Stereotaxis Inc (STXS) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 Stereotaxis, Incorporated earnings conference call. (Operator Instructions).

I would now like to turn the call over to Mr. Greg Gin, of EVC. Please proceed, sir.

Thank you, Regi. Good afternoon, everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the second quarter, which ended on June 30, 2012. 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 qualify that 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, 2011, and the quarterly filings for 2012.

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 backlogs, there can be no assurance that the Company will recognize revenue related to it's 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 an comments may be revised, modified or canceled, either by their express terms as a result of negotiations, or by project changes or delays. Now, I would like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis.

Thank you, Greg. Good afternoon, everyone, and thank you for joining us for the review for our second quarter 2012 performance. With me today is our Chief Financial Officer, Sam Duggan. Following our prepared remarks, we'll open up the call for your questions. Let me briefly review the quarterly results, then Sam will provide further details in his prepared remarks.

As the year unfolds, we're seeing greater excitement around our Niobe Epoch System, or Niobe ES, which is designed to significantly enhance complex electrophysiology procedures. In addition, we're continuing to build a strong referral base of Niobe ES users, which we believe will accelerate future capital sales. In the second quarter, we generated two new Niobe ES orders and two went to revenue, both in North America.

We also upgraded 22 sites in the installed base to Niobe ES, bringing the total upgraded sites to 41 in the first half year, and surpassing our milestone of 40 installations. To date, 47 sites, or over 30% of our customer base in North America and the EU, have transitioned to the ES platform since it's launch in December 2011. We're also seeing encouraging results from our focus on increasing clinical adoption. Among Niobe ES users, utilization grew 28% during the first half of 2012, while all sites grew 13% compared to a year ago period. For the same period AFIB procedures increased 31% in ES sites, and by 23% for all sites.

Supporting these trends is an extremely positive feedback from physicians. Some of which have told us that they no longer will perform complex procedures without the advanced capabilities of the Niobe ES system. It has changed the way they approach EP procedures. At the same time, we continue to make substantial progress in reducing operating expenses, which were down 27% year-over-year. Our commitment to cost reduction has resulted in a 52% improvement in operating losses for the first half of 2012, compared to the same period last year.

As I outlined on the last quarterly call, our current cost reduction initiatives include, leveraging our clinical sales force to help drive capital sales, focused spending on R&D projects, aggressively reducing general expenses, including G&A, support functions and discretionary spending that does not align with top line growth. To date, we've completed the majority of the discretionary spending cuts and continue to realign other areas.

We're on track for the 15% to 20% decrease in operating expenses by year end, from the first quarter 2012 levels. We've also significantly improved our balance sheet and financial position in the quarter, by securing approximately $18.5 million in gross proceeds from our successful financing. Offsetting these successes, we face challenges in the quarter that impacted top line growth.

First, was a sequential decline in reoccurring revenue. This decrease was largely a result of the stocking of disposables by customers in the first quarter, in anticipation of a ES upgrade or Vdrive utilization, which resulted in lower purchases in the second quarter. Additionally, while the underlining trends for utilization are very positive at Niobe ES sites, overall procedures were down 3% sequentially driven by non-ES sites. This reflects our intense focus on allocating resources towards driving successful clinical adoption in upgraded sites, thereby shifting resources away from non-ES sites and ultimately impacting their utilization. To overcome this challenge, we will engage trained ES physicians to facilitate the learning curve of non-adopted physicians, including hosting regional best practice forums.

At the same time, we'll continue to make transitioning the installed base of the ES platform our top initiative due to the net positive impact on our business model. Switching to Vdrive. We continue to receive favorable clinical feedback, but Vdrive's utilization did not meet our expectations. After discussing the barriers to increase utilization in each of the ten Vdrive European sites, the primary issue that emerged is the incremental $900 cost per case, that the Vdrive adds to each procedure. European customers are experiencing a challenging reimbursement environment and the incremental post per procedure is a barrier to accelerated adoption.

As a result, our engineering teams are redesigning the disposables to address this issue. We intend to launch a new line of multi-use disposables by year end. The disposables have a computer chip, which allows customers the benefit of using the consumable products for multiple patients. By allowing multiple use, consumers can reduce the per patient costs significantly. We're testing the economics of the product over the next two quarters, with the commercial release planned by the end of this year. With respect to the regulatory status of the Vdrive in the US, we've moved one step closer to market clearance with FDA approval, in July, for a human clinical trial V-Loop.

The study of 120 patients at three centers, will compare the effectiveness of V-Loop's manipulation of a circular mapping catheter to conventional methods. We expect to begin patient enrollment in the upcoming weeks. In the meantime, the animal study on V-Sono or intracardiac echo are complete and we expect to submit our filing to FDA by year end. Approval of either of the Vdrive disposable components, the V-Loop or V-Sono, will allow us to market the Vdrive Universal Robotic Arm in the US. Meaning customers can buy the basic platform and expand usage as additional disposables are cleared for the US market.

Turning to the Odyssey business. We recognize revenue of $1.1 million on system sales for the second quarter of 2012, compared to $1.6 million in the prior year. We expect performance to improve in the second half of the year, as more Niobe ES users come on board and we're able to realize the full value of the Odyssey and Robotic suites. To date, 80% of the upgraded sites have incorporated the Odyssey solution, and we believe a large portion of the remaining 20% will order once capital becomes available. In the second quarter, we booked over 700,000 of new Odyssey orders.

We recognize the initial revenue from our Biosense Webster commercial agreement in the second quarter, and expect momentum to increase as the year progresses. We will continue to leverage this relationship and seek other commercial partnerships to expand Odyssey's foot print outside of the Niobe suites. With an improved financial position and ongoing expense reduction, the key to reaching sustainable break-even is driving further ES upgrades, improving our reference base of users, and leveraging this base to accelerate capital growth.

To that end, we reaffirm and outline the following milestones for the remainder of 2012; achieve at least ten new Niobe ES sales during the year, upgrade 50% of the existing North America and European sites, or 22 more, by year-end, submit Vdrive arm with Sono for FDA clearance in the US by year-end, commercialize Vdrive disposable multi-use product line by year-end in Europe, and reduce operating expenses by 15% to 20% from the first quarter levels by 2012 fourth quarter, through cost reduction plan implemented in May of this year. Given current trends, we're confident in achieving these milestones and believe we're on a path to break even.

With the introduction of the Niobe ES platform, we have revitalized the installed base, as reference sites expand and increase utilization of new system orders are expected to continue to accelerate. The evidence of this is the rebound of system orders this past quarter, and the growth of mid and late stage customers in our pipeline. The advancements we've made in the Niobe ES safety, efficiency and efficacy, have put us on a path to gold standard status for complex EP ablation.

Also, by combining magnetic controlled a distal tip of interventional devices, with the mechanical arm to control the proximal end, we have a unique ability to customize and maximize the robotic performance of a given application. The Vdrive platform also gives us a unique opportunity to capture control of diagnostic devices in robotic procedures, and has received very positive clinical feedback in Europe.

By addressing the cost per case issue and gaining market clearance in the US, we expect this product to emerge as a significant contributor to revenue growth. Additionally in 2013, we're exploring the possibility of expanding the Vdrive arm to a broader number of products, giving customers greater flexibility and allowing us to capture revenue on a broader number of cases.

Finally, as more robotic systems are installed and customers realize the value of integrated clinical information systems in the robotic suites, we expect Odyssey sales to continue to rebound. As we evaluate the state of the business today, we have significantly improved our financial position, brought to market several new clinically advanced products that are gaining commercial acceptance, and have a strong customer base who believe in what robotics can do and bring to interventional medicine. I'll now turn the call over to Sam, to provide further details on our quarterly results.

Thanks, Mike. Good afternoon, everyone. Revenue in the second quarter was $10.5 million compared to $11.6 million in the 2011 second quarter, and $12.3 million in the first quarter 2012. The year-over-year decline resulted from lower system sales. This was primarily due to one less Niobe ES system sale, which contributed to overall Odyssey revenue being lower than $0.5 million.

Odyssey standard lab revenue improved slightly. These declines were partially offset by $0.7 million of Niobe ES upgrades. Reoccurring revenue of $6.6 million was unchanged year-over-year, as higher disposable sales were offset by lower royalty and service revenue. The decrease in royalty revenue was principally attributable to a contractually lower royalty rate of 14%, which went into effect on January 1, compared to approximately 16% in the prior year period. Service revenue decreased slightly due to lower timing material billing, and to a lesser extent currency, while a number of service contracts remained unchanged from the prior year period.

Sequentially top line growth was impacted by lower Odyssey and Vdrive sales, and lower recurring revenue. Odyssey revenue declined $900,000, split pretty evenly, between sales into Niobe Labs and Standard Labs. Sequentially recurring revenue was down $0.5 million. As Mike already mentioned, this was due to stocking orders for disposables in Q1, in anticipation of ES upgrades and Vdrive utilization. Utilization and Niobe ES sites increased 25% in the quarter over the same period last year, and overall utilization was up 10%. This has positively impact disposable and royalty revenue, as we move forward and strengthen our reference base for capital sales.

Gross margin was $7.3 million or 69% of revenue in the second quarter, compared to a margin of 69.7% in the year ago quarter. The decrease in gross margin percentage is principally driven by lower production volumes. Operating expenses in the second quarter were down $5.7 million or 33% year-over-year, and $0.8 million sequentially. The year-over-year decrease was principally related to reduced headcount and lower consulting and discretionary spending. The head count and head count related expenses representing $3.3 million or 58% of these reductions. Operating loss in quarter was reduced to $4.6 million compared to $9.5 million in the prior year quarter, a 51.4% improvement.

Interest expense increased to $1.8 million in the second quarter, compared to $0.8 million in the prior quarter. The rise is primarily related to the Cowen Healthcare Royalty Partners II, LP financing in November of 2011, and amortization of warrants issued in conjunction with the renewal of the revolving line of credit. Net income for the second quarter was $2.8 million or $0.32 per diluted share, compared to a net loss of $9.7 million or $1.77 per diluted share reported for the second quarter 2011.

The weighted average diluted shares outstanding for second quarter of 2012 and 2011 totaled $9.3 million and $5.5 million respectively. The 2012 second quarter results included a $9 million gain, related to mark-to-market conversion features of the warrants and subordinated convertible debt associated with the $18.5 million financing in May 2012. Excluding the gain associated with the mark-to-market conversion features, the second quarter of 2012 adjusted net loss would have been $6.2 million or $0.91 per adjusted diluted shared, or $6.7 million adjusted average diluted shares outstanding.

Let me pause for a moment to discuss the mark-to-market conversion features and $9 million gain recognized in the second quarter. In accordance with generally accepted accounting principles, we're required to assign a fair value to the warrants related to the pipe insubordinated convertible debt, as well as the embedded derivative related to the ability of the subordinated convertible debt holders to convert this debt to equity.

As of May 10, 2012, the date the $18.5 million in financing was closed, a fair value of $3.5 million was ascribed to the pipe warrants, $4.1 million to the subordinated convertible debt warrants, and $3.5 million to the ability to convert this debt to equity. This accumulative $11.1 million is reflected as a liability on our balance sheet, and is mark-to-market each quarter. As our stock price declined from May 10 to June 30, the mark-to-market at quarter end, resulted in a $9 million gain being recognized in the second quarter in other income.

For the pipe and subordinated convertible debt warrants, this mark-to-market treatment will continue for the lesser of 6 years. Which is the life of the warrants, or until the exercise of the warrants. For the embedded derivative related to the ability to convert the debt to equity, the mark-to-market treatment will continue the lesser of two years, which is the maturity of the subordinated convertible debt or until the conversion of the debt to equity. From a balance sheet perspective, the $3.5 million in fair value ascribed to the pipe warrants, is reflected as a reduction to stockholder's equity, additional paid in capital specifically. The $4.1 million ascribed to the subordinated convertible debt warrants and $3.5 million to the ability to convert this debt to equity, is reflected as a discount or reduction of the $8.5 million in subordinated convertible debt.

This cumulative $7.6 million discount to a subordinated convertible debt will be amortized as interest expense through May, 2014, using it the effective interest method. This non cash interest expense will increase from $0.1 million in the second quarter of 2012, to $0.3 million in the 2012 third quarter, to as high as $2 million in the first quarter of 2014.

Let's turn back to our results for the quarter. At quarter end, we valued our active backlog at $12 million, compared to $16.9 million at the beginning of the quarter. During the quarter, we added $3.1 million in new orders and converted $3.9 million in new revenue. Consisting principally of $2.7 million for two Niobe sales and ES upgrades, and $1.1 million in Odyssey sales. We moved two products from active backlog, valued at $3 million. The remainder of the difference, primarily, is due to changes in deferred revenue. For the two projects removed from backlog, one related to North America and was expected to go to revenue in 2013, the other related to EMEA and was anticipated to go to revenue in 2012.

These projects were public tenders, with one being canceled and the other expiring. Both projects are in our sales pipeline, as new public tenders are expected in early 2013, with potential delivery in late of 2013 or early 2014. In the second quarter, cash burn was $4.2 million compared to $5.9 million in the prior year quarter, and $4.3 million in the 2012 first quarter.

At June 30, 2012, we had cash and cash equivalent of $12.1 million, compared to $10.5 million at March 31. Outstanding debt was $29.1 million, including $14.1 million related to Cowen debt. Related to the Cowen financing agreement, on July 30, we gave irrevocable notice to borrow an additional $2.5 million on August 14, based upon achieving our first milestone of six Niobe ES sales, in the nine months ending June 30, 2012.

As a reminder, we will receive another $2.5 million beginning December 31, 2012, subject to the sale of ten Niobe ES systems for the fiscal 2012 year. Our commitment to reducing costs has substantially improved our bottom line and financial stability over the last 12 months. Looking to the second half of 2012, we continue to expect to reduce operating expenses by 15% to 20% from the first quarter of 2012 levels. With completion of our recent $18.5 million financing, significantly lower operating costs and with positive trends and system orders, we are in a strong capital position moving forward. With that, I'll turn the call back to Mike.

Thanks, Sam. We have been and will always be, a Company driven by a vision to transform interventional medicine through robotic technology. Executing on this vision requires alignment and advice from respected industry leaders who believe in its value. Today, we announced the appointment of Dr. Gery Tomassoni, M.D. FHRS, as our new Chief Medical Officer for a three year term. Dr. Tomassoni is the Director of Electrophysiology at Central Baptist Hospital in Lexington, KY and was one of the earlier doctors of robotics.

In fact, he and his team were the first in the world, to complete in the Stereotaxis Niobe procedure. We look forward to a deep and valuable insight he'll bring to leading our scientific product and clinical training. Dr. David Burkhardt, who has served in this capacity for the past three years, will continue in the role of Chief Development Officer, and we are grateful for his guidance over the past three years. And he will continue to lead in this role deep product advancement of our platform. I want to thank both gentlemen, for their commitment to our Company. With that, Operator, I'd like to open up the call for any questions.

(Operator Instructions). Your first question comes from the line of Steven Lichtman, of Oppenheimer. Please proceed, sir.

Hi. This is actually Rosemary, in for Steve. Can you guys hear me okay?

Hi, Rosemary.

How are you doing?

Good, thanks. Thanks for taking my question. Quickly, on the redesign of Vdrive disposables in Europe, just trying to gauge how many demand you expect to draw through the lower price point? Also, longer term, how does this dovetail with the Vdrive process in the US?

Well, the way it will work is, the multi-use will be able to be used by customers and they can go through a cleaning process between, obviously patients, and we're targeting somewhere between five and ten times before they would be required to buy a new set of disposables or reuse products. With that in mind, that would drop the price more than 50%, around 50% from where it is now, depending on the pricing of the multi-use device, but that's what we're targeting.

Then with that, what we've done in early testing, is seen a marked improvement in what their interest is to use it for the AF cases. Where we've seen price not as sensitive, and there are some markets in Europe where it is not as sensitive, they're almost using it one to one. Obviously there are markets that are very sensitive, and we want to address it through this means. Now in the US, we don't anticipate that the disposable prices are as sensitive, so we'll go through a launching of that multi-use line early next year, as it becomes available in the US.

Okay, got it. And then also, I wanted to get a little more color on what you're hearing from the field in terms of Niobe ES system placements. You reiterated your end goal was to achieve at least ten new system sales during the year. I was just wondering what gives you the confidence to still hit that number?

The pipeline continues to strengthen, We've seen a lot of activity that's going on, Q3 has a lot of activity that Sam and I get exposed to on a daily and weekly basis. Obviously, some will come out of backlog, others will come out of new orders, and we're confident that the ES -- earlier in the year, what we talked about was the first wave would be the upgrades of sites, then would come an increasing utilization and strengthening of our reference base. We think both of those have happened, and as a result of that, the positive feedback from the market is continuing to strengthen our pipeline. We think it will merge into a stronger orders-end revenue.

Yes, definitely. Actually, finally on that point, I was going to say that very nice improvement at utilization at Niobe ES site this quarter. Can you just elaborate a little more on that feedback that you're hearing, and what you're thinking in terms of run rate for the rest of the year?

Obviously, the utilization -- we're very happy with at Niobe ES sites. It's taking a disproportional amount of our resources, which we believe is the right thing to do. To focus to make sure that those sites go well. We anticipate the continuation of clinical adoption pathway in Niobe ES sites, that's why we're putting so much emphasis on a continuation of the upgrades.

We think it's the right thing to do to drive the business model. What we hear from those sites is very favorable response on the product improvements that ES provides, the value it creates. We continue to hear very favorable market responses on that. Obviously, with the one exception with the price for the Vdrive disposable, which we think we'll address later this year.

Great. Thanks so much, guys.

Thank you.

Thank you.

(Operator Instructions). You have no further questions at this time. I would now like to turn the call back over to Mr. Mike Kaminski, for closing remarks.

Thank you, everybody, for attending the call today, and we look forward to talking again in the November timeframe, with our third quarter results. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.