Stereotaxis, Inc.
Q2 2017 Earnings Call Transcript

Published: 10 Aug 2017

[Operator:]

Good morning. Thank you for joining us for the Stereotaxis' Second Quarter 2017 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 Private Securities 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 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. It is now 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, and good morning, everyone. I'm joined today by Marty Stammer, our Chief Financial Officer. I apologize that our press release this morning did not include the dial-in information and so if you are on the webcast, please look at the dial-in information that was available on the August 3 press release. The number is 800-946-0706 with the conference pass-code of 1952158. If you would like to ask any questions during the Q&A session, you can dial in through the live number. On our last earnings call, I took the opportunity to provide a detailed background on Stereotaxis' technology, clinical value, strategic differentiation and history. I'll keep my comments on this call more brief, but want to reiterate some of those points and provide a bit more granularity on our focus. Marty will then review our financial results and I will provide additional financial commentary before opening the call to questions. Stereotaxis' robotic technology allows for the design and navigation of endovascular devices in a way that addresses the inherent weaknesses of traditional catheters. Instead of relying as all traditional catheters do, on structural rigidity and pull wires to transfer force from a physician's hand at the base of the catheter into movement of the catheter tip, our unique mechanism of action utilizes magnetic fields to act upon a catheter with tiny magnets added to tip. Navigating a catheter directly from the tip allows for unmatched precision, reach and stability. It enables movements that would be impossible with a traditional catheter. And by removing pull wires and structural rigidity from the catheter shaft, it allows for an extremely gentle and safe catheter. These capabilities improve patient care, improve outcome and enable procedures that could otherwise not be performed. For physicians, performing a procedure un-scrubbed, seated and removed from radiation exposure increases their safety and comfort. Being seated in front of a large screen computer control station, provides physicians with all the data and control they need at their fingertips, allowing them to focus their attention fully on the treatment of the patient rather than physical rigor of manipulating the catheter. The clinical value of our technology has been extensively documented in several hundred peer-reviewed publications and through the real-world experience of hundreds of physicians at over 100 hospitals globally, ranging from large research universities to small local hospitals. In a few days, you will see a press release, describing a recent publication of meta-analysis of studies spanning nearly 800 patients treated at several prominent hospitals, comparing robotic to manual ablation from ventricular tachycardia patients. The results were dramatic, with robotics providing statistically significant improvement in acute and long-term efficacy in patient safety and in procedure efficiency. And while our clinical value is pronounced in the most complicated procedures, where this trifecta of efficacy, safety and efficiency is all in our favor, it is by no means limited to that portion of the market. I recently had the opportunity to attend the two largest electrophysiology conferences of the year, HRS in Chicago in May and EUROPACE in Vienna in June. Stereotaxis had an attractive and robust presence at both conferences. HRS was immediately preceded by the inaugural meeting and launch of the North American Chapter of the Society for Cardiac Robotic Navigation, a physicians' society dedicated to advancing robotics in electrophysiology. At the tail-end of a HRS, a Rhythm Theatre presentation included five prominent physician users of Stereotaxis technology describing a broad range of arrhythmias, where robotics provide significant differentiated value. The room was filled with over 100 physicians, fellows and individuals from industry. The discussions at these events showcase the range of situation and reasons why physicians and patients benefit from robotics. Both conferences also provided the opportunity for us to reengage with the broader industry. That interaction is very useful, in that it allows for bidirectional education and exploration of ways to advance and expand our product offering. One additional point on the topic of our technology having significant real-world validation, later this month we will be celebrating the achievement of an impressive milestone, the treatment of our 100,000th patient. I want to take this moment to congratulate and thank all the employees, physicians, hospital administrators, corporate partners and investors who made reaching this milestone possible. On our last earnings call, I described one of our primary goals being the development and initiation of a long-term product innovation plan prior to yearend. It is premature to provide granular detail on that plan, but I'm pleased with our progress in delineating an attractive strategy. Our innovation plans can be distilled into three guiding goals. We want to improve patient care, physician choice and technology availability. The guiding goals can be advanced by improvements to the five core technologies that interact in a robotic ablation procedure

[Marty Stammer:]

Thanks, David, and good morning, everyone. Revenue for the second quarter of 2017 totaled $8.5 million, up from $7.9 million in the year-ago quarter and $7 million in the first quarter. Recurring revenue in the quarter was $6.6 million, down from $6.9 million in the prior year quarter, and $6.8 million in the first quarter. Recurring revenue in any given quarter fluctuates with the timing of disposable shipments and field service projects, and recurring revenue for the first half of 2017 of $13.4 million was essentially flat with the first half of 2016. Global procedures in the second quarter saw a 2% year-over-year growth, with a continuation of the pattern of double-digit growth in ventricular procedures, offsetting declines in less complex procedures. System revenue in the second quarter was $1.8 million, up from $900,000 in the prior year quarter and $200,000 in the first quarter. System revenue reflected the sale of a Niobe system to an international distributor as well as the sale of Odyssey systems. System revenue of $2 million for the first half of 2017 was down from $3 million in the first half of 2016, primarily reflecting the expiration of an Odyssey distribution agreement and the timing of Niobe system installations in 2016. At quarter end, our backlog was $3.2 million. Gross margin in the second quarter was $6.3 million or 74% of revenue, compared to $6.8 million or 86% of revenue in the second quarter of 2016, and $5.7 million or 82% of revenue in the first quarter of 2017. The reduction in gross margin percentage does not reflect any fundamental changes in product pricing or costs, but is primarily a result of higher system sales during the quarter, which carry a lower margin than recurring revenue, and service margins being temporarily lowered as we launch and install e-Contact technology at our European customers side. Gross margin of 78% for the first half of 2017 was essentially equivalent to the gross margin we showed for the full 2016 year. Operating expenses in the quarter were $6.7 million down from $8.4 million in the prior year quarter, and $7.6 million in the first quarter. Operating loss in the quarter was $400,000 compared to $1.6 million in the prior year second quarter, and $1.9 million in the first quarter. Interest expense was less than $100,000 in the quarter, down from $800,000 in the year-ago quarter, as a result of the extinguishment of the Healthcare Realty Partners debt in Q3 of 2016. Net loss for the quarter was $200,000 compared to a net loss of $2.3 million in the second quarter of 2016. Excluding mark-to-market warrant revaluation, the company would have reported a net loss of $500,000 for the quarter, compared to a net loss of $2.5 million for the second quarter of 2016. The weighted average diluted common shares outstanding for the second quarters of 2017 and 2016 totaled $22.6 million and $21.8 million respectively. Cash burn for the second quarter was $700,000, consistent with the second quarter of 2016 and less than the $2.7 million in the first quarter. Cash utilization in the quarter does not reflect the receipt of cash from the sale of the Niobe system, with which the company would have recorded positive free cash flow. At June 30, we had cash and cash equivalents of $5 million and unused borrowing capacity of $3.9 million on our Silicon Valley Bank revolver for total liquidity of $8.9 million. I will now hand the call back to David.

[David Fischel:]

Thank you, Marty. Our financial performance in the quarter can be summarized into a few key takeaways. Our recurring revenue remains stable and robust a testament to the clinical value that physicians and hospitals see in our technology. I'm proud of our team's performance as the greater engagement with our physician customers contributed to a slight growth in procedures over the last year. I believe, our focus on building a more customer oriented business, particularly as we are able to put in place additional tools and processes to support the growth of robotic ablation practices, will provide opportunity for more robust procedure and recurring revenue growth in the future. Our system revenue remains low, and while I continue to expect the trickle of system sales, I believe this will remain lumpy and at relatively low levels, until we can show more tangible progress along our two strategic focuses. The market opportunity for selling orders of magnitude more systems is very much intact. The operating expense reductions in the quarter reflect lower executive compensation and more efficient management of expenses across the organization, but do not represent any material changes in the organizations personnel, infrastructure or capabilities. I appreciate the contribution of many individuals across the organization, who found ways to be more efficient and who have embraced more of an owner's mentality. As just one example, we had beautiful booths and an impressive presence at both the HRS and Europace conferences, while I don't have the historical perspective, many individuals commented that they were our best conferences in many years, and both were done at reduced cost to last year. Going forward, we will likely benefit from some additional expense efficiencies as it often takes time for expense reductions to take place, but these reductions will be counteracted by increased spending on focused R&D projects and on investments in the business. We are not planning to turn Stereotaxis into a successful company by making it breakeven at $30 million sales level. The market opportunity, first in electrophysiology and then more broadly in endovascular surgery, our leadership in endovascular robotics and unique mechanism of action and the range of attractive ways we can meaningfully advance our product offering all justify an aggressive effort to build a highly impactful company. Lower operating expenses and losses are appropriate and prudent in the near-term, as it provides a runway for new realities to be put in place and initiated. In the intermediate term, we expect invest for a robust innovation program and growth. We are reiterating to three expectations we made at our first quarter earnings call. First, we expect full-year 2017 revenue to exceed $30 million. Second, we expect to end the year with approximately $5 million in cash without the use of our credit facility for pursuing other financing benefiting from system sales and minimum purchase commitments in the later part of the year. Third, we are in the process of developing a long-term product innovation plan, and we'll provide additional commentary on the various components of this plan when appropriate. As described earlier in the prepared remarks, I feel good about the progress we're making here on various fronts. That concludes our prepared remarks. Operator, can you please open the line to questions?

[Operator:]

Yes, sir. Thank you. [Operator Instructions] We'll go first to Mike Hammer [ph].

[Unidentified Analyst:]

Yes, thank you for the question here. The anticipated removal of the medical device tax, it's not set yet. But how will that impact companies like Stereotaxis? Thank you.

[Marty Stammer:]

Thanks, Mike, for your question. This is Marty. So it's a good question. There is currently or there has historically been a 2.3% medical device excise tax on companies selling medical devices here in the U.S. When that was in effect, we were spending a couple of hundred thousand dollars a year on that tax. It's actually been in - taken a pause here for a couple years but is supposed to come back into effect I believe here in 2018. So assuming that the healthcare laws do change, and that piece gets pulled out permanently, we would be looking at saving a couple hundred thousand dollars off of where we were previous to 2016.

[Unidentified Analyst:]

Thank you.

[Operator:]

We'll go next to Andrew Gezzi [ph], private investor.

[Unidentified Analyst:]

Yes, this question is for David. Thinking it over the years and I've been an investor with Intuitive Surgical for quite some time. I remember when they had their start that a lot of the markets that they looked at, although they were profitable and kind of in line with what the company wanted to do, it really wasn't until that the doctors and the other partners kind of get feedback about other ancillary areas. But you start to see Intuitive Surgical really gain some traction. So when looking at now, say, four or eight quarters, and when you're having these product innovation discussions with your partners, does the conversation specifically focused only on the cardiac space or are conversations taking place in, say, renal, urology, neurology or even oncology with respect to ablation?

[David Fischel:]

So, that's also a good question. And we - prior to joining Stereotaxis we obviously had a significant interaction with other robotic companies in the field. So I understand the gist of your question. The EP market is really one of the most attractive medical device markets that exist. It's estimated to be about $4 billion in size this year. And it has been growing at a 10% to 15% rate very consistently. And it's expected to continue growing at that rate by all of the larger companies in the field. The differentiation in clinical value that we provide in the EP is significant. And we're a small company. So as an organization, I want us to be fully focused on EP and I think that's the right thing to do. I think that it's much better to do well and build a great business in one field, and then to leverage off of that success into other fields. When I speak with potential industry partners, it is obviously a benefit and it's not harmful in any way to raise other ideas that could be done with a magnetic robotic mechanism of action. And so there has been those types of discussions and planting seeds, so to say, in people's minds on what potentially could be done and what the benefits would be if a procedure that is now being done manually was done with a magnetic robotic mechanism of action. I leave that really to my role exclusively. As an organization, I want us to remain entirely focused on EP. If at some point, there's an attractive way to explore and move into other fields and become a broader platform technology that would obviously be the right thing to do.

[Unidentified Analyst:]

Great. Great, it answers my question. Do I have time for one more question?

[David Fischel:]

Sure.

[Unidentified Analyst:]

And this just relates more back to the ET space. When you have this product fully automated say in the fourth quarter or the first quarter of next year, do you envision any change in the mix of staffing to affect an ablation in a hospital setting? So would there be less of a reliance on having ET there or cardiologists in more looking as like a tech experience? Thus, making a procedure from a hospital standpoint a lot cheaper, because many of the components are automated, or do you expect the staffing for a typical ablation to remain the same?

[David Fischel:]

Okay, so a few comments on that. One is you suggested that, a full robust automation might be available at the end of this year. I think that is probably an overly rosy assessment. We have automation software and automation algorithms already built into our system. They work fairly nicely and we have case examples like I mentioned in my prepared remarks of human patients that have had lesion sets done through automation software that worked very well. The software though has - is not yet robust enough where it is reliable, reproducible and rapid enough for most physicians to use it in daily usage. There are a range of inputs so to say or sub-automation algorithms that would help the master automation algorithm improve and that is what we're working on improving. It will be - it will take probably several years. Though there's probably not one point, where suddenly it's reliable, reproducible and rapid enough for everyone, different physicians will probably find it useful, and in different settings they might find it useful at different points of time. And so there's a fairly clear understanding of what needs to be done to improve the reliability of the algorithms. But that's something that is going to be an incremental process. In terms of the effect on staffing, already the benefit of having all of the information available to the physician, to the electrophysiologist right in front of them and at their fingertips, and giving them full control over manipulation of the cardiac map and over the delivery of energy, and over the view of the x-ray and at their fingertip, does allow for somewhat reduced staffing. And so you have hospitals, where there are lower usage of nurses or techs in the room in a robotic case versus in a manual case. The goal of automation is not at all to replace electrophysiologist or cardiologist, on the contrary the electrophysiologist, their primary role and really the magic of their profession, is that they're able to look at a cardiac map, and they're able to look at the ECG signals, and they are able to judge where do they think an ablation should be made in order to treat the patients arrhythmia. That is not intuitive and it's not simple, and it requires a lot of expertise and skill. What we want to do is to allow the physician to focus entirely on that aspect of the procedure, on treating the patient, delineating where therapy must be provided in order to treat the patient. If we can provide robust automation software you allow the physician to focus exclusively on that, and not have to focus on the manipulation of a catheter. And that is great from an efficiency point of view, it's great in terms of ensuring that the therapy, they think they're providing and that they want to provide actually gets provided with good lesion sets and in the most effective manner, and that's really the promise of automation is that you remove the physician from being a manipulator of catheters, whether it's done by hand or being done through a computer mouse, and you allow them to focus exclusively on the thinking of their profession, which is a very valuable role that they provide, and something that we don't plan to supplant at all.

[Unidentified Analyst:]

That's great. That answers my question. And dovetailing off of that you have a lot of ETs out there, who are used to manipulating the catheter, that I almost think it like you put a guy on a grill, he just can't stop touching the stuff on the grill, he just want to fiddle with it. You just got to let it sit down let the grill do its work, now letting your system do its work. I want to confirm one thing from my side, this is my last question, with the younger physicians coming out of the university programs and the younger ones that are training. For my own research, I'm showing that fluoroscopy exposure and radiation exposure for them is a significant concern. But where you have the entrenched people out there that are performing ablations, right now, they are aware of it, but maybe since they've been exposed for so long or for whatever reason, or they are at the tail end of their career it's not so much a focus. From your conversations, can you confirm that younger physicians are making a very conscious choice on fluoroscopy issues?

[David Fischel:]

Sure. As in everything there's great dispersion in opinions and views across all physicians, irrespective of age. You're right that radiation exposure is like smoking, where in the acute term, and on a daily basis, you don't see the effects, but they add up - and they add up and can lead to terrible consequences. The physicians that have been in practice for longer, they might recognize that long-term risk, but they have long since generally though there's clearly exceptions accepted it as part of their profession. There are many younger physicians, and you're right that generally younger physicians are more attracted to robotics, part of it seems to be the ability for robotics to extend their careers and to provide them a safer lifestyle, others might be that it's just they're much more comfortable working with a joystick and a mouse and a computer than some of their peers. So there's a range of issues, but we do recognize that the younger physicians and there isn't awareness of the safety risk of radiation. I think, I mentioned on our last call three months ago, a fairly taming [ph] study, which shows that in cardiologists - interventional cardiologists that had brain tumors, 89% of their brain tumors were on the left side of the brain, which is the side that is facing the x-ray. And so the small difference in distance between the left side of the brain and the right side of the brain just a few centimeters leads to a multiple fold increase in the risk of brain cancer. So it is a significant issue, but again like smoking without broader awareness, many people ignore that risk and that's partially our role and society's role to over time make sure that the benefits of robotics from a safety perspective, not only to the physician, but also to the staff and nurses at the hospital it is made clear.

[Unidentified Analyst:]

Great. Thank you very much.

[David Fischel:]

Thank you.

[Operator:]

At this time, we have no further questions in the queue. I would like to turn the call back over to Mr. Fischel for any additional or closing comments.

[David Fischel:]

Okay. Thank you everyone for joining us today. We look forward to working hard on your behalf and speaking again in three months unless I - yes, and speaking again in three months. Great.

[Operator:]

That does conclude our conference for today. We thank you for your participation.