Vicarious Surgical Inc. Q3 FY2023 Earnings Call

Good afternoon, and welcome to Vicarious Surgical's Third Quarter 2023 Earnings Conference Call. My name is Kate, and I’ll be your operator for today's call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Kaitlyn Brosco with Vicarious Surgical for a few introductory comments.

Thanks, Kate, and thank you all for participating in today's call. Earlier today, Vicarious Surgical released financial results for the three months ended September 30, 2023. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to obtaining approval for the Vicarious Surgical System and timing for any such approval, our operating trends and future financial performance, expense management, market opportunity, and commercialization are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors set forth in our Securities and Exchange Commission filings, including our most recent Form 10-K and Form 10-Q. This conference call contains time-sensitive information that is accurate only as of the live broadcast today, November 13, 2023. Vicarious Surgical disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. With that, I'll now turn the call over to Adam Sachs, Chief Executive Officer.

Thanks, Kate, and thank you everyone for joining us. The third quarter brought several successes for our business but also introduced new challenges. Our successes included the announcement of our fourth hospital system partnership with Intermountain Health, as well as completing a $47 million equity follow-on offering that significantly bolstered our balance sheet and meaningfully extended our cash runway. Further, we were pleased with the significant progress made within the individual V1.0 subsystem build; currently, our surgeon console, patient cart, robotic instruments, and camera components are all built and functioning as a subsystem. Conversely, we also experienced some setbacks. Challenging market conditions and the resulting pressure on our business drove us to make the difficult decision to once again downsize our team and reduce future planned spending in order to prioritize capital efficiency and better ensure our long-term success. Additionally, as we entered the initial system integration process, we identified certain software and hardware components of the V1.0 system that will require additional development efforts in order to ensure system compliance, reliability, and safety ahead of formal verification and validation testing. With the impact of the cost-cutting initiative combined with some integration challenges, we predict a 12 to 18-month delay in the overall program. We believe this will ultimately push the completion of the V1.0 build and integration to fall of 2024 and our de novo submission to early to mid-2026. Developing a surgical robot is complex and capital-intensive. It involves building multiple medical devices and integrating them as one to perform precise procedures safely and reliably, but we remain committed to delivering the best product possible for surgeons and hospitals. We understand the importance of this announcement and will continue to provide updates as we progress through the integration process and address existing software and hardware challenges. We have a powerfully differentiated technology and a unique opportunity to revolutionize robotic surgery. Over recent months, we've had the opportunity to attend medical meetings such as the American Hernia Society, as well as our internal hospital partner summits. Throughout these engagements, one common theme emerged: surgeons and hospitals are hungry for a new, truly differentiated surgical platform, and even more importantly, there is strong excitement around the unique Vicarious Surgical offering. Despite our recent challenges, I continue to be enthusiastic about our mission and our potential to improve patient lives. With that, I will now turn the call over to Bill Kelly to review our financial performance.

Thanks, Adam. Over the course of this year, we have taken the necessary steps to appropriately adjust our costs to better align with the challenging economic conditions we and other similarly staged companies have been and are continuing to experience. That being the case, total operating expenses for the third quarter of 2023 were down slightly at $21.4 million compared to $22.2 million in the third quarter of 2022. General and administrative expenses, as well as sales and marketing expenses, were down year-over-year. G&A expenses in the third quarter were $6.9 million compared to $8.1 million in the prior year quarter, and sales and marketing expenses were $1.4 million in the third quarter compared to $1.9 million in the third quarter of 2022. The only operating expense line item up year-over-year was R&D as we continue to invest in the critical product development aspects of our business. R&D expenses for the third quarter were $13 million, up 8% compared to $12.1 million in the prior year. GAAP net loss for the third quarter was $15.7 million, equating to a net loss of $0.10 per share. This compares to a net loss of $24.7 million or a net loss of $0.20 per share, respectively for the same period in the prior year. Adjusted net loss for the third quarter of 2023 was $20.4 million, or an adjusted net loss of $0.12 per share, compared to an adjusted net loss of $21.7 million or an adjusted net loss of $0.18 per share for the same period in the prior year. For a reconciliation of all non-GAAP measures to GAAP, please review our earnings press release. At the end of the third quarter, cash, cash equivalents, and short-term investments were approximately $110 million, including the $47 million in gross follow-on proceeds. Excluding these proceeds, third-quarter cash burn was $16.8 million, and we now expect full year 2023 cash burn to be between $60 million and $65 million, which is on the higher end of our previously communicated guidance range. Taking into account our recent cost-cutting initiatives, we now estimate preliminary full year 2024 cash burn to be between $40 million and $55 million, with cash runway extending to Q1 2026. I'll again reiterate Adam's sentiment that the third quarter brought both new successes and challenges for the business, but we remain committed to acting in the best interest of shareholders and therefore, have taken the necessary steps to better position the company to be successful in the long run. I'll now turn the call back over to Adam for closing remarks.

Thank you, Bill. I'd like to close by thanking all Vicarious Surgical employees for their hard work and dedication. Although there are still challenges that remain, I am confident that our team will rise to the occasion and deliver an exceptional product. There is still much to be excited about. With that, we'll be happy to take questions. Kate?

Thank you. We will now start the question-and-answer session. The first question will come from Ryan Zimmerman with BTIG. Your line is now open.

Thanks for taking my questions. Good afternoon. So, I guess to start, I'm wondering if we can walk through the milestones with the impact of timing in terms of a clinical trial, when you expect to complete that. And most importantly, do you think you have sufficient cash to get through that trial based on the timing you just mentioned, Bill, first quarter 2026 before you submit for your de novo clearance?

Thanks for the question, Ryan. To start with the milestones that we're looking at into the near future, some of the most important milestones that we'll have over just the next 12 months will be around our V1.0 system. We're in the midst of integration right now. We're hitting some speed bumps as we bring all of these subsystems together, but we expect them to be up and running fairly shortly, and we'll be doing our first cadaver procedures with the system next spring. We're then thinking that likely we'll have some remediation to perform with our system over the summer, and that's all in anticipation of our first clinical patient and our first clinical use, which will be in mid to late 2025. So that's being pushed back approximately 12 months, with multiple clinical patients following that in our OUS clinical trial and then an FDA de novo submission in early to mid-2026. I would also like to emphasize that our goal with these changes was to make our company significantly more efficient and more streamlined to maximize our available capital given our current market cap. The significant change in the ratio of burn to market cap that occurred over the last quarter is notable. So, Bill?

Yeah. Just to echo that, I think we want to make sure that we remain prudent with our fiscal spend. And that's really the lens that we continue to look at our spending this quarter, as we always do. We've provided guidance that cash burn will be $40 million to $55 million in 2024, and that should get us into 2026 as well.

Okay. And then just more specifically, what did you cut back on? And going from 60 to 65 down to 40 to 55, what's that delta that you're giving up?

We made significant cuts to our team as well as to external spending. Within our team, we've had a very large change over the course of this year, including two overall reductions to the total team size. The first reduction was really targeted at non-R&D functions and then decreasing external R&D spending. This recent cut targeted R&D functions as well as significant outsourced R&D spending throughout the budget. Most of the functions we've cut are parallel effort functions, focusing on remediating issues we expect will arise. Instead, we’ll implement a more serial, capital-efficient approach by addressing issues as they emerge.

Okay. Got it. Thanks for taking the question.

Thank you. The next question will be from the line of Adam Maeder with Piper Sandler. Your line is now open.

Hi, guys. Thank you for taking the questions here. Maybe just to start, the first one would be following Ryan's question just on cash runway, and maybe I'll ask it a little bit differently. But the IDE study for ventral hernia, do you have any kind of rough estimate around spend there? How do we think about the cost of that study?

We haven't given external guidance on what that would be, but as we have talked about, it's going to be about a 30 to 60 patient trial, probably closer to the 30 side, hopefully. So, it's within the guidance that we’ve provided here. It's probably less than a month's worth of burn.

Okay. That's helpful, Bill. Thank you for that. Then, in terms of the integration process and understanding some of the bottlenecks or speed bumps, I heard comments referring to both software and hardware components. Could you flesh that out for us in a little more detail and what's being done to resolve those?

The V1.0 system, as mentioned in the past, is a complete re-architecting of the beta two system. The beta two was the final prototype; it had all the necessary functionality and received rave reviews from our hospital partners and surgeons. Over the course of the last year and a half, it has been re-architected and redesigned into the V1.0 system we have today. The way to think about it is that there are about eight different, fairly complex medical devices—patient carts, surgeon console arms, the interface, the camera, etc.—and each of those has been designed by its own subsystem team and is running effectively. As we integrate them, we're starting to encounter some bugs and issues across the system. Overall, most components are functioning effectively, but some software challenges are revealing hardware challenges. These issues aren't particularly significant, which is why we're now looking at a one to two-quarter delay instead of an earlier integration timeline.

That's helpful color. Thanks, Adam. If I could sneak in one more, could you be more specific about what the R&D organization looks like, compared to the beginning of the year versus where we are today? Trying to understand the magnitude of the reduction and how many individuals are currently focused on developing the system.

I don’t have the exact numbers in front of me, but we started the year with about 230 people and have reduced that to approximately 130. This accounts mostly for internal reductions; we have made greater cuts to external teams for capital efficiency reasons.

If you look at people involved in the product, including operations, quality, and R&D, about 70% to 75% of the business is still made up of individuals engaged with the product even with reduced headcount.

Thanks for the color, guys.

Yeah. Thanks for the question.

Thank you. The next question will be from the line of Josh Jennings with TD Cohen. Your line is now open.

Hi, good afternoon. Thank you. I wanted to ask Adam and Bill about verification and validation testing. I know there's a process, and you may have mapped out some timelines that include V&V, but where does that stand, and is there a timeline specifically for verification and validation? The real point of the question is to ask about the manufacturing side—understanding that V&V must assure that manufacturing systems are in place—where does that stand today, and when do you plan to have V&V completed and manufacturing capabilities ready to move forward?

That's a really good question. After V1.0 is integrated and operational, the focus shifts to verification and validation. This process begins with subsystems and culminates in summative testing, which is the end phase of system-level validation for the product. We will carry out any remediations after next spring, primarily concentrating on the system's performance during our preliminary V&V testing of the subsystems. Any issues identified during V&V will be resolved to reduce risks during the process. A key advantage of the timeline adjustment is the opportunity to mitigate risks and address challenges in the earlier stages of the V1.0 build, which is essential leading up to V&V. As for manufacturing, we are in the midst of preparing with our contract manufacturing partners and are well on track. Given the context of today's discussion, I do not expect any challenges with that from a timeline perspective.

Excellent. I also wanted to ask about the integration challenges and where you stood earlier in the year concerning locking in on 1.0, particularly around design and future prospects. Is this delay causing any reconsideration or opportunity to explore different visualization, sensing, or data collection enhancements for the system?

That's a fair question. We're excited about several advancements in visualization technology. We plan to incorporate these enhancements soon after our initial launch. However, given the resource reductions, our immediate focus is predominantly on rectifying the challenges we've encountered and preparing for V&V as well as FDA authorization.

Thank you. The next question will be from the line of Caitlin Cronin with Canaccord Genuity. Your line is now open.

Hi. Thanks for taking the questions. To start, in terms of clinical trial plans, are there any changes to your plans for pursuing other indications?

No, not at this time, other than the expected timeline changes we're discussing. We're still going to pursue other indications as quickly as we can. The OUS opportunity allows us to do that much more easily, and we're leveraging this extra time with our clinical engineering team to evaluate several other procedures and ensure they are adequately prepared.

Got it. And any kind of risk to current or future hospital or surgeon partnerships given this delayed timeline?

I believe the risk is relatively low, but there is always some inherent risk. It's a competitive market. That said, our hospital partners have been incredibly supportive of our progress. What frustrates me most about the delays is that it prolongs the timeline for delivering this important product for our hospital and surgeon partners.

Got it. Thanks for taking the questions.

Yeah. Thank you.

Thank you. At this time, there are no additional questions registered in the queue, so that will conclude today's Q&A session, as well as today's conference call. Thank you all for your participation, and you may now disconnect your lines.