Stereotaxis, Inc. (STXS) Q3 2019 Earnings Report, Transcript and Summary

Good morning. Thank you for joining us for the Stereotaxis Third Quarter 2019 Earnings Conference Call. Certain statements during the conference call and the 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 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 and 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, David Fischel, Chairman and CEO of Stereotaxis. Please go ahead.

Thank you, operator, and good morning, everyone. I'm joined today by Kim Peery, our Chief Financial Officer. The last several months were productive and energetic as we made significant progress in reengagement with the capital markets, in our commercial growth strategy and in innovation and industry collaboration. I'll briefly discuss each of these 3 topics in today's prepared remarks, after which Kim will discuss our financial performance, and we will open the line to questions. A highlight of the third quarter was our uplisting to the New York Stock Exchange in September and the $25 million equity financing announced in August. These were 2 significant steps forward in our effort to reengage with the capital markets and to reintroduce Stereotaxis into the community of high-technology, publicly traded companies. They reflect increased awareness and confidence in Stereotaxis' clinical value and growth opportunity. On our last call, I provided additional commentary on how our strong financial position will allow us to accelerate near-term growth activities and invest in longer-term drivers of value. I also reiterated our commitment to operating Stereotaxis prudently and deploying our financial strength in a methodical, thoughtful fashion. For several quarters, I have fielded investor questions and skepticism on our ability to uplist without a reverse stock split. I'm pleased that we were able to uplist onto the NYSE American exchange without needing to execute a reverse split as promised. Our approach to reengaging with the capital markets and driving progress in a natural methodical fashion is reflective of a broader philosophy for all aspects of the company. The broad commercial launch of our next-generation Genesis robotics system, combined with our tightly integrated proprietary fluoroscope, will serve as the first significant wave in our commercial growth strategy. We continue to methodically advance on multiple fronts towards broad commercialization. There are 3 primary areas here where we are investing significant effort: the regulatory process, supply chain optimization and engagement with customers. We are working on all 3 in tandem and are rapidly making tangible progress on each. On the regulatory side, the Genesis system is cleared for commercialization in Europe, and I commented on our last call that we were pursuing a two stage submission process with the FDA. We received FDA clearance for the first 510(k) application in September and recently submitted the second 510(k) application for the Genesis system. These submissions were significant undertakings. We appreciate FDA's constructive engagement, and I want to acknowledge the Stereotaxis team for advancing in such a professional and efficient fashion. From a supply chain perspective, the Genesis system incorporates over 1,000 components from over 100 suppliers. We have been working through the process of building inventory for commercial systems and ensuring that all key suppliers have the capacity to deliver sufficient quantities of components in a timely fashion. There's still work to be done here, but I'm pleased with our progress. Commercially, in Europe, we have begun engaging with existing hospital customers on replacement projects and with new potential customers on building robotic EP labs. In the U.S., we are ensuring that customers are aware of our innovation strategy so that they can plan accordingly. The purchase of a robotic system by a hospital is a lengthy process requiring multiple layers of hospital approval, extensive contracts and the coordination of construction schedules with local contractors. In Europe, there is often the added layer of a public tender submission. I'm pleased with the activity taking place at multiple hospitals. There are now public tenders that have been submitted for robotic systems in Europe. We are in meaningful, advanced discussions with other hospitals. I'm confident that in the coming months, we will be able to provide you with additional clarity that the replacement cycle opportunity for Genesis is real and that our innovations support robotic adoption by new customers. Launch of the Genesis system serves as the first significant wave in our commercial growth strategy. Stereotaxis' proprietary next-generation magnetic ablation catheter serves as the second even more substantial driver of revenue growth. Development in collaboration with Osypka continues to go well and is advancing in accordance with previously provided time lines. We are currently working through iterative improvements of prototypes, with many aspects of the catheter design having been successfully refined such that they do not require additional iteration. The design considerations in this next-generation catheter are meant to meaningfully improve patient care and the physician experience. A proprietary catheter will also improve Stereotaxis' financial and strategic positioning. We continue to believe that clinical use and commercial launch in select geographies is possible in 2020. A final topic I'm excited about and want to elaborate on is preoperative mapping. We recently announced collaborations and successful integrations with 3 innovative preoperative mapping technologies: inHEART, ADAS 3D and VIVO. In order to treat a patient suffering from an arrhythmia, a physician needs to be able to, first, diagnose the arrhythmias accurately; and then, second, deliver therapy successfully. The precision, stability and safety of Stereotaxis' robotic technology supports physicians in that second critical task: successful delivery of therapy. Despite the prevalence of cardiac arrhythmias and the development of cardiac ablation into a multibillion-dollar industry, the underlying clinical understanding of various arrhythmias is still limited. The primary methods used by physicians to determine where to deliver therapy include intraoperative mapping technologies, the analysis of electrograms or the reliance on crude, one-size-fits-all anatomical approaches. Intraoperative mapping technologies are critical for successful procedures and involve capturing anatomical and electrical information on the patient's heart during the cardiac ablation procedure. Companies like Acutus, which we are pleased to be partnered with, are pioneering more advanced intraoperative mapping technologies. Preoperative mapping, in contrast, involves using insights from MRI or CT images captured prior to a procedure to guide therapy. The use of preoperative mapping for cardiac ablation is still in its infancy that complements and is additive to intraoperative mapping technologies. ADAS 3D, inHEART and VIVO, each in their own way, take preoperative MRI or CT images and apply sophisticated algorithms to enhance and extract insights from the images. Enhancement and insights provided by each technology differ and is likely to be best suited for different types of arrhythmias and patients. Collectively, the use of advanced preoperative mapping technologies should help increase the success, safety and efficiency of procedures. These collaborations to integrate advanced preoperative mapping information enhance the robotic ecosystem. In combination with robotics, advanced preoperative imaging will increasingly drive personalized patient-specific therapy in electrophysiology. Kim 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 third quarter of 2019 totaled $8.2 million, a 9% increase from the $7.6 million reported in the prior year third quarter. This increase was primarily due to the delivery of a Niobe system to a new U.S. hospital customer and was partially offset by reduced service revenue as certain aged, inactive accounts no longer maintain active service contracts. Gross margin in the quarter was 78% of revenue, consistent with the third quarter of 2018. In the current quarter, gross margins on recurring revenue and system revenue were 85% and 61%. Operating expenses in the third quarter of $6.4 million increased from $6 million in the prior year. The increase in operating expenses reflects increased head count and timing of project-based expenses. Operating and net income for the quarter were both near breakeven, with an operating loss of $41,000 and net income of $43,000. These compare to an operating loss and net loss of $0.1 million each in 2018. Negative free cash flow for the quarter was $0.4 million, consistent with and ahead of our previously provided guidance for cash utilization in the year. At September 30, we had cash and cash equivalents of $31.7 million and no debt. This strong balance sheet allows for increased investment in growth initiatives and the ability to reach profitability without additional financings. I will now hand the call back to David.

Thank you, Kim. We are delighted that we have been able to execute on each aspect of our business in a solid methodical fashion while remaining financially prudent. As we look towards 2020 and the broad commercialization of Genesis, the financial results in this quarter reflect the positive impact that new system sales can have for Stereotaxis. On both the top and bottom line, the impact of any individual robot sale has a disproportionate effect on growth and profitability. We will remain focused on the commercial activity that support recurring revenue as that has been important longer term determining the value, but we expect the impact from a resurgence in system sales to drive robust and accelerating revenue growth next year. We look forward to now fielding your questions. Operator, can you please open the line?

[Operator Instructions]. And we do have our first question, and that is coming from Josh Jennings at Cowen.

Congratulations on the continued progress and including the collaborations with the preoperative imaging platforms. It's exciting. David, maybe I could ask first just to -- you made progress with the FDA undoubtedly that you just put on the table. Could you just help us just think through what are the additional steps? Any other specifics you can provide just in terms of what's left in the FDA approval process?

Sure. So as I described on our last call, we had a two stage approach for the FDA submission, the first of which was a broad 510(k) submission that included a broad range of software changes that had taken place over the years and kind of some improvements in the indications and/or changes in the language. And that was a fairly substantial submission, and we had many questions. We worked with FDA collaboratively to those questions and answers, and we're pleased to have received the submission in September. This submission now for the Genesis system, which was made recently, that is also 510(k). It has a 90-day clock, and it was a relatively much simpler submission. So we -- obviously, we have not yet received feedback from the FDA, but our expectation is that, that two-pronged strategy was supposed to significantly simplify the second stage.

Excellent. And maybe you could help us understand how the replacement funnel is evolving over in Europe? I know it's still very early days post-CE Mark approval and get deeper into a more full launch into 2020. But just how is the replacement funnel, demand funnel shaping up? And then just United States, front of the FDA approval, I mean clearly, the announcement of Genesis launch and CE Mark approval was made at HRS. And what are you able to discuss with customers? And similarly to Europe, how is the replacement funnel shaping up in the United States?

Sure. So in Europe, we have about 35 active hospital customers. And that means that on a normalized basis, you should have about 3, 4 hospitals that are undergoing a replacement cycle each year. We have multiple existing customers that are looking to upgrade their labs, are looking to change their X-ray, are part of that replacement process and are engaging with us actively in the activities that I described on the earnings call. And there are multiple types of activities that have to take place for a robotic system to take place. I mentioned some of those, including multiple layers of hospital approval, extensive contracts in Europe. There is -- almost always seems to be a public tender submission. And then there's coordination of construction schedules with the local hospital. And so that is kind of -- there's a lot of that, that comes together before you actually have a system sale and even a system order. Orders cannot take place until the tender submission take there is complete. So we're working through multiple of those replacement projects in Europe right now. And similarly, there are new potential customers that have never had a robot that we're working with in Europe. And in the U.S., we cannot -- we're obviously not able to commercialize Genesis. We do not commercialize Genesis. What we're able to do is we're able to provide physicians with insight into our innovation pipeline, our innovation plan. And they obviously are able to discuss with us purchasing a Niobe system, which is our historical robotic system. And so we are engaging both with existing customers and with new potential customers in the U.S. Many of them were interested and excited by the updates we shared at HRS and have been engaging with us. And similarly, I think that there might be kind of some of the sites that would otherwise have planned to do a replacement cycle perhaps around now, might push that out a bit in anticipation of a more opportune time to replace their labs. But again, that kind of -- we're obviously limited until we have FDA approval to really engage in terms of our Genesis system sale.

Great. And then just last question. I know you have a lot in front of you just within the electrophysiology and cardiac ablation markets. But any updated thoughts on other indications that Stereotaxis could pursue with the Genesis system?

Sure. Thanks. That's a great question, Josh. When I look at the value of Stereotaxis' robotic technology, is the ability to navigate interventional devices with precision directly from the tip. When you navigate a device from the tip rather than relying on translation, of course, from handle of the catheter until the tip, you have much greater precision, you have much greater stability, you can navigate tortuous anatomies. And you have a very -- you can design the interventional devices to be much safer and much more gentle than traditional devices. There are kind of a broad range of endovascular or endoluminal applications that would make sense where either precision, stability, reach or safety would be valuable. We -- the primary barrier to working and attacking any of those other indications is the interventional device. So it's less so the robotic system itself. The Genesis system is designed and capable of providing magnetic fields that could be applied in various anatomies since it's largely the interventional device. The financing that was completed in August was obviously a major step forward in enabling us to think critically and seriously about some of those additional applications. And so I think that kind of as some of those concepts are further refined and become real tangible programs with milestones that we feel comfortable discussing publicly, we'll share additional details there. I think kind of on one of the previous calls, some -- during the Q&A section, I was asked a little bit, and I did mention things like neural intervention as a growing interesting field. Kind of interventional oncology is obviously an interesting field. And there's also some endoluminal applications that could be interesting.

[Operator Instructions]. Our next question will come from Guy Judkowski with Logan Capital.

My question is regarding -- I guess, one, when you sign a deal, would that be considered material, and you'll announce deals as they occur? Or I guess would it just -- we would just find out at the end of each quarter? And then secondly, on implementation schedules for a upgrade versus a brand-new sale, do you have any sense of the time frame? It looks like the deal is -- the sale you made this quarter, it seems like it's sort of about 5 to 6 months. And I'm just curious if that's -- is that anticipated to be typical for a new sale? And also, what would be the difference versus an upgrade in terms of time of implementation?

Yes. So it really actually -- it depends on multiple factors. So you have the purchasing process. In terms of that second question, the time line, you have the purchasing process, which involves all of the contracts, all the hospital approvals, the tender process in Europe. And that's kind of one track. And then you have a parallel track which is the construction process. And those 2 are oftentimes kind of unrelated to some extent from each other. And so you can have situations where there's a lab that's already kind of an empty shell lab that is perfectly suited for us. And what's holding it up might be a tender process. And then as soon as the tender is completed and the contract is signed, we could ship a system and recognize revenue on that in solid relatively rapidly. There are other times where you might work with a hospital through the purchasing contract and have that signed. And then they're still working through their own construction, and that construction can take months, if not even a year plus. I think there's been historically cases where you'd have signed the contracts, and yet it still takes over a year for the construction to be complete and for them to be able and willing to kind of take delivery of the system. So kind of I think about it in those 2 tracks, and there's kind of wide dispersion in kind of the time lines that could take place. Generally, we're not going to be the type of capital equipment company that will kind of report backlogs or things of that sort because our orders, we're not -- we take orders only with significant down payments that are nonrefundable. And so we're not going to be the type of company that has orders that then just fall through. If we have an order, there should be a 90%-plus, 99% chance of that order becoming an actual system sale. And if it doesn't, there will be financial kind of benefits anyways reaped by Stereotaxis in the process. In terms of the plan of whether to announce orders or not, I have to admit that we haven't actually determined what -- whether we should or not. I think over time, we're definitely going to evolve away from announcing every order. Just I expect a substantial amount of that. I think it's more reasonable to report those on a quarterly basis rather than as they come in. But we've not yet determined that plan.

I see. And do you anticipate, I guess -- you gave a good answer. But specifically on an upgrade versus a new sale, would in general an upgrade not require as much new construction and would be quicker on implementation time?

You are generally correct. Though I know of examples of hospitals that do not have purchase contracts and yet have shell labs that are perfectly designed for us. And I know examples of hospitals that are looking to do replacement cycles, but they might only want to do a replacement, let's say, in the summertime when people are more on vacation and the hospital has lighter procedural volumes. And so it can be driven also by things outside of just whether the space is available and ready for kind of the replacement.

Our next question will come from Raul Grande with CBTM [ph].

This is Dr. Grande [ph]. I have been hearing rumors that Stereotaxis will be taken over by ISRG for more than $10, $20 around in the range of between $10 to $20? Do you have any comment on it?

No, that would be inappropriate to comment on anything on the biz dev side. I apologize.

Congratulations for the -- whatever you have, all these financial reports, what you have given. And then some of my friends feel this -- Stereotaxis, and then they're very incredibly surprised and very happy with the system.

Thank you. We are grateful for all the physicians that treat patients with our technology.

We'll move to our next question coming from John Morganelli.

I just have a comment, David. I've been a long time investor with Stereotaxis through the tough years, and I just want to say 2 things. One is that you've brought confidence to this great product. So it didn't crash and burn. It's a great product. And second, integrity, you've been straightforward with where this company has been since you've been involved. And I just want to thank you for both the confidence and the integrity that you've brought to this good product.

I am very grateful for those comments, and I'm honored to be able to lead a company with this technology and with this clinical value and potential. So I likewise feel very, very grateful to be here. Thank you, John.

At this time, there are no further questions.

Okay. Thank you for your questions and for the comments and for your continued support and interest in Stereotaxis. We look forward to working hard on your behalf in the coming months in preparation for an exciting year of significant growth in 2020. Thank you.

And thank you all for your attention. This concludes today's conference. All participants may now disconnect.