Stereotaxis, Inc.
Q3 2011 Earnings Call Transcript

Published: 8 Nov 2011

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Stereotaxis Third Quarter 2011 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday, November 7, 2011. I would now like to turn the conference over to Mr. Greg Gin of EVC Group. Please go ahead, sir.

[Greg Gin:]

Thank you, operator, and good afternoon, everyone. Thanks for joining us for the Stereotaxis conference call and webcast to review the financial results for the third quarter of 2011, which ended on September 30, 2010. Before we get started, we’d 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 reflect 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 that qualify the forward-looking statements made on this call, we refer you to the company’s periodic and other public filings filed with the SEC, including the Form 10-K for the fiscal year ended December 31, 2010 and the quarterly filings for 2011. 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 or forward-looking statements. In addition, 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 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 canceled, either by their expressed terms as a result of negotiations or by project changes or delays. And now, I’d like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis. Mike?

[Mike Kaminski:]

Thank you, Greg. Good afternoon, everyone, and thank you for joining us this afternoon on the third quarter 2011 conference call. With me today is Sam Duggan, who joined us as Chief financial Officer in early October. Before we begin, let me formally welcome Sam to the team. Sam brings 25 years of financial leadership experience with management responsibility for treasury, investor relations, financial analysis, budgeting and lease financing. His broad experience in senior strategic finance roles make him ideally suited to lead our finance function as we execute our strategy to establish our technology platform as a standard of care for treatment of complex arrhythmias and other cardiac diseases. So, Sam, welcome to your first Stereotaxis conference call. On today’s call, I’ll start by providing an overview of the third quarter and discuss our progress on preparing for the upcoming launch this quarter of the new Epoch platform. I’ll then discuss our progress with the Odyssey platform before Sam reviews the quarterly financial results. We’ll then open it up to your questions. Let’s get started. Revenue in the third quarter was $8.5 million, down 38% from a year-ago period. Global new capital orders were $2.2 million and were comprised of $1.6 million in Odyssey products, four Epoch upgrades and two Vdrive systems. Our top line performance and system orders, as we expected, were impacted by the transition from Niobe II to Epoch. These factors resulted in soft Niobe II revenue and the related impact on Odyssey installations in Niobe labs. The top line was also affected by the emergence of larger standard Odyssey deals, which will take longer to close but will significantly increase our growth. Among the bright spots in the quarter, recurring revenue grew 13.8% and reflects continued growth in clinical procedures with our magnetic robotic platform. In addition, we continue to build market interest in Epoch ahead of its planned launch this quarter. We’ve designed Epoch to significantly enhance physician efficiency and experience for robotic-assisted EP procedures. We believe these clear benefits will regenerate market demand for our EP platform, resulting in renewed growth in systems revenue and new capital orders. We’re focused on driving rapid market adoption of Epoch and believe this will significantly contribute to the future growth and profitability. With respect to the Odyssey platform, we’re continuing our efforts through direct sales and with distribution partners to expand the potential market opportunity. We expect the expansion of the Odyssey business in 2012 as our distributor, Biosense Webster, builds momentum in non-Niobe standard EP labs. Company is very focused on achieving key milestones, which will accelerate us through this transition period. I’ve mentioned some of these in previous calls, but let me review with you what we’ve accomplished on the top five milestones. The milestones are

[Sam Duggan:]

Thanks, Mike, and good afternoon, everyone. I’ll be focusing my comments on the third quarter financial results. But I’ll be happy to address any questions on the year-to-date results in the Q&A section of our call today. Revenue for the third quarter was $8.5 million, a decrease of 38% from the $13.9 million reported in the prior year. Systems revenue was $2 million, down 75% compared with $8.2 million a year ago. As Mike mentioned, soft system revenue for both the Niobe and Odyssey businesses was impacted by market demand for a more efficient solution for complex ablation procedures and the ongoing platform transition from Niobe II to Epoch. We recognized revenue on one Niobe system versus five systems a year ago. The Niobe system taken to revenue this quarter was placed in rest of the world. Odyssey system revenue was $1 million, down 54% from a year ago. Recurring revenue grew 14% to $6.5 million versus the third quarter of last year. The rise in recurring revenue was attributable to the larger installed base of Niobe systems and an increase in utilization leading to greater disposable sales and service contracts as well as favorable pricing. Let’s move on to backlog, which consists of orders that we anticipate will go to revenue in the next 18 months. We conducted a comprehensive evaluation, identified four projects where there is low likelihood that this hurdle will be met and removed these systems from active backlog. Three of these were Niobe projects. So rolling forward from our active backlog of approximately $33 million in the second quarter, we added $2.2 million in new orders and we had subtracted $2 million in systems revenue for the quarter and we also are subtracting the $4.5 million backlog and moving these projects to inactive. This brings active backlog to approximately $29 million at September 30 and represents 16 Niobe systems. Gross margin was $5.9 million or 68.9% including a $500,000 charge related to the absorption of overhead costs based on normal production levels. Q3 gross margin was down from 72.2% from the year-ago quarter. Before the charge, gross margin in the quarter was 74.3%, which is higher than the prior-year quarter due to a higher mix of recurring revenue. Operating expenses in the third quarter were $14.9 million, an increase of 10% compared to the $13.6 million in the year-ago period. The increase was primarily due to higher research and development expenditures related to the Niobe Epoch and Odyssey upgrades, increased spending on registrations in Japan and foreign currency exchange losses as the US dollar strengthened against the euro. The result was an operating loss of $9.1 million compared to an operating loss of $9.5 million in the second quarter of 2011 and operating loss of $3.6 million in the third quarter of 2010. Other income includes a $2.6 million mark-to-market gain related to the outstanding warrants which must be adjusted quarterly under derivative accounting rules. Net loss for the third quarter was $7.3 million or $0.13 per share versus a net loss of $5.1 million or $0.10 per share in the third quarter a year ago. Average shares outstanding for the third quarter were 54.9 million compared with 50.1 million in the same quarter last year, primarily reflecting the issuance of the 4.6 million shares as part of our follow-on stock offering completed in November 2010. Turning to overall liquidity, we had a cash burn of $6.4 million for the quarter. Year-to-date 2011 cash burn is $23.4 million versus $16 million during the same period a year ago. At September 30, 2011, we had cash and cash equivalents of $17 million, while we had $21.8 million at September 30, 2010. We had total debt outstanding of $29 million at September 30, 2011 versus $26.5 million a year ago. As such, net debt at September 30, 2011 was $12 million, up from $4.7 million a year ago. As of September 30, 2011, the company has completed the majority of the operating expense reductions through head count and discretionary spending cuts and continued to implement processes and changes to further reduce the operating costs. We anticipate that this will result in an operating expense reduction of 15% to 20% on a year-to-date September 30 annual run-rate basis. As a sign of our progress today, on a sequential basis, operating expenses declined $2.7 million or 15% from the second quarter of 2011. When both quarters are normalized for costs such as severance, foreign currency gains and losses, marketing costs related to HRS, et cetera, sequential operating expenses still declined by approximately $2.3 million or 15%. While it is not the company’s practice to comment on capital transactions that have not been consummated, we realize that our shareholders would like to have some additional information regarding our plans to raise capital to support our future growth. To that end, we announced today that company entered into a non-binding term sheet on October 11, 2011 with an institutional investor to raise non-equity capital, and company expects the capital raise to be completed by November 30, 2011, satisfying the company’s obligations under the Fourth Loan Modification Agreement with Silicon Valley Bank. The company and the institutional investor are working diligently and in good faith to close the transaction subject to customary closing conditions, including the negotiation and execution of mutually acceptable definitive transaction documentation. As the company is subject to a confidentiality agreement related to this transaction, we will not be able to provide additional details at this time. Thank you very much for your attention. Operator, we’d like now to open the call for questions.

[Operator:]

Thank you, sir. (Operator Instructions) And our first question is from the line of Sameer Harish with ThinkEquity. Please go ahead.

[Sameer Harish:]

Hi, guys. Good afternoon.

[Mike Kaminski:]

Hi, Sameer. How are you doing?

[Sameer Harish:]

Hi. I thought I would start with the Epoch launch. Can you talk a little bit about what version of the Epoch product in terms of compatibility with the different Vdrive modules that you have you expect to launch on the initial go in Europe?

[Mike Kaminski:]

Yeah. So the Epoch in Europe will have the single first and then the dual-headed Vdrive will come out right behind that. So both will be available in Europe. We think the dual head may – will sit on the fence between December and January, but it’s timing, so we’ll have both come out right behind the upgrade of the Epoch.

[Sameer Harish:]

Okay. And are they on – they’re on different submissions then for CE?

[Mike Kaminski:]

They are. The single head has already been approved; it’s been in use. We have eight systems installed. The dual, we’re – as I mentioned, we’ll get the approval, we believe, in December.

[Sameer Harish:]

Okay.

[Mike Kaminski:]

And then install that in – right after that period of time.

[Sameer Harish:]

Okay. And what are you seeing in terms of utilization on those eight systems in Europe when you look at procedure types and then the growth as the installations are starting to use that product?

[Sam Duggan:]

Yeah. So the first embodiment was a Lasso only. They came out – this summer, we installed the fixed curve sheath on the Lasso and it’s staggered. So the eight systems have installed as the year has progressed. But I believe it’s pretty close to a one-to-one – one magnetic case for one use of the Vdrive. And so as you look at that – I know that the fixed curve has also been well received because they can position the curve, so that it points towards the area – if you’re moving the catheter, for example, you move to the left or the right side of the heart, so you begin to orient the catheter and it helps efficiency of the process. Obviously, the feedback we’ve received is they’d like to see both, which is the dual drive. So they want to see both. Now, as a reminder, Sameer, the deflectable sheath that’s going to be used in the dual drive is a proprietary sheath that we’re producing. So it’s a less costly sheath than the ones that are commercially available today, but it also will be additive to the disposable revenue.

[Sameer Harish:]

Got it. Got it. And how do you think that utilization translates when you look at the potential for the US market? I know the use in Europe of the fixed curve sheath and deflectable sheaths is different in the procedures, maybe just kind of comment on what your expectations could be?

[Mike Kaminski:]

Historically, I think the ability to use additional devices has always been stronger in the US than Europe. But everybody – I think it’s pretty universal that a Lasso is used in most AF procedures. I think if you start going beyond the Lasso, then I think clearly there’s a much higher percent of EPs in the US using ICE than in Europe. I think deflectable sheath, I don’t know, but I suspect it probably follows a similar trend. So I think we’ll get a larger percent acceptance of the dual Vdrive in the US because of the kind of the broadening of the number of devices used in the US versus Europe.

[Sameer Harish:]

Got it. Okay. So you’re not expecting the dual Vdrive in Europe to be a big additive to what you have in the market today?

[Mike Kaminski:]

Well, no. What I think will happen is they’ll use Lasso in one and a fixed curve in the other.

[Sameer Harish:]

Okay.

[Mike Kaminski:]

And then as it moves into the US, I think you’ll expand beyond just a Lasso and fixed curve to a Lasso and an ICE or a Lasso and other devices. Though it’ll be a much broader use of the product in the US.

[Sameer Harish:]

Okay. Got it. Thank you very much.

[Mike Kaminski:]

Thanks, Sameer.

[Operator:]

Thank you. And our final question is from the line of Tao Levy with Collins Stewart. Please go ahead.

[Mike Kaminski:]

Tao?

[Tao Levy:]

Hi, guys. Hear me okay?

[Mike Kaminski:]

Yeah, not a worry.

[Tao Levy:]

Okay, perfect. In terms of – and sorry, I was on a couple of calls, but in terms of the Epoch system orders in the quarter, there weren’t any or new Niobe systems?

[Mike Kaminski:]

Correct.

[Tao Levy:]

Correct. What – why do you think that is – what are the sites telling you about wanting to wait, needing to wait to place those orders?

[Mike Kaminski:]

I think everybody – let me qualify this, everybody was very positive that have come – that has visited St. Louis and seen the Epoch in use. I think everybody would like to see it in use in human clinical environment, not just in our lab. But I think it’s not a reflection of the acceptance. It’s kind of a reflection of kind of the proof of value over time. So I think everybody is very excited about what they see here. They’d like to see it in a clinical environment. Obviously, we hope to show them that in the next upcoming month or two depending on where they’re located. And then we’ll begin to look at the collection of the value statements as we go between Boston and HRS, so we can begin to promote that in the market.

[Tao Levy:]

Got you. Since some folks coming to visit are non-Niobe, non-Epoch sites, is that (inaudible) some of them, is that fair?

[Mike Kaminski:]

I’m not – you mean the upgrades? There is...

[Tao Levy:]

No, no, no, the clinicians that are expressing interest, the sites that are expressing interest, do they currently have a Niobe system and are looking to upgrade? You’ve got four upgrades this quarter...

[Mike Kaminski:]

So you could segment the group into two, right? Those who have a system that are looking to upgrade. We had four this quarter and we’ll anticipate that that will continue to be the case as we move through the year. They’ll continue to buy the upgrades. Then there is those who are looking to buy a system who haven’t had a system before. They’re going to look to see it in use before they make the final decision. Obviously, we hope to have that up and running this quarter in Q4.

[Tao Levy:]

Okay. Did you indicate on the call what the cost was for those upgrades?

[Mike Kaminski:]

The upgrade is $200,000 for the Epoch and about another $250,000 for Vdrive, right, and that’s without Odyssey. So in many cases, the ones that are coming in had Odyssey already. It’s about $0.5 million for both.

[Tao Levy:]

Okay. And then my last question, if you look at the systems that are getting pulled out of the backlog, 12, 13 systems this year including four this quarter, what’s the theme to these removals? I ought of felt that by last quarter, everything would have been trued up, so you can see another four come out. I was a little bit surprised.

[Mike Kaminski:]

Yeah. There were three, Tao, this quarter. It was $4 million, the three, because they all had Odysseys with them.

[Sam Duggan:]

Right

[Tao Levy:]

Okay.

[Mike Kaminski:]

Most of those are just delays, right?

[Sam Duggan:]

Yes.

[Mike Kaminski:]

So they’re just delays. I know some of those are – two of them are construction delays that are moving into 2013 and 2014, right?

[Tao Levy:]

Got you. Okay.

[Mike Kaminski:]

All right.

[Operator:]

And that does conclude the question-and-answer session. I would now like to turn the call back over to management for closing remarks.

[Mike Kaminski:]

Well. Thank you, everybody, for attending the call and we look forward to talking to you at the beginning of next year. And operator, if you would read back the call back information, we’d appreciate it.

[Operator:]

Ladies and gentlemen, this concludes the Stereotaxis third quarter 2011 financial results conference call. If you would like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 303-590-3030 with the access code of 4484029. We would like to thank you for your participation. You may now disconnect.