Stereotaxis Inc (STXS) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Stereotaxis Q3 2012 results conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

At this time I would like to it turn the conference over to Jim Byers of the MKR Group. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the third quarter, which ended on is September 30, 2012.

Before we get started, we would 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 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 in 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 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 outside of the Company's control. In addition, the orders and commitments may be revised, modified or canceled, either by their express terms as a result of negotiations or by project changes or delays.

Now with that said I would like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis.

Thank you, Jim. Good afternoon, everyone, and thank you for joining us for the review of our third quarter 2012 performance. With me today is our Chief Financial Officer, Sam Duggan. Following our prepared remarks, we will open up the call for your questions.

We are pleased to report a strong financial quarter and trend for the Company. To start, we reduced our operating loss to $900,000, our lowest level since the Company's initial public offering in August of 2004 and a 90% improvement over this time a year ago. This near break even operating performance was the as a result of a marked increase in revenue, strong margins and significantly lower expenses. Specifically, third quarter revenue was up 36% and operating expenses down 40% compared to the same quarter last year.

Through the cost reduction plan that we announced and implemented early in the year, operating expenses in Q3 were down 29% compared to first quarter levels, which is a full quarter ahead of schedule. We have made a company-wide commitment to focus operating spend on key revenue drivers and as a result have substantially reduced our cost structure.

As impressive as our financial metrics are for the quarter, the nonfinancial results are even greater indicators of our momentum. Incoming new capital orders for the quarter were $7.1 million, up 131% sequentially and up 227% compared to a year ago,reaffirming our planned uptick in capital revenue as orders translate to revenue.

Now let me cover some highlights of the [Epoch] in the quarter. When we launched Epoch 11 months ago, we anticipated that upgrading the installed base would ignite excitement around the new platform in the broader market and drive capital sales. That is exactly what is occurring.

As you will recall, we generated no new Niobe ES orders in Q1, two Niobe ES orders in the second quarter. In the third quarter, new orders for the ES system increased to four, two of which were second system sales. This is the second consecutive quarter that we experienced second is system sales, as hospitals look to advance their robotic research and supportive or procedure growth with installation of a second Niobe ES.

At the same time we have continued to see our pipeline strengthen with mid and late stage customers as market awareness of the value of the platform broadens. During the quarter, another 13 sites from the installed base upgraded to the new platform, bringing the total ES upgrade to 60, or 43% of customers in Europe and North America. We also saw utilization among ES users continue to improve, aresult of enhanced customer is support and innovative programs to ensure clinical adoption.

In Niobe ES sites EP procedures grew 26% in the third quarter, while all sites grew 9% compared to the same quarter last year. The Epoch solution represents a fundamental treatments in complex arrhythmias for the single physician operators, and enthusiasm around its capabilities and potential continues to grow in the mainstream commercial market. With our robotic suite of Niobe ES, Odyssey and Vdrive, procedures are performed safer, simpler and faster.

Difficult to reach area of the heart are assessed more easily, and we believe that with the consistency of performance of our robotic platform we can positively impact the recurrence rate. In fact, one physician relayed that when asked by a colleague about his strategy to redo AF cases, he realized that none of the patients treated with the robotic navigation system had comeback for further treatment. This kind of validation continues to come about with our latest generation technology.

Vdrive contributed $0.5 million to capital revenue on four system sales in the third quarter. During the quarter we released a disposable bundle of consumable products for the Vdrive system to test the economics of a multiuse program, and we have seen renewed sales activities and utilization as a result. We have had extremely positive feedback regarding the clinical value of Vdrive, and by addressing the cost per patient we should allow our European customers to significantly improve the cost/value equation. We expect the commercial release of the multiuse product line in Europe by the end of this year.

During the quarter our clinical affairs team began enrolling patients in the V-Loop human clinical trial. The study compares manual navigation of a circular mapping catheter with the mechanical navigation of Vdrive. We expect a total of 120 patients to participate in the study, which will be conduct at up to five sites in the US and Europe.

We also submitted the first FDA premarket notification for V-Sono ICE, which enables remote control of a variety of ultrasound catheters. Approval of either of the Vdrive disposable components, the V-Loop or Sono, will allow us to market the Vdrive universal robotic arm in the US with disposables added as they receive US approval.

In the Odyssey business we recognized revenue of $1.6 million on eight system sales for the third quarter. Year-to-date the Odyssey solution has contributed $4.8 million torevenue. During the quarter, we saw traction with Odyssey outside of the Niobe lab through our Biosense Webster commercial agreement.

Given the growing demand for the Epoch solution, we believe we will accomplish our 2012 Niobe ES milestone by the end of the year. First, achieve ten new Niobe ES system sales during the year. We shipped one is system in October and expect to confirm a second system from backlog. The other two systems are expected to come from our late stage pipeline. It is worth noting that we have been able to reduce the time from order to shipment for Niobe ES as evidenced by two orders posted to revenue in the third quarter, which were also received during the quarter.

Secondly, upgrade at least 50% of the existing North American and European sites, or are nine more by year end. Also, in addition to releasing the Vdrive disposable multiuse program in Europe, we have set a goal of submitting the Vdrive [VCAS] ablation catheter manipulator for FDA clearance before year end. VCAS, which stands for catheter advancement system, is the disposable used to advance and retract the catheter during the Niobe procedures. Approval is anticipated in 2013.

The Vdrive product line is an example of the innovations that will continue to define Stereotaxis. While we are focused on translating the excitement around our robotic technology into capital revenue and higher utilization and are always mindful of costs, we remain dedicated to delivering new products that bring value and change people's lives.

I will now turn the call over to Sam to provide further details on the quarterly results. Sam?

Thanks, Mike, and good afternoon, everyone. Revenue in the third quarter $11.6 million, up from $8.5 million in the 2011 third quarter and $10.5 million in the second quarter 2012. System revenue improved to $5 million from $2 million in the prior year quarter and $3.9 million in the second quarter.

In the third quarter we recognized revenue of $2.9 million on two Niobe ES systems and upgrades,$0.5 million on four Vdrive systems and $1.6 million in Odyssey sales. Recurring revenue of $6.5 million was unchanged year-over-year and sequentially. Compared to the prior year period, growth in procedures was more than offset by a weakening of the euro and to a lesser extent inventory adjustments at our customers, resulting in a slight decline in disposable revenue.

Royalty income was also marginally lower than last year due to a contractually lower royalty rate of 14%, which went into effect on January 1, and compares to a rate of approximately [16]% in the prior year period. Utilization in Niobe ES sites increased 26% in the quarter or over the same period last year ,and overall utilization up 9%. This should positively impact disposable and royalty revenue as we move forward.

Gross margin was $8.1 million or 69.8% of revenue in the third quarter, compared to a margin of 68.9% in the year-ago quarter and 69% in the second quarter. The improvement in gross margin was driven by higher production volumes.

Operating expenses in the third quarter were down $5.9 million or 40% year-over-year and down $2.9 million sequentially. The year-over-year decrease was principally related to reduced head count and related travel expenses, lower consulting and discretionary spending, as well as a decline in registration costs in Japan as our products approach the end of clinical trials. The third quarter also realized $0.8 million in positive adjustments primarily related to noncash stock compensation and bad debt expense.

As Mike mentioned, we also reduced our operating expenses by 29% from first quarter levels to an aggressive reduction in expenses impacting top line growth, more focused R&D spending and reliance on clinical sales team to drive capital sales. Operating expenses are expected to be higher on a sequential basis in the fourth quarter, as the $0.8 million in positive adjustments are not expected to reoccur and the V-Loop clinical trial ramps up. However, we expect expenses will remain 15% to 20% below first quarter levels in the first quarter.

Operating loss in the quarter was reduced to $0.9 million, compared to $9.1 million in the prior year quarter and $4.6 million sequentially. This represents a 90% improvement over the prior year quarter and our lowest reporting operating loss as a publicly traded company. Even excluding the $0.8 million in positive operating expense adjustments,we still realized our lowest operating loss since August of 2004.

Interest expense increased to $1.6 million in the third quarter compared to $0.8 million in the prior year quarter. The rise is primarily related to the Cowen Healthcare Royalty Partners financing in November of 2011, an additional $2.5 million in Cowen borrowings in August of 2012 and issuance of $8.5 million in supported convertible debentures in May of 2012.

Interest expense includes the amortization of the debt discount on the subordinated converted debentures totaling $0.2 million in the third quarter. This amortization is expected to grow to $0.4 million in the fourth quarter of 2012. Other income for the 2012 third quarter included a $0.6 million gain primarily related to mark to market conversion features of the warrants on subordinated convertible debt associated with the $18.5 million financing in May of 2012. Third quarter 2011 results included a $2.6 million gain in other are income related to the change in market value of certain warrants issued in December of 2008.

Net loss for the third quarter was $1.9 million or $0.25 per share, compared to a net loss of $7.3 million or $1.33 per share reported for the third quarter of 2011. The weighted average shares outstanding for the third quarter of 2012 and 2011 totaled 7.7 million and 5.5 million respectively. Excluding the mark to market gains included in other income, the third quarter adjust the net loss would have been $2.5 million or $0.33 per adjusted share, and the 2011 third quarter adjusted net loss would have been $9.9 million or $1.80 per adjusted share.

At quarter end we valued our active backlog at $13 million, compared to $12 million at the beginning of the quarter. During the quarter we add $7.1 million in new orders and converted $5 million in revenue, consisting principally of $2.9 million for two Niobe ES sales and upgrades,$1.6 million in Odyssey sales and $0.5 million Vdrive. We removed one project in backlog valued at $1.1 million. The projectwas put in backlog in 2010 and removed due to a construction delay but is still in tour sales pipeline.

In the third quarter cash burn was $3.6 million compared to $4.6 million in the prior year quarter and $4.2 million in the 2012 second quarter. The cash burn in the 2012 third quarter was composed nearly equally between cash losses and higher working capital. As we look forward to the fourth quarter of 2012, we expect our cash burn to continue to decline through higher revenues and controlling costs. At September 30, 2012, we had cash and cash equivalents of $9.9 million, compared to $12.1 million at June 30.

Outstanding debt was $30.9 million, including $16.4 million related to Cowen debt. On August 8 we borrowed an additional $2.5 million from Cowen upon completion of the first milestone of six Niobe ES sales in the nine months ending June 30, 2012. We will receive another $2.5 million in the first quarter of 2013 with the sale of ten Niobe ES systems for the 2012 fiscal year.

While we remain focused on continuing the positive operating and financial trends of the quarter, we also recognize the need to strengthen our balance sheet. In that spirit we he have engaged an independent financial advisor to assist management and the Board of Directors in viewing all possible strategic and financing alternatives, including the sale of noncore assets or distribution rights in geographic partnerships. There can be no assurance as to whether any particular strategic or financing alterative will be recommended by the Board, and we do not intend to disclose information on the progress of this evaluation until such time as deemed appropriately the Board.

With that, I will turn the call back to Mike.

Thank you, Sam. When we look ahead to 2013, we have several opportunities that we are excited about. First, Vdrive's expected approval in the US should significantly increase its contribution to our top line. The US market is less challenged from a reimbursement standpoint than Europe, and we believe physicians will be eager to utilize the unique capability of the full robotic suite.

We will also be exploring the possibility of expanding the [V-arm] to a broad number of product, giving customers greater flexibility and allowing us to capture revenue on a greater number of cases. Secondly, the Japan market will open up with the expected regulatory approval of Niobe in the first half of 2013. Japan currently has approximately 400 hospitals performing ablations, with 12% annual procedure growth. AF in particular is a growing problem, as 23% of the population is now 65 and older. Japan represents a large untapped market for Stereotaxis, with high regard for value added US medical technology.

At the same time we are committed to continually improve in quarterly financial results. We continue to see positive uptick in new capital orders, strengthening of our capital pipeline and broadening of our Epoch installed base, positively impacting utilization. As a result we believe we are positioned to further drive top line growth with strong margins and through diligent control of expenses to demonstrate a stronger bottom line. We believe our vision for the Epoch platform is becoming a reality and leading us on a path to profitability.

We are well positioned to penetrate the commercial hospital market with our robotic technology. Simply put, the EP physician can treat and access all area of the heart more easily with an Epoch solution. The idea of robotics in the interventional suite is no longer conceptual, but it is a reality that's designed as a practical means to deliver better outcomes through safer, more precise and minimally invasive treatment.

In closing, I would like to recognize our employees for their commitment to the success of Stereotaxis and for stepping up to the challenges of the last couple of years. Thanks to each of you for your continued support. With that, operator, I would like to open it up for some questions.

Thank you, sir. (Operator Instructions). The first question comes from the line of Steven Lichtman of Oppenheimer & Company. You may go ahead.

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

Hey, Rosemary.

Congrats on the strong [Epoch] showing this quarter. Obviously the advantages of the system are definitely generating excitement. I just wanted to see, with Epoch now three quarters into its launch, hoping to gain color on the dynamics you're seeing in the field, possible spending appetite, and basically how sustainable you expect the growth to be looking forward?

The -- I don't know if I understood the question. Is the sustainability of growth in Epoch? Is that your question, Rosemary?

Exactly.

Okay. We are seeing -- obviously we watch the sales pipeline, the prospective customers, and look at the growth of that and excitement around that. We are beginning to see the Epoch utilization like we talked about. The upgrades drive utilization which drives a stronger reference base which builds the excitement in the market. That is translating to stronger pipeline, and now you are seeing it translate to orders.

So what we are seeing is the strengthening of the US and Europe. There is still a fairly untapped market in Eastern Europe that's growing in excitement. And a lot of that I would call more the innovators and the early adopters. And of course our view is Asia is just this big untapped potential that is going to open up in 2013. Particularly Japan, which I believe is the third largest EP market. So we are bullish on what the Epoch has done, and what it can do in the foreseeable future.

That is definitely very exciting that two of the new capital orders this quarter were second system sales. Could you remind us how many of the original Niobe sites have more than one system, and roughly how many hospitals your install base you believe to be potentially interested in more than one system?

Yes, I think the -- you have to date back a number of years, but I believe we had a total of five sites, but none of which had two EP systems. I believe they shared -- one -- all five of them had one IC and one EP. So that was back in the early -- or mid-2005, 2006 time period. This to my knowledge -- to my memory is the site that -- the first site that we had with multiple EP systems, which is pretty exciting.

And I think, obviously, what you will see is physicians have embraced the value of robotics, the consistency of what it can do, and the fact that sitting remotely is a better way to treat patients. So as we begin to penetrate that market, obviously there are hospitals out there with multiple ES sites that will begin -- we think -- begin to look at buying second systems.

[Definitely]. And also, sorry if I missed this earlier, but could you remind us what percent of the Epoch sites today have incorporated Odyssey by now?

There are I think 70 -- is that right? Incorporated -- 70 sites that have -- roughly 70 that have incorporated out of the 160.

I think there is about 116 Odyssey systems out there at roughly -- 74 hospitals?I believe that number is, correct.

Okay. And, Mike, last quarter you had reference to the possibility of [also seeking additional] partnership to drive Odyssey's footprint. Just wondering if you had any updated thoughts for us on this?

We are continuing to explore the strategic partnerships, and we think that will -- you will see that emerge as the year unfolds and as we go into next year.

Okay, fair enough. And just lastly on the Japan launch, obviously a very exciting market. Maybe any early color on your expected rollout process there?

Yes, so we are -- we anticipate a first half approval. There are -- we are getting some exposure, although obviously weare not approved so we have to be careful of not marketing the product in Japan, because as the Japanese physicians come to international Congress they get exposed to our technology there.

So we believe that by midyear we should be actively marketing in Japan with the approval, and obviously we have been fortunate to have our partners support our progress there so that we should be able to hit the ground running pretty hard. And we have -- I have seen market interest, although -- and believe that you should see the resulting impact a little bit in 2013 and then obviously build as the years unfold past that.

Great. Thank you so much. That's it for me.

Thank you, Rosemary.

(Operator Instructions). Our next question comes from the line of Jose Haresco of JMP Securities. Please go ahead.

Jose?

Can you hear me?

Yes.

Okay. First of all, good afternoon. Just want to go back to your guidance of being able to install or recognize revenue on ten systems this year. Can you give us a little more color on what gives you the confidence you will be able to install four more systems by year's end. That's actually a sequential doubling of the installs that you have this quarter.

Yes, so, Jose, on that one -- we already recognized one in October.

Okay.

One is in the process of being confirmed from backlog, which we are very comfortable will happen. And then two are in very late stage -- and actually we are working more than that, but two we are very confident will come from late stage pipeline that will convert. And those are -- I believe the construction progress -- or process has already began, so they are moving in some cases to try to buy in late stage to match what is already going on in the hospital. So we are -- although there is work to do --by no means is this a slam dunk -- we are confident we can get it done.

Okay. As we start to see or think about 2013, I know this is very lumpy business, but is your sense of 2013 that it will be more like this year where it is pretty steady pace of installs throughout the year rather than the typical seasonality that we get in the CapEx businesses? I mean, we are [already] starting to look at 2013, 2014 numbers now, so whatcan you tell us how to think about next year, both from Niobe to [serephim] Epoch down to Odyssey?

I think our natural seasonality that we have seen in the business is the capital in Q1 is always lighter than the rest of the quarters, and I think that is true of even our partners. Because I believe that a lot happens in the last half of the year, and as a result -- and the holiday seasons make new construction hard, so it tends to make the first quarter lighter than the rest of the year. And then the summer months are always lighter on utilization because of holidays. I think that seasonality will always -- to my -- to the foreseeable future always impact the way we look at year.

Obviously the backlog -- or the building of backlog and the incoming order rate bodes well for are what we believe will translate to revenue and capital. To the extent we get $7.1 million and it grows, we he have is a building pipeline, then we think that will translate -- should translate on a quarterly basis to -- if we can consistently do that, to $7 million or more in capital revenue, which is what we anticipate this Company can get to and get to break even in the not so distant future.

Do you think your pipeline is more predictable now than it was even a year ago?

I think the US and Europe, yes, because I think we are coming -- we have a stronger reference base. I think the rest of the world still probably has some work to do,because we don't have as many personal touches on the rest of the world. Sometimes we are working through distributors, so we have a little less clarity on that. We are pretty comfortable, and the US and Europe are bullish on next year.

Okay. I guess Last question. You have done a great job of cutting costs. The down side is how do we -- are you going to continue to keep cutting costs into next year, because at some point there is a diminishing return on that in terms of needing to grow and needing to feed the pipeline and support the systems throughout. How low are you intending to take expense?

I will let Sam jump in here in a minute, but letme give you the quick view before Sam jumps in. We have done an exceptional job, and all employees and all the managers and layers here of making sure that we keep an eye on growing the Company and innovating the product. So we have looked at all of the different areas we could trim back and improve in order to continue to could that. And I think as we go into 2013 we can leverage that to continue to grow.

So we do believe we are at the a position that we can grow with the cost structure we he have. It is not our intention to cut to prosperity. We need to grow the Company and spread the cost to a higher revenue base so we can get through this break even and obviously start generating cash. But I'll let Sam put a little color on it?

Jose, we've actually indicated -- obviously for Q4 we expect the operating expenses to be higher in Q4 than in Q3, partly because we had $800,000 in favorable adjustments that will not repeat, partly because the Vdrive trials -- excuse me, the V-Loop trials and going to be going on and will increase costs. But we would not expect that we will be able to continue cut costs at the rate we have. Because you are correct, we have to continue to grow the business, and as the business continues to grow, you don't have the ability to continue to cut those costs.

But we he should be able to leverage the operating expenses at this lower level that we have been able to achieve, to leverage it as then the revenue grows and gross margin grows, and have it more naturally flow down then to the bottom line and help us get to that break even level. So we indicated that expenses will likely go up, as we said, in Q4, and then I think you will kind of see the run rate or potentially a little higher next year as we go into 2013. But obviously we are going to continue to focus on controlling those operating expenses and trying to invest those dollars wisely.

Jose, let me -- as I mentioned in my script, obviously we think the pipeline bodes well for where we think traction on Niobe will continue to grow in US and Europe and rest of the world. Also Vdrive coming in the US will be additive to the procedures already done in the US, so that we have account managers supporting a case structure within hospitals. By putting Vdrive in there, we should get more revenue per case. So it doesn't increase our cost structure per se, but we should see a nice inflection in revenue per case and the resulting margins too.

Okay. Thank you very much.

Thank you.

Thank you.

Thank you. And at this time I would like to turn the conference back over to management for any closing remarks.

Thank you for joining us on our call. We look forward to talking again in February and reporting an exciting Q4 results at that time. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude the Stereotaxis Q3 2013 results conference call. I would like to thank you all for your participation. You may now disconnect.