Stereotaxis, Inc.
Q1 2009 Earnings Call Transcript

Published: 7 May 2009

[Operator:]

Welcome to the Stereotaxis Q1 2009 earnings conference call on the 7th of May, 2009. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator instructions). I'll now hand the conference over to Mr. Doug Sherk. Please go ahead, sir.

[Doug Sherk:]

Thank you, operator, and good morning everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the first quarter of 2009. Before we get started, we like to remind you that during the course of this conference call, the company may make projections and other forward-looking statements regarding future events or the future financial performance of the company, including without limitation statements regarding future operating results, growth opportunities and other statements that refer for Stereotaxis plans, prospects, expectations, strategies, intentions and beliefs. These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. For a detailed discussion of the risks and uncertainties that affect the company's business, and qualify the forward-looking statements made in this call, we refer you to the company's recent public filings filed with the SEC, specifically the Form 10-K for the fiscal year ended December 31, 2008. The company's projections and forward-looking statements are based on factors that are subject to change and therefore these statements speak only as of the date they are given. The company assumes no obligation to update any projections of forward-looking statements. In addition, regarding the company's comments and regarding orders and backlog there can be no assurance that the company will recognize revenue related to its purchase orders and other commitments in any particular period or at all because of some of these purchase orders and other commitments are subject to contingencies that are outside of our control. In addition, these orders and commitments may be revised, modified or cancelled, either by their express terms as a result of negotiations, or by project changes or delays. Now I like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis.

[Mike Kaminski:]

Thank you, Doug and good morning everybody. On the call with me this morning is Jim Stolze, our CFO and Lou Rouggiero, our Chief Commercial Officer. This morning, we reported a strong first quarter, demonstrating excellent progress since the launch of our partnered magnetic irrigated catheter in Europe, back in November and the same launch in the US, early this March. First quarter revenue increased 58%, compared to the first quarter of 2008, and we reported a record gross margin of 69%. Recurring revenue also set a record of $4.3 million, a 61% increase over the prior years first quarter and a 26% sequential increase over the fourth quarter of 2008. We continue to manage our operating expenses with the mindful eye on maximizing revenue, while driving the company's profitability. For the quarter, we achieved a 17% reduction on operating expenses compared to last year, while total spending is down, sales and marketing as a percent of spending continues to grow. The net result for the quarter was a 46% reduction in our operating loss, compared with last year's first quarter. Financially, we're off to a strong start and we continue to stay focused on business fundamentals that are building the foundation for long-term success. Jim will review our first quarter financial performance in more detail in a few moments. First, I'd like to discuss these fundamental improvements in the business, as well as, address the capital equipment market headwinds and what we are doing to optimize our results. First, concerning business operations. While we are always positive and thankful for capital revenue in placements, we know that like all platform companies, sustained success comes through usage and customer value realization. The way for ramping utilization has been the availability of our partnered magnetic irrigated catheter for use in the left side of the heart. We've completed the rollout of the magnetic irrigated catheter in Europe and began shipment of the device in early March to our top US sites. To drive the adoption process properly throughout the installed based of over 100 sites, we have developed a robust training process segmented into three phases. Phase I includes onsite training and support, with the goal of confirming that individual physicians are confident about performing all the macro and micro movements needed to complete specific cases. The second phase is the advanced training on best practices. The goal of Phase II is to ensure physicians are capable of performing a more complex set of movements and to shorten the learning curve by using the best practices from the most experienced users. The last phase is to move each physician to the level of successful independent use. It is important to note that this is a physician-by-physician training process. Many sites have multiple physicians who learn and adopt at different rates. As physicians become more adverse through with our system, we will increasingly leverage the Odyssey Network to provide ongoing support through a virtual clinical support presence network. This complex metrics is being managed closely. So we can assure we are aligning the proper resources needed to drive adoption. Let me share with you some of the earlier results of our efforts. All of the 34 European sites have entered at least Phase I of the training program. 5 of the European sites have completed all three phases and are now independent users. In the 5 independent sites in Europe they were using the system on average over four times per week. In the US, 28 sites are in Phase I of the training process, of these 28 sites, the top five sites in the US have sequentially increase utilization 50% in the first quarter over the fourth quarter and now average more than two cases per week for the quarter even though the irrigated catheter was only introduced in March. Importantly, the clinical results from the magnetic irrigated catheter remain strong. The data from there earlier cases continues to support excellent clinical utility of the catheter across the broad range of our revenues. It is interesting to note that despite the fact that many of the US users are relatively inexperience with magnetic navigation, we have maintained the same outstanding safety record with irrigated catheter, as was documented in the European experience. We have reported of the acute success data in previous call and we're now beginning to see some of the chronic results from the irrigated catheter. Professor Pappone and his associates in the lawn reported on a series of 69 patients treated for Afib with the catheter in last months ACC, Annual Scientific Sessions, in Orlando. Acute success was achieved in 96% on these in patients, in an average case time of only one hour and twenty minutes. There were no adverse events or catheter charring reporting at any of these cases. At a one-year follow up 86% of the patients were free from Afib and were completed off their entire arithmetic medication, which compares very favorably to chronic AF outcomes and peer reviewed literature. These results will also be presented at the upcoming HRS meeting in Boston, along with long-term results from Copenhagen and Hamburg. In total, there will be 13 podium presentation and 8 poster session at the HRS session which will either feature or discuss our technology. Utilization growth is the first step to improving our recurring revenue. In addition, to the irrigated catheter in the first quarter, we released our new NAVIGANT Software and our second-generation Cardiodrive, called QuikCAS disposable product line, which in combination improves the simplicity of our user interface and responsiveness of our system. With the introduction of the new QuikCAS and its corresponding price increase, along with the increased royalty, dollars we received from the irrigated catheter, we have surpassed our goal of realizing $1000 of net revenue per EP case during the quarter. Additionally, we continue to refine our ability to provide onsite daily clinical support that enables adoption, but recognizes the challenge in cost associated with this requirement. The customer support needs can be significant as individual sites demand different levels of daily support. With the introduction of the Odyssey Network we are redefining how we can provide superior real-time support in a cost effective manner. In fact, by using the Odyssey network, one clinical support representative is five times more efficient than having the same representative provide onsite support. As you can see, we put in place those building blocks, which will continue to drive increasing revenue, improved margins and provide superior real-time support, but at a significantly lower cost, leading to a stronger, sustainable, recurring revenue business for Stereotaxis. Before we move to capital equipment part of our business, its important to note that, building utilization is the cornerstone for building capital equipment sales. Increasing utilization builds a stronger reference base that enables our company to increase the Niobe and Odyssey interest and accelerate the decision making process. Our first quarter capital revenue was driven entirely from backlog conversion. In our last call, we outlined how we've segmented our backlog into those orders which we were forecasting will convert to revenue in the near future and those orders that are beyond that horizon. 2009 capital will be primarily driven by converting our backlog, which will help insulators from some of the short-term compression in the US hospital capital market. In the first quarter we secured $8.8 million of new orders, with approximately half coming from Europe. The EUs exceptionally strong first quarter order rate reflects our increased penetration of the EU replacement market driven by the strengthening of our European reference sites. In the US we're experiencing a mix picture and like many companies in our industry, we are feeling the effects of the cutback in hospital capital spending. Our strategic partners are forecasting that the US x-ray market will decline by approximately 20% for the year. But conversely, catheter companies are reporting bullish numbers reflecting growth in the EP Appalachian market. We remain convinced that the EP space will serve better than the overall average for hospital capital spending in the US, but still maybe down from 2008. Additionally, we have estimated that the Niobe penetration is 10% to 15% of the total annual EP x-ray business. Thus even in the US capital constrained market, we fully expect that we can grow our penetration rate as for our reference site strengthen. In forecasting our capital sales, we track closely the number of accounts in the pipeline and the movement of these accounts through a decision process. A few of the leading indicators are, late stage prospect customers for all geographic areas increase slightly from the end of 2008 through the end of the first quarter 2009. Additionally, we continue to fund and focus on programs and projects that will, we believe will drive revenue. An example of this is the new customer education center in St. Louis, where we are effectively demonstrating the capabilities of both the Niobe and Odyssey. This center is set up to facilitate live case demonstrations from around the world via Odyssey backbone, thus highlighting our value proposition in various environments. We believe these investments ensure that we are maximizing capital revenue opportunities and providing educational environments that drive clinical adoption. The center opened in February and for the first quarter we hosted more than 20 sites that in St. Louis. We recognized the growing customer interest in US doesn't directly translate into new orders in a capital constrained environment. We have met with many customers who are interested in purchasing, but do not have access to capital funding. So, to provide these customers access to capital we have introduced and seeing growing interest in operating leases which can match cost to revenues for institution. We believe our recent introduction of an operating lease to our partner RTS will gain an importance as the year progresses. Our last significant business development during the quarter is the strengthening of our Odyssey product line. Growing market interest demonstrates the potential for Odyssey to be a significant contributor to our future financial success. We are schedule to introduce three new Odyssey products this year. First is the Cinema product, which is the archiving and data distribution hub for the platform. We're pleased to announce that we've installed our first Cinema product in April and the customer reaction has been exceptional. As a reminder, the Cinema enables intra and inter-hospital communication creating the beginning of network to clinical environment. Secondly at HRS we're introducing our new quad high-definition display, which provides the clinicians the ability to obtain resolution on large screen format comparable to native smaller screen. This product is scheduled to begin shipping in the third quarter. The third Odyssey product we are developing is for Standard Labs. This version of the Odyssey is for Cath Labs which do not have Niobe systems. Request for this product have continued to grow as customers look at the standard Cath Lab as customer looks at standardizing Cath Lab data management. The Standard Lab version of the Odyssey product will be available to ship and install in the fourth quarter of this year. The pipeline of the Standard Lab customers has increased over 25 accounts in a short period of time and we're confident even in this capital constraint market that the Odyssey line will continue to experience revenue growth. Lastly, we continue to invest in our sales and marketing efforts in the Odyssey product line to ensure that we are taking advantage of the first mover opportunities. As we look into 2009 our key objectives remain consistent and clear. We are focused on first insuring the successful launch of the magnetic irrigated catheter, driving recurring revenue growth and developing reference sites. Second, we will ensure we maximize our capital business through investments in our channel, leveraging the Odyssey network to highlight reference sites, creating financing options and continuing to develop our robust sale processes. Thirdly we will expand our Odyssey offering and capitalize on first mover opportunities. Finally, but importantly, we are tightly managing cash and expenses as we march towards breakeven. Now, I'd like to turn the call over to Jim to discuss our financial results in more detail. Jim?

[Jim Stolze:]

Thank you, Mike. I'm going to focus my comments this morning on some specific financial metrics for the first quarter. Of course, if you have any questions about the financials, issued with our news release this morning, please feel free to ask them during the Q&A. Stereotaxis reported total revenue of $11.1 million for the first quarter, systems revenue was $6.9 million of this and included revenue recognized on five Niobe Systems and five Odyssey Systems. Of the five Niobe Systems, three were placed in Europe and two were placed in the US. Purchase orders in the quarter for both Niobe and Odyssey systems totaled $8.8 million. New orders included approximately $1.3 million of orders for our Odyssey systems. Backlog at the end of March was $67 million, $2 million below the level of December 31st, reflecting sales of Niobe and Odyssey systems, as well as the removal of two Niobe System orders, partially offset by the new orders. Gross margin for the first quarter was $7.7 million or 69% of revenue, another record for the company. This represented continued improvement over the 68% of revenue for the fourth quarter of 2008 and 65% of revenue for the first quarter of 2008. Average selling prices for the Niobe and Odyssey systems remain strong with system margins for the quarter of approximately 63%. Incoming Niobe order ASP continues above our recent historical levels and bodes well for a continuation of our system margins. During the quarter, we introduced our next-generation Cardiodrive disposable in conjunction with our enhanced Niobe Software operating system. The improved pricing of this Cardiodrive, as well as the increase for royalty dollars associated with the magnetic irrigated catheters, has allowed us to exceed our target of $,1000 of revenue per EP procedure. As a result of this pricing and our success in controlling product cost, our margins from disposable services and accessories are in the 80% range. Operating expenses were $14.8 million in the recent first quarter, compared with $17.8 million in the first quarter of 2008. R&D expenses declined 30%, reflecting the completion of several major product development initiatives. General and administrative expenses decreased 26% and sales and marketing dropped 3% compared with the prior year's first quarter. We continue to expect that our run rate for a normalized quarter will be between $15 million and $16 million. We reported a net loss of $7.5 million or $0.18 per share for the recent first quarter, a significant improvement from the $13.5 million net loss or $0.37 per share in the first quarter a year ago. Average shares outstanding for the recent first quarter were 41.3 million, compared with 36.5 million in the same quarter last year, reflecting the 4.4 million shares issued as part of the simultaneous offerings that we completed at the end of December, 2008. Cash investments total $18.8 million at March 31st. This represented a decrease of $11.6 million from the end of December. We use $10.4 million of cash flow from operations, compared to an EBITDA for the quarter of negative $5 million plus. We used an additional $1 million in capital expenditure during the quarter. As I anticipated in our last conference call, the cash used this quarter was greater than the fourth quarter, due to approximately $4 million of advances and prepayments received in the fourth quarter related to fourth quarter's revenue in systems. These prepayments benefited our fourth quarter cash flows and negatively impacted a normal first quarter. Additionally, we collected approximately $1.5 million on the first two days after the end of the first quarter. Historically, we have used less cash than the related period EBITDA. For example, for the years 2006 through 2008 our cash used in operations was anywhere from $1 to $6 million better than the related EBITDA. In addition, our average quarterly cash used in operations for the three quarters ended March 31, was approximately $6.5 million. As a result, even though with the anomaly of the first quarter, I would expect used in operations for the second quarter of 2009 to be significantly less than that used in the first quarter and for the remainder of 2009 to more closely match the related period EBITDA. Thus, we believe that our cash consumption for the full year 2009 will be less than the $30 million consumed during 2008. Total bank and investor debt was $29.1 million at March 31st with $13.2 million drawn against our $25 million working capital line that we recently extended with Silicon Valley bank. Included in debt is approximately $15 million owed to Biosense Webster related to the $18 million facility that was finalized in July of last year. Repayment of this liability will be from royalties, otherwise payable from Biosense to Stereotaxis with no minimum cash outlay requirements until May 2010. At the end of the first quarter, we had in cash and approximately $12 million remaining under the bank working capital line. Now let me turn the call back to Mike to provide an update on our outlook for 2009.

[Mike Kaminski:]

Thanks, Jim. Before, we take your questions I'd like to just make a few final remarks regarding 2009. Our general guidance remains unchanged from what we've provided you in February. We expect the Niobe revenue for 2009 to exceed 2008, although, the level will depend on the overall economic climate in the hospital capital expenditures. Odyssey revenue is expected to grow significantly this year. With full commercial US launch of the magnetic irrigated catheter we anticipate an increase of more than 50% in our recurring revenue in 2009 versus 2008. We project gross margins will remain between 65% and 70% for the year, anticipate that this will be driven in large part by the favorable shift at sales mix towards higher margin recurring revenue products. Full year operating expenses for 2009 will be lower than full year 2008 expenses of $67.4 million. Sales and marketing expenses are expected to be inline at or above 2008 levels, while R&D, G&A levels will be below 2008. If we meet these operational and financial objectives, we believe our breakeven level will be below $24 million in quarterly revenue. With that, I'd like to open it up the call for any questions.

[Operator:]

(Operator Instructions). Our first question comes from Tao Levy from Deutsche Bank. Please go ahead with your question.

[Tao Levy:]

I was wondering if you could provide us with some procedure numbers, you talked about growth rates, again if you had some specific procedure numbers in EP, like sort of like Q4 versus the first quarter?

[Mike Kaminski:]

Tao, we want to stay with some given actually utilization numbers because, we track closer to the revenue and obviously the procedures are up, because you see in the recurring revenue. If you look at how we've segmented the accounts the top users have accelerated usage and I think we said last time if you look at the very top group it's over three cases, obviously I said the top five sites were over four cases a week. The bottom groups we haven't rolled out everybody in the US yet. So they still remain very low at usage and then the middle group has increased about a 100% in usage. So, we are still tracking along with those trends.

[Tao Levy:]

You've mentioned the five sites in Europe are independent out of the 34. When do you expect all 34 to be fully independent?

[Mike Kaminski:]

I'll let Lou to cover that.

[Lou Ruggiero:]

Hi, Tao, it's Lou. We have the remaining customers going through an aggressive training cycle. So, we have a portion of those customers that were as Mike indicated are in Phase II of the training which is the best practice sharing. We expect it will be migrating substantial number of those customers into the advanced stage here over the next couple of months. So our expectation is by the end of the third quarter, we should substantially have those customers migrating through that cycle. So, we are making good progress. We are managing it on a physician-by-physician basis. So, I expect that we'll see significant progress by the end of the third quarter.

[Tao Levy:]

In the US, you said 28 sites are in the first phase. When do you expect, first one to be independent?

[Lou Ruggiero:]

Yeah. There again, we just rolled those out in March. We have weekly calls and daily discussions about the physician. We expect substantial number of those 28 to migrate into Phase II here over the next couple of months. So, I would work on the same timeline. By the end of the third quarter, you will see a substantial number of customers having migrated through that cycle.

[Tao Levy:]

In terms of Odyssey, how many of these sort of early irrigated catheter users have an Odyssey system or part of the backlog?

[Lou Ruggiero:]

We have approximately 20 or so Odyssey systems in place today. I would say at least half of those are within sites that are currently using that catheter, using the thermocool catheter, and we have several in the backlog. So it is a fair number. It continues to grow.

[Tao Levy:]

My last question like, can you remind us, I think it is this year you start to some of the exclusivity arrangements with Biosense start to expire. Can you remind us there, what's left, what will happen this year and what opportunities could be open to you guys thereafter?

[Mike Kaminski:]

So, in May of this year or month right now, the cardio exclusivity expires. At the end of 2009, actually January 1st, 2010 the four and eight catheters exclusivity expires and then the irrigated catheter is at the end of 2011.

[Operator:]

Thank you. And the next question comes from Mimi Pham from JMP Securities. Please go ahead with your question.

[Mimi Pham:]

In terms of the end-stage pipeline can you further define that for us; I know you've talked about 300 system pipeline number. Can we assume at least 10% or 30 systems are in this end-stage of pipeline category?

[Mike Kaminski:]

I'll let Lou he'll give all the pipeline numbers.

[Lou Ruggiero:]

So there are over 700 opportunities in the pipeline right now and that's up marginally from the last time we had this call. The way that that's migrated is you see an increase coming at Europe which is consistent with European orders increasing, and is flat in the US slightly and roughly flat coming at rest of world.

[Mike Kaminski:]

In late stage.

[Lou Ruggiero:]

In late stage it's up. In late stage it is up, that's where you'll find most of the growth is coming out of the latest stage opportunities.

[Mimi Pham:]

Yes, I'm just trying to get a cog, you said 700?

[Lou Ruggiero:]

Yes, over 700.

[Mike Kaminski:]

In the whole pipeline.

[Lou Ruggiero:]

In the whole pipeline over 700 and in the latest stage we were up marginally.

[Mimi Pham:]

But can you say that's 10% of the 700 around ballpark?

[Lou Ruggiero:]

I wouldn't say it's 10%. It's less than that. But that growth is coming largely from overseas.

[Mimi Pham:]

In the US, you talked about there is good interest, it's just they don't have the financing. So, is there anything that they, if they hear something at HRS, if they hear something near-term about feedback from your initial US site. Is that going to change anything, or it's just all about financing, in terms of new orders picking up at the end of the year in the US for Niobe?

[Mike Kaminski:]

Let me take the top level and I'll turn it over to Lou on this. I think there is two parts to this Mimi. One is we need to focus on making sure the CEOs of hospital recognize the growth in EP and the potential profitability out of the EP because often times, they get a complex job and I didn't know it was easy to see that as we think it should be. Then when we do that, what we found is there's interest to look at how we could expand on the opportunity in EP. Now, there may not be capital availability or capital available when we do that. Now some accounts just have a more touring amount capital than in some other accounts. Obviously, they are looking to invest in areas where they think it's going to grow in the future, but they don't have access to the bond market. That's the perfect foray to an operating lease or capital lease. You want to add any color?

[Lou Ruggiero:]

The only thing I'd add Mimi is, for those hospitals that do not have a moratorium, but certainly we have to compete for those capital dollars. Building the story around the financial benefit and the growth associated with the space that we play in is highly valuable. So, to the extent that we can show the benefit associated with utilization, it just gives us the more powerful story. So, that's the approach we take with this and that's the interest level by the perspective customer.

[Mimi Pham:]

So would you say, like you're still expecting new orders to pick up as in the year than based on earlier feedback in the US and they trust data from reference sites?

[Lou Ruggiero:]

Absolutely I think the US will continue to look at reference site, as the way of proving the value and then interest will grow as a result of that, and decisions will be made probably late this year, early next year will reflect the order rates from decisions made around thermocool.

[Mimi Pham:]

Then if you could just the sequential increase in your disposable revenue from 3.4 to 4.3, is the bulk of that from royalties from catheters?

[Jim Stolze:]

There is a disproportionate percentage increase in the royalty and disposable as of close to the service and software, yes.

[Mimi Pham:]

Then last question, you obviously talked about annually typically see some new orders that you get in the first half of the year convert by year-end. Should we expect that or do the lengthening cycles know?

[Lou Ruggiero:]

There is certainly opportunity for that, but I think that we should expect the substantial piece of our shipments coming from our backlog which in and out itself we are constantly managing and working those timelines and pushing those through the process maybe. So, a substantial number of those will come out the backlog.

[Operator:]

Our next question comes from Keay Nakae from Collins Stewart. Please go ahead with your question.

[Keay Nakae:]

Cardiodrive ASP, help us understand how many folks or what you're procedure in terms of folks who were buying that particular piece of equipment under prior arrangements versus the increase in pricing. What percent are paying the higher ASP at this point?

[Mike Kaminski:]

It is a different product which works for the different software. So, largely I think, it's more than 50% is rolled out now. So, the new software and the hardware that's associated with the QuikCAS go together, and more than half of our installed base are using right now.

[Keay Nakae:]

Is that consistent to US or OUS?

[Mike Kaminski:]

Yes. It is.

[Keay Nakae:]

That's very good. Then as far as the initial experience with the irrigated catheter in the US. Are you getting any issue raised by docs in terms of how to properly manipulate, are you seeing challenges there that you're having to help them with?

[Lou Ruggiero:]

I wouldn't necessarily characterize in this problems. I would say that as Mike mentioned in his opening, the experience level by some of the physicians in the US is at early stage. As a result of that, we're highly focused on providing the proper training the manipulation training, the basic training associated with that. So, it's more about the learning curve. It's more about them getting accustomed to using this catheter and frankly to using magnetic on a more regular basis. Our experience is that the more they use the product, the more proficient they get and that learning curve accelerates.

[Mike Kaminski:]

Keay, the only thing I'd add is that's the advantage of the Phase II best practices. So what Lou has put in place is, it go through somewhere around 10 cases get their experience, so that they understand where they are challenged, come in for a best practice learning and then we could move them through that those phases pretty easily and the challenges they have. So, it established that kind of a phased approach in order to address those things in a timely way.

[Keay Nakae:]

Then just using the same product category back over to Europe and thinking how that might extrapolate to the US. What type of success are you seeing, now that you have the catheter over there for a while, in terms of turning on what had been dormant accounts. So they've had an IOB, but weren't using it, and now that you have this catheter and you're in there showing it to them. Is that making a difference in those dormant accounts?

[Lou Ruggiero:]

Yes, on the whole that is a true statement. So, on the whole having thermocool has revitalized accounts that were once dormant. Now, of course it varies by account, but on the whole, we're seeing with thermocool we're seeing significant insurance and significant growth in Europe. So that is a true statement.

[Operator:]

Our next question comes from Sameer Harish from Needham & Company. Please go ahead with your question.

[Sameer Harish:]

I wanted to start off as far as the facing that you are talking about in getting the accounts to transfer to the irrigated catheter. From an infrastructure standpoint in the organizations who is involved in that transition? Is it all sales? Is it are you involving some research staff? Just, maybe comment on how much time this has maybe taken away from active new selling?

[Lou Ruggiero:]

Well, we have a dedicated selling team. We call them account executives. The selling teams clearly have relationships with physicians, but they are largely focused on selling new equipment and also helping to sell service contracts and the like. The folks that we have highly focused on the roll out come in a couple of categories. One is we have a clinical team that has a few layers to it. One is the field base folks or the account managers they are the hands on people, who are working in concert with J&J to do the roll out, to do the training, to the set the stage for the customer to ramp up etcetera. In addition to that, we have a training group here and those are the advanced team, combination of training folks and other advanced folks from engineering, who are supplementing those advanced training efforts and who go out into the field to do that as well. So, we have varying levels of clinical and technical support that we provide physicians.

[Sameer Harish:]

How much support is J&J providing along this time?

[Lou Ruggiero:]

A fair amount, especially early on. So when we roll out a new account they are present for the first X number of cases, and then we obviously, it's our responsibility to continue to stay there to, to drive towards sustainability, but when we roll it out initially they are playing the role.

[Sameer Harish:]

Mike, you mentioned two Niobe's removed from the backlog. Can you give any color as where these delays or where they outright cancellations and was it budget related?

[Mike Kaminski:]

Both we're from the US and both were in the backlog that we put as outside of our 18 month window. So, they both were significantly longer than the timeframe of what we'd recognize revenue in the near future. Lou has gone through a robust process of continuing to look at those accounts and making sure that they're going to transfer the revenue within a reasonable amount of time, and these two I know you have the detail on it. These two came to a point in the first quarter where you were convinced they weren't got revenue on a reasonable amount of time.

[Lou Ruggiero:]

That's correct and they will well beyond the window.

[Mike Kaminski:]

We've removed them.

[Sameer Harish:]

I guess was that delay due to financing or due to construction timelines or any color there?

[Lou Ruggiero:]

Yeah in both cases it was a funding related matter. In one case, it got particularly complicated due to construction and the additional finances that would be require to do that construction.

[Sameer Harish:]

Where do you expect backlog to be at year-end?

[Mike Kaminski:]

We're going to not prognosticate that because obviously, we're going to watch the capital markets above a little bit, before we give any guidance on orders.

[Sameer Harish:]

Okay, no problem. As to your new systems that you're placing are they all QuikCAS ready?

[Mike Kaminski:]

Yes.

[Sameer Harish:]

So everything that you're installing is that?

[Mike Kaminski:]

Everything rolling out has this, the NAVIGANT 3.0 software. So that makes it QuikCAS capable.

[Sameer Harish:]

You mentioned 50% roll out to-date. Is that driven by the customer demand or is that the company making the switch on your schedule or who is driving that?

[Mike Kaminski:]

The company mainly is the constraint there, we have to go onto the site and upgrade each site to the new software and hardware that's associated with QuikCAS. We should get largely through that by Q2. There will be some accounts that aren't done by the end of Q2, but it should be 80%, 90% done by the end of Q2.

[Operator:]

Thank you. Our next question comes from Spencer Nam from Summer Street Research. Please go ahead with your question.

[Spencer Nam:]

First one is the customers who are buying this system right now, Niobe system right now. What sort of situation are they in, in terms of the funding and what is driving their purchase decision? Some of the factors that are involved in making decision is that, is it based on the funding that they got last year or are they actually actively making purchase decisions this year because they would like to have one?

[Mike Kaminski:]

Let me give a little color to the general environment then I'll let Lou take specifics. But if you think the general environments, customers are making in to the x-ray business still is going through replacements and new install, right. So in EP, we've forecasted that to be more wide about 300 systems in growing in general. Now, even if that's down that market continues to turn. So every time that happens, Spencer, there is a decision about what to put in that room. So there is a general turning of the market about EP x-rays are getting replaced. Obviously in a down market the benefit of that for us is, as we walk in, we talk about before you make the final decision, let's look at what you're going to be using in that room over the next 10 years and what kind of patients are going to be presenting themselves. That presents the opportunity for us to talk about the value of the system in that room as I make a capital decision they are going to live with for 10 years. Then now these specific ones Lou has more color on them.

[Lou Ruggiero:]

In adding to Mike's point, there is the general flow right the turnover of those rooms, but, in addition to that when a hospital knows that these rooms will be ready for turnover, that's really when we come into play and we sell the value of the growth in EP and ablations in general. Then they go through the normal budgetary cycle. So, we are usually in a budgetary cycle earlier on or when a need arises like this, if they know they have to replace the room that may have been unplanned several months ago. We go in and we work through getting access to the capital that's already been approved on a global basis within the hospital. So, we do have some situations like that. This generally shows a nice return for EP. So, the argument that we have to justify is usually pretty soft and evident.

[Spencer Nam:]

Then in terms of the HRS, are you playing in specific activities there or what should we expect from you guys next week?

[Mike Kaminski:]

We don't have a dinner. We have used our meetings for our physicians. We have well, one user meeting and one perspective customer meeting. We've elected not to have a dinner. So we have those just as general meetings. Then, obviously, we have boots in several scientific sessions. So, we will be pretty active at the show.

[Spencer Nam:]

Then in terms of the overall competitive landscape are you seeing much of interactions with your competitors in terms of your customers making decisions about which direction they want to go with, any thoughts on the outlook there?

[Mike Kaminski:]

On the competitive landscape?

[Spencer Nam:]

Yeah.

[Mike Kaminski:]

I am of the opinion Stereotaxis's paid (in a tan), we got to be successful in doing what we can do. Utilization well if we get stronger reference sites, which will drive our success I think that there is a lot of talk about and I think we're confident that our value proposition is strengthening. You see that in our ASPs, you see that in the utilization I think we are in a good position to leverage that. I think we got a very good position in the market today, that having a control with distal tip allows you to have some unique safe effective properties that just won't be mimicked. So, I think we're in a good shape. Obviously, we got to focus on executing ourselves. I think if we do that we'll be very successful.

[Spencer Nam:]

Final question, if I could add is, how long do you believe that you're cash reserve will allow you to operate without needs for financing at this point?

[Jim Stolze:]

Well, as I said if you look at our average run rates its $6.50 million three quarters. Our EBITDA this quarter was about $5.50 million negative and we're back just the $30 million between cash on hand and bank line. Our OpEx is improving and as the year goes on one would hope to actually improve on those EBITDA numbers. So, it's kind of mathematic exercise at that point.

[Operator:]

(Operator Instructions). Our next question comes from (inaudible) from Deutsche Bank. Please go ahead with your question.

[Unidentified Analyst:]

Could you discuss the nature of your relationships with Siemens and Phillips? How you're working together in this period of time of constraint on budgets? Then I have a follow-up.

[Mike Kaminski:]

We're fortunate to have a good relationship with both. I think Lou's group worked closely in the field with kind of the tactics of whose replacing and what we can do to jointly go on and be successful. It seems we do our own individual mining of opportunities, as well as work with them on where they see the replacement cycle. Obviously, we have development initiatives with the companies in improving some of the aspects of how we integrate 3D imaging and some other items in the platform. So we have a good working relationship. Lou, do you want to add any little color to that?

[Lou Ruggiero:]

Yeah. It is a good working relationship. We work on a deal-by-deal basis with both of them. We'll have several meetings with them HRS just go forward strategic type of sessions on how we can both grow our business collectively. So, I characterized it on the whole as a close relationship and very cooperative with both of those vendors.

[Unidentified Analyst:]

The follow-up is that this morning GE enhanced and then announced in a collaboration I mean, that's current news. Could you discuss how that might what sort of relationship have you had with GE if any, and does that collaboration has any impact on your business?

[Mike Kaminski:]

Let me answer the first question. Obviously, we haven't had an integrated relationship with GE. The reason is in the past if you look at the Innova platform, which is the GE x-ray system. It's not because, either company is not interested, this is a historic statement. But the Innova collimator and plate sits to the side of the x-ray, which hit the magnets at a very acute angle. So, there wasn't a practical way to integrate the systems together. So, because of that, we work with the companies who have more inline x-ray systems. The answer to the second part, my understanding is our competitor's level of integration is really just giving x-rays to visually integrate in their system. So, that you can move their system in CD x-ray move, now it's a very high level statement. So, there is the technical integration is more disvisual, just to make it a more useful user interface. That's much different in our level of integration. Our level of integration, obviously as the systems have to move together, we have to understand where and the software have to talk to each system and of course, we do integrate images. So we can see, as we move our system, we move the x-ray image as well. So, the level of integration for the effort of Siemens and Philips with Stereotaxis is pretty deep. My understanding is there is it is less deep and it's more just visually how you display the image.

[Unidentified Analyst:]

Potential impact?

[Mike Kaminski:]

I don't think it has any potential impact from yesterday, because, we don't work for GE and so we shouldn't see anything in our pipeline change.

[Operator:]

Well it seems to be the last audio question. Please continue with any points you wish to raise.

[Mike Kaminski:]

Well, thank you everybody. We look forward to seeing those who can make it at HRS. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This conference will be available for replay from Thursday May 7th 2009 at 9