Stereotaxis, Inc. Q1 FY2023 Earnings Call

Good morning. Thank you for joining us for Stereotaxis' First Quarter 2023 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 all participants have been placed in a listen-only mode. The floor will 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. Our last call two months ago included a fairly comprehensive overview of Stereotaxis and our strategy. We will keep today's call more brief, focusing on a few commercial and innovation updates. Revenue in the first quarter was essentially identical to last year's first quarter, barring the royalty payments that we no longer receive from Johnson & Johnson. System revenue in the quarter reflects partial revenue recognition on the shipment of one Genesis system that is completing installation as we speak. During the first quarter and subsequent to our last earnings call, we received a purchase order for a Genesis system from a U.S. hospital. We received another Genesis system order from Europe so far this quarter. The combination of the partial system revenue recognition out of our backlog and additional order into our backlog slightly increased quarter end system backlog to just over $15 million. Hospital construction has remained relatively slow, weighing on the speed with which backlog converts into revenue and then into installed active robots. That said, we have a fairly busy schedule of installs planned over the coming months and continue to expect the majority of our backlog to be recognized as revenue this year. Since the launch of Genesis three years ago, we have now received orders for 22 robotic systems. Building a capital sales capability, process and infrastructure has taken time and required significant effort, but these 22 orders over two years is a dramatic turnaround from the period prior to Genesis when only one system was ordered over the same time frame. Of the 22 robots ordered since our launch, nine have been installed and are doing procedures, five have been shipped to the hospital customer but are not yet installed or launched and eight remain in backlog waiting to be shipped. Our orders have been broad-based geographically with just over 50% of orders from the United States and approximately 25% each from Europe and Asia. They are also evenly split between greenfield robots and upgrades with 11 of each. We are continuing to improve and refine our commercial capabilities and expect as we do so to see increasing orders of Genesis. Our capital pipeline looks healthy and has seen growth across our three focus regions. We have a few dozen, approximately 50 unique opportunities in our near-term pipeline where we see a possible order over the next 12 months. Order flow remains lumpy. The macro environment remains pressured, and we have still not fully benefited from a normalized replacement cycle. But given the engagement received from the bottom up, there is increasing confidence in a consistent flow of orders. Most important to the adoption of robotics is the enthusiastically positive experience of the physicians who are using Genesis along with the reliability and clinical value Genesis robots are demonstrating in the field. Engaged and happy customers who are able to provide great care to their patients and build successful practices are the best ambassadors through which to ultimately increase awareness, change historical misperceptions and grow adoption. We are pleased with the procedure utilization we are seeing on Genesis robots, which is meaningfully higher than our average global utilization. This is playing out both at accounts that upgraded to Genesis and with those that establish entirely new robotic practices. Last month, I had the opportunity to meet physicians from two of our most recent greenfield Genesis launches, Poland's National Institute of Cardiology and Broward Health Medical Center in Fort Lauderdale. Both were happy and excited users who are grateful for our technology and are using it to treat patients in ways that meaningfully improve the quality of care and access to care. Discussions like those reinforce the positive impact of our technology and the relevance and importance of robotics for the field. Our overall experience with Genesis serving as the spark to restart capital adoption and to support utilization is a reminder of the significant impact innovation has on commercial results. This segues well into a few concepts around innovation. On our last call, we discussed in detail the key efforts in our strategic innovation plan and how they deliver meaningful clinical, commercial and strategic value. Apart from the minority of our users who have been able to upgrade to Genesis, most existing robotic electrophysiologists have remained limited to using essentially the same ecosystem of robot, catheter and mapping technology for over a decade. Stereotaxis' proprietary robotically navigated ablation catheter, MAGiC, is set to positively address this. Since our last call, we have made significant progress on both the EU and U.S. regulatory paths for MAGiC. In Europe, we have been awaiting receipt of the full spectrum of technical, clinical and microbiology questions from the EU regulator. We have now received questions across all three of those categories and have fully responded to all the questions in what we believe to be a comprehensive and thoughtful manner supportive of CE Mark. It would not be surprising to receive follow-up questions to our responses, but we believe our previously communicated timeline is reasonable and still see receipt of CE Mark as most likely to occur late in the second quarter or in the summertime. In the U.S., submission of an IDE application to the FDA has been dependent on successfully completing a dozen preclinical studies. As of our call two months ago, we had established a GLP-level institutional animal care and use program and run a few pilot cases but had not yet performed those on the record studies. We completed all the required studies since that call and will complete all the required follow-up periods within the next two weeks. The results we have seen and physician feedback we received is very supportive of our confidence that the catheter performs well and will be enthusiastically adopted by the community of robotic users. Given this progress, we expect to make an IDE submission to the FDA in the third quarter. Our other major innovation efforts, including a smaller self-shielding robot that frees us from the extensive planning and construction currently necessary to adopt robotics, a family of interventional guidewires and guide catheters that expand the benefits of our robot into new endovascular indications, a digital surgery hardware and software offering, enabling broad operating room connectivity and a full electrophysiology product ecosystem being built in collaboration with MicroPort. There is a significant amount of work in progress being made on each of these in parallel. As we provided much more color on each of these during our last call, I'll just reiterate that the timelines communicated on that call stand. We have line of sight to reaching multiple significant regulatory and commercial milestones this year with growing commercial impact from each of these technologies next year. As these technologies come to market, we will host focused innovation days to present these technologies in greater detail. While the optics of Stereotaxis' financial results are unexciting, we see ourselves as being on the cusp of strategic transformation. We have clear line of sight to a future with strategic independence, an attractive revenue model, broad robot accessibility and platform indication opportunity. This core product ecosystem serves as a foundation for a high-growth, high-value medtech company pioneering endovascular robotics. Kim will now provide some commentary on our financial results, and then I will make a few financial comments as well before opening the call to Q&A.

Thank you, David, and good morning, everyone. Revenue for the first quarter of 2023 totaled $6.5 million, down from $7 million in the prior year first quarter, primarily due to discontinued royalty from Johnson & Johnson. System revenue of $1.8 million reflects revenue recognition on the delivery of one Genesis system. Recurring revenue for the quarter of $4.7 million was predominantly impacted by the absence of the J&J royalty, along with a smaller impact caused by J&J catheter production shortages, which pressured procedure volume. Gross margin for the first quarter of 2023 was 59% of revenue. Recurring revenue gross margin of 79% remained similar with recent quarters with the loss of royalty impacting otherwise operational improvement. System gross margin of 7% continues to reflect significant allocation of overhead expenses over low manufacturing volumes. Operating expenses in the quarter of $9.5 million included $2.6 million in noncash stock compensation expense. Excluding stock compensation expense, adjusted operating expenses were $6.9 million compared to the prior year adjusted operating expenses of $6.5 million, reflecting increased spending in R&D. Operating loss and net loss in the first quarter were $5.6 million and $5.3 million compared to $4.1 million for both in the previous year. Adjusted operating loss and net loss for the first quarter, excluding noncash stock compensation expense, were $3 million and $2.7 million. Negative free cash flow for the first quarter was $3.2 million. At March 31, we had cash and investments of $26.8 million. I will now hand the call back to David.

Thank you, Kim. As detailed in today's press release, we are reiterating our expectation of double-digit revenue growth for the year given our existing system backlog and the view we have into our near-term system pipeline and installation schedule. System orders are also expected to increase in 2023 compared to 2022. Genesis system revenue remains the primary driver of overall revenue growth until we start to see more meaningful commercial contribution from our innovation strategy in 2024. Our core recurring revenue business remains relatively sticky and stable, and we expect will be boosted significantly as we bring the MAGiC catheter and vascular interventional devices to market. That said, procedures and disposable revenue in the first quarter were slightly pressured by catheter shortages J&J experienced due to supply chain and production challenges. These challenges have continued into April, but we are told by J&J that they will be addressed by the end of the quarter. We expect some impact from this likely in the low hundreds of thousands of dollars during the second quarter. Situations like these further reinforce the strategic, operational and financial value of the MAGiC catheter and having control over our own destiny. As we advance our innovation strategy to market, we maintain a balanced financial posture. We are investing in the organizational infrastructure and capabilities that will allow us to drive significant revenue growth from those innovations. At the same time, we remain financially prudent to ensure that our existing balance sheet can comfortably fund all our innovation efforts and commercial launches without the need for additional financing. We look forward to now taking your questions. Operator, can you please open the line to Q&A?

Thank you. We will now begin today's question-and-answer session. We'll take our first question from Joshua Jennings with TD Cowen. Your line is open.

Hi. Good morning. Thanks for taking the question.

Hi, Joshua. Good morning.

Good morning. Thanks. I wanted to ask about just the replacement cycle channel. And are you seeing any cracks in terms of that opening up? And what do you think needs to happen for that replacement cycle opportunity to start to kick in more fully?

Sure. So it's been interesting because when we started it then with the launch of Genesis around three years ago, we were always talking about the typical traditional 10-year cycle by which capital equipment gets replaced and by capital equipment, I mean mainly X-rays and cath labs. Clearly, that has been extended over the last few years, where we now have multiple systems that are even 14, 15 years old out there in the field. I think in the past, I've mentioned that it's unclear how much of that extension of the life of X-rays is due to cyclical nature, just the macroeconomic environment and the financial pressures that hospitals have been under versus a secular change due to perhaps the reduced use of X-ray overall and to the longer life that they can exist before needing to be replaced. Probably, the truth is a mix of both. Either way, we have not seen that a contraction in that age where people are now starting to replace X-rays earlier. So it seems like the average age of an X-ray is definitely extending in most settings beyond 10 years. We are starting to see as some of these sites become very old, we are starting to see obviously much more of a contribution from the replacement cycle of the two orders that we just mentioned. One was a replacement order, one was a greenfield order. I would expect still that in our normalized level, we should probably be receiving a high single-digit number of replacement systems a year. We've still not got into that point. We're still probably in the mid-single digits. So we probably still have a little bit of room to go to get to a more normalized level.

Understood. I wanted to ask a question about potential just your drive for an open ecosystem within the EP world? And are there any potential advancements with, say, INHABIT to integrate your robotic magnetic navigation technology into the EnSite X mapping platform or any other mapping system integrations that we should have on our radar for this year?

Sure. We cannot comment on any collaborative activities until they are officially announced. However, we have emphasized the importance of open ecosystems for the advancement of the medical field, patient care, and physician choice. Specifically for Stereotaxis, this allows us to combine the advantages of robotics with various diagnostic and therapeutic technologies. The idea of an open EP ecosystem is crucial, and we have made significant progress in this area over the past few years, although there is still more work to be done. We encourage you to stay tuned for updates as they become available.

Great. And just last question, sorry to sneak one more in, but this full-scale ablation race in terms of getting a commercial cath in the United States is on, the major cardiac ablation catheter players kind of teed up to get approvals over the coming 12, 18, 24-plus months. I guess how would you have investors think about the role that robotic navigation system like Genesis or mobile could play and could potentially enhance one of these larger players' platforms and help them win this race, this PFA race. Thanks for taking all the questions, David.

Sure. We obviously see what's going on in the field and overall view how PFA is evolving into the field. In many ways, we view actually robotics as particularly well suited to be paired with PFA. We've had some experience that we've discussed in the past some of the preclinical studies that we've done with different PFA generators and some of the ongoing work that we are doing there. Given the constant and consistent contact that a robotically navigated catheter has with the heart tissue, there are mechanical benefits to pairing a robot with PFA. We’ve done the preclinical work, and like I've mentioned, and we’re trying to kind of advance things in a way where we can reach a first-in-man study and provide kind of more clarity on clinical commercial timelines. And I'd say kind of overall, I would look though when I step back and think about PFA and how it's entering the EP field, when you look at kind of all the cardiac ablation procedures more generally, really kind of PFA is right now being targeted at paroxysmal AF and there's some thoughts in persistent AF. We have a majority of our procedures kind of in the ventricle and certain SVT style procedures, where probably it will take still five to 10 years to know the role of PFA in those settings. There are certain procedures where PFA will likely never be particularly applicable or beneficial or safe given the type of arrhythmias that you would be dealing with and certain focal arrhythmias. Even in AF, as you have probably noticed, the original view of PFA being a panacea has evolved into a more nuanced understanding of its role and its partial role in the field. So, again, we might not be the first mover in the PFA space, but I think we're doing all the right things on the backside to ensure that we have a nice offering there. And that's where, again, this open EP ecosystem provides a lot of value in allowing us to pair the benefits of robotics with a range of other technologies that are being developed.

Excellent. Appreciate it. Thanks, David.

Thank you.

Next, we'll go to Frank Takkinen with Lake Street. Your line is now open.

Great. Thanks for taking the question and good morning. I wanted to start with one on the construction timelines. You briefly commented on it in the prepared remarks, but I was hoping you could take us a little bit deeper into how the construction timelines have been trending year-to-date and if there's any sign of those starting to be a little bit more predictable as we look at the back half of 2023?

Hey, Frank. Good morning. So when I look now at kind of our history of these 22 orders received since we launched Genesis, it seems kind of almost like there’s a lot of variability around these averages. But it’s almost kind of one year from an order to roughly until most sites get kind of revenue recognized and installed in around two years until they go revenue recognized that they get shipped and then around two years until they get installed and are starting to do procedures. There's obviously a wide variability around that. We've had orders that get shipped and installed and start doing procedures within six to nine months. We've had things where it takes two years and you still don't recognize revenue by shipping the system. So, there's kind of a wide band around that, but that seems to be kind of what the average has ended up being. We are seeing more scheduled installations over the next, let's say, nine months or the remainder of this year and with a fairly busy schedule of things, i.e. some of those are things that have been backed up for long periods of time and others are from fairly recent orders where the sites seem to be on track for meeting the timelines that they want to have for installation. We still see many anecdotes, many cases of hospitals that have a plan and that plan gets significantly delayed due to whatever construction issues or permitting issues they have. I still am very much looking forward to the day where we do not have the complexity and the pain of the architectural and construction timelines. But at least we're seeing some movement that seems real for the next several months.

Okay. That's helpful. And then for my second one, maybe speak to some of the usage patterns you've noticed from the new Genesis installs over the last couple of years. And what I'm hoping you can touch on is maybe where are these physicians typically starting to use the technology with patient pool? And what's their usage patterns look like at different milestones, say, three months, six months, 12 months? I'm just trying to get a better understanding of how the new Genesis users are ramping and how their usage is expanding within their patient populations.

Sure. So I don't have all the data in front of me to answer you in a comprehensive way with three months, six months, 12 months data. But let me think and provide a rough answer for that. Obviously, across our installed base, Stereotaxis is overrepresented in the more complex ablations. That's where the mechanistic benefits of our robots are particularly pronounced. About half of our volume is in ventricular tachycardia, premature ventricular contractions, congenital patients and those types of patients. That's also a patient population which is generally underserved, undertreated. Many of them don't have an option for good therapy without the use of our robot. That's where we provide particular clinical value. That said, there are benefits across the spectrum of ablation procedures. There are even procedures that might be considered typically as simple procedures where we are being used because of the safety profile and the precision of robotics and the clinical benefits that provides. There is a full spectrum. When I think about our Genesis installed base, I generally would say that the types of procedures they perform follows that spectrum of our overall installed base. We definitely have a pronounced use in the complex cases, and that is oftentimes the motivating driver for why, let's say, a greenfield account would adopt a robot. We do see usage across the spectrum of procedures, not just in the most complex ones, at least across many of the sites. There are certain sites which might limit us only to the most more complex cases, but we definitely do see usage across the installed base across the Genesis installed base and across greenfield Genesis installs also usage across the spectrum. And does that kind of partially answer you?

Yes. No, that's perfect. Appreciate the color and thanks for taking the questions.

Thank you very much, Frank.

Next, we'll go to Alex Nowak with Craig-Hallum Capital Group. Your line is now open.

Okay. Great. Good morning everyone. Could you elaborate on the J&J royalty ending? Please remind us of the relevant dynamics. Also, if the royalty had not ended, what would the consumables sales have been this quarter? We would like to understand the same-store volume trends better.

Sure. Hi, Alex. Good morning. So we've had a very long-term relationship with Johnson & Johnson. Several years ago, that relationship was turned from an exclusive relationship into a nonexclusive relationship. Then there was the time frame would remain a nonexclusive relationship and then where there would be a tail supply period where still for several years, J&J would have to continue supplying catheters to the market. The transition from the nonexclusive relationship to the tail supply period has started at the beginning of this year, and J&J stopped paying us royalties at that time. We missed out on something around $0.5 million in the quarter due to the lack of the royalties.

Okay. That's helpful. And then how long does that tail supply agreement last till?

A three-year period.

It's three years. And then after the three years, there's basically no assumption that they will continue to supply catheters. Is that right? That will be the time frame when we will have MAGiC online by?

There is no legal requirement, contractual requirement. I think it's still open to interpretation of how things will play out there, but if we do our job well, there shouldn't be any reason for them to continue supply.

Okay. Understood. And then any discussion with the FDA around the Gen 3 self-shielded robot? Just what needs to be done internally before submitting the 510(k)? And then what could influence the time lines? What could pull it forward? What could drag it down?

We have notified the FDA that we are moving forward, though we have not submitted any formal documentation yet. Our recent experience with the FDA regarding a robotic magnetic navigation system, particularly the Genesis FDA approval we received three years ago, has been quite extensive. At that time, we navigated a series of steps, including completing some catch-up 510(k) requirements, after a period of limited communication with the FDA. We have maintained ongoing communication to keep them updated on our progress. We have a clear grasp of the submission requirements, although we recognize that regulatory expectations can change over time. We are particularly aware of the growing emphasis on human factors testing and cybersecurity, which we plan to document more thoroughly than before. Overall, we feel confident about the regulatory process ahead and have recent experiences that help guide us on this journey.

Excellent. Thanks for the update. Appreciate it.

Thank you.

Next, we'll go to Neil Chatterji with B. Riley. Your line is open.

Hi, everyone. Good morning. Thank you for the question. I wanted to ask about the sales funnel and how it's been affected by the current capital spending environment and ongoing challenges in hospitals. It seems like there is still a pipeline of about 50, so I would like to get an update on that.

Yes. When reviewing the pipeline, I previously mentioned that we have a more structured approach to assess it in each region. There are about twenty-five projects in the U.S., around twelve in Europe, and approximately twelve in Asia that are in this pipeline, and the sites are discussing potential orders for the upcoming year. Generally, I expect some of these will experience delays, but that's the current status of our pipeline. I see this bottom-up pipeline as expanding. I also recognize, based on top-down evaluations, that we are still in a somewhat challenging environment. The macro conditions have been more of a hindrance than a support. Despite this balance, we are making progress and remain confident in our guidance for this year. This reflects a comprehensive perspective based on both specific and broader data.

Got it. Thanks for that. And then just maybe on China and MicroPort, the ecosystem there that's being developed, didn't sound like any huge updates there versus last quarter or last call. Just curious how things are tracking there. You obviously have Genesis submitted for approval and the broader platform being developed. So just curious on an update.

Sure. MicroPort submitted Genesis at the end of last year. Over the last couple of months has been submitting some supplemental information to the regulator and has been also working on its submission for the catheter. It has to wait until we get CE Mark for MAGiC before we can submit MAGiC given the pathway that we want to go through. MicroPort is also working on the submission for its own variant of a magnetically driven ablation catheter. From a mapping interrogation perspective, we've already done very well. That won't be a long pull in the tent at all. As we look at kind of all of that and what MicroPort feels is a reasonable timeline, given its discussions with NMPA, we're still comfortable in this first half of next year, that full ecosystem coming together. There might be some approvals that can come earlier. But that feels like the right timeline overall. Really, it's that ecosystem of robot, catheter, mapping that should come together well to allow for the full launch and take advantage of the full commercial team.

Got it. And maybe just one last quick one. I don't know if I missed it, but just any update on how you're tracking for the mobile RMN clearance in Europe in the second half?

Yes. We talked about in the third quarter, and I’d say we are working feverishly on multiple fronts there to be ready for approval at that point in the third quarter.

Great. Thanks. That’s it from me.

Thank you.

Next, we'll go to Adam Maeder with Piper Sandler. Your line is now open.

Hi, David. Hi, Kim. Thank you for taking the questions. Two from me. The first one is on the MAGiC RF catheter. I think I heard timelines for Europe still stand late Q2 or summer. Can you talk just a little bit about kind of commercial strategy there in terms of the launch? How aggressively will you be rolling MAGiC out to customers? Will you look to bolster or add sales reps prior to launching that? Just maybe flesh out the commercial strategy a little bit. And then I have a follow-up. Thanks.

Sure. Hi, Adam. Good morning. Yes, the timeline, obviously, still remains somewhat of a black box. You respond to questions and you kind of sit and wait, but everything is now back on their court. We are very pleased that we got at least the first set of questions from them across all three categories, and we were able to respond in a timely fashion. When we look at the commercial strategy, we have invested somewhat in our team in Europe. We now have two more people than we have had historically, and that was done in anticipation of MAGiC coming to market and the opportunity that would present itself. We have conducted fairly detailed reviews of every one of our 30 some hospitals in Europe that have a robot. We understand both the logistics of bringing the catheter to market, whether there is a tender or not, and what hospital application needs to be filled in just on the logistics side. On the financial side, we are looking at what pricing should look like, and on the clinical side, we are assessing what the motivations of the physicians are, what they think about the catheter, what would be the drivers of adoption, and the risks to adoption. I think we have a fair degree of clarity. The team there has worked fairly hard and has developed business plans site-by-site for what we want to do. We have designated a few sites as those that will participate in a limited market release phase. While the catheter has shown itself to be robust and working well across many studies, there are specific intricacies to cardiac ablation procedures. You want good physicians who are interested in being the pioneers and are willing to take the early procedures in order to learn tips and tricks that can only really be gathered in that setting. I think about an LMR period of probably several weeks, a couple of months perhaps. We are really focused on those sites, ensuring they use the catheter across the range of cases and can document and refine best practices. At that point, we would move into a full launch across all the 30 accounts in Europe. Some countries like France and some of the Scandinavian ones have tenders or other administrative hurdles that prevent you from fully converting an account based just on commercial agreement and the desire of physicians. Solidifying the commercial structure may take about a year to overcome the majority of those. However, there are places that will delay adoption to some accounts as we work through them.

Okay. Great. Very helpful color, David. Thank you for that. For the follow-up, I just wanted to ask about HRS, which is scheduled for later this month. I saw in the press release something about the potential to share meaningful updates on the innovation strategy at that conference. I was hoping you could just expand on that a little bit. What do you have planned either from a clinician standpoint or Wall Street perspective? Just any more details on HRS would be great. Thanks for taking the question.

Thanks, Adam. Stay tuned. At this point, we won't share much more, but as it's appropriate and as we're able to share more, we look forward to sharing some news at HRS that we think will be impactful for the EP community and also impactful for the company and for the investor base. We look forward to sharing it there. More generally, at HRS, we're excited for our showing there. There is a special session, a joint session of the Society for Cardiac Robotic Navigation and HRS at the conference. That will be a nice session in which robotics is, obviously, front and center. Again, apologies, I can't provide much more detail at this moment, but we look forward to sharing news in less than two weeks.

Okay. Perfect. We'll stay tuned there. Thank you.

Thank you.

There are no further questions at this time. I'll now turn the call back over to David Fischel, Chairman and CEO of Stereotaxis for any additional or closing remarks.

Okay. Thank you very much for all your questions. We look forward to sharing the updates at the Heart Rhythm Society meeting next week and working hard on your behalf in the coming months, and we'll speak again in another quarter. Thank you.

This concludes today's conference call. You may now disconnect.