David Fischel - Chairman and CEO Marty Stammer - CFO

Good morning. Thank you for joining us for the Stereotaxis Third Quarter 2018 Earnings Call. Certain statements during the call and question-and-answer session may relate to future events, expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the company in the future to be materially different from the statements that the company's key executives may make today. These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q. We assume no duty to update these statements. [Operator Instructions] As a reminder, today's call is being recorded. It is now my pleasure to turn the floor over to your host, Mr. David Fischel, Chairman and CEO of Stereotaxis.

Thank you, operator. Good morning, everyone. I'm joined today by Marty Stammer, our Chief Financial Officer. We continue to make progress on multiple fronts at Stereotaxis. Our primary focus is executing a robust innovation strategy and developing the commercial infrastructure to support improved performance. These are both being advanced, while maintaining financial discipline. Innovation and collaboration is crucial for a company like Stereotaxis that stands at the cutting edge of technology in the dynamic medical field of electrophysiology. We have reinvigorated Stereotaxis’s commitment to innovation and collaboration and are advancing an innovation plan that is elegant, realistic and medically and commercially sound. As described previously, our innovation plan addresses the five core technologies utilized in a robotic cardiac ablation procedure. Our robotic magnetic system, the magnetic ablation catheter, software that allows for intuitive navigation, the cardiac mapping system and the fluoroscopy system. There is tangible progress on each of these five technologies. The three guiding goals of our innovation plan are improving patient care, improving physician choice and improving the availability of our technology. The right innovation plan can provide these benefits to patients, physicians and hospitals, while also improving Stereotaxis’s opportunity. Our innovation plan will more than double the annual revenue opportunity for Stereotaxis in just our existing commercial footprint of active hospital customers and should support meaningful growth in our commercial footprint. In the second quarter, we announced an extension to our development alliance and supply agreement with Johnson and Johnson's Biosense Webster and a new collaboration with Acutus Medical, a San Diego based private company with an innovative cardiac mapping system. The engineering effort to integrate with Acutus is advancing well and last week we performed our first animal study using the integrated systems. While we have provided visibility into the focus and goals of our broader…

Thanks, David and good morning, everyone. Revenue for the third quarter of 2018 totaled $7.6 million. Recurring revenue was $6.8 million in the third quarter, up 4% from $6.5 million in the prior quarter. Recurring revenue for the first nine months of 2018 of $21 million was up 5% from the first nine months of 2017. System revenue in the third quarter was $700,000, down from $1.6 million in the prior year quarter. System revenue in the prior year quarter primarily reflected the shipment of a Niobe system to an international distributor. Gross margin in the quarter was $5.9 million or 78% of revenue compared to $6.2 million and 76% of revenue in the third quarter of 2017. Operating expenses in the third quarter were $6 million, down from $6.1 million in the prior year quarter. Operating expenses for the first nine months of the year were $19.7 million, down from $20.4 million during the same period of 2017. The change in operating expenses primarily reflects increased investment in research and development, partially offset by decreased general and administrative expenses. Operating loss and net loss in the third quarter were $100,000. Negative free cash flow in the third quarter was $400,000 compared to $600,000 in the year ago third quarter. Negative free cash flow for the first 9 months of 2018 was $2 million compared to $3.9 million in the first nine months of 2017. At September 30, 2018, Stereotaxis had cash and cash equivalents of $11.6 million, no debt and $3.2 million in unused borrowing capacity on its revolving credit facility for a total net liquidity of $14.8 million. I will now hand the call back to David.

Thank you, Marty. As detailed in our press release, we look forward to closing out 2018 with record recurring revenue of approximately $28 million. We are working hard to ensure 2019 sets up to be an exciting year of overall growth. We are comfortable that our balance sheet will allow us to deliver on our commercial and innovation initiatives over the coming years and reach profitability without the need for additional financings. That concludes our prepared remarks. Operator, can you please open the line to questions?

[Operator Instructions] We’ll first go to John Morganelli [ph], private investor.

I just wanted to commend the leadership of the company again for keeping things moving. Just one question real quick and that was, in the last call, that was mentioned I think by David as to attempts to get on NASDAQ and now that’s a stock has been holding steady above a dollar, what are the plans with respect to trying to get on the NASDAQ.

Sure. Hi. Good morning, John and happy birthday. So actually uplift on NASDAQ, I think there might be some confusion because I have heard others speaking about a $1 stock price and the $1 stock price is really to a, I think, if you're on NASDAQ, to remain listed on NASDAQ. In order to uplift the NASDAQ, we have to have a stock price of $2 a share for a period of several -- a few weeks, several weeks or we have to have a stock price of $3 a share for a few days. And so I think kind of the strategy and plan right now is exactly, as I’ve described before, we are not planning to do anything like a reverse stock split in the near term. If we would do so, it would be paired with a very positive news, but kind of really right now, our goal is to have the stock price naturally get to those levels where we could uplift.

All right. We’ll next to JR Grand, also a private investor.

I have a lot of friends who are actually using this product, incredible excited and incredibly excited about this -- the machines what you guys are doing it. The problem is that the stocks high was like 6 and it's right now trading at 1.5 around, what are the chances of somebody taking over, what I heard that some of these companies, which is -- there's a possibility of taking all these -- since the stock price is 6 at its high.

So, a few kind of comments on that. One is, I mean, at least for the last couple of years, the stock price has not been at 6 -- the stock price has generally been much lower. Stereotaxis has a long history and so if you go far back into the history, you're right, the stock price has been at 6 and has been higher than that, even kind of over the previous years. Kind of, in terms of what you seem to be worried about or alluding to, I guess, that's not something that we are concerned about. We have kind of a shareholder base, which is committed to the long term success of Stereotaxis. We have a plan that we feel is elegant and that improves the company fundamentally. And so really our focus is on executing on our strategy and turning Stereotaxis into a successful company. I don't kind of -- I don't think I share the same concern that you have.

[Operator Instructions] We’ll next go to Mike Hammer.

Hey, I'm excited about the news and excited about your commitment to the goals and not stated in there was really your Investor Relations and I actually, as an investor, I'm more excited that you're committed to the product and developing that than the share price. So kudos to you guys for working hard at it. I guess in your remarks, David, the one thing that just kind of flagged me just a little bit was your comments on something around transparency. I don't know if that was it, could you give me some clarification on that. Was that a greater commitment to more transparency with things that are happening in the company and sales, those kind of things? Just some clarification on that.

Sure. So first on your first comment about kind of a commitment to kind of the fundamental efforts versus stock price, we're committed to what we can control. So I can't control the stock price, I can control or try to impact our fundamental performance. And so that's exactly like you say, that's where we put our focus on. In terms of the transparency, that really was a comment that was tied to our innovation efforts. So, I know, we have described our innovation strategy in broader strokes in terms of the focus of it, the types of core technologies that are used in a robotic ablation procedure and kind of -- and that we're focusing on those five from an R&D perspective and collaboration perspective and have also described the guiding goals of that innovation strategy in terms of improving patient care, improving physician choice and improving the availability of the technology. And so it's kind of -- that is a broader, kind of broad stroke of the strategy. I understand that you and hospitals and physicians and internal team here, those that aren't kind of based at headquarters would like to probably know more of that strategy at some point and so I think that the right timing is likely going to be in the first half of 2019 to be able to share much more.

All right. We’ll next go to Chris Baster.

First off, congrats on the continued rise in recurring revenues. I think it's very encouraging to see the company remains on plan to achieve record recurring revenues this year. And with that foundation in place of this high margin revenue, any growth in system sales will obviously be a meaningful catalyst, so I'm looking forward to 2018. With that being said, can you give more color, you made David the comment about doubling the potential opportunity, can you put some color around that.

So I would prefer not to provide much more color. I think that's the type of color that when we present innovation strategy in the first half of 2019 will become much clearer. What I did say was that, if you look again at the innovation strategy that is focused on those five core technologies, as that comes out and it might not all come out at exactly the same time, so it might come out in kind of a stepwise approach, if you look at just our existing customer base, in terms of the number of active sites we have and the number of procedures that are being performed robotically each year, just among that existing footprint, we would have revenue that is more than double where we are today. And so that was kind of what the comment was meant to describe and again you can look at the five core technologies that doesn't mean that we capture all the revenue that happens in a procedure. Oftentimes, in cardiac ablation procedures, there's many thousands of dollars, high single digit thousands or even $10,000 worth of disposables being sold per case. I'm not at all suggesting that we're going to be owning every aspect of a procedure, but again as we kind of improve our product offering and start to participate in different ways, we will have an opportunity that’s more than double our current revenues, just at the existing footprint.

So I know you don't want to disclose too much, but can we -- should we be thinking about this innovation plan as potentially driving a replacement cycle within the installed base you have as well as driving new system sales.

So we have talked -- I think I mentioned a few earnings calls ago that when I step back and look at some of these kind of glaring holes as something like a replacement cycle is an obvious one where every capital equipment company I know of has a replacement cycle. The fact that we have 100 active customers, approximately 100, a little bit over 100 active hospital customers and no replacement cycle is strange and so it would make sense as that’s kind of a whole or kind of a strange observation that we would be thinking to address. But that by itself wouldn't account for a doubling of our market opportunity that might contribute to that, that wouldn't address that by itself.

[Operator Instructions] All right. We did have another question queue up. We’ll take that from Chris Deane.

I guess I just had a more of a curiosity question. Do you guys see any effect on tariffs, affecting your margins or anything like that? And I had a separate question.

I can jump in on that one. At this point, we haven't seen much on the COGS sides. So on the supply side, we don't have too many vendors that are based in areas that are being hit by tariffs. On the sales side, we are seeing a little bit more in the regions, especially within APAC where the tariffs are impacting us, but as a percentage of our total business, that's a pretty small portion.

We did have probably in the low tens of thousands of dollars of kind of additional taxes or fees that we had to pay. So there's some hit. So again, it's not huge, but it wasn't particularly fun to pay last quarter.

Right. Is that scheduled to increase, do you know or?

No. I think last quarter was fairly representative of what we would expect.

Yeah. I think it's a little bit hard to forecast what's going to be in the future, but we don't anticipate any changes at this point in time.

And I was just kind of curious from a sales -- from a system sales perspective, like what sort of drivers are out there to get a hospital to pay out this big chunk of money? Is there expiring equipment that helps push them into the decision or do you primarily just rely on the superiority of the machine and maybe a few key doctors' recommendations?

Sure. So when you talk about expiry of a system, do you mean that another technology is expiring and that's why they would adopt a robotic practice or what exactly?

Yeah.

We're a very differentiated technology. So there's not -- we're not used as a replacement for another technology that they used to have that’s expiring. We really stand kind of alone in terms of a very different approach to medicine in this field and what usually starts to drive the interest is physician interest. So there's a clinical interest that is aroused, it's aroused because physicians visit a hospital, but does have the technology and they suddenly see this very new and innovative way to move catheters and they see the clinical data and that strokes their interest or for example I described the fellowship, the robotics fellowship program that we started earlier this year and that has really kind of taken hold. I am fairly confident that over time as many of these fellows graduate, that will seed the world with many younger electrophysiologists who have an appreciation for the technology and that might be supportive of new system placements, but it really starts with that strong clinical support and then it's up to us working with physicians who desire the product to work through the administrative process, which oftentimes is the very kind of difficult long cumbersome effort to get a natural system sale to take place and that's where kind of the more that we can reduce the complexity and the barriers to administrative approvals of these purchases, I think the better off and the more successful we will be in terms of our results.

[Operator Instructions] Okay. It looks like we have no further questions at this time. So I’d like to turn it back to our speakers for any additional or closing remarks.

Okay. Thank you all for your many questions and good questions. Thank you also for your continued support and interest in Stereotaxis. We wish you a good end to the year and we look forward to working hard in your behalf over the coming months and speaking again in 2019.

That does conclude today's conference. We thank everyone again for their participation.