Stereotaxis, Inc. (STXS) Q1 2019 Earnings Report, Transcript and Summary

Good morning. Thank you for joining us for Stereotaxis First Quarter 2019 Earnings Conference Call. Certain statements during the conference call and question-and-answer period to follow may relate to future events, expectations and, as such, constitute forward-looking statements within the meaning of 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 executives make today. These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q. We assume no duty to update these statements. [Operator Instructions]. As a reminder, today's call is being recorded. It is now my pleasure to turn the conference floor over to your host, David Fischel, Chairman and CEO of Stereotaxis.

Thank you, Operator, and good morning, everyone. I'm taking today's call from the Heart Rhythm Society's annual conference in San Francisco. Yesterday evening, at the conference, we had the opportunity and pleasure of sharing publicly for the first time Stereotaxis' innovation, strategy and accomplishments. The positive reaction and energy was powerful. We shared these announcements this morning in press releases for the investment community. I want to focus today's call on describing these innovations as they represent the primary drivers of Stereotaxis' clinical, commercial and strategic transformation. I'm also particularly delighted that after two years of talking about innovation in a vague and general manner, we can tangibly showcase what we have been working on. For the last several earnings calls, I've consistently repeated a comment that Stereotaxis is advancing an innovation plan that is elegant, realistic and medically and commercially sound. I promised that the strategy will benefit patients, physicians and hospitals while also meaningfully improving Stereotaxis' financial opportunity and strategic positioning. These statements should all be amply supported by our announcements this morning. Stereotaxis has successfully developed a next-generation robotic system that is the first large leap forward in robotics magnetic navigation technology since Stereotaxis launched its first system in 2003. Stereotaxis has taken increased responsibility and is now directly offering customers a private label x-ray system that is tightly integrated with the robotic system. Stereotaxis is developing a next-generation magnetic catheter and has achieved tangible progress in development to date. And as we announced earlier this year, Stereotaxis implemented an open mapping API and mapping integration with Acutus as a way to broaden access to mapping ecosystems in the industry. We are advancing these innovations decisively and prudently. Our announcements today are not theoretical. They are very tangible and will positively impact the medical community and Stereotaxis in the coming quarters and years. Let me spend some time on each technology individually, starting with the robot system itself. The Niobe robotic magnetic navigation system was first introduced in 2003. It was science fiction to believe that magnetic fields could be harnessed to navigate catheters. But the dream was successfully translated into reality and the robotics system didn't just work, it worked well, allowing for catheter precision, stability, reach and safety that was otherwise unimaginable. Since then, for 16 years, there's been iterative improvements that simplified procedure set-up, provided some more aesthetic covers and addressed system responsiveness. These improvements were all iterative though. The core architecture, the magnets, the way they are moved and the superstructure around them remained stagnant. Stereotaxis Genesis, our next-generation robotic system, is a leap forward. It represents the future of robotics electrophysiology. Genesis is fundamentally a new beginning. We have completely redesigned the magnets and the way they are manipulated. We're providing the differentiated benefits of Niobe but in an architecture that is faster, smaller, lighter and more flexible. By using smaller magnets that rotate along their center of mass, we have a system that provides for instantaneous responsiveness. Across a broad range of navigational routine, the Genesis System was 70% to 80% faster than the current Niobe epic system. The entire system is significantly smaller and designed to improve the patient experience while on the operating table, provide physicians and nurses with greater access to the patient during the procedure and increase space in the labs for an enhanced work environment. The magnets are held on flexible and rugged robotic arms, greatly increasing the potential range of motion of the system. With appropriate regulatory approvals, this should allow to tighten the magnets in positions to generate stronger magnetic fields for increased catheter performance. It allows for wider x-ray angulation. It serves as a platform on which potential future ventures in new endovascular anatomies are possible. Across all aspects of the systems, motors, electronics, hardware and software, we have incorporated modern technology to support our overarching effort of improving performance, reliability and size. We are proud to have successfully achieved CE mark for the system, and it is now available for commercialization in Europe and certain other geographies. We will pursue additional regulatory clearances in the coming months to allow for a broader commercial launch. Our robotic system is not the only large capital equipment required in robotic electrophysiology lab. Stereotaxis' robotic technology has until now only been available in conjunction with x-ray systems provided by two large firms. This duopoly was not always a healthy ecosystem for our hospital customers. It led to duopoly pricing and to limited technological progress. X-ray has become less and less critical in electrophysiology, and that gave us confidence to pursue directly offering an advanced x-ray system to our hospital customers. We are proud to be able to offer the electrophysiology community, Stereotaxis Imaging Model S, an advanced x-ray system specifically designed for electrophysiology, tightly integrated with Genesis and also compatible with Niobe. This system was developed in collaboration with the Omega Medical Imaging, a U.S.-based x-ray manufacturer we are pleased to be working with. Stereotaxis Imaging is a step forward clinically. It incorporates the newest flat panel detector technology to support radiation reduction and clear image quality and includes a broad range of features, including beam collimation, adjustable frame rates, variable SID and more to support radiation reduction and good image quality. The primary benefits of Stereotaxis Imaging, though, are structural and strategic. The benefits of robotics in EP are significant and should be broadly accessible and affordable. By providing Genesis and Stereotaxis Imaging in a combined fashion, we have significantly reduced the cost of acquisition, the ongoing cost of ownership and the complexity of installation of a robotics electrophysiology practice. In the -- in a bundles fashion, we can now offer a full robotic EP practice for the price of a high-end biplane x-ray on its own. This is a type of affordability that no other robotic system in any surgical specialty offers. We will provide all the services, architectural planning, installation and ongoing servicing and maintenance of the technology in a bundled fashion, making the experience more efficient, pleasant and cost-effective. The size, weight and space requirements of the combined systems are dramatically less than Niobe with other x-rays, allowing for robotic EP lab to be installed in labs previously never considered possible. Genesis and Stereotaxis Imaging would -- has each individually been highly exciting. In combination, we have dramatically transformed the accessibility of robotics in electrophysiology. We're providing improved clinical performance with an improved customer experience and improved cost-effectiveness. These innovations will enable a return to a more robust effort to grow new system sales. It will support the replacement cycle at just our existing hospital customers of approximately $15 million annually. But more importantly, it's the first step towards a future in which every electrophysiology practice will have access to a robotic system. We still need to receive FDA clearance for the Genesis system, and there are still some work to be done to optimize the supply chain for various components as disciplined rollout initially in the EU will allow us to make sure that the first installs are perfect experiences for our physician and hospital customers. Subsequently, we will more aggressively pursue full commercialization. The other significant innovation announcement I want to discuss today is that Stereotaxis is developing a proprietary, next-generation magnetic ablation catheter. I'm highly excited by our efforts here and believe the impact of this innovation will be very significant as it advances towards clinical use. While catheter innovation is long overdue, I want to place this development in the right context. Hundreds of peer-reviewed publications have documented the clinical value of the existing magnetic ablation catheters being offered by Johnson & Johnson. The clinical outcomes, both safety and efficacy, from those publications are very positive, even when the magnetic catheter is compared to the most modern, manual catheters. The differentiated capabilities and profile of a magnetic catheter navigated by magnetic fields has intrinsic advantages of safety, stability, precision and reach. We are pursuing innovation not because the current offering is flawed but because we can take something great and make it that much better. We're still in the development stages. And so for a variety of reasons, the prudent thing is to keep my comments broad. We've entered into a collaboration with Osypka, one of the early pioneers in electrophysiology with significant expertise and impressive capabilities in catheter design and manufacturing. The next-generation magnetic ablation catheter is being developed with three primary design considerations: improving the capabilities and performance of the radiofrequency ablation tip, improving the quantity and placement of magnet material in the catheter to improve navigation efficiency and ensuring an open ecosystem design that can accommodate use within various mapping environments. There are additional terms of our collaboration that are not being disclosed but provides for attractive potential strategic options in the future. The benefits for patients and physicians of a more modern ablation catheter are significant. There are other financial and strategic benefits. Using just our existing global procedure volume, we estimate a proprietary ablation catheter generating over $20 million in incremental high-margin annual revenue for Stereotaxis. Using the existing market of cardiac ablation procedures, our own catheter increases our addressable global market opportunity by over $2 billion. The increased performance of the catheter should fuel increased utilization and market share gains. Increased magnetic material in the catheter tip may also serve to advance other meaningful innovations in the future. Development timelines are always difficult to estimate. But we've already developed initial prototypes of the catheter, and it is possible that we could enter clinical use and commercial launch in European geographies in the latter half of 2020. The clinical and regulatory task for the United States needs to be determined but will likely take an additional couple of years. I'm proud that we have been able to advance our various innovation initiatives in a financially prudent manner. We have a good team at Stereotaxis that is able to accomplish significant interdisciplinary technological achievements. We have established collaborations with a broad range of industry partners, some communicated publicly and several still confidential. We are highly excited by our progress to date and the path ahead of us. The innovations described today are only the initial act. We are committed to continuous innovation, and there's much more I know we can and will do in subsequent stages. It is a longer-term, multiyear strategy, but we will continue pushing forward in a decisive fashion to increase the capabilities of robotics and decrease the barriers to adoption of robotics. I'm confident that in the future, every EP lab will have a robotic system. Physicians will be focused on the important cognitive aspects of EP and will leave the mechanical aspects to the machine. Marty will now provide some commentary on our financial results, and then I will make a few financial comments before opening the call to Q&A.

Thanks, David, and good morning, everyone. Revenue for the first quarter of 2019 totaled $7 million. Recurring revenue for the quarter was $6.7 million consistent sequentially with the prior quarter and down from $7 million in the prior year first quarter. Due to new accounting guidance for the treatment of leases, we were required to record $200,000 in revenue and cost of goods sold related to the income and cost of lease space that we sublease to another tenant in our headquarters. Gross margin for the first quarter was approximately 80%. Excluding the impact of the lease accounting changes, gross margin would've been 83%, a slight increase from previous periods. Operating expenses in the first quarter were $7.7 million, up from $6.8 million in the prior year quarter due to a $1 million increased investment in R&D in the quarter. Operating loss and net loss in the first quarter were $2.1 million. Negative free cash flow for the quarter was $1.8 million compared to $2 million for the first quarter of 2018. Consistent with last year, the cash utilization in the first quarter of 2019 is higher than expected in any subsequent quarter this year. Stereotaxis expects to end 2019 with greater than $6 million in net cash and cash equivalents. At March 31, 2019, Stereotaxis had cash and cash equivalents of $9 million, no debt and $3.3 million in unused borrowing capacity on its revolving credit facility for a total net liquidity of $12.3 million. I will now hand the call back to David.

Thank you, Marty. On our last call, I made a comment providing broader context for Stereotaxis' efforts. I recognized that Stereotaxis was being judged by our quarterly financial results, have explained that this focus, while understandable, is missing the larger picture. Stereotaxis is being methodically rebuilt on a new foundational structure that is more strategically sound and financially attractive. This is a rebuilding that will take place over a multiyear period, but what we shared with you today should make clear that this rebuilding is tangible, impactful and already well underway. The primary goal of our effort is to better serve our patients and physician customers. We will accomplish this goal while placing Stereotaxis in a far more attractive strategic position with greater control of our own destiny and while more than doubling our annual revenue opportunity. While the exact timing of the financial impact of our innovation accomplishments is uncertain and precludes providing specific revenue guidance for 2019, we do see robust overall revenue growth returning to Stereotaxis in the coming quarters. We have a solid financial foundation to execute our strategic plans and can deliver on our commercial and innovation initiatives over the coming years and reach profitability without the need for additional financings. We are very excited for the year ahead of us. That concludes our prepared remarks. Operator, can you please open the line to questions?

[Operator Instructions]. Our first question comes from Josh Jennings with Cowen.

Congratulations on the announcement of the unveiling of Genesis. I was hoping to just start on your comments around the replacement cycle and if there's any incremental color that you can share at the symposium, where you unveiled Genesis to the clinical community at HRS last -- yesterday evening. It was a packed house. It seems like there's significant position demand. That's only one data point that I have though. But I imagine that your current installed base has been thirsty for a next-generation system for a decade, as you mentioned. But can you just talk about the level of demand you have in the customer base? And just any more details you can provide around that, that kind of $15 million annual replacement cycle tailwind that is now in place with the launch of Genesis?

Sure. So thanks again for joining us yesterday afternoon there. It was great to see you. And when I calculate the $15 million estimated annual replacement cycle, I really take the roughly 110 active robotic practices we have globally, assume a replacement cycle of approximately every 10 years, 12 years and then multiply that by the ASP that we expect to accomplish for replacement at existing labs and that takes me to $15 million a year. We are in a period where I know -- we have clear visibility into every labs, that is not a lab of ours, that is going to an x-ray replacement, and that would be the natural time for them to also change the robotic system. And so we have fairly good visibility into that and are very comfortable with that estimate of approximately, let's say, 10 systems being replaced each year. We have been -- we still don't have FDA approval. So obviously, we have not gone out and marketed any new systems. We're still kind of going to do that in a methodical fashion. We want to make sure, as I described on the call, that the planning for installation, that the supply chain is all worked up really well, that we've built the inventory. As we described yesterday, there was a lot of excitement from our existing installed base and from completely new physicians for our technology advancements and what we described at the presentation. I am -- I'm very comfortable that the replacement cycle will be real, and that as labs are being replaced, there will be practically no lab that will stay in Niobe lab going forward.

And maybe just a note, you're not going to give guidance on FDA approval timeline, et cetera. But just to be clear about the requirements for approval, this is a 510(k) pathways. Are there -- and what kind of data is required for approval? Is there anything that the FDA is requiring? Or what exactly is the hurdle that you need to clear in terms of your submissions?

So the Niobe System has always been a 510(k) that hasn't acquired human clinical data, and our understanding at this time is that the same will be true for Genesis. We're obviously not going to be changing our indications for use in any way at this point. Given that it is a more flexible platform for the future, there likely will be potential expansions of indication over time, but those won't happen upfront. And so we believe that the first approval will be kind of a relatively benign 510(k) pathway.

Great. And my last question is just the announcement about the development of the next-generation magnetic ablation catheter. It might be helpful just to understand why Osypka is the right partner for Stereotaxis. Maybe just -- I mean it sounds like they have a distinct history in the electrophysiology arena and with atrial fibrillation or just ablation catheters and RF generators. But any incremental color just in terms of why Osypka is the right partner for you guys would be great.

Sure. Thank you very much. So when we went -- started out on this venture, I knew that we wanted to advance like this. We started talking and working and visiting with a broad range of potential partners on this, and we were just very impressed with Osypka. We heard about them actually and we're introduced to them by several of our physician customers in Europe that are highly distinguished electrophysiologists and complimented them as a smaller, nimble company that had really, really high quality products. We visited them, and we're similarly impressed by the quality of their products and by the breadth and depth of their experience in catheter technology, broadly and specifically in electrophysiology. And then whenever you work with a company on a big venture like this, you want to have an alignment of vision and mind share and a view of how the world should evolve. And gratefully, the leadership there and myself got together really well, and we see the similar opportunity. And so it has been fantastic collaboration to date, and we look forward to advancing forward together.

[Operator Instructions]. The next question comes from Chris Battista [ph].

With respect to the prepared comments, I think you threw a number of $20 million in there. Could you just repeat what that was around? I'm sorry I missed it.

Sure. So I mentioned that if you look at just our existing global procedure volumes and a likely kind of price of ablation catheter, the incremental recurring revenue on an annual basis for Stereotaxis from a proprietary ablation catheter would be over $20 million annually. And we also mentioned that our global market opportunity would be increased by over $2 billion, given the existing cardiac ablation market and given, again, a proprietary ablation catheter.

Great. And then just to be clear, you said that I think latter half of 2020 for European approval and then you mentioned a couple of years for U.S. Are you talking about a couple of years from today or beyond European approval?

As you know, both development timelines and clinical timelines, you have to have wide bands around them. So I don't want to get too much into timelines at this point, given that it's -- we're still in the development phase. And while we want to advance things rapidly and in a rapid fashion, we also want to make sure that whatever we bring to market is a great experience for patients and for physicians. So there's that -- going to be that balance in play. I think where -- given where we stand today and given what we have seen of the prototypes and how we've been improving them in a fairly rapid fashion, it seems reasonable that we would be in clinical and commercial use at the end of next year in Europe. And then the U.S. clinical and regulatory path will have to be determined. That is typically a PMA process, and so having two additional years for the clinical and regulatory process would be the likely timeline. But again, that is -- it's a little bit early in detailing an exact timeline for that. My assumption as well is that there will be a type of halo effect on overall physician excitement and engagement with Stereotaxis as this enters the clinic, that you don't necessarily need to see the full -- you don't necessarily need to wait until full approval to have some impact on the way the physician community engages with you.

Okay. Last question for me. I think you mentioned that the new Genesis system and its architecture may provide a better opportunity for new procedures outside of Stereotaxis' core focus today. Can you remind us what procedures that Stereotaxis currently has 510(k) clearance on and which indication you see as the most likely next area of focus for the company?

Yes. So right now, we have fairly broad approval for navigation of magnetic interventional devices in the vascular system, and the vascular system obviously kind of reaches from the heights in the head till the toes. Where we think about where would be the most appropriate place for us to advance robotics in endovascular surgery, we think about any place where millimeter precision and control of a catheter's distal tip is desirable. And there are -- or where reach of a catheter to areas where previously manual catheters have very difficult times reaching would be beneficial. And so there are a broad range of applications where that would be exciting. I think things like neurovascular would be interesting. We've obviously seen that the industry has become much more excited about that. Some pulmonary indications. There are areas in the peripheral vascular that could be exciting. And so -- and the Genesis system has a benefit of having much more flexible robotic arms, which again can allow for a broader positioning of magnets in different positions, and that enhances our ability to try to approach some of those anatomies. Again, this will be kind of a staged approach. We want to make sure you also have the right interventional devices to complement the robotic system. But that is our vision for the future. As I've described on previous calls, I do view Stereotaxis' future as the intuitive surgery of endovascular surgery.

That if I were to narrow it down, would neurovascular be the -- I mean you mentioned neurovascular, but obviously a broader opportunity set, which is great to hear. But if you had to pick one, what -- is it neurovascular? Is that the place where you see the quickest opportunity set?

We haven't made any terminal determination on which one to pursue. If you ask me just from my personal opinion, I've seen that the neurovascular space has blossomed in terms of interventional approaches for treating stroke. And so I think it is a highly attractive field. It is one where still the vast majority of stroke patients do not get treated with interventional approaches largely because of the complexity of going more deeper into the brain's vascular system with conventional approaches. So yes, there probably is a very significant opportunity there.

[Operator Instructions]. There are currently no additional questioners at this time.

Okay. Thank you for your questions and for your continued support and interest in Stereotaxis. We're excited for the path ahead of us. If you're in San Francisco, we welcome you to visit our booth at HRS over the next two days. And if you can't make it physically, we'll be sharing updates from the conference on our social media pages, which we encourage you to follow. We look forward to working hard on your behalf and speaking again in August. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.