Stereotaxis Inc (STXS) 2017 Q3 法說會逐字稿

Good morning. Thank you for joining us for the Stereotaxis Third Quarter 2017 Earnings 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 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, Mr. David Fischel, Chairman and CEO of Stereotaxis.

Thank you, operator, and good morning, everyone. I'm joined today by Marty Stammer, our Chief Financial Officer. There are a few topics I want to touch upon in my prepared remarks, after which Marty will review our financial results and I will provide additional financial commentary. We then look forward to fielding your questions.

It has been 9 months since I joined Stereotaxis. The first 3 to 6 months were predominantly spent exploring and mapping out the potential ways to advance the company while meeting and learning from all of our key stakeholders.

During the third quarter, we started to make real progress on a range of tactical, structural and strategic initiatives. There are 2 key areas of focus I have previously described for Stereotaxis: first, ensuring our physician customers have successful and growing robotic ablation practices; and second, advancing our technology through significant innovation.

The first focus, ensuring existing robotic ablation practices, have successful experiences, and growth is important as that is the right way to build a long-term prosperous business. Focusing on system sales, without guaranteeing that those systems turn into successful practices is ultimately a liability rather than a benefit. Having successful robotic practices that attract patients, capture market share in their region and showcase the clinical and commercial benefits of adopting robotics creates an environment for significant adoption of our technology. This exact process is what drove the adoption of robotics for Intuitive Surgical and MAKO in their respective surgical fields.

We are working on various commercial initiatives to advance this area of focus. These commercial initiatives are categorized into effective physician training, good procedure support, tools to drive physician practice growth, tools to generate patient demand, building physician relationships and supporting impactful clinical literature. Some of these initiatives have already been implemented and others are being worked on. For example, to enhance procedure support, there has been significant improvement in our capability to provide remote technical and clinical support as a complement to our field clinical team. From improved physician training, we are utilizing simulators that allow physicians to experience realistic robotic magnetic navigation from a laptop. And in 2 weeks, we will be hosting the first robotic fellowship course, directly tailored to electrophysiology fellows in conjunction with Washington University here in St. Louis.

Certain initiatives impacts more than one category. As an example, in August we were excited to celebrate the milestone of 100,000 patients treated with Stereotaxis' robotic technology. As part of the celebration, we have been showcasing the physicians and hospitals that have helped us reach that milestone in what we call the Togetherto100K campaign. I encourage you to visit our website and social media pages to see the several dozen profiles that have been showcased to date.

The initiative not only demonstrates the robust support for robotics in the field and the wide range of clinical benefits that patients and physicians received from adopting robotics, but it has helped strengthen physician relationships and provides the foundational content and experience for some of our future initiatives to help practice growth and drive patient demand.

I want to also briefly discuss the topic of clinical literature, as that is 1 of the 6 categories of commercial initiatives and there was material progress and news here in the third quarter. The clinical value of Stereotaxis technology has been documented in nearly 300 peer review publications. The quantity of clinical literature showcasing our value has been accelerating, with over 30 publications expected in 2017 compared to 22 in 2016 and 19 in 2015. The quality of literature has also improved, with perhaps the most dramatic study showcasing our significant clinical advantages being published in the September issue of the Journal of Interventional Cardiac Electrophysiology. The study in independent meta-analysis consisting of 779 ventricular tachycardia patients treated at multiple prominent hospitals compared ablation with Stereotaxis robotic technology to manual catheters. The result was clinically meaningful and statistically significant benefits for robotics across the trifecta of efficacy, safety and efficiency. Both acute and long-term efficacy favored Stereotaxis with a 39% lower risk of VT recurrence versus manual procedures. Patient safety was significantly improved with a 65% reduction in risk of complication and an average of 10 minutes of reduced radiation exposure.

Finally, for the physician, the procedure was on average about 10 minutes faster robotically versus manually, a meaningful efficiency benefit. This is additive to the safety and convenience benefit a physician receives from doing a procedure unscrubbed, seated and outside of radiation exposure.

Stereotaxis is currently running a prospective randomized trial to replicate and definitively demonstrate our superiority in VT. And in the third quarter, we saw the highest enrollment to date in this trial, with 22 patients enrolled despite the typically weak summer seasonality. This compares to 34 patients in the first half of the year and 14 patients in the full year of 2016.

It is important to make clear that the clinical value of robotics is by no means limited to the ventricular portion of the market. We recently prepared a clinical dossier with several publications comparing robotic to manual ablation for atrial fibrillation, each publication being fairly recent and with large numbers of patients.

Stereotaxis showed a consistent and significant improvement versus manual technology in patient safety and a consistent trend towards improved long-term efficacy. We do not yet have the copyright permissions to share this dossier externally, but hope to be able to do so in the coming months.

This data is even more striking when compared to the clinical evidence that has supported the adoption of robotics in other surgical fields. Just a few weeks ago, the prestigious medical journal, JAMA, had an editorial evaluating the evidence supporting adoption of Intuitive Surgical's da Vinci system in a range of laparoscopic surgeries. I'll just say that the clinical evidence supporting the usage of Stereotaxis robotic system to treat cardiac arrhythmias is significantly more compelling than that of the da Vinci system despite approximately 85% of prostatectomies and almost 50% of hysterectomies in the U.S. now being performed robotically.

A second key focus I described was advancing our technology through significant innovation. One of our primary goals for 2017 was delineating and initiating a long-term product innovation plan. I'm glad that such a plan has been delineated ahead of schedule and believe it is elegant and both medically and commercially sound. Importantly, it also reflects the realities of what can be achieved internally with our resources and what we believe potential collaborators are open to working with us towards.

The details of the innovation plan will become clearer over time as it becomes appropriate to provide additional disclosures. The plan addresses each of the 5 core technologies that interact in a robotic ablation procedure and has 3 guiding goals. The 5 core technologies include a robotic magnetic system, the magnetic ablation catheter, software that allows for intuitive navigation, the cardiac mapping system and the fluoroscopy system. Three guiding goals of our innovation plan are improving patient care, physician choice and technology availability.

The right innovation plan can provide these benefits to patients, physicians and hospitals while also improving Stereotaxis' opportunity. As just one fairly intuitive example, Stereotaxis does not currently enjoy a replacement cycle of system sales despite a robust base of over 100 actively utilized systems. Every capital equipment company I am familiar with has a replacement cycle. Modeling one for Stereotaxis requires very few assumptions or leaps of faith, and the impact would be significant. The lack of replacement cycle is not due to any inherent lack of opportunity, but we need to create the right dynamics in order for such a cycle to take place. This is just one example, and there are other similarly meaningful ways to improve our product offering for the benefit of patients, physicians, hospitals and ultimately Stereotaxis. Tangible activities on several components of the plan have been initiated, and others are in negotiation and expected to be initiated in the coming months.

I'll now pass the call over to Marty who will discuss the third quarter financial results in more detail.

Thanks, David, and good morning, everyone. Revenue for the third quarter of 2017 totaled $8.1 million. Recurring revenue was $6.5 million in the quarter, up 3% from $6.4 million in the prior year quarter and down sequentially from $6.6 million, which reflects normal summer seasonality.

Recurring revenue benefited from a 2% year-over-year growth in global procedures. This is the second consecutive quarter of year-over-year procedure growth, reversing a negative trend we have seen for several years and driven by strong performance from all major geographies.

Recurring revenue for the first 9 months of 2017 of $19.9 million is slightly higher than the sales recorded for the same period in 2016. System revenue in the third quarter was $1.6 million, down from $2 million in the prior year quarter and $1.8 million in the second quarter. System revenue reflected the sale of a Niobe system to an international distributor in the third quarter as well as the sale of Odyssey systems. System revenue of $3.6 million for the first 9 months of 2017 was down from $5 million in the first 9 months of 2016, primarily reflecting the expiration of an Odyssey distribution agreement and the timing of Niobe system installations in 2016.

Gross margin in the quarter was $6.2 million or 76% of revenue versus $6.1 million or 73% of revenue in the third quarter of 2016 and $6.3 million or 74% of revenue in the second quarter of 2017. Gross margin percentages may fluctuate due to the mix of recurring versus system revenue, but underlying pricing and cost of sales have remained relatively stable.

Operating expenses in the third quarter were $6.1 million, down 17% from $7.3 million in the prior year quarter and down 10% sequentially from $6.7 million in the second quarter. We generated operating income in the third quarter of $200,000, only the second time in our history that operating income was achieved. This compares to operating losses of $1.2 million in the prior year third quarter and $400,000 in the second quarter.

Net loss for the third quarter of $4.3 million compares to a net loss of $6.2 million in the third quarter of 2016. The third quarter 2017 net loss is driven by $4.5 million of noncash mark-to-market warrant revaluation expenses. Excluding mark-to-market warrant revaluation, the company would have reported net income of $100,000 for the quarter.

Third quarter 2016 net loss of $6.2 million was impacted by $4.2 million of net expenses, primarily related to noncash mark-to-market warrant revaluation, partially offset by the gain on debt extinguishment.

The weighted average diluted common shares outstanding for the third quarters of 2017 and 2016 totaled 22.8 million and 21.9 million, respectively. Cash burn for the third quarter was $560,000 compared to $1.8 million in the prior year quarter and $700,000 in the second quarter. Cash burn in the quarter does not reflect the receipt of cash from the sale of the Niobe system with which the company would have recorded positive free cash flow.

At September 30, we had cash and cash equivalents of $4.5 million and unused borrowing capacity of $3 million on our Silicon Valley Bank revolver, for a total liquidity of $7.5 million.

I will now hand the call back to David.

Thank you, Marty. As Marty described and as I commented on our last call, our recurring revenue remains stable and robust. I am pleased by the early indications of sustainable procedure and recurring revenue growth. And while it's still not it, we'll hopefully accelerate at some point -- as some of our commercial initiatives, capabilities and processes are implemented.

I'm proud of our commercial team across each major geography that contributed to the quarterly procedure growth. System revenue remains low. I continue to expect a trickle of system sales, but believe this will remain at relatively low levels until we can show more tangible progress along our 2 strategic focuses. The market opportunity for selling orders of magnitude, more system is very much intact.

The operating expense reductions in the quarter reflect lower executive compensation and more efficient management of expenses across the organization but do not represent any material change in the organization's personnel, infrastructure or capabilities. I appreciate the contribution of many individuals across the organization who found ways to be more efficient and who have embraced an owner's mentality. There continues to be room for additional expense efficiencies, but these will be counteracted by increased spending on focused R&D projects and on investments in the business.

We believe our financial position puts us in a comfortable situation to advance the company significantly over the coming quarters. It is important, though, to reiterate what I mentioned last quarter: the market opportunity, first, in electrophysiology and then more broadly in endovascular surgery, our leadership in endovascular robotics and unique mechanism of action and the range of attractive ways we can meaningfully advance our product offering, all justify an aggressive effort to build a highly impactful company.

That concludes our prepared remarks. Operator, can you please open the line to questions.

(Operator Instructions) We'll take our first question from [John Morganelli].

My name is [John Morganelli]. I'm a major investor in Stereotaxis. I own about 70,000 shares. Mr. Fischel, I commend you. I think you have done a great job in the short time you've been there. But I have a couple of questions. One is it seems to me that there's no dispute about the quality of the product, but I get the impression that out in the market, the potential buyers of these systems are not convinced that this product is -- can do all that it proclaims to do. Is there a resistance out there in terms of actually trying to sell these systems? That's my first question. Second question is what is the company doing to try to increase investment in the company, more stockholders? Is there any type of campaign underway to encourage people to invest if the outlook down the road of this company is good? Because all of us who hold the stock watches this company go -- a few years ago the stock was at $40 a share. We went through all these different reorganizations. I thought that Mills was completely incompetent. For so long, I sat and listened to these presentations. So if you could address that, I'd appreciate it.

Sure, and thanks for joining the call and thanks for being a long-time shareholder. So the first question regarding system sales, as I mentioned before, my focus has been on making sure we have successful robotic ablation practices rather than trying to drive system sales in the short term. I feel comfortable doing that because we have a sufficient and robust recurring revenue base that I know that just from that growing, we have a stable company that can invest in growth. And it's not that we require system sales in the short term in order to fund the company. And because if you think about the historical missteps that the company took, one of the major historical missteps early on in its history, as I described in I believe the second quarter -- or first quarter earnings call, was selling too many systems without the right support afterwards and then having systems that were stalled and idle, and that creates a negative feedback loop in the marketplace. Right now, it is perplexing that we don't have more systems because the system is very capable. We have, as I described, in the 100 -- Together to 100,000 campaign and if you look in our social media pages or on our website, you will see it, there are robust group of physicians that are actively utilizing our system on a regular basis. They find great value from it, both for themselves and for patients. It enables them to treat patients that otherwise wouldn't be treated. And that's also with new system installation. So I was recently in Japan and saw 2 systems that were installed just over the last couple of years. And they are using the system very actively and finding great results with it. Similarly, kind of other relatively newer installs are being utilized very, very well. And so the difficulty on new system sales is perplexing. There's a few thoughts. One is that we still have very small market share at only around 1% of the EP market. And so that's -- it's a bit small to generate the type of momentum and the competitive dynamics between hospitals where a hospital feels that adoption of robotics is a need to have rather than a want. And so we have little pockets of this momentum, for example, in Scandinavia. The majority of the hospitals that have and are actively utilizing our systems. But recreating that momentum in specific geographies requires creative efforts, and that's -- when I described the 6 categories of commercial initiatives, that include some of those creative ideas to recreate that momentum in local geographies. Another thing that I mentioned on the call was a replacement cycle and I don't want to go into more detail there. But every capital equipment company has a replacement cycle, if you look at the 150-plus system sales that Intuitive Surgical had in the last quarter, a good portion of those were replacement system sales. And the same takes place for nonrobotic capital equipment across the medical field. We should have, just from our active installed base, 10-plus system sales a year on the replacement cycle, which we don't have. And creating the right environment for replacement cycle is something that would be, obviously, then very material for the company. And the other kind of final point in my mind is that there are still fundamental issues that we should address and there are concerns that physicians and hospital administrators have in terms of wanting to see a clear innovation plan. And so I think it's important to show them that we have a long-term plan that will significantly improve the technology. On the one hand, we're telling them that we want them to adopt cutting-edge technology that's revolutionary for the field. And on the other hand, we haven't shown very significant innovation now for several years. And so I think that, that will be very helpful in moving the process forward both with physicians and hospital administrators. And again, the market opportunity for system sales is kind of very significant. But I feel fairly comfortable that as we start to generate that momentum, we have the ability to do what other robotic companies in the field have done, like Intuitive Surgical in laparoscopic surgery, like MAKO in hip and knee arthroplasty and like Mazor more recently with Medtronic in spine surgery.

Okay. And just a follow-up. Was there -- is there any plan to try to get more investors in Stereotaxis in terms of more investors gives you more capital?

So there's 2 comments on new investors. One is new investors in the stock in the open market and one is new investors for more capital. On the first, what I'll say is that I'm a shareholder exactly like you. I'm probably the largest shareholder and I very much care about increasing shareholder value. And I think that for the most part, most of my efforts are on fundamentally improving the company because that's the right way to, over the long term, again, build shareholder value. We are, though -- we will be presenting, let's say, at the Piper Jaffray Healthcare Conference at the end of this month. And so when the opportunity presents itself to share our story and our vision and our efforts with the investment public, I'm definitely happy to do so. And to some extent that's why also we're having public Q&A. That's open to everyone on our earnings call because I do like the opportunity to engage with shareholders like you. And...

I just want to thank you for your efforts on this company. I know that you're working without compensation. As I said, I was very frustrated by Mills. I thought he was just sort of picking up a paycheck. But keep doing what you're doing and we'll keep on following it.

I appreciate that. And on the second point, just on shareholder value and on kind of whether we're trying to attract shareholders, we have now -- we started the quarter with $4.5 million in cash. As you see, our operating expenses and our burn rate, even without getting any cash from system sales, is fairly low and has been declining. That has been done without impacting the company in any fundamental way in terms of reducing our capability. If anything, I think there's more activity and good activity taking place here than in a long time. And so I'm not that stressed at all on the needing to do an equity raise of any sort. I think there are some ideas on potentially nondilutive ways of bringing in capital that are attractive to explore. But I'm not -- I don't expect to do any dilutive financing at this valuation and in the near future at all.

(Operator Instructions) We'll go next to Paul Nouri with Noble Equity Funds.

Just wondering if any of the warrants are exercised mid-quarter, whether you would file an 8-K or something as notification to investors?

If warrants were exercised, I don't believe that would require a notification via 8-K. And it's likely that the next time that, that would come up then would be at our next 10-Q or 10-K filing, you can say in ...

That's an interesting question. I have to admit, I haven't thought about that. We have not had the warrants exercised yet. I could see where you're coming from that if there was a significant amount exercised that might be material, I have to discuss that with our legal counsel, but I admit that I just haven't thought about that at this point.

Okay. Yes. Because I look at it as one way to over the long term increase the stock price would be to do a reverse split, but it's not really feasible with the number of shares there are now. So I was just thinking that if the warrant holders exercised that, that might be a possibility. That's the only reason I brought it up.

Yes. We could get in about $26 million, I believe, from the warrant exercise, as again, there's only -- it's only cash exercise. And so kind of we would get in that cash with warrant exercises. And I would very much like to uplift to Nasdaq, though, I generally am averse to reverse stock split. So I'm going to try to see what we can do to uplift without a reverse stock split at this point, but we will see how things go in the future.

And to the extent that those warrant exercises were by insiders or directors, then it would obviously be a Form 4 that we'd file that.

(Operator Instructions) And with no more questions in the queue, I'd like to turn the call back over to Mr. David Fischel for any additional or closing comments.

Thank you, everyone, for joining today's call and for the good questions. As I mentioned in the Q&A, I'll be presenting Stereotaxis at the Piper Jaffray Healthcare Conference in New York at the end of November. The presentation will be webcast and a press release with instructions for the webcast will come out in a couple of weeks. I look forward to speaking with you then, and otherwise, wish everyone a happy Thanksgiving and holiday season. Thank you.

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.