Stereotaxis, Inc. Q4 FY2023 Earnings Call

Good afternoon. Thank you for joining us for Stereotaxis' Fourth Quarter and Full Year 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 be opened 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 afternoon, everyone. It's an exciting, productive, and promising time for Stereotaxis. We're pleased to enter this year having made substantial progress toward our strategic transformation. Given our current position, we are confident that the essential elements of this strategy will align in the coming months, establishing a strong strategic foundation and offering a clear path to potential commercial breakthroughs. We are making this progress despite encountering various challenges that underscore the validity of our strategy. As this is our annual call, I would like to take a moment to provide a broader perspective before discussing specific updates on our innovation and commercial initiatives. Kim will then share details about our financial results, and we will open the floor to questions. Stereotaxis' primary mission is to enhance minimally invasive endovascular surgery through the precision, safety, and unique capabilities of robotics. We are the pioneers and global leaders in endovascular robotics, demonstrating the clinical significance and value of our technology in extensive real-world applications at over 100 hospitals that have served 150,000 patients. Despite having developed a highly innovative and reliable technology that delivers meaningful clinical benefits, Stereotaxis has faced a long history of commercial challenges. After joining Stereotaxis, I realized that these issues stemmed from structural weaknesses within our product ecosystem. These weaknesses created commercial disadvantages and strategic dependencies, making it difficult for even our strongest advocates to adopt robotics. We pinpointed three critical structural issues. First, in our core market of electrophysiology cardiac ablation procedures for treating arrhythmias, our business has become reliant on Johnson & Johnson. We were solely integrated with their diagnostic mapping system, and they produce the ablation catheter used in all our procedures. This dependency restricted the ability for patients and physicians to benefit from ongoing innovation, created commercial obstacles, and diverted the majority of the economic benefits from each robotic procedure to Johnson & Johnson instead of Stereotaxis. Second, installing our robotic system in a cath lab involves a significant construction process that requires architectural planning, shielding and reinforcement, specialized electrical work, and hiring contractors, all of which increase complexity, time, effort, and cost. This leads to lengthy sales cycles and raises the bar for adoption, resulting in most interested potential customers ultimately failing to acquire a system. Third, while our robotic technology is intended as a platform to treat a wide range of complex endovascular procedures, the company did not provide the necessary interventional tools to facilitate this expansion of applications. Being confined to one specific procedure, no matter how large and appealing the cardiac ablation market may be, prevents healthy diversification and limits the full recognition of our potential. Acknowledging our challenges honestly was the first step toward improvement. Over the subsequent years, we diligently crafted a comprehensive strategy to tackle these weaknesses. Our strategy was innovative and required significant creativity but was feasible for us to implement while managing technological and financial risks. It was appealing because it offered strategic independence and the chance for considerable commercial growth. Most importantly, it fundamentally enhances and broadens our product offerings for the patients, physicians, and hospitals that depend on us. Stereotaxis has pursued this comprehensive innovation strategy through an extensive development process over several years. We anticipate that 2024 will see all essential elements come together, positioning us for multiple opportunities for breakout growth in 2025. In our existing cardiac ablation market, our significant effort has focused on eliminating our strategic dependency, developing a proprietary ablation catheter, and establishing an open ecosystem around our robot. We are excited to announce today our initial clinical results and regulatory submissions for the MAGiC catheter, our proprietary advanced robotically navigated ablation catheter.

Thank you, David, and good afternoon, everyone. Revenue for the fourth quarter of 2023 totaled $4.6 million compared to $7.3 million in the prior year fourth quarter. System revenue was $0.1 million, and recurring revenue was $4.5 million compared to $2.2 million and $5.1 million in the prior year fourth quarter. System revenue was abnormally weak due to delays in hospital construction schedules and no shipments being made as a result. Recurring revenue was in line with recent quarters but below the prior year level due to Stereotaxis no longer receiving royalty payments from Johnson & Johnson. Revenue for the full year 2023 totaled $26.8 million compared to $28.1 million in 2022. Full year system revenue was $8.7 million compared to $6.8 million in the prior year, reflecting increased system deliveries and installations. We started 2024 with system backlog of $14.7 million. Full year recurring revenue was $18 million compared to $21.3 million reflecting the continued absence of the J&J royalties and periodic catheter shortages by Johnson & Johnson. Gross margin for the fourth quarter and full year 2023 were approximately 60% and 56% of revenue. For the full year 2023, we reported gross margins of 79% on recurring revenue and 8% for system revenue. System gross margins continue to reflect relatively low production volumes, combined with significant allocations of fixed overhead and related expenses. Operating expenses in the fourth quarter were $8 million. Excluding $2.6 million in non-cash stock compensation expense, adjusted operating expenses in the current quarter were $5.4 million compared to prior year adjusted operating expenses of $6.2 million. Adjusted operating expenses for the full year 2023 were $26.2 million compared to $26.8 million in the prior year. Operating loss and net loss for the fourth quarter of 2023 were $5.3 million and $5 million compared to $4.5 million and $4.2 million in the previous year. Adjusted operating loss and adjusted net loss for the quarter, excluding non-cash stock compensation expense, were $2.7 million and $2.4 million compared to $1.9 million and $1.6 million in the previous year. For the full year 2023, adjusted operating loss of $11.3 million and adjusted net loss of $10.2 million compared to an adjusted operating loss of $8.3 million and an adjusted net loss of $7.8 million in the prior year. Negative free cash flow for the full year 2023 was $9.1 million compared to $10.8 million for the full year 2022. At December 31, we had cash and cash equivalents of $20.6 million and no debt.

Thank you, Kim. We are cognizant that accurately guiding revenue has been challenging, and there has been significant volatility in quarterly revenue results as any individual robot sales have a significant impact on the quarter. Humbled by that experience, we are providing specific revenue guidance only for this current first quarter of 2024, in which we expect revenue of approximately $7 million. Looking at the full year 2024, we generally expect recurring revenue to remain stable, until MAGiC can contribute to disposable revenue growth. We expect continued growth in system revenue through conversion of our $14.7 million backlog and new system orders, with system revenue growth driving overall double-digit revenue growth for the year. We expect our bolus of innovation to play a decisive role in driving breakout revenue growth in 2025 and beyond. We will now take your questions. Operator, can you please open the line to Q&A?

Great, thanks for taking the questions. Maybe to start with the MAGiC catheter submissions. On the EU submission, how should we handicap that being a resubmitted file? I assume that there's a little bit more certainty that they'll come back with a clearance on that now that they've had a chance to already review it once. And they made their request, but maybe is there any way to kind of risk adjust that, given it's already been looked at once. And then two on the FDA side, when was that submitted? And is that a standard 180-day review, or how should we think about the process, between now and the clearance expectation, you put out there?

Yes, hi Frank. Thanks for the question. So generally I want to state that we're not going to give a lot of commentary on regulatory submissions or the review during the review period, other than that we think we made a strong submission. And obviously we're going to work collaboratively with the reviewers over the coming months, and look forward to working collaboratively with them. And your commentary on the EU submission, you're correct. It is a resubmission of the vast, vast majority of the information, with just the addition of the clinical data. We are fortunate that the reviewers are the same reviewers that looked at the submission a year ago, and so that should support the review process in a more efficient fashion. There's no statutory time limit of the review. So, we are obviously beholden to the notified body, and when they're able to review things, but given the history there, and given the multiple discussions that took place last year, we are hopeful and believe it's reasonable to assume that this will be a much more efficient process. And with the U.S. FDA, this is a 180-day PMA supplement, and we expect to work collaboratively with the FDA during the review process. And it wouldn't be surprising if during that review process, we do kind of have additional questions and discussions with the FDA. So we're not, I wouldn't kind of think that, necessarily the 180 days has to be the way it's going to play out, but overall it is a 180-day PMA supplement process.

Okay. That's perfect. And then maybe thinking about once those clearances occur, how should we think about how quickly the uptake could occur within the installed days? Maybe starting with, how many procedures you're doing today, would be helpful context, and then how quickly you can roll that MAGiC catheter into your established sites and swap out the old catheter for the new one?

Sure, so we've talked before, about doing under 10,000 procedures a year, with approximately 40%, 45% of that volume in Europe, 40%, 45% of that volume in the U.S., and about 10%, 20% of that volume in Asia. And so that's kind of the overall install base. So, we have several thousand procedures a year, each in both Europe and the U.S. And we've talked about previously, the structural barriers in Europe where in certain geographies, certain countries, certain regions, you do pursue then, local tenders after you have CE mark while in others, really the only structural barrier is a contract, with the hospital and setting a price, with the hospital. And generally, I would expect given also the fact that we are gaining a real-world clinical experience with the catheter currently through the clinical trial, I would expect a relatively quicker ramp in catheter adoption as it becomes available. The things that we have to do in tandem with gaining regulatory approval is scaling of manufacturing and building of sufficient stock for a commercial launch. And then also the work that we are doing with Abbott to convert existing users, which historically were predominantly using Johnson & Johnson's mapping system, to using the current integrated offering with Abbott, that will also be beneficial in accelerating adoption. So those are the things we think about, as we think about adoption, but I overall expect to see a relatively rapid transition over a handful of quarters.

Okay. That's helpful. I'll stop there. Thanks for taking the questions.

Thank you.

Hi. Thanks for taking the questions, and congrats on the submission here. In terms of - you just kind of highlighted this a little bit, but in terms of this year's outlook, should we expect anything from MAGiC this year, or is this really a 2025 event?

We didn't discuss - and thanks for joining us, Jason. I'm glad to have you on the calls again. We didn't incorporate any revenue from MAGiC in the commentary we provided, in terms of how we generally think about this year's revenue. That said, it would be surprising if we do not generate some revenue from MAGiC in the back half of this year. And it will really be dependent on the timing of regulatory approval in terms of how much to expect. And so, I think until we don't have that approval in hand, it's hard for us to estimate how much to contribute. But I would definitely expect that we get at least one approval prior to the end of this year with the chance for MAGiC to start to contribute to recurring revenue.

Okay. That's helpful. Thanks. And also, I appreciate the backlog information of $4.7 million. I mean, roughly, what is the expectation in terms of how long those take to get placed in a hospital?

Sure. So just - it is $14.7 million.

Okay. If I said that wrong, I apologize, yes.

No, it's fine. And then, and so overall, we would estimate - and I'm looking at Kim right now, she wants to correct me - that typically you would estimate that approximately 80% of that will be recognized as revenue. I'm getting a thumbs up, so that seems correct. About 80% of that should be recognized within a given year. We have seen scenarios where hospitals that were planning to take delivery at a specific date, push back that date, due to their own challenges. And so, there are no guarantees, of that playing out, as we've seen even up till the fourth quarter obviously, in the results of our fourth quarter. But generally, that 80% within one year for backlog is a general rule that holds.

Okay. That's helpful. Then last question. Just in terms of supply issues with the current catheter. Are there any updates from your supplier? Or is there any change in outlook? Or how should we be thinking about this for 2024?

Yes. So just to be clear, the catheter shortages are not from a supplier of ours, nor from a company that we have any control over. This is all related to the dependency, which I described before, where Johnson & Johnson independently manufactures, sells and supplies the magnetic ablation catheters that are used alongside our robot. And so, we do not have control over them, or even influence over them in the same way that we would have influenced with a supplier that we have hired and worked with. We have seen these cropped up over a year ago now, about a year and a half ago. We have seen continued shortages that flare up in various specific geographies, various accounts. And there is a randomness to it, though it does definitely pressure the physicians and hospitals that rely on our technology and create disturbances to their normal practices. And so, I think given where we stand right now, it seems like the intensity and distribution of those flare-ups doesn't seem worse than it was a year ago. And so, it seems like overall, the numbers this year should look similar to last year, but there is an aspect of dependency there. And that again speaks to how valuable and important having MAGiC on the market will be.

Great, thanks. I'll jump back in queue.

Thank you very much, Jason.

Okay. Great. Good afternoon, everyone. Continuing the manufacturing question there. Just with regards to MAGiC, if you get the approvals, let's just say, second half of this year for both Europe and U.S., how quickly can you ramp up manufacturing?

Hi, Alex, thanks and good afternoon. So overall, that is something that we've been working with Osypka, our contract manufacturing partner in Germany, to improve. They have significant experience, manufacturing thousands of units, of various interventional devices. And so, they have the organizational capabilities to do that. With every product, there is its own scaling effort during the formal regulatory testing of MAGiC, we did produce - I believe it was near 1,000 units of the catheter. So, they demonstrated their capability to scale manufacturing to those - to that type of level. We are working with them, have been working with them. We'll continue working with them, so that they can scale, to the point where we're able to service the entire European, and U.S. installed base. I think that probably reaching that level still, over the course of this year is probably aggressive, but that's what we're shooting for, and there are all sorts of incentives in place, to increase that manufacturing.

Okay. That is great to hear. Maybe expand on the qualitative commentary, with the physicians who are using MAGiC in the European study. Just, what do they like about it, versus the J&J device specifically?

Sure. So, I had the good fortune of being able to actually watch eight procedures, when I visited Vilnius University in January. And I think that kind of obviously, you recognize that the financial, the strategic, the independence benefits of having a catheter, the fact that the catheter serves as the enabling technology for our mobile robot. So all of those are kind of the more strategic aspects from our side. From a clinician's perspective, how does the catheter benefit the patient and the physician. I'd say that some of the main benefits that were described by the physicians. One was an observation that the stability of the catheter was particularly nice. And we are - magnetic catheters are known that one of their key benefits is stability. Oftentimes, that stability is dependent on your approach towards the tissue. And they felt that irrespective of how they approach the tissue with the catheter, they had very, very good stability, beyond what typically they consider very good stability, with the existing magnetic catheters. That was one thing that was particularly called out. The ease of navigation, and how that was more intuitive than what they were used to was the second observation that was called out. And then the fact that reduced fluid is required, to cool the catheter that should benefit patients that have renal issues, or longer procedures, and that just generally creates a reduced fluid load, for patients. And so, some of those were some of the things that I remember, from a visit and from the discussions with physicians. I think kind of those are some of the key benefits, both for patients and physicians, as they switch to MAGiC.

Okay. Great. And then just last question. Are you teeing up any U.S. studies just in case the supplement, the FDA comes back and request additional U.S. data? Just how quickly could you turn something like that around?

I believe in the coming months, we will have a much clearer feeling - coming few months, we will have a much clearer feeling for the regulatory path in the U.S., given what we've done in Europe that has been very helpful in educating us, and giving us certain infrastructure, to run clinical trials more broadly. If you step back, and think about Stereotaxis as a company, we have a very, very unique and kind of a special capability, in terms of building robots - that's something that almost no other company has, very few companies have demonstrated the capability, to build robots that can actually be deployed in a real-world clinical setting, and can work robustly and reliably there. We have that capability in-house. We did not have a historical expertise, or experience in developing interventional devices. And that doesn't just mean the engineering aspect. It means the quality, clinical regulatory aspects, related to interventional interbody devices. And I think that kind of as we've gone through this process, both from a regulatory perspective, and now setting up the clinical trial in Europe. And all the testing processes that we went through. That all gives us more of an institutional capability, in order to replicate those again in the future. And so, I think there was definitely a benefit, from what we've now demonstrated, we're able to pull off in Europe. And depending on how the next few months go, we'll have a feeling on whether it's necessary to start that in the U.S.

Okay. Great. I appreciate the update. Thank you.

Thank you very much, Alex.

David and Kim. Thank you for taking the questions here. Wanted to ask a question on the sales force. With the MAGiC launch and the mobile launch coming down the pike here, when you look to build out the sales force to support those launches. Is that a 2025 event? Or is the plan to kind of push forward with initial - sorry, the existing infrastructure? And then I'd follow-up? Thanks.

Hi, Adam. Good afternoon, thanks for the question. So, we have done a small incremental hiring in Europe already late last year, early this year in anticipation of a MAGiC launch, and ensuring that we have the ability to launch MAGiC across our installed base, with the added level of coverage and service that that would entail. And as discussed in the past, as we launched the catheter initially, we would plan to use our existing sales teams both in the U.S. and Europe to cover those accounts, to launch MAGiC. They are in all of these accounts. They have the relationships. We have a good team that has good electrophysiology knowledge. And so, they're more than capable of launching the MAGiC catheter in a successful fashion. And we would, though, start to reinvest any proceeds from the catheter back into the sales team, so that we grow the team, and can gradually evolve to something more like the larger players in the space, who oftentimes have one, or even more than one individual per account, per hospital customer. And so, I would see us kind of growing that sales team, but we would do it, as we're growing the revenue, of the MAGiC catheter. Similarly, on the capital side, I would say that we are - we know that, with any new robotic system, the scaling of supply chain manufacturing and deployment of the robot is a process that takes many months. And even with the new robot that doesn't have the construction requirements, there are still those styles of infrastructure, kind of process improvements that play out over a period of months. And so, I'd say that kind of, you'll see most of that type of real mind sharing effort in building the commercial team happening in 2025, with some of the preparatory work being done already this year.

That's great color. I appreciate that, David. Thank you. And for the follow-up, I wanted to switch gears and ask about mobile. If I heard correctly, regulatory submissions both in the U.S. and Europe for Q2 events. Can you just maybe share what's left, to still be done ahead of submission, to the regulatory agencies? And just talk about what's informing the confidence, there that you'll be able to make healthy submissions and ultimately garner regulatory clearance? Thank you.

Sure. So we are - we have the formal - the full body of formal regulatory testing that you have to do before you can do a submission. There is still various testing that needs to be done there. Most of it done internally with our team, some of it that is done through external testing services that you have to do through an external testing service. And so that is all expected to play out over the next, let's say, month to couple months. And then, you have to obviously put together all of the documentation for the submission - and that happens concurrent with testing, but there's always some work after you finish the testing process. Overall, our confidence comes from the fact that we have - this is really our expertise robots. We went through a process very, very similar to this, just about four years ago, five years ago, when we submitted the Genesis robot. And so, we have the organizational infrastructure, the muscle memory, the documentation that we can leverage for these types of processes. And we have a skilled team that has run this playbook before, including very recently. So that gives us the confidence. We've had preparatory discussions with regulators. We have clarity on what the regulatory path is, and so that gives us kind of that confidence.

It's helpful. Thank you.

Thank you.

This concludes today's question-and-answer session. I would now like to turn the call over to David Fischel for closing remarks.

Okay. Thank you very much, for all your thoughtful questions and for your continued support. We look forward to working hard on your behalf this year, bringing about the transformations we promised, and speaking again in a couple months. Thank you.

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