Stereotaxis, Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good day and welcome to the Stereotaxis’ Third Quarter 2014 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jim Byers with MKR Group. Please go ahead, sir.

[Jim Byers:]

Thank you, operator and good afternoon everyone. Thank you for joining us this afternoon for the Stereotaxis conference call and webcast to review the financial results for its 2014 third quarter ended on September 30, 2014. Before we get started, we would like to remind you that during the course of this conference call, the Company might make projections and other forward-looking statements regarding future events or the future financial performance of the Company. These include 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, 2013, the quarterly Form 10-Q filings and the Form 8-K filed today. 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 the Company’s control. In addition, these orders and commitments may be revised, modified or cancelled, either by their expressed terms as a result of negotiations or by project changes or delays. Now with that said, I would like to turn the call over to Bill Mills, Chairman and CEO of Stereotaxis.

[William C. Mills:]

Thank you, Jim. Good day and thank you for joining us for a review of our third quarter 2014 performance. With me on the call today is Marty Stammer our CFO. Following our prepared remarks, we will open up the call to questions. Overall we’re pleased with our progress in the third quarter, by quarter end we had accomplished several important milestones in major global markets and expanded our installed base with the completion of five new Niobe ES system deployments. These installs contributed to an 89% sequential improvement in system revenue and have already demonstrated a strong commitment to active utilization. Procedures grew year-over-year and our newest product enhancement Ablation History continued to improve operator performance. We also further narrowed the gap to breakeven through stedfast expense management, which resulted in our lowest reported operating expenses $7.7 million since our IPO in 2004. Our team is fully committed to strengthening the fundamental drivers of our business, brand expansion in key global markets clinical adoptions, while exercising physical discipline. With respect to global markets our development efforts in Japan are off to a solid start. In September, we secured our first order for the Niobe ES system from a leading hospital in Osaka, which will be fully reflected in revenue results following shipment and instillation and is expected to be complete in the first quarter of 2015. The hospital plans to situate the Niobe lab in a newly constructed and state-of-the-art facility describing the project as a commitment to safer, better quality services through the latest innovations. At the same time, we established a business office in central Tokyo under the leadership of a new Japan business director, bringing 20-years or experience in sales, marketing and organizational management for Japan based operations of global medical technology companies. The business director will guide our near-term priorities along side our in country distributors while developing long-term market goals to drive growth. Consistent with these proprieties, we are focused on closing additional sales opportunities in Japan expanding our sales funnel and establishing Niobe reference sites to build clinical evidenced and improving hospital reimbursement related to the Stereotaxis’ platform, part of which includes working toward additional product approval. In the third quarter, we submitted an application for our Odyssey solution in the Niobe lab to the pharmaceuticals and medical devices agency, Japan’s equivalent to the U.S. Food and Drug Administration. We are also preparing for regulatory submission of our Vdrive system. When we look at the worldwide electrophysiology market, we see North America Europe China and Japan performing 90% of all EP procedures. Establishing a foothold in Japan has been a critical step in our global expansion into these larger market geographies. And we believe there is tremendous opportunity in Japan for the unique capabilities of our robotic navigation platform. In the U.S., we received FDA clearance of our Vdrive system with V-Loop Variable Loop Catheter Manipulator, the second Vdrive product to enter the U.S. market. We anticipate actions soon on our V-CAS catheter advancement system which was submitted for review in June. With the launch of V-Loop in addition to V-Sono U.S. physicians can now realize the potential of the Vdrive Duo robotic navigation system which can eliminate manual manipulation of the two most commonly repositioned diagnostic tools used during ablations procedures Variable Loop and ICE catheters. Also during the quarter we installed two new Niobe ES Systems in the U.S., both serving the greater Denver area and representing our first programs in the state of Colorado. These systems have the opportunity to set a new standard for complex ablations among a population of approximately 3 million residences. Our remaining installs in the third quarter were completed in our EMEA region and include the largest EP site in Russia, located in the third most populous city in Russia; the hospital has the highest EP ablation throughput in Russia about 1700 each year and is active in clinical research and associated international publications. Since launch in September, the Niobe ES lab has averaged 2.5 procedures per day and has been featured on major television networks, eager to illuminate the story of the new unique treatment option now available in Russia. This site is a great example of what we hope to achieve with each launch of Niobe System, a program that not only hits the ground rhyme, but maintains a steady pace of utilization. We are well aware of the importance of an effective launch process and have implemented new training techniques in clinical resources to ensure a strong start at each new account. Likewise, we've become more adapt to targeting the most significant accounts and triaging the adoption issues by understanding exactly where the physician is in the learning pathway, how the platform does and does not resonate with him or her and addressing any specific concerns. We also continue to leverage the experiences of proficient users in communicating and demonstrating the benefits of our system in particular patient cases. A worldwide procedure volume while down 6% on a sequential basis primarily due to the annual summer holidays in Europe increased 2% year-over-year from the same quarter last year. Just as we are focusing our energies on top global markets and select accounts in each, we are committed to aligning our resources with technology advancements that we believe will deliver long-term value to our customers and ultimately our shareholders. Once such innovation, Ablation History continues to demonstrate a positive impact on procedure efficiency as well as some unexpected positive results. Utilized in more than 1,300 procedures to-date, physicians have seen a significant improvement in their ability to track therapy delivered during EP procedures with Ablation History. Rather than relying on a discrete point-by-point graphic representation of lesion-related data, as is the case with existing approaches Ablation History takes advantage of data visualization techniques to render an intuitively accessible continuous display of the power time parameters used in characterizing ablation intensity. While the intent is to assist physicians in identifying gaps and lesion lines, many physicians are claiming that they are achieving first pass isolation of the pulmonary veins more easily and reliably with Ablation History. In other words, rather than merely highlighting potential gaps it is helping to prevent gaps. In the words of one physician “By relying on the continuous and consistent contact that Niobe creates, Ablation History provides meet the information I need to maximize the efficiency of ablation.” This past week, we released an enhanced version of Ablation History that allows physicians to more preciously control the display of watt seconds delivered. The next step is a clinical study on the watt seconds required to most effectively treat different locations of the heart anatomy. With that I would like to turn the call over to Marty to provide details of our third quarter 2014 financial results.

[Martin C. Stammer:]

Thanks Bill and good afternoon everyone. Revenue in the third quarter was $8.9 million, down 18% from $10.8 million in the year ago third quarter, but up 10% sequentially from $8 million in the second quarter of 2014. Did some revenue of $2.2 million compared to $4.4 million in the third quarter of 2013 and $1.2 million in the second of this year. During the third quarter, we recognized revenue of $900,000 on five Niobe ES system installation and one Niobe ES system upgrade, $1.1 million in Odyssey Solution sale and $200,000 in Vdrive system sales. New capital orders totaled $1.5 million compared to $600,000 in the second quarter and $1.8 million in the year ago third quarter. Orders included one Niobe ES system, an ES system upgrade and two Odyssey Solutions. At quarter end, our active backlog was $6 million. Recurring revenue was $6.7 million in the quarter, compared to $6.4 million in the 2013 third quarter and $6.9 million in the 2014 second quarter. We believe our new higher levels of recurring revenue are sustainable with continued progress in driving utilization and maintaining strong service revenue. In the third quarter 2014, gross was $6.5 million or 73.6% of revenue, compared to $7.3 million, or 67.7% of revenue, in the year-ago quarter. Operating expenses in the third quarter were $7.7 million, compared to $8.4 million in the year-ago period and 8% improvement and our lowest reported operating expenses in ten-years. As Bill indicated we are mindful of the strategic importance of every economic decision which has created a culture of expense discipline and focused execution with the goal of continuing to narrow operating losses and generate the best return for our shareholders. Operating loss in the third quarter was $1.2 million compared to $1.1 million in the third quarter of 2013. Interest expense was $800,000 compared to $7.6 million in the 2013 third quarter, which was primarily related to a one-time non-cash expense on capital transactions in August of 2013. Net income for the third quarter of 2014 was $23,000 or less than $0.01 per share compared to a net loss of $56.9 million, or $ 4.49 per share reported for the third quarter of 2013. The 2013 third quarter included a non-cash mark-to-market adjustment and accelerated amortization of convertible debt discount as a result of transactions with convertible note holders and other equity investors. Excluding this charge, the net loss for the 2013 third quarter would have been $ 3.3 million, or $0.26 per share. Excluding mark-to-market warrant revaluation, the net loss for 2014 third quarter would have been $2.0 million, or $0.10 per share. Weighted average diluted shares outstanding for the third quarters of 2014 and 2013 totaled 20.5 million and 12.7 million, respectively. On September 30, 2014 we had cash and cash equivalents of $8.7 million, compared to $10.6 million on June 30, 2014. In the third quarter cash burn was $2.3 million, compared to $1.6 million in the prior year quarter. During the quarter, we raised $500,000 through our previously announced ATM facility. At quarter end total debt was $18.4 million related to HealthCare Royalty Partners long-term debt. I will now hand the call back to Bill.

[William C. Mills:]

Thanks Marty. As we move towards the end of 2014 we are pleased with the progress of our activities in Japan and with our opportunities of the Vdrive system to the U.S. Our global network is expanding along with the clinical evidence accumulating around our path breaking solutions for the EP market. We are using every tool at our disposable to more fully engage physicians on a superior performance of our platform. We will continue to enhance the efficacy, efficiency and usability of our technology while working to achieve profitability and position the company for future growth. Now, we will open the call up to your questions. Operator.

[Operator:]

(Operator Instructions) And we do have our first question from Suraj Kalia with Northland Securities.

[Suraj Kalia:]

Gentlemen, good afternoon, congrats on the quarter.

[Martin C. Stammer:]

Thank you Suraj, good afternoon.

[Suraj Kalia:]

So Bill I have a few directional questions if I may. Now that you will have a business director in Japan in agreements with Hokushin and Medix, I know last quarter you had talked about I remember correctly Japan being almost 40% of the U.S. procedure volume. What are the initial feedbacks you are getting and I’m not specifically asking for guidance, I guess when we look out the next four, six quarters what are your people on the ground distributors and direct telling you is “achievable?”

[William C. Mills:]

Suraj, it’s a good question, but one that I’m afraid we don’t yet have enough information to answer. Our installation won’t occur for a short while; it’s sufficed to say at this point in time the unit is not installed and not operating. So we don’t yet have cases being performed and as a consequence can make no estimation as to the velocity of the case volume that we’re likely to see and we really aren’t in a position to ask for their opinions. Our strategy though is to try to address this market by establishing – we are looking at two exceptionally well situated facilities that can serve as reference sites, centers of excellence to establish the paradigm in Japan as to how an enlightened user approaches the prospect of using Niobe in their complex case and we are focusing our energies on those two accounts. We’ve announced one of them obviously we’ll hopefully be sharing with you further progress as we go forward and situating those two accounts, but our approach here is to make certain that centers of excellent quality, whose opinions will be respected and taken onboard by other potential users in the community in Japan will be well situated and well supported to have favorable case experience as they begin their operations and move forward into a sense of equilibrium. When we get into that part of the experience curve with those folks, I think we and they both will be able to make better estimates or really any informed estimates at that point of what sort of a trajectory we might expect to see from those facilities, but we do know as you pointed out that although Japan is a substantial fraction, represents a substantial fraction of the activity that the U.S. represents in terms of case volume, yet a site is a site and there are natural limits to utilization in a site, because you can only use it for the time that it is physically available to you. So with luck what we’ll find is that we can approach the kind of utilization rates that I mentioned we were very pleased to see in our recent startup in Russia, where we as I think I said more colloquially hit the ground rhyme and sustained these early high utilization rates, which really approach the ceiling of throughput in a facility doing procedures of that sort. So we’re hoping to provide the same level of support in Japan and as a consequence have the same very favorable experience when they do in fact start performing cases, which won’t be too long from now.

[Suraj Kalia:]

Fair enough. Bill, I know it’s just been few weeks since you have received the Vdrive and V-Loop clearance. Any color you can shed from the field, in terms of utilization, in terms of clinical feedback, how it’s been perceived in the field?

[William C. Mills:]

Well, I guess the first thing I would say Suraj is that it works, I mean you know people those folks whose workflow benefits from having that capability either by itself or in tandem with the capacity to manipulate ICE catheters, I think are entirely satisfied with the workability and usability of the device and on that option. The issue in every account will be does their workflow require or otherwise suggest that they would benefit from this type of additional or accessory capability, some workflow will and some won’t, some clinicians will rely very heavily on a loop device as you know and some may issue those devices in favor of other approaches and strategies. So in each case, this is going to be an account-by-account, workflow-by-workflow, really operator-by-operator at some level kind of an analysis, but I guess the only thing that we’re in a position to tell you today is based on the limited experience that we've had to-date, which will grow of course as we look forward. Is that it works as advertised, it does what its intended to do and it provides that augmentation of workflow that will be valuable for many, but certainly not for all. It depends on the strategies that they employ to conduct their cases.

[Suraj Kalia:]

Fair enough. And last two from my side and I will hop back in queue. One for you Bill and one for Marty, so Bill just any color from a housekeeping perspective on procedure volume, let’s say over the next two or three quarters. I presume this quarter was influenced by seasonality and Marty a question for you, just in terms of looking out, how do you see gross margins that was a pretty nice gross margin this quarter, I’m curious any color you could shed moving out couple of quarters and I’m not specifically asking for guidance, just directional and improvements so on and so forth. Thanking for taking my questions.

[Martin C. Stammer:]

Sure.

[William C. Mills:]

You are welcome Suraj, maybe Marty can jump on the margin question, first, we could come back to procedure volume then.

[Martin C. Stammer:]

Yes, so yes you are right. We are happy with the gross margins right around 73%, I would expect that to continue going forward, the biggest determinant is going to be the distribution of mix between our recurring revenue and our system revenue. Traditionally, our recurring revenue has been in the 85% range and our system has been in the 50% range. So in a quarter like this, we do see it north of 70%, if were to see a greater percentage of our revenue and system revenue that could bring it down slightly, but we would still expect it to be at least in the high 60% numbers blended.

[William C. Mills:]

Yes. So we’re very pleased with the margin mix, we will as we expand system sales in any given quarter it will attenuate slightly that overall margin, but nevertheless I think we remain at very healthy levels regardless of the mix, but the mix does move around the number on us a little bit on the aggregate. Suraj on the procedure volume trajectory, I would say first of all you are absolutely correct by noting the seasonality. The one true seasonality feature that is quite macroscopic I think in our calendar year experience each year, which is driven by the fact that there are significant holidays taken in Europe in the summer. And we experience this each year to those of us in the states that we have to continue to remind ourselves that that holiday period is considerable over there and it absolutely does impact our volumes and because we have quite a considerable level of activity in Europe we do experience that seasonality. So the third quarter inevitably for us at the procedure level is impacted by that seasonality. I would say that is the most macroscopic and probably only remarkable element of seasonality that we experience. There maybe other elements that relate to Christmas and New Years, I’m sorry Christmas and Thanksgiving perhaps, but those are relatively modest compared to the one that we are describing. I think that underlying all that though, the trajectory is encouraging to us. Our procedure volumes are driven by increased utilization in existing accounts, needless to say, but they are also at the same time impacted by our new installations which are typically associated with early enthusiastic adoption and if we can continue the pattern that we were noting prevailed in Russia through our other new installations, those two will contribute in very positive ways to our procedure trajectory. So we are feeling quite encouraged by that. I think we’re feeling encouraged by both sides of that equation, both the new installs as well as the existing sites. So without giving specific guidance, I would say that we are directionally encouraged by that and gratified by the contribution to our margin that that mix of business represents for us.

[Suraj Kalia:]

Thank you gentlemen. Congrats on the progress.

[William C. Mills:]

Thank you Suraj. We look forward to telling you about more of it next quarter.

[Operator:]

(Operator Instructions) And I see no further questions in the queue at this time. So I would like to turn the call back to Bill Mills for any closing remarks.

[William C. Mills:]

Well thank you operator and thanks to each of you for your continued support. We wish you well in the final weeks of 2014 and very much look forward to speaking with you again in the New Year. Have a good evening or good afternoon as the case maybe.

[Operator:]

Once again that does conclude today’s call. We appreciate your participation.