nonrecurring payments. At March 31 we had cash and cash equivalents of $5.7 million and unused borrowing capacity of $4.3 million on our Silicon Valley Bank revolver for total liquidity of $ 10 million. I will now hand the call back over to David.

[David Fischel:]

Thank you, Marty. As Marty described, revenue in the first quarter reflects a nadir in system sales with no Niobe sales and minimal sales of other system. While system sales were disappointing, I'm proud of our clinical team's performance in the latter part of the quarter and with the growth shown in recurring revenue which benefited from the broad based contribution of many geographies and team. We do expect to see system orders and sales in the remainder of the year, given the pipeline of interested customers. For the full year 2017 we expect revenue to exceed $30 million. We also intend to be approximately cash flow neutral for the remainder of 2017, benefiting from the system sales in the second half of the year and minimum purchase commitment from international distribution partners. This would allow us to end the year with over $5 million in cash, with alpha use of our existing credit facility for pursuing other debt or equity financing. I'm proud that Ernst & Young our audit firm provided Stereotaxis with a clean going concern opinion in our Form ten-K, the first time such an opinion has been provided since 2010. One of our primary goals for the year is to develop and initiate a long-term product innovation plan prior to year-end. We are exploring the various parts of such a plan and the best way to progress and will provide additional commentary when appropriate. That concludes our prepared remarks. Operator can you please open the line to questions.

[Operator:]

Of course. [Operator Instructions] And we'll take a question from Steve Emerson from Emerson Investment Group.

[Steve Emerson:]

First of all, congratulations on your rapidly going to cash neutral and positive. Thank you for going to lower salary levels both at the Chief Executive and by example the Board of Directors. In your guidance of $30 million, how much would be system sales and how much would be the rest of your offerings?

[Marty Stammer:]

Hi Steve, thanks for the question. And thank you for the comments on the CEO and Board compensation. We would estimate having approximately flat recurring revenue for the year, which would take us to about $26.5 million, or $27 million or so recurring revenue and then the remainder would be system sales. We have certain commitments from international distribution partners that would make up some of the sales and then we have a pipeline of interested hospitals in the U.S. and Europe each individual hospital in that pipeline carries a probability and a risk that doesn't fall through, but given the amount of active sites out there on a probability-weighted basis, we think that will have systems sales in the U.S. and Europe.

[Steve Emerson:]

Excellent. And in terms of the going ahead the world map aren't there any particular date or time objectives when we might be able to present the fully automated device? What kind of timing and my apologies if you went through this earlier in the call.

[Marty Stammer:]

We didn't provide more clarity in the call, but obviously that is important, I know that Stereotaxis has been referred over the years by the lack of significant innovation. In terms of automation, I would look at the progress to automation as a methodical march forward. It won't be one step that brings us to final automation, it will rather be congruence of multiple software modules and capabilities that combined provide a much more reliable, reproducible and rapid automation. We do actually have automation modules currently available to physicians. They just are not yet reliable, reproducible and rapid enough to justify daily usage. And that is a longer term endeavor, some of those models are coming out as we speak. So in the prepared remarks I mentioned e-Contact™ module which will be launched in Europe momentarily that is a key component to helping improve automation algorithms and later this year we do plan to launch at both hardware capabilities that will be added to all of our existing sites and some additional software modules that will again provide the basis on which to provide future automation modules. And so we see that as a methodical march forward that will take some time to come to its full fruition, but that benefits incrementally along the way. And then in terms of long-term innovation plan, that is something that we are exploring now the best way forward. I think that involves that potentially collaboration with other industry participants, or can be done internally, but it's worthwhile to spend the time looking at those options and evaluating all the options with full knowledge and making that decision once we have all the information in front of us and can make the best decision for the company.

[Steve Emerson:]

Thank you.

[Marty Stammer:]

Thank you.

[Operator:]

[Operator Instructions] We will pause for another moment to see if there's any further questions today. And we'll take our next question from Andrew [indiscernible].

[Unidentified Analyst:]

Good morning gentlemen how are you?

[Marty Stammer:]

Good morning.

[David Fischel:]

Good morning.

[Unidentified Analyst:]

Hi, great job on the quarter. I’d just kind of say as a long-term holder of your stock, I sense a great amount of enthusiasm and refreshing comments with respect to both the business as well as strategic directives that you have. So the other point you napped out over the next year, I had one quick question regarding the uptick that we've seen in March. Is there any color that you can give on that as far as initiatives that has been taking place or behind the scenes, how that's working out as you kind of look forward to the rest of the year, whether or not that's something we should be counting on or its just a anomaly in the market? Thank you.

[David Fischel:]

Sure. Let me try to answer that a bit. And thanks for the question. The strong procedure volume in the month of March was broad-based. So many geographies, customers and team members contributed to the strength. Our sales team did a great job and I'm proud of the impact of their energy and professionalism. They were supported by a few new tools including the simulators, which I described in our prepared remarks and some clinical literature that allowed them to better engage with physicians. I also think that the greater engagement of our management team with customers had some impact in that month given the transition that took place a bit earlier. In terms of April, we don't yet have full data for the month, but it was not as strong as March. There's obviously natural volatility in monthly and quarterly procedure volumes. And so we're working on several initiatives to strengthen our sales organization and help our physician customers, grow their robotic ablation practices. It will take sometime to put in place and show an impact. But those are the types of the activities, that I think should help us progress towards consistent revenue growth.

[Unidentified Analyst:]

Great. Thanks.

[Operator:]

And now we will hear from Ronald Davis, who is a Private Investor.

[Unidentified Analyst:]

Hi, thank you gentlemen. Appreciate the information. I have several questions related to sales, if I could ask them all at once, I hope you don't mind and maybe to get one answer. The questions are

[David Fischel:]

Okay. Thank you. Those are all great questions. I hope we actually got them all down. So let – we'll try to answer some of them briefly and, obviously, if you want a longer discussion after the call, we can take it also off-line.

[Unidentified Analyst:]

Thanks.

[David Fischel:]

Let me try going backwards. So in terms of competition, there is no robotic competition in the cardiac ablation space. But there are significant competitors, large companies, so Johnson & Johnson, Abbott, Medtronic, Boston Scientific are – and a private company based in Europe are the primary competitors in this marketplace. They each have manual ablation catheters, which are manipulated by a physician's hand, holding onto the base of the catheter. But there's obviously significant organizations and they do advance their technology on a regular basis and they are our primary competitors. In terms of how much revenue should be generated from a system that is installed. We generate revenue both per procedure and on service contracts that maintain the up-time of our systems and that provide with those service contracts, continuous software and hardware improvements as they come out. So for example, our E-contact module that would be launched in Europe, that will go – that will be included for all existing customers as part of their long-term service contracts. We would generally estimate, depending on the region, somewhere, and depending on the procedure volumes, somewhere between $200,000 and $300,000, sometimes more per hospital in terms of annual recurring revenue. In terms of how many systems are usually installed in a hospital, we – it's almost in all of our customers, its one system per hospital, a system can be used obviously if its being used actively, it can be used a few hundred times a year. And we don't have – we might have one hospital or two hospitals that have two systems at their hospital. But otherwise our installed base is all one system per hospital. In terms of salespeople, it sounded like what you are asking was on the catheters sales side, regarding how many salespeople are focused on system sales – new system sales. It is – it’s a little bit difficult to answer that with pure numbers because we have both certain sales reps that are focused on new system sales. And we have sales reps that are focused on driving clinical adoption. And in different geographies, there are sometimes overlap between the individuals who are focused on clinical and on system sales. In the U.S., we have three individuals, who are focused exclusively on system sales. And they are also supported by our clinical sales directors and our regional directors and our head of sales, while they have a clinical focus, also oversee and participate in driving system sales. In Europe, there's much more overlap, where the clinical sales people are also very much involved in system sales in each of their own geographies. We have Marty will jump in, but we have approximately full all-in sales team, we have approximately 25 or 20 in a bit individuals in the U.S. and approximately…

[Marty Stammer:]

10.

[David Fischel:]

10, 12 or so in Europe, and that includes clinical and system sales.

[Marty Stammer:]

And that's where we're looking at it from a direct sales perspective. We also, in other markets outside of North America and Western Europe, we have distributor model that we work through. So that makes the number, I guess, a little murkier but does expand our reach significantly.

[David Fischel:]

Does that answer some of your questions, I’m sorry, yes, there were additional ones if you could please just repeat them.

[Unidentified Analyst:]

No, you’ve answered my questions. I’m just a little concerned with total of three systems sales reps, how you really anticipate increasing your growth significantly?

[David Fischel:]

So we don't need significant system sales to reach our guidance for the year. And I believe in growing the business incrementally, and so as you see success, you invest further in that success to fuel the momentum. So I agree with you, it’s unlikely that we're going to see 10 system sales this year off of a sales team in the U.S. of three focused on system sales. But I think that you can show some and incrementally that is all positive in terms of showing growth and building momentum. And as we show that momentum, obviously, we would like to invest more in growing the team and in growing our capabilities.

[Unidentified Analyst:]

Okay. Thank you, gentlemen.

[David Fischel:]

Just to clarify, that would be three in North America and then worldwide, depending on how you allocate people, it'd be closer to five to 10 plus distributor network.

[Unidentified Analyst:]

Are these people trained in-house to adapt to your project?

[Marty Stammer:]

Yes, they actually receive extensive training on our product. And the individuals that we are looking for, when we are recruiting our experienced Medtech salespeople. So our team typically has anywhere from five to 15 years of experience of previous med devices sales before they come here and then we do give them comprehensive training on our product.

[Unidentified Analyst:]

If you were to receive a purchased order from a hospital tomorrow, how long would it take for you to actually deliver the product?

[Marty Stammer:]

Typically that’s a pretty short timeline. I think your other question was around lead time for projects.

[Unidentified Analyst:]

Yes.

[Marty Stammer:]

There are a number of things that have to line-up for a system sale to take place, and there's usually a construction timeline and this is – it's usually part of a larger project. In general, what we've said is the lead time from kind of earliest discussions until PO and then shipment, which PO and shipment are generally pretty close together is approximately 12 to 18 months.

[David Fischel:]

We just can't say fairly quickly. Sometimes hospitals will provide a purchase order, but will only request to receive the system several months out, depending on when they want the system installed. And so that's – it's largely driven by the customers plans and desires rather than by our inability to provide a product when it's demanded. So if a system is ordered and they would like to receive it in short order, we can achieve that. Sometimes you will receive purchase orders that the hospital only wants to receive the system several months later and then we will obviously, follow their directives.

[Unidentified Analyst:]

Thank you, gentlemen. Appreciate the information.

[David Fischel:]

Thank you.

[Operator:]

[Operator Instructions] With no additional questions in the queue. I'll turn the call back over to David Fischel for closing remarks.

[David Fischel:]

Thanks. Thank you, everyone, for joining us this morning. We look forward to updating you on our progress over the rest of the year and we'll speak with you again in August.

[Operator:]

With that, ladies and gentlemen, this does conclude your call for today. We do thank you for your participation. And you may now disconnect.