Stereotaxis, Inc. (STXS) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Stereotaxis Third Quarter 2011 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday, November 7, 2011. I would now like to turn the conference over to Mr. Greg Gin of EVC Group. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Thanks for joining us for the Stereotaxis conference call and webcast to review the financial results for the third quarter of 2011, which ended on September 30, 2010. Before we get started, we’d like to remind you that during the course of this conference call, the company may make projections and other forward-looking statements regarding future events or the future financial performance of the company, including, without limitation, statements regarding future operating results, growth opportunities and other statements that reflect Stereotaxis’ plans, prospects, expectations, strategies, intentions and beliefs. These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. For a detailed discussion of the risks and uncertainties that affect the company’s business and that qualify the forward-looking statements made on this call, we refer you to the company’s periodic and other public filings filed with the SEC, including the Form 10-K for the fiscal year ended December 31, 2010 and the quarterly filings for 2011. The company’s projections and forward-looking statements are based on factors that are subject to change and therefore these statements speak only as of the date they are given. The company assumes no obligation to update any projections or forward-looking statements. In addition, regarding orders and backlog, there can be no assurance that the company will recognize revenue related to its purchase orders and other commitments in any particular period or at all because some of these purchase orders and other commitments are subject to contingencies that are outside of our control. In addition, these orders and commitments may be revised, modified or canceled, either by their expressed terms as a result of negotiations or by project changes or delays. And now, I’d like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis. Mike?

Thank you, Greg. Good afternoon, everyone, and thank you for joining us this afternoon on the third quarter 2011 conference call. With me today is Sam Duggan, who joined us as Chief financial Officer in early October. Before we begin, let me formally welcome Sam to the team. Sam brings 25 years of financial leadership experience with management responsibility for treasury, investor relations, financial analysis, budgeting and lease financing. His broad experience in senior strategic finance roles make him ideally suited to lead our finance function as we execute our strategy to establish our technology platform as a standard of care for treatment of complex arrhythmias and other cardiac diseases. So, Sam, welcome to your first Stereotaxis conference call. On today’s call, I’ll start by providing an overview of the third quarter and discuss our progress on preparing for the upcoming launch this quarter of the new Epoch platform. I’ll then discuss our progress with the Odyssey platform before Sam reviews the quarterly financial results. We’ll then open it up to your questions. Let’s get started. Revenue in the third quarter was $8.5 million, down 38% from a year-ago period. Global new capital orders were $2.2 million and were comprised of $1.6 million in Odyssey products, four Epoch upgrades and two Vdrive systems. Our top line performance and system orders, as we expected, were impacted by the transition from Niobe II to Epoch. These factors resulted in soft Niobe II revenue and the related impact on Odyssey installations in Niobe labs. The top line was also affected by the emergence of larger standard Odyssey deals, which will take longer to close but will significantly increase our growth. Among the bright spots in the quarter, recurring revenue grew 13.8% and reflects continued growth in clinical procedures with our magnetic robotic platform. In addition, we continue to build market interest in Epoch ahead of its planned launch this quarter. We’ve designed Epoch to significantly enhance physician efficiency and experience for robotic-assisted EP procedures. We believe these clear benefits will regenerate market demand for our EP platform, resulting in renewed growth in systems revenue and new capital orders. We’re focused on driving rapid market adoption of Epoch and believe this will significantly contribute to the future growth and profitability. With respect to the Odyssey platform, we’re continuing our efforts through direct sales and with distribution partners to expand the potential market opportunity. We expect the expansion of the Odyssey business in 2012 as our distributor, Biosense Webster, builds momentum in non-Niobe standard EP labs. : In August, we took measures to substantially conserve our financial resources. This plan is designed to minimize cash burn by aligning our operating expenses with our revenue and growth expectations. While progress was made in the third quarter and will continue to be realized in the fourth quarter, we would not expect to see the full realization of the 15% to 20% reduction in annualized operating expenses until the first quarter of 2012. At the same time, we focused R&D investments to strengthen our value in the market and support our future growth. Sam started in early October and we secured back covenant relief in both September and October in anticipation of our non-equity capital raise. On the fourth milestone, we reported today that we entered into a non-binding term sheet on October 11 to raise additional non-equity capital. We anticipate that this transaction will satisfy our Fourth Loan Modification amendment with Silicon Valley bank. I’ll let Sam discuss this in more detail in a few minutes. Lastly, we are on plan to install our first Epoch upgrade in Europe by the end of the year. The top five milestones are completed or well on their way to be completed, which we believe will position us to move through this transition period and have a strong 2012 and beyond. With that as an overview, let me turn to the business segments, starting with our robotic business and then the coming launch of Epoch. The Epoch advancements are designed to significantly benefit the physician experience, including improved catheter responsiveness, the new catheter and capability to precisely move diagnostic devices, friendlier user interface and shorter procedure times, while maintaining the Niobe’s recognized benefits and safety radiation, reduction and clinical efficacy. We believe these product enhancements improve our value and complex ablations as well as position us to capitalize on new set of patient applications. The platform enables us to both steer the device from the tip as well as support the same or different device from the proximal end. This combination uniquely positions Stereotaxis to provide new capabilities for control, support and capture new innovation in devices in a robotic footprint which enables us to extend beyond EP over time. The lab test and early reaction of the Epoch upgrade among key opinion leaders is extremely positive. Early market feedback has confirmed that this new platform has the potential to significantly improve the efficiency of our system for complex ablations. Our goal is to be better than the best hands in the world. Additionally, the new Epoch interface is designed to shorten the learning curves for physicians. The exact impact will vary by physicians, but early testing suggests up to 30 minute shorter for an AF case. Also, we anticipate that most EP physicians will need significantly fewer cases to move through the learning curve compared to the training required for Niobe II. Following, Epoch’s introduction at the HRS meeting in May and the initial market excitement, we’re continuing to build interest in that market. We view site visits as a leading indicator of clinicians and hospital’s commitment to make purchase decisions and expect site visits will translate to increased sales pipeline and budgeting activity. Since May, average monthly site visits to our lab to see the Epoch firsthand have been significantly higher than the level of site visits to test the Niobe a year ago. We’re focused on converting the strong interest into orders as quickly as possible and are aggressively following up on the high level of physician interest to generate new leads for system placements and refocus on improved utilization with accounts that have installed. While we do not have an updated data points to forecast the time to revenue conversion, we anticipate the following Epoch ramp. First, several of the key sites are in progress of upgrading to Epoch. They’re expected to demonstrate improved system performance based on efficiency improvements and the corresponding increase in recurring revenue per site. Secondly, the resulting usage will benefit us by building a stronger reference base among Epoch users, which will accelerate market interest and new orders relating to the increased Epoch revenue. Third, the collateral positive impact will be an increased market awareness of Odyssey supporting standard lab pipeline increases. As I mentioned, we’re on track to achieve our milestone of upgrading the first Epoch system in Europe by the end of the year. Now, turning to the Vdrive system. The Vdrive is an add-on module that can be used to robotically and remotely manipulate an array of devices such as loop diagnostic catheters and sheaths to enable enhanced procedure efficiency. For EP, we believe the Vdrive will accelerate utilization of our platform by expanding the capability to control diagnostic devices leading to improved efficiency of the entire procedure. We began shipping Vdrive devices in Europe late in the first quarter, have a total of eight sites that have installed the product to date. We’ve completed over 300 cases with an average incremental price of approximately 850 per case. Customer feedback has been very positive and indicates that Vdrive may provide additional functionality and efficiency in completing EP procedures by removing an additional manual process. In addition, physicians have told us that they envision the arm in many innovative applications. Our current development plans are to expand the Vdrive to a dual head platform designed to hold multiple devices and we expect to launch this in Europe in the next few months. The combination of Lasso sheath or deflectable sheath will allow physicians to perform an efficient and more precise and fully remote procedure. The feedback is consistent with our expectation of this product. When fully released, it will significantly change the adoption curve for AF. We currently have CE Mark for the single-head Vdrive in Europe. In the US, we expect a 510(k) approval process to require human clinical data. We’re finalizing the plan with the FDA and our current expectation is the first embodiment of the Lasso version will be available in the US in the last half of 2012 and the dual-drive in late 2012, early 2013. Let’s move on to utilization and recurring revenue. We are encouraged with the progress we made this quarter recognizing that this has historically been a slower quarter due to the normal summer holiday season, especially seen in Europe. Utilization continues to reflect a sharp difference in adoption trends in sites installed before 2008 and those installed after the irrigated catheter returned to the market. We now have approximately 60 sites performing on average over 2.5 cases per week. This distribution is much broader than two years ago when a handful of sites performed a majority of the cases. There is a solid and growing body of clinical evidence supporting the Niobe value. Stereotaxis has been well represented at major conferences that have taken place since our last call. Back in August, we provided you with good news about our STOP-VT prospective VT study presented at the ESC meeting, Europe’s largest medical meeting. Additionally, compelling data supporting the value of magnetic case – the magnetic navigation was presented at last month’s Venice Arrhythmia Meeting. Professor (indiscernible) (0:13:18) from Lisbon, Portugal, presented data from his lab where Stereotaxis is used exclusively for all arrhythmias. The series of 523 patients included all types of arrhythmias, including AF, VT and SVT. Despite the wide variety of arrhythmias in this large study, the major adverse event rate was reported as a remarkable 0%. On the publication front, we are driving towards our 200th publication in peer-reviewed literature. These presentations and publications reaffirm the outstanding clinical outcome and documented safety advantages of Stereotaxis. To summarize utilization trends, Niobe II adoption continues to be based on strong value seen daily in labs and demonstrated in the scientific evidence. The positive utilization trends gives us confidence that the foundation of science along with our new efficiency improvements with the Epoch platform will position us to increase penetration in the complex ablation market. Now, let us turn to the Odyssey business. We remain bullish about the long-term opportunity for the Odyssey business in all interventional suites. Odyssey products seamlessly integrate multiple data streams into synchronized patient records, condense the record and transmit it over a low bandwidth network and maintain patient confidentiality. We’re convinced that this will provide the information needed at the time required to change how labs interact and how to supply – and how the supply base interacts with the clinical support. Odyssey revenue and new orders in the quarter were impacted by slowing momentum in the Niobe orders and the increase in standard lab deal size, which caused the longer decision process by hospitals. We continue to build a strong customer interest for the Odyssey in standard labs. We believe it’ll take a few quarters for these efforts to bring new prospects through the sales process. However, we are encouraged by some leading indicators, which seem to show that after only a short period of time, we began to build momentum in standard Odyssey lab sales pipeline. Some leading indicators are, hospital interest in Odyssey continues to grow on the pipeline. Multiple hospitals recently expanded their Odyssey portfolio by adding labs to existing installations. By year-end, one hospital will soon have Odyssey in clinic – in use in three different care settings – EP, IC and the hybrid cardiovascular OR. We announced today that the launch of the Odyssey Cinema Studio, an industry-first clinical procedure online broadcasting platform providing a turnkey solution for hospitals to facilitate high-definition remote physician collaboration and global medical education. The Odyssey Cinema Studio can be purchased by hospitals as a premium version of the Odyssey Cinema offering or as an upgrade to the existing Odyssey Cinema installation. Stereotaxis also announced an agreement with the North American Center for Continuing Medical Education as their exclusive live broadcasting platform for delivering medical education via the Odyssey Cinema Studio. NACCME, an accredited medical education provider, is introducing the cardiovascular learning network to enhance its ability to bring innovative high-quality education to its network of more than 26,000 medical professionals. Stereotaxis and CVLN will jointly broadcast educational cases such as the newly FDA approved TAVI procedures to the worldwide cardiovascular community. Due to the new Odyssey steady growth, hospitals are starting to require major medical equipment suppliers to ensure compatibility with Odyssey. A major global imaging company, who has never worked with Stereotaxis before, started system interface testing and optimization work, so their image systems in IC, IR and EP become compatible with Odyssey. Lastly, I discussed in the last call the growth in the sales pipeline for several larger deals. We continue to be encouraged by this trend and believe these deals will come to order in the next few quarters, changing the curve for the standard lab orders and total orders. In summary, we’re optimistic about the potential of Epoch platform to become the standard of care for treatment of complex arrhythmias. We are positioned for growth in the coming launch of Epoch this quarter and expansion of Odyssey in the standard lab markets. We have taken actions to ensure that we have the necessary financial resources to capitalize on our growth opportunities. Our operating expense reduction continues and we expect to see the full realization of a 15% to 20% reduction in the annualized operating expenses in the first quarter of 2012. In addition, we reported today that we entered into the non-binding agreement to raise non-equity capital. With these actions, combined with the strong recurring revenue performance and the opportunity to accelerate capital revenue, we believe we’ve created a foundation for stronger financial results and improved returns for our shareholders. Now, I’ll turn it over to Sam to go through the financials. Sam?

Thanks, Mike, and good afternoon, everyone. I’ll be focusing my comments on the third quarter financial results. But I’ll be happy to address any questions on the year-to-date results in the Q&A section of our call today. Revenue for the third quarter was $8.5 million, a decrease of 38% from the $13.9 million reported in the prior year. Systems revenue was $2 million, down 75% compared with $8.2 million a year ago. As Mike mentioned, soft system revenue for both the Niobe and Odyssey businesses was impacted by market demand for a more efficient solution for complex ablation procedures and the ongoing platform transition from Niobe II to Epoch. We recognized revenue on one Niobe system versus five systems a year ago. The Niobe system taken to revenue this quarter was placed in rest of the world. Odyssey system revenue was $1 million, down 54% from a year ago. Recurring revenue grew 14% to $6.5 million versus the third quarter of last year. The rise in recurring revenue was attributable to the larger installed base of Niobe systems and an increase in utilization leading to greater disposable sales and service contracts as well as favorable pricing. Let’s move on to backlog, which consists of orders that we anticipate will go to revenue in the next 18 months. We conducted a comprehensive evaluation, identified four projects where there is low likelihood that this hurdle will be met and removed these systems from active backlog. Three of these were Niobe projects. So rolling forward from our active backlog of approximately $33 million in the second quarter, we added $2.2 million in new orders and we had subtracted $2 million in systems revenue for the quarter and we also are subtracting the $4.5 million backlog and moving these projects to inactive. This brings active backlog to approximately $29 million at September 30 and represents 16 Niobe systems. Gross margin was $5.9 million or 68.9% including a $500,000 charge related to the absorption of overhead costs based on normal production levels. Q3 gross margin was down from 72.2% from the year-ago quarter. Before the charge, gross margin in the quarter was 74.3%, which is higher than the prior-year quarter due to a higher mix of recurring revenue. Operating expenses in the third quarter were $14.9 million, an increase of 10% compared to the $13.6 million in the year-ago period. The increase was primarily due to higher research and development expenditures related to the Niobe Epoch and Odyssey upgrades, increased spending on registrations in Japan and foreign currency exchange losses as the US dollar strengthened against the euro. The result was an operating loss of $9.1 million compared to an operating loss of $9.5 million in the second quarter of 2011 and operating loss of $3.6 million in the third quarter of 2010. Other income includes a $2.6 million mark-to-market gain related to the outstanding warrants which must be adjusted quarterly under derivative accounting rules. Net loss for the third quarter was $7.3 million or $0.13 per share versus a net loss of $5.1 million or $0.10 per share in the third quarter a year ago. Average shares outstanding for the third quarter were 54.9 million compared with 50.1 million in the same quarter last year, primarily reflecting the issuance of the 4.6 million shares as part of our follow-on stock offering completed in November 2010. Turning to overall liquidity, we had a cash burn of $6.4 million for the quarter. Year-to-date 2011 cash burn is $23.4 million versus $16 million during the same period a year ago. At September 30, 2011, we had cash and cash equivalents of $17 million, while we had $21.8 million at September 30, 2010. We had total debt outstanding of $29 million at September 30, 2011 versus $26.5 million a year ago. As such, net debt at September 30, 2011 was $12 million, up from $4.7 million a year ago. As of September 30, 2011, the company has completed the majority of the operating expense reductions through head count and discretionary spending cuts and continued to implement processes and changes to further reduce the operating costs. We anticipate that this will result in an operating expense reduction of 15% to 20% on a year-to-date September 30 annual run-rate basis. As a sign of our progress today, on a sequential basis, operating expenses declined $2.7 million or 15% from the second quarter of 2011. When both quarters are normalized for costs such as severance, foreign currency gains and losses, marketing costs related to HRS, et cetera, sequential operating expenses still declined by approximately $2.3 million or 15%. While it is not the company’s practice to comment on capital transactions that have not been consummated, we realize that our shareholders would like to have some additional information regarding our plans to raise capital to support our future growth. To that end, we announced today that company entered into a non-binding term sheet on October 11, 2011 with an institutional investor to raise non-equity capital, and company expects the capital raise to be completed by November 30, 2011, satisfying the company’s obligations under the Fourth Loan Modification Agreement with Silicon Valley Bank. The company and the institutional investor are working diligently and in good faith to close the transaction subject to customary closing conditions, including the negotiation and execution of mutually acceptable definitive transaction documentation. As the company is subject to a confidentiality agreement related to this transaction, we will not be able to provide additional details at this time. Thank you very much for your attention. Operator, we’d like now to open the call for questions.

Thank you, sir. (Operator Instructions) And our first question is from the line of Sameer Harish with ThinkEquity. Please go ahead. Sameer Harish – ThinkEquity: Hi, guys. Good afternoon.

Hi, Sameer. How are you doing? Sameer Harish – ThinkEquity: Hi. I thought I would start with the Epoch launch. Can you talk a little bit about what version of the Epoch product in terms of compatibility with the different Vdrive modules that you have you expect to launch on the initial go in Europe?

Yeah. So the Epoch in Europe will have the single first and then the dual-headed Vdrive will come out right behind that. So both will be available in Europe. We think the dual head may – will sit on the fence between December and January, but it’s timing, so we’ll have both come out right behind the upgrade of the Epoch. Sameer Harish – ThinkEquity: Okay. And are they on – they’re on different submissions then for CE?

They are. The single head has already been approved; it’s been in use. We have eight systems installed. The dual, we’re – as I mentioned, we’ll get the approval, we believe, in December. Sameer Harish – ThinkEquity: Okay.

And then install that in – right after that period of time. Sameer Harish – ThinkEquity: Okay. And what are you seeing in terms of utilization on those eight systems in Europe when you look at procedure types and then the growth as the installations are starting to use that product?

Yeah. So the first embodiment was a Lasso only. They came out – this summer, we installed the fixed curve sheath on the Lasso and it’s staggered. So the eight systems have installed as the year has progressed. But I believe it’s pretty close to a one-to-one – one magnetic case for one use of the Vdrive. And so as you look at that – I know that the fixed curve has also been well received because they can position the curve, so that it points towards the area – if you’re moving the catheter, for example, you move to the left or the right side of the heart, so you begin to orient the catheter and it helps efficiency of the process. Obviously, the feedback we’ve received is they’d like to see both, which is the dual drive. So they want to see both. Now, as a reminder, Sameer, the deflectable sheath that’s going to be used in the dual drive is a proprietary sheath that we’re producing. So it’s a less costly sheath than the ones that are commercially available today, but it also will be additive to the disposable revenue. Sameer Harish – ThinkEquity: Got it. Got it. And how do you think that utilization translates when you look at the potential for the US market? I know the use in Europe of the fixed curve sheath and deflectable sheaths is different in the procedures, maybe just kind of comment on what your expectations could be?

Historically, I think the ability to use additional devices has always been stronger in the US than Europe. But everybody – I think it’s pretty universal that a Lasso is used in most AF procedures. I think if you start going beyond the Lasso, then I think clearly there’s a much higher percent of EPs in the US using ICE than in Europe. I think deflectable sheath, I don’t know, but I suspect it probably follows a similar trend. So I think we’ll get a larger percent acceptance of the dual Vdrive in the US because of the kind of the broadening of the number of devices used in the US versus Europe. Sameer Harish – ThinkEquity: Got it. Okay. So you’re not expecting the dual Vdrive in Europe to be a big additive to what you have in the market today?

Well, no. What I think will happen is they’ll use Lasso in one and a fixed curve in the other. Sameer Harish – ThinkEquity: Okay.

And then as it moves into the US, I think you’ll expand beyond just a Lasso and fixed curve to a Lasso and an ICE or a Lasso and other devices. Though it’ll be a much broader use of the product in the US. Sameer Harish – ThinkEquity: Okay. Got it. Thank you very much.

Thanks, Sameer.

Thank you. And our final question is from the line of Tao Levy with Collins Stewart. Please go ahead.

Tao? Tao Levy – Collins Stewart: Hi, guys. Hear me okay?

Yeah, not a worry. Tao Levy – Collins Stewart: Okay, perfect. In terms of – and sorry, I was on a couple of calls, but in terms of the Epoch system orders in the quarter, there weren’t any or new Niobe systems?

Correct. Tao Levy – Collins Stewart: Correct. What – why do you think that is – what are the sites telling you about wanting to wait, needing to wait to place those orders?

I think everybody – let me qualify this, everybody was very positive that have come – that has visited St. Louis and seen the Epoch in use. I think everybody would like to see it in use in human clinical environment, not just in our lab. But I think it’s not a reflection of the acceptance. It’s kind of a reflection of kind of the proof of value over time. So I think everybody is very excited about what they see here. They’d like to see it in a clinical environment. Obviously, we hope to show them that in the next upcoming month or two depending on where they’re located. And then we’ll begin to look at the collection of the value statements as we go between Boston and HRS, so we can begin to promote that in the market. Tao Levy – Collins Stewart: Got you. Since some folks coming to visit are non-Niobe, non-Epoch sites, is that (inaudible) some of them, is that fair?

I’m not – you mean the upgrades? There is... Tao Levy – Collins Stewart: No, no, no, the clinicians that are expressing interest, the sites that are expressing interest, do they currently have a Niobe system and are looking to upgrade? You’ve got four upgrades this quarter...

So you could segment the group into two, right? Those who have a system that are looking to upgrade. We had four this quarter and we’ll anticipate that that will continue to be the case as we move through the year. They’ll continue to buy the upgrades. Then there is those who are looking to buy a system who haven’t had a system before. They’re going to look to see it in use before they make the final decision. Obviously, we hope to have that up and running this quarter in Q4. Tao Levy – Collins Stewart: Okay. Did you indicate on the call what the cost was for those upgrades?

The upgrade is $200,000 for the Epoch and about another $250,000 for Vdrive, right, and that’s without Odyssey. So in many cases, the ones that are coming in had Odyssey already. It’s about $0.5 million for both. Tao Levy – Collins Stewart: Okay. And then my last question, if you look at the systems that are getting pulled out of the backlog, 12, 13 systems this year including four this quarter, what’s the theme to these removals? I ought of felt that by last quarter, everything would have been trued up, so you can see another four come out. I was a little bit surprised.

Yeah. There were three, Tao, this quarter. It was $4 million, the three, because they all had Odysseys with them.

Right Tao Levy – Collins Stewart: Okay.

Most of those are just delays, right?

Yes.

So they’re just delays. I know some of those are – two of them are construction delays that are moving into 2013 and 2014, right? Tao Levy – Collins Stewart: Got you. Okay.

All right.

And that does conclude the question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Well. Thank you, everybody, for attending the call and we look forward to talking to you at the beginning of next year. And operator, if you would read back the call back information, we’d appreciate it.