Stereotaxis, Inc. (STXS) Q3 2021 Earnings Report, Transcript and Summary

Good morning. Thank you for joining us for Stereotaxis Third Quarter 2021 Earnings Conference Call. Certain statements during the conference call and question-and-answer period to follow may relate to future events, expectations and 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 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, David Fischel, Chairman and CEO of Stereotaxis.

Thank you, Operator, and good morning, everyone. I'm joined today by Kim Peery, our Chief Financial Officer. We are proud of the progress made on multiple fronts in the third quarter. We continue to demonstrate both year-over-year and sequential revenue growth, driven by increased adoption of our robotic systems. We initiated a strategic collaboration with MicroPort EP that serves as the foundation for a new geographic pillar for our business in China. We made meaningful progress on a wave of upcoming innovations and we did this while establishing new headquarters, expanding our team and maintaining financial discipline. I'll discuss each of these in a bit more detail. System revenue in the third quarter reflects the successful installation and launch of the Genesis and Model S system at Princess Grace Hospital in Monaco as well as the shipment of the Genesis and Model S system to Missouri Baptist in St. Louis. Both hospitals have begun performing procedures, and we are pleased with the launches. Since our last call, we received orders for two additional Genesis systems, one from a hospital establishing a new robotic electrophysiology program in Europe and the second from a U.S. hospital that is upgrading its existing robotic labs. We made progress on multiple other capital processes during the quarter and expect additional near-term orders. This activity supports our confidence in our previously provided guidance of approximately a doubling of robotic system revenue next year. Strength of our system revenue more than counteracted the impact of resurgence of COVID and hospital staffing shortages had on recurring revenue by depressing procedure volumes. We saw the brunt of this impact in August across several geographies with a return towards more normal activity through September and October. We continue to view renewed adoption of robotic systems as the first significant wave of revenue growth in our strategic innovation plan to be followed in relatively rapid succession by additional waves. We are aggressively advancing the subsequent waves of innovation and revenue growth. Our proprietary robotically navigated ablation catheter represents the second wave in our strategic innovation plan. Supply chain challenges that had delayed production were successfully addressed late in the summer and system has been ramping up manufacturing of the hundreds of catheters needed for submissions for European approval and a U.S. IDE study. We remain on track with the time lines provided on the last call, expect to complete the manufacturing and testing early next year and believe that will allow for initial revenue contribution from the catheter in Europe in 2022 and a potential U.S. regulatory approval in 2023. We continue to work energetically on a third wave of innovations that we are looking forward to showcase at an Innovation Day next month, tentatively planned for Monday, December 13. As mentioned on previous calls, these innovations not only expand our robotic technology to new clinical applications but also enhance our opportunity in EP and across interventional medicine. We view these innovations as transformative for Stereotaxis' strategic and financial future and are very excited to share them with you. Geographically, our strategy has been to deliver this revenue growth with a focus on the United States and Europe. As a small company pioneering transformative technology with very long growth runway, geographic focus is prudent. On our last call, I mentioned that we were seeing particularly high customers’ strategic interest in China and that China was thus emerging as a potential third geographic pillar for our business. We were very pleased to enter into a strategic collaboration with MicroPort EP as a realization of that promise. MicroPort is one of the largest and most successful medical device companies in China, specifically in the cardiovascular field. MicroPort EP has built a particularly broad platform of EP products and a commercial team that is serving hundreds of customers across China. Our collaboration calls for the development of a robust ecosystem of products in China surrounding our robotic technology, including integration of MicroPort's mapping system with our robots and the development of robotically navigable catheters and regulatory approvals for Genesis and future innovations. Since entering into the collaboration, both teams have begun working together on development, regulatory and commercial activity with an aim towards substantial long-term revenue growth and value creation. China is a unique region where many of the benefits of our robotic technology are pronounced. And with the right ecosystem of products, I believe we could see a very significant business there with the potential to sell tens of systems a year. We expect this ecosystem of technologies, catheters integrated mapping and robotics to come into focus in 2023 and to support substantial commercial efforts then. In a similar way to how we're building the foundation for long-term growth in China, we are investing in the foundation for substantial growth here. The most tangible activities include the build-out of our new headquarters and growth of our team. Stereotaxis' new headquarters in Downtown St. Louis is in the final stages of being built out, and we plan to move our office there in the middle of December. Our new space will support improved collaboration, an expanded team and several times greater manufacturing capacity. It's a more modern office and was a financially thoughtful move. Already this year, our team has expanded by 14 additional net hires. This growth and enhancement of our team is across all parts of the business with a particular focus on R&D, manufacturing and service operations and clinical regulatory and quality. These are the right areas to invest at this point in our growth cycle, and we have a strategy for how to build a substantially larger commercial sales team as our new catheter and future innovations come to market. We are glad that we have been able to make these investments in a financially prudent fashion. We have maintained a relatively low cash utilization of about $2 million through the first nine months of this year. And even with substantial cost to build out the new headquarters and advance several innovations, we expect to end the year with greater than $40 million in cash. Kim will now provide some commentary on our financial results, and then I will make a few financial comments as well before opening the call to Q&A.

Thank you, David, and good morning, everyone. Revenue for the third quarter of 2021 totaled $9.1 million, a 5% increase from the prior year third quarter. System revenue of $3.5 million includes the delivery of Genesis RMM systems in both the U.S. and Europe. Recurring revenue for the quarter was $5.3 million, consistent with the prior year third quarter and pressured by a resurgence of COVID that depressed procedure volumes across various geographies. Gross margin for the third quarter of 2021 was 52% of revenue with system gross margin of 5% and recurring revenue gross margin of 86%. System gross margins reflect an allocation of overhead and other expenses and do not reflect a normalized expected margin from system revenue, which we expect to be north of 30% for the full year. Operating expenses in the quarter of $9.4 million included $2.6 million in non-cash stock compensation expense. Excluding stock compensation expense, adjusted operating expenses were $6.8 million compared to $5.5 million in the prior year third quarter. Increased adjusted operating expenses continue to reflect R&D project spending and measured investment in key business functions. Operating loss and net loss for the third quarter of 2021 were $4.6 million compared to $1.6 million in the previous year. Adjusted operating loss and adjusted net loss, excluding non-cash stock compensation expense were $2 million for the quarter, both compared to the prior year quarter adjusted operating and net loss of $0.8 million. Negative free cash flow for the third quarter was $1.5 million compared to $0.2 million for the prior year third quarter. Negative free cash flow for the first nine months of 2021 totaled $1.9 million compared to $3.9 million during the same period the previous year. At September 30, we had cash and cash equivalents of $42.8 million. I will now hand the call back to David.

Thank you, Kim. Consistent with our previous guidance, we expect robotics system revenue for 2021 of approximately $11 million. Given the orders we announced on today's call and several additional orders we expect in the near term, we continue to expect approximately a doubling of system revenue in 2022 compared to 2021 contributing to robust double-digit overall revenue growth in 2022. We expect to start 2022 with $40 million in cash, and we'll continue to balance increased investment in key value drivers with financial prudence. Our robust balance sheet allows us to continue these investments and reach profitability without the need for additional financings. We look forward to now taking your questions. Operator, can you please open the line to Q&A?

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

Good morning, thanks for taking the questions. Good morning, wanted to ask about the third wave of innovation, but I know we're going to get more details on that in a couple of weeks. So I'll hold off. I wanted to just check in, David, on just you've had more orders you're expecting two more since the last call. You're expecting more orders to be to come in the relatively near term. You have the MicroPort partnership. Just wanted to see if you could provide an update on the sales funnel trends on both the replacement of Greenfield channels and just whether your level of confidence in the doubling of system revenue next year has increased since the last earnings call? And then I have one follow-up.

Sure. So it was difficult to hear you, but I think I understood that you wanted to get more color on the pipeline of orders and our confidence in the doubling of system revenue next year. Is that correct?

That's right. Sorry for the bad transmission.

No worries. So kind of our guidance for next year on system revenue, as we described on the last call, is predicated and largely on a return to a more normalized level of replacement cycle system sales across our installed base and then kind of similar or perhaps some growth in the number of greenfield system sales next year. And when we look at our installed base, we see that many of the replacement cycle projects are -- seem to be advancing in a way where that would support our thesis. And similarly, as you saw, we do continue to engage with and receive orders from Greenfield hospitals where we haven't had a system before. And so given that level of activity, I would expect, obviously, given the commentary today several new orders before our next call. And I think we're on track to meeting that expectation of approximately doubling next year.

Great. And then I just wanted to follow-up on the China MicroPort partnership. And I know it's very early. It's only been, I think, less than two months since you announced that agreements. But they have a large number of China hospital accounts already that -- for the electrophysiology business. I was hoping you could just help us understand the selling process, the sales cycle, maybe the book-to-bill timing through that channel. Anything else you can offer just in terms of whether or not tender processes involved in some regions and just the book-to-bill timing with this MicroPort distribution channels. And then whether or not this partnership gives you even more confidence in that 2022 near doubling of system revenue? Or should we think that it will take time for this partnership to bear fruit in terms of generating new orders in China? Thanks a lot, David.

Sure. So our China business has done that beautifully overall, despite being a relatively small part of our installed base, they use us very actively and we obviously had the two orders in system revenues this year from China. And that team there has performed beautifully. When we look at kind of our relationship with MicroPort, I would divide the activities into three main categories. And one is innovation-related activities, how do we build out the right ecosystem of products in China surrounding our robotic technology. The second is the regulatory activities, which is part of also building out that ecosystem, but how do we bring Genesis to China, how do we bring our new catheter to China, how do we bring other future innovations. And then the third is the commercial activity together. And there, obviously, we benefit from the footprint and the team that MicroPort has, which is order of magnitude larger -- much larger than ours. And when I think about kind of what we should expect over the coming few years, I'd say that in 2022, you won't yet have the ecosystem of products that allow you to really accelerate and push hard from a commercial perspective. Though I think that there are obviously leveraging the MicroPort team, I expect 2022 to be better than 2021 in China, so that will contribute to our overall growth. But I really think that what we're working hardest on is all of the innovation and regulatory activities that really create that nice kind of -- nice proprietary tightly connected ecosystem of products in China. And I think that that's what -- when that comes together, which we think should be in 2023, that really allows you to now not just increase your efforts, but really kind of make an exponential increase in the way you commercialize in the market. So there's a range of commercial activities we can do now to prepare for that. Some of that will bear fruit just in the nearer term. But in terms of really accelerating and reaching what we want to be the potential of this partnership, I will look more towards the building of that product ecosystem. And right now, it seems like that's a 2023 event.

Great. Thanks so much.

Our next question comes from Adam Maeder with Piper Sandler.

Hi, David, hi, Kim, thanks for taking question. Congrats on the progress. I wanted to start with a question just on headcount. And you talked about adding 14 new members to the team year-to-date. Was just curious if you could maybe elaborate on what those rules are or the functions are at Stereotaxis? Are they part of the commercial organization? And then one question I get from investors is when will you look to kind of go a little bit more on the offense or aggressive in terms of adding headcount to the sales team. The company has obviously done really nice job managing cash and operating with discipline. But when can we see spending maybe accelerate some just to capitalize on the large opportunity in front of the company? And then I have a follow-up. Thanks.

Sure. Hi, Adam, good morning. So the 14 incremental new hires, it's obviously more than that, but you also have turnover, obviously, in the normal business. But the 14 incremental new hires, which is about probably 10-plus percent, between 10% and 15% of our employee base, that kind of was primarily focused on -- it's across all aspects of the business, including actually the sales team, but it's primarily was focused on R&D, clinical regulatory quality and manufacturing/field operations. When we think about kind of what we're doing right now in the normal life cycle of a business, those are the types of things that you do prior to a significant commercial effort. And so those are areas where we've had a lot of activity. We could kind of see immediate near-term use for incremental energy and effort there. And so kind of we've been kind of investing accordingly in that. On the R&D team, particularly, I think that kind of some of the things we expect to show you next month, I think are transformative for our business and for our long-term growth. And so I think that kind of -- it will be very clear why we're increasing the R&D team given that activity. And I think that, that innovation day might also help explain why we have not yet aggressively built up the commercial team. Obviously, and we've spoken in the past, having our own proprietary ablation catheter and the increase in disposable revenue that, that provides that allows for a very natural way to build the sales team in a significant fashion where you can kind of move more towards the model that most other companies have in this field, where they have one sales rep per hospital that is really dedicated to a specific hospital. And that would be a sustainable model when we have our own ablation catheter. And so we have a plan in place for how to build the sales team as that comes to market. And I think some of the other innovations as well will probably provide some color as to when it makes sense to incrementally invest in the sales team and then switch to kind of a more, again, kind of stepwise or exponential growth in the sales team. So hopefully, it will become clear, and we can also discuss this more in December.

Okay. Understood. Appreciate the fulsome response, David. And then for the follow-up, FcRn, the medical meetings coming up this weekend, tomorrow, I believe. So I just wanted to take your pulse there. How impactful can that meeting be? Is this a potential springboard for Genesis? Are there presentations of note or planned Stereotaxis commercial activities at that event that could maybe kind of help you build the momentum heading into the latter part of this year and 2022? Thanks so much guys for taking the questions.

Sure. So I'm actually doing today's call from the Society for Cardiac Robotic Navigation Conference. It starts formally tomorrow, but there's already some activities today and this evening. And FcRn is independent physician-led society, but it's obviously was started and is run by physicians that are very passionate about what we're doing in our mission to improve cardiac disease and it has loomed into a beautiful organization over the last few years. In the press release we shared earlier this week, we kind of listed many of the more interesting or unique topics that are being discussed. It's a powerhouse group of physicians that are speaking at the conference. And so overall, we're very excited by it. It always allows us to engage with physicians that know us very well and there are some physicians also that aren't long-term users of Stereotaxis that joined. And so I kind of view as one of the nicest events of the year in terms of engaging with the community and so I wouldn't -- I don't expect kind of that orders don't get signed at conferences like this, if that was kind of what you were perhaps alluding to, that's usually kind of more on the administrative side when we talk about near-term late order. But I do think it's a very good opportunity to engage with the physician community. And in reality, also with the strategic community, it was nice to see how many other companies FcRn has recruited to support the conference and to join the conference. And so there's a range of both the physician community and the general electrophysiology industry community here.

Great. Thanks for the color, David.

Our next question comes from Frank Takkinen with Lake Street Capital Markets.

David, Kim, congrats on the quarter. I wanted to start on the order side, maybe just level set us on how many orders you have in hand right now that will be recognized in 2022. And then as you start to get more greenfield orders into the book, can you just talk a little bit about expected time from order to install some of those might have in comparison to some of your greenfield sites?

Frank, good morning. Sure. So the two orders that we announced today, those will turn into revenue installations in 2022. And generally, I would expect again that the time line between an order and kind of either a shipment or an installation is probably somewhere in the range of three to nine months in typical situation.

Okay. That's helpful. And then I wanted to ask on the disposable side of the business, obviously, a lot of impacts and different headwinds in the quarter. Maybe bring us a little bit deeper into what went on exactly in this quarter and then how you're kind of feeling about a sequential rebound into the last quarter of this year.

Sure. So as probably as kind of I've heard on some of the other earnings calls of other medical device companies, I think both the resurgence of COVID in certain geographies relatively broadly actually, both in the U.S. and Europe. And in some unique cases, we heard about just personnel challenges and staffing challenges as we did see a decline in procedures, at particularly in August and then gradually kind of returning back to better and better activity in September and October. And so overall, it is still a pressured environment. We've not gotten back to levels pre-COVID. That being said, we're able to, with the system revenue counteract those forces, but that is still somewhat pressured external environment.

Okay. And then just last one for me. Maybe give us an update on utilization trends. I know some of your earliest Genesis users were tracking above the average of the overall installed base. Maybe talk to some of your mid-year installs and how those are tracking from a utilization perspective.

I do not actually have the numbers closely available. I know that when we do launch a new site kind of anecdotally, I'm thinking about one of the most recent ones, we get flurry of near-term activity. We have one of those launching just a few weeks ago. And so there is a general increase in activity. Again, I wouldn't kind of -- we're still in the early phases of these launches. And so it's hard for me to say that typically, we would expect about 100 procedures per system per year. It's hard for me to put kind of something down definitively that it should be much higher with Genesis, but our activity both at Banner and Helsinki, where we've obviously been installed now for over a year and then the initial activity, which is really kind of weeks or a few months at that kind of two of the more recent sites matches that.

Okay. That’s helpful. I’ll stop there. Thanks for taking my questions.

[Operator Instructions] Our next question comes from Javier Fonseca with Spartan Capital.

Thank you so much. Great being here. Congratulations on a solid quarter. My question is regarding the progress with the proprietary magnetic ablation catheter. And if management has any sort of expectation as far as when you expect a market entry for this device?

Javier, sure. So as we kind of discussed in the prepared remarks, our system is still ramping up the manufacturing of the hundreds of catheters needed for the testing necessary for regulatory submissions. That is advancing relatively well. And we expect to finish all the manufacturing and the testing early in the year and that will support a CE Mark submission and that will support an IDE submission to the FDA. And so with that, we would expect CE Mark approval at some point in 2022 and our commercial launch in Europe in 2022. And depending on how well we're able to enroll patients in an IDE trial, how quickly we're able to do it. It could support also an approval in 2023 in the U.S.

Excellent. And another quick follow-up question. I think this was touched on before, but as far other than the MicroPort strategic collaboration, could you provide any insight as far as any specific channels or infrastructure that's currently in place to support double system revenue in 2022?

Sure. We have a commercial team of about 40 people globally. That's kind of -- they're focused from system sales to clinical adoption to training, but that direct global sales team, along with distributors that we have in various geographies, like Eastern Europe, like Middle East, like our relationship with MicroPort. That kind of commercial effort is what we expect to drive the increase in revenue next year. And I think that's a reasonable again assumption given what that team has shown. They're capable of doing this year, the natural benefit you have with time and as you've commercialized Genesis more and more, there is increased comfort in the community about how it's performing, that is able to work well and that gives you a natural tailwind. And then you also have the start to a replacement cycle that again, we got very little benefit of that during this past year, but a normalized level would incrementally add at least several more systems. And I think that next year is going to look much more like a normalized year from a replacement cycle. So I think those are the ways we think about the commercial effort and what's driving revenue growth next year and that also kind of just kind of add similar to what Adam's question was earlier is that we do have a plan for how to build the commercial team up in a much more robust way. So when we think about the commercial team that's needed to sustain a multi-year significant double-digit revenue growth, there is a plan in place for that. And I think you'll see as we launch the catheter and then also as you have better clarity on some of our future innovations, why that staged approach to building the commercial team makes a lot of sense.

Awesome. Thank you for the insight.

Our next question comes from Guy Judkowski with Pufferfish Capital.

Hi, David, how are you? Good morning to you as well. My question is regarding the magnetic VT randomized trial. You guys -- I know you talked about it like maybe over a year ago, and the last I had heard that it was going to be result in early or at least in 2022. I guess, one, do you have any update on that? And also is it significant in any -- do you still feel that it has significance once it's released?

Sure. So let me talk about clinical data overall. And I'll then touch upon specifically the magnetic VT trial. So the overall, the continued build-out of the clinical data for robotics and EP is kind of, I think, one of our strong points. I was particularly pleased with the publication new pediatric patients that came out a few weeks ago. I think, again, kind of consistently that type of data coming out on safety benefit and efficacy benefit across all sorts of arrhythmias across all sorts of patients and then particularly in the most kind of delicate sensitive patients like children like those with severe disease. And that's what drives our entire business. And our reason for existence is how good that clinical data is. And so that's kind of overall been a very strong suite. I think also on the last call, I mentioned that there was a very interesting publication on silent cerebral events. That should come out very soon. So I hope that we'll have an ability to share that also in the near term. And then the magnetic VT trial was actually a prospective randomized trial initiated by Stereotaxis, multiple centers, looking to demonstrate superiority of robotics versus manual ablation in ischemic VT patients. We ended up enrolling about 180 patients. The last patient was enrolled, I believe, in February or March of last year. There's a one-year follow-up period. And so we should have the last follow-up in the first quarter of 2023 with probably kind of the unblinding of the data a few months later. And so I would expect by about mid 2023 data announced from that trial. And again, I think that kind of -- it's unlikely that any one data point immediately switches the field. But I think the totality of the data is what really counts. And the magnetic VT trial is obviously in terms of the structure of the trial, it's as good as it gets. It's a prospective, randomized head-to-head trial. It's kind of -- it's as good of a structure as one could ever ask for. And again, we think that even given kind of everything that we know still being blinded. We expect that we're going to show off well and so we're excited to have that as positive or material.

One follow-up question, David, regarding the fellowship program, I think originally, it sounded from what I've been able to ascertain, you added about 18 graduates, and it looked like the program now has close to 50. And I'm just curious, like once they -- I guess, one, is that accurate? And then two, once these doctors do graduate, what is happening? How many -- do you track what percentage of them are actually able to use robots in their day-to-day? Or I'm just kind of curious what happens to them once they graduate from the program.

Sure. So I don't have the exact numbers in front of me right now, but there has been that gradual growth from -- I think we had about 10 graduates in the first year. Now we have about 20 or so fellows in any given year, so it’s about 40 fellows active right now across the U.S. and Europe. We actually just started an Asia Pacific version of the fellowship program as well. So that's kind of adding a little bit on top of that. And I'd say that kind of -- there's kind of three ways that things evolve after the fellow graduate from the fellowship program and goes on into practice. Either they stay on at the site or we help and match making them with sites that have a robot, and they can continue their procedural activity there. Oftentimes, again, kind of their energy and youth and kind of the engagement they have with us in the fellowship program provides kind of a nice halo effect wherever they go. Second is they might go to a site that doesn't have a robot, but then they remain engaged with us, and we try to advance the capital process at that site. And then in the third setting, they go to a site that doesn't have the opportunity to do a capital build out of a lab and adoption of a robot in the near term. And then what we try to do is to find ways to engage with them and to maintain a connection with the hope that when an opportunity presents itself in the future that we can kind of start a robotic program there and that they will be the clinical champion for that. And so that's kind of the way I'd categorize the graduates. And I don't have -- again, I apologize, I doesn't have just the numbers in front of me, but I probably guess that about -- somewhere about one-third of the graduates probably end up at sites that have a robotic program. And so they just continue their procedural activity after the fellowship.

Is there like a number that you guys target? I mean, could you add 150 fellows? I'm just trying to -- I'm trying to -- obviously, that's somewhat of a leading indicator on the more fellowship people you would have, the greater opportunities it would sound like -- but I'm curious like is your capacity for 100 students to 150, is now your attic capacity? Is there any kind of plan there that you have?

Yes. So it's really driven by two things. It's driven by how many robotic programs we have at University style hospitals where they have fellowship programs. And it's driven by how well we do in attracting fellows in those programs to actually join our program. And so what I'd say is that given our installed base, we're doing relatively well. Maybe we could have 50% more fellows if we really kind of were successful across the entire installed base. But relatively, we've -- I'd say the majority of fellows at hospitals that are active users of our robot and have fellowship programs are part of our program. And so there's room for incremental improvement, but we can't double or triple the fellowship program given our existing installed base, as we sell new robots and have an expanding installed base that provides additional opportunities, but we're doing relatively well in our existing base.

Got you. Last question. No one asked it, so I'll ask it. Did you do continue to do these virtual test drives this quarter? And do you have any kind of numbers that you could share with us?

Yes, we continue to do them, and we've seen more and more though as kind of things have opened up or opened up, close down, opened up again, we've seen more and more site visits to actual hospital accounts. And so hospitals like Banner University and Helsinki University, Monaco have all hosted physicians already. And so we're continuing the telerobotic visits. But I'd say that we're kind of seeing more and more a shift towards in-person visits.

Thanks so much, David.

[Operator Instructions] I am showing no questions at this time. I would now like to turn the call back over for closing remarks.

Okay. Thank you for all your questions and for your continued support. We look forward to speaking with you in a few -- in a month at Stereotaxis' Innovation Day. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.