Stereotaxis, Inc. Q2 FY2020 Earnings Call

Good morning. Thank you for joining us for Stereotaxis' Second Quarter 2020 Earnings Conference Call. Certain statements during the conference call and question-and-answer period to follow may relate to future events, expectations and as 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 may 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. At this time, our participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. As a reminder, today's call is being recorded. It is now my pleasure to turn the floor over to your host David Fischel, Chairman and CEO of Stereotaxis.

Thank you, operator, and good morning everyone. I hope you're all healthy and well. My commentary today will be similar in many ways to the situation described on our last call in May. The past few months have been challenging as COVID-19 created broad disruptions to our customers and to normal activities. Stereotaxis has faced these challenges with resilience, prudence, and creativity. Despite the challenges, this has been a period of significant progress and one of the most invigorating times of positive change. The most acute and pronounced financial impact of COVID-19 was a dramatic reduction in procedure volumes as hospitals globally attempted to lessen infection risk, conserve vital equipment, and focus their resources on battling the pandemic. We've previously described a steep deceleration in procedures beginning in the second week of March, reaching a nadir of approximately 70% below normal in mid-April. Consistent with the experience of other companies, we saw a gradual return to more normal activity throughout the quarter. Global procedure volume compared to last year was down 57% in April, 44% in May, and 13% in June. Procedure numbers remain volatile and there remains risk of additional disruption as COVID-19 flares up regionally, but we saw very consistent results between June and July. Approximately half of Stereotaxis' recurring revenue typically comes from disposables sold and royalties earned from each procedure. Disposable revenue in the second quarter was down 43% in line with the 38% reduction in procedures. The impact of this decline on overall revenue was cushioned by the stability of Stereotaxis' long-term service contracts. Despite the macro challenges, we continue to collect service payments in a timely fashion and have been successful in renewing service contracts as they come due for renewal. While our recurring revenue stream is an attractive source of stability, we had anticipated robust double-digit revenue growth for Stereotaxis in 2020 driven by Genesis system sales. Receipt of FDA clearance in early March, signing of two purchase orders in the first quarter, and the interest we saw from several hospitals supported that confidence. We continue to engage with multiple interested hospitals on both greenfield and replacement system sales, but timelines for new orders have been delayed. Most hospitals have been unable to advance capital purchases as hospital administrators are still trying to assess the financial strain caused by the pandemic with its impact on their budgets. Existing robotic electrophysiology practices with nearer-term replacement projects have been asked to extend the life of their old labs. These are delays, not cancellations, and the lab renovations cannot be delayed indefinitely. While these delays in orders are disappointing, we are making progress with Genesis' commercialization, have responded to the environment with creativity, and are seeing increased interest in robotics. We successfully completed installation of the first Genesis and Stereotaxis Imaging Model S systems in July and we're very excited to see our new technology successfully treat patients. A second Genesis and Model X system is being installed as we speak. The feedback from these first procedures has been very positive and both sites will serve as key referral and demonstration sites for other interested physicians. These installations and initial procedures are significant milestones for Stereotaxis. The lack of press releases or PR activity is not indicative of any lack of excitement or oversight but reflects specific hospital dynamics and current customer sensitivities during the pandemic. Despite the challenges and uncertainty faced in procedure growth and system orders, this has been a period of significant progress. There are several highlights. First, as I mentioned on the last call, we launched telerobotic test drives as creative ways to engage with customers and accommodate physician interest in viewing our Genesis system. These test drives allow physicians from their home or office to tour our headquarters, receive a live demonstration of the Genesis system, and take direct control of a catheter with Genesis. Each tool also includes a tailored presentation on Stereotaxis' mission, technology, and clinical value. These telerobotic test drives have been remarkably effective, efficient, and powerful. I often prided myself on being highly active and engaged with physician customers, but the quality and scope of recent interactions is incomparable to any other period. Since late April, we have hosted 198 physicians and hospital administrators from 76 unique hospitals. Approximately 30% of the physicians and hospitals represent greenfield Genesis opportunities. Second, our efforts to advance telerobotic support, telerobotic collaboration, and ultimately telerobotic surgery from novelties to broadly utilized capabilities has accelerated significantly. Telerobotic support is being used by the Stereotaxis team on a daily basis to provide enhanced procedure support for physicians globally. During the recent virtual visit, a prominent electrophysiologist whose team has been restricted from visiting due to quarantine rules, commented on how well our telerobotic support has been for his procedures. We are observing growing interest and initial use of telerobotic collaboration between physicians. Last month, we hosted an inaugural symposium that showcased the potential of telerobotic surgery. In dual live cardiac operation procedures, physicians in Portugal and Italy navigated catheters in each other's patients safely and effectively. Stereotaxis is pioneering these unique capabilities in electrophysiology and this adds an important new dimension to our operational infrastructure and the value of robotics for patients, physicians, and hospitals. Third, we were pleased to celebrate the milestone of 400 scientific publications now documenting the clinical benefits of Stereotaxis' robotic technology. The quality and quantity of clinical literature is undeniable. We welcome you to visit the Stereotaxis' website, which includes a searchable database of all publications as well as the comprehensive analysis of head-to-head robotic versus manual studies. The 400th publication described the outcomes of over 1,000 patients treated with our technology in Shanghai. It reported that complication rates were ten-fold lower than comparable manual studies, efficacy rates were high at 99% depending on the procedure, and the X-ray usage was remarkably low. Another interesting publication highlighted the pronounced benefits of our technology in protecting electrophysiologists when treating COVID-19 patients. A physician in Milan successfully treated a COVID-19 patient suffering from an electrical storm. The physician was kept safe, and the patient did not experience a recurrence and recovered from COVID-19. These publications remind us of the ultimate value and importance of all our efforts. Fourth, and most important for Stereotaxis' success, our strategic innovations continue to progress well. We finalized the design of Stereotaxis' advanced robotically navigated magnetic ablation catheter and are now establishing and refining the manufacturing processes and infrastructure. This manufacturing process is designed to be highly robust, producing catheters at scale with high quality and cost efficiency. The first batch of catheters developed with this manufacturing process was just completed, and the coming weeks will be spent testing, refining, and validating every step of the process. Concurrently, we have been preparing our regulatory strategy for Europe and had our initial discussions with the FDA on the U.S. IDE trial. Beyond the catheter project, we have made meaningful initial progress on a wave of new innovations within NEP and BIP. These efforts give me confidence that over the coming years we will continue to creatively redefine robotic magnetic navigation in ways that dramatically increase our commercial opportunity. Stereotaxis' revenue growth strategy is built upon three primary drivers: a return to robust system revenue with the launch of Genesis, a significant increase in disposable revenue with the launch of our proprietary ablation catheter, and the expansion of our robotic technology into several multibillion-dollar endovascular and endoluminal markets. Each of these structurally improves our revenue model, expands our market opportunity, and is highly accretive. The three were designed to have their positive impacts as waves following Gessler in rapid succession. Genesis was expected to drive significant revenue growth in 2020 and accelerating growth in 2021. Our proprietary ablation catheter was and still is expected to contribute to revenue growth in 2021 with a commercial launch in Europe and a subsequent launch in the U.S. Clinical applications beyond EP would follow. This overall strategy remains intact and commercially sound, but we recognize that COVID-19 is delaying the financial impact of the first wave, the launch of Genesis. We continue to expect a return to robust robotic system sales as the pandemic recedes and remain confident that these waves of innovations, along with those that we have not yet publicly detailed, will transform Stereotaxis financially and strategically. Kim will now discuss our financial results in more detail and then I'll make a few financial comments before opening the call to Q&A.

Thanks, David, and good morning everyone. Revenue for the second quarter of 2020 totaled $5.3 million, down 21% compared to $6.8 million in the prior year second quarter. This decrease was primarily due to lower procedure volumes and associated sales of disposables. Gross margin for the second quarter was approximately 80%. Operating expenses in the quarter were $6.2 million, down 13% from the $7.1 million in the prior-year quarter, with the decrease driven by timing of R&D projects, pandemic-related reductions to sales and marketing activities, and various cost efficiencies. These cost reductions were partially offset by increased non-cash, stock-based, general and administrative expenses driven by the higher current year stock price. Operating loss and net loss in the second quarter were $1.9 million. Negative free cash flow for the second quarter of 2020 was $1.2 million and for the first half of 2020 was $3.4 million. At quarter-end, Stereotaxis had cash and cash equivalents of $44 million. I will now hand the call back to David.

Thank you, Kim. Stereotaxis responded to the challenging macro environment with financial prudence and attention to shareholder value. The expense reductions were made in a delicate surgical fashion, improving our focus and did not harm or slow progress. We continue to invest in the team, infrastructure, and projects that are critical for success. We expect cash utilization in the second half of the year to be lower than the first half of the year and to end 2020 with greater than $40 million of cash and no debt. Stereotaxis has the strongest balance sheet in its history and we appreciate the support and investment of constant capital in the second quarter. We were also pleased to be included in the Russell indices at the end of June. For the third quarter, Stereotaxis expects year-over-year revenue growth driven by completed installations of two Genesis systems. That concludes our prepared remarks. Operator, can you please open the lines to questions?

Thank you. We take our first question from Josh Jennings from Cowen. Please go ahead.

Hi, good morning, David. Thank you for taking my questions. I want to start by asking about the Genesis sales funnel. From what you've shared, it seems that 76 hospitals have been introduced to Genesis through virtual telerobotic visits since April, which is significant. Based on my calculations, there are 20 to 25 hospitals that have not yet adopted the system, indicating potential new customer accounts. Can you provide insight into the difference between what you observed in the second quarter regarding these introductions and what you observed in the first quarter for Genesis, and how much progress that represents in reaching both replacement customers and new customers?

Yes. Hi, Josh, good morning. Thanks for the question. That addresses a bit of your inquiry about the contrasting experiences we've had lately. On one side, the lack of new orders is disappointing, especially since we expected significant revenue growth this year and Genesis orders haven't met our initial expectations. However, the volume and quality of interactions I've had with both existing and potential new customers have been unprecedented. We used to have some level of interaction, but now, especially on the new customer front, it's vastly improved both in quantity and quality. Overall, I feel very encouraged by these interactions. It's been interesting to observe that even within hospitals, high-level personnel sometimes seem uncertain about what they can do or what is allowed based on their budgets. Additionally, we often receive news from hospitals that quickly changes, indicating they haven't fully established what is feasible. Nevertheless, I remain optimistic about the engagement levels and the progression of these interactions into concrete activities, even though it has been slower than we had hoped. Does that help answer your question?

I apologize for the interruption, David. That addressed the question. I wanted to follow up on that topic. Can you provide any insights into what is driving the increased interest? Those are significant numbers regarding the introduction to the Genesis system. Is this primarily related to the Genesis launch or the clinical community? I'm sure there are some factors, like physicians being available and not traveling during the quarantine in April and May, which has given them more time. Any insights you can share regarding this substantial increase in the number of physicians being introduced to Genesis would be appreciated.

Sure. Some of it is like you described, it could be external factors. But I think also we've been making many initiatives internally to drive that type of interest. The telerobotic visits have been an amazing tool to lower the barriers to having these types of interactions. That is one kind of effort that has been just – it's a form of innovation to some extent, a commercial innovation. Beyond that, we have been experimenting with various ways to kind of top of funnel building of sort of the funnel of potential customers. We have worked on building out a database and proactively reaching out to the top several hundred hospital customers globally. We have made interesting partnerships with others in the field to enable some top-of-funnel work and build out of the customer base. Our clinical team has really stepped up and participated also in driving some capital adoption and engagement with new customers. There’s a range of things we've been doing internally to proactively build out a funnel to build out a database of customers to reach out to them in creative ways and to start to kind of build out that capital sales capability. I think as you know, we’re generally conservative in how we build things. We haven't been just hiring 10 new capital reps, but that doesn't mean that we're just sitting on our hands waiting for people to come to us. There are, again, a range of creative ways that we've been reaching out to potential customers and engaging them and trying to hook them into starting a learning process.

Thanks for that. And just last question on great to see the progress you're making on your proprietary magnetic ablation catheter. I just wanted to see if you could help us think through the steps that are remaining for the CE Mark submission. It sounds like you're expecting approval in 2021, CE Mark approval. And then on the U.S. side just any insights you can provide just in terms of potential FDA PMA trial design. We have been very encouraged by some of the checks that we've done recently around your e-Contact infinis technology and how that matches up against contact for sensing. Will that e-Contact infinis technology be included in the FDA trial?

Thank you, Josh. From the catheter design perspective, the e-Contact technology will be incorporated into the new catheter, and it will be introduced in the U.S. as part of the IDE trial. We have recently published the first two peer-reviewed studies on this technology's application in Europe, showing robust results. We are also pleased that over a dozen physicians have experienced navigating the catheter during telerobotic visits. These physicians are very familiar with our technology, and the feedback has been consistently positive, which reassures us, as it’s always nice to have external validation of our confidence. We are excited about the upcoming launch. Regarding the regulatory process, the next steps involve establishing a comprehensive manufacturing process for commercialization, which requires testing and validating every step to minimize variances, costs, and risks. Once validated, we will document the process and prepare a submission, including some clinical data from Europe, likely just preclinical data, along with a proposal for a post-market study. This will be our focus in Europe in the coming months, and we anticipate revenue contributions from there in 2021. As for the U.S., it is still a bit early. We have had initial discussions with the FDA and proposed several trial designs. We believe we have solid plans but are awaiting feedback from the FDA on our proposals. There will likely be some back-and-forth dialogue, and we hope to have a clearer understanding of what the IDE trial will entail by the next call.

Sounds good. Thanks, David.

Thank you. And now we take our next question from Frank Takkinen from Lake Street Capital Markets. Please go ahead.

Hey guys, thanks for taking my question and congrats on the first Genesis install.

Hi Frank. Good morning, thanks.

Just a few from me. On the procedural side, I heard your commentary about July being similar to June on the procedural rebound commentary. Could you talk a little bit about that? I guess I kind of figured July would have continued to trend maybe even in positive territory or even territory on a procedural basis. So if you can just give us a little feel for what you're seeing in the field in July on the procedural front?

Yeah. So no, July was almost exactly like June, on a year-over-year basis. We still only have preliminary numbers, so there's always some sites in more distant geographies where we don't get automated procedure data. That comes with a little bit of a delay. So, our preliminary number is almost identical to June. What we're seeing is a complete mess everywhere in the world, where every hospital seems to have its own dynamics. We have hospitals where there have been additional restrictions on doing procedures again, due to COVID-19 flare-ups. We've had some that have additional restrictions, but the physicians have buckled against those restrictions and are continuing to do procedures because they've documented that by stopping procedures earlier in the year, their patients were actually harmed due to other cardiovascular issues that arose. So they're continuing to do procedures. But sometimes there's not enough hospital beds, so when they're forced to stop again. We’ve seen every type of event playing out at hospitals across the regions. It is still a very, very dynamic environment. That's to some extent why it's very difficult to give guidance. We've had weeks where we are growing year-over-year, and then we have weeks which are down again, often driven by a few regions or by a few hospitals that are suddenly on a momentary pause. So I just tried to provide transparency in the data for you and everyone. We will continue to do our best and to try to drive progress, but sometimes it feels like we're a small boat in a wavy ocean. To some extent, you just have to ride it however it takes you. Some of these things are macro considerations beyond our control.

Got it. That's very helpful. Thank you for that. Secondly, as some Genesis systems go in, can you just frame up for us the ramp-up of the associated disposables as well as service contracts with those new installs? So we just have a good understanding of how that's going to ramp on that revenue line item?

Sure. From a high-level perspective, if you have a Genesis install at a greenfield site, we will start to generate service revenue. We've typically talked about service revenue being in let's say 7% to 10% of the system sale level on an annual basis, and that will start about a year after the install, once the warranty period passes. Then you should also expect, on average, we have about 100 procedures per hospital, per year. Obviously, there's variability there. Some hospitals do many more, some hospitals do less. But you would expect disposable revenue from around that level of procedures from the hospital and that would start relatively immediately after install.

Perfect. If I could just ask one last one on the telerobotics symposium, posted earlier in Q2. Can you just talk to the inadvertent value, or I guess inadvertent is not the right word to use. But the potential value of creating a KOL board of Stereotaxis professionals, if I may say, and how that could impact your demand and further rollout of Genesis over the next year and beyond?

Sure. We're very grateful for that. There were many physicians that were interested in working with us to better determine the value of telerobotic support, telerobotic collaboration, and telerobotic surgery in electrophysiology and more broadly in interventional medicine. They were interested in educating us and educating themselves, and educating the broader community on how that can have a bigger impact. It has been very helpful having that physician community that works with us on that. It is just one additional aspect to the robotic value. There is obviously the safety aspect for the patient, the safety aspects of the physician and the staff, the ability to treat patients that otherwise wouldn't be good candidates for therapy, and the stability and precision capabilities that impact procedure outcomes. Telemedicine is one of these newer things that, as it starts to become a bigger part of their focus, it adds an additional dimension and additional positive aspect to the adoption decision. In terms of telerobotic support, that is a clear current benefit. We have dozens of hospitals and physicians that are benefiting from it currently. Telerobotic collaboration is also a reality in some ways, still on a small scale, but there are things both we can do internally and physicians can do to expand it. We expect significant increases in use in that over the coming months. Telerobotic surgery is still largely something of the future, but there are tangible steps that can be taken to make it more of a reality. Fortunately, there are physicians that are very passionate about working together with us to make that part of the reality for the future.

Perfect. Thanks for taking my questions.

Thanks, Frank.

Our next question comes from Mike Hammer, a private investor. Please proceed.

Thank you. One comment and two questions. I just want to say great leadership navigating through this time. You guys are doing a great job. I've been long since 2015 and thrilled to be watching the genesis of the Genesis system, so to speak. So my first question is, how prepared are you for the manufacturing and distribution of the Genesis system? And then also the second one would be, and you kind of alluded to this a little bit in a prior question, but what's a reasonable amount of time from sale to street?

Sure. Thanks a lot for the comment. In terms of our manufacturing capability for Genesis, that was, if you remember earlier in the year, we discussed the supply chain as being one of the major focuses and a critical part of the commercialization process. I think our manufacturing and supply chain team has worked beautifully well in managing some of the challenges that emerged earlier in the year without really any hiccup. I believe that our manufacturing capabilities in St. Louis can accommodate a few dozen systems a year without any changes. As we reach those types of volumes, we could add additional shifts or reorganize parts of the office to accommodate higher volumes. Overall, I feel good about our capabilities there. There are additional innovations and things that we can do over time, which can also make that a much more palatable process for the long term. If you think about the commercial team, we still have a relatively lean commercial team primarily focused on working with existing customers and clinical adoption. That engagement with existing customers bodes well towards the replacement cycle opportunity. By itself, that can have a very significant impact on Stereotaxis' overall top-line revenue. Like I mentioned earlier to one of the questions, there are ways our clinical team can support capital adoption in their own territories. There are creative things we've done with external companies and partners to try to advance capital sales. I don't think, at this time, we're really being limited by our commercial team's capabilities. There are, however, macro challenges out there. From our size, we should be able to drive very significant revenue growth on the Genesis side with our existing capabilities and team.

That's great. You guys will do it. Good job.

Thank you, Mike.

We have no further questions at this time.

Okay. Thank you very much for your questions and for your continued support. We wish you a healthy and successful coming months. We'll continue working hard on your behalf and look forward to speaking to you again in November. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.