Stereotaxis, Inc. Q1 FY2024 Earnings Call

Good afternoon. Thank you for joining us for Stereotaxis' First Quarter 2024 Earnings Conference Call. Certain statements during the conference call and the following question-and-answer period may relate to future events and expectations, and thus may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the company in the future to differ significantly from the statements made by the company's executives today. These risks are detailed in our public filings with the Securities and Exchange Commission, including our most recent periodic report on Form 10-K or 10-Q. We do not undertake any obligation to update these statements. 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. Our last call two months ago covered a detailed overview of Stereotaxis and our strategy. We'll keep today's call shorter. I will focus on three specific topics: our commercial results, progress in our innovation strategy, and the acquisition of APT, which we just announced in a press release this afternoon. It's an exciting time with significant progress. Our commercial goal has been to sustain sales momentum and preserve our financial strength while preparing for a breakthrough driven by our innovation strategy. Despite the structural challenges posed by our legacy product ecosystem, we continue to achieve commercial progress. Revenue in the first quarter increased by 5% from the previous year, primarily due to higher robotic system sales. We have grown our system backlog since our last call with two new orders for Genesis robots from existing customers in Europe upgrading their older labs. The receipt of these orders and the revenue recognition in the first quarter has raised our current system backlog to $16 million. There continues to be a strong active pipeline of customers for Genesis across our three key regions, although challenges in our historic product ecosystem, including ongoing catheter shortages from Johnson & Johnson, are affecting purchase decisions. Our recent regulatory submissions for MAGiC and the positive outcomes from our clinical trial are helping somewhat. Our recurring revenue is still impacted by the J&J catheter shortages, which are affecting procedure volumes. We're experiencing inconsistent availability of the J&J catheters in various regions, but we anticipate our overall recurring revenue in 2024 to match that of 2023. Our innovation strategy is crucial for driving substantial commercial success, and we are making significant strides on multiple fronts. We submitted Stereotaxis' proprietary ablation catheter to the relevant EU authority and the FDA during the first quarter. We were pleased with the prompt responses from both regulatory bodies. In Europe, we received a completeness check soon after our CE application submission, followed by our answers to a first set of clinical questions before receiving a single follow-up question last week, which we intend to address shortly. We are still awaiting technical and biocompatibility questions but had considerable progress on those topics last year. In the U.S., the FDA reviewed our PMA supplement and decided to convert the submission into a traditional PMA after collaborative discussions. That conversion has been completed, and the traditional PMA is now undergoing its initial review, utilizing the data collected from the ongoing MAGiC study in Europe and the broader body of preclinical and bench data. Enrollment in the European study is progressing well, maintaining a perfect safety record for MAGiC and overall excellent performance. We aim to enroll more patients in the study and appreciate the cooperative approach from both regulators as we work to make the MAGiC catheter available for the patients and physicians who need it. Our second significant innovation is developing a smaller self-shielding robot that will enhance the accessibility of our technology. We are methodically completing the extensive tests required for regulatory submission and are pleased with the robot's performance. We expect to submit for regulatory approvals in both the United States and Europe this quarter, with European clearance anticipated by mid-year and FDA clearance in the second half. Following approval, we plan to demonstrate the robot's real-world capabilities, enhance its compatibility with various x-ray systems, and prepare our supply chain and commercial operations for a full launch in 2025. Initial demonstrations of the robot to physician customers bolster our confidence that having a smaller and more accessible robot will significantly enhance adoption. Our third effort is to expand the robot's application beyond electrophysiology into a wider range of endovascular conditions, building on the development of a family of robotically steered guidewires and guide catheters. The manufacturing ramp-up for the guidewire has been slower than anticipated, but we plan to file for regulatory approval later in the third quarter, with commercial availability targeted for year-end. The guide catheter is being produced by APT, and we are excited to bring that project in-house through the APT acquisition. We expect it to be commercially available in early 2025. In China, our partner MicroPort has submitted key parts of our product ecosystem for regulatory approval and is responding to questions from the NMPA. MicroPort anticipates approval for Genesis this summer, along with the robotically navigated ablation catheter and integration with their mapping system before year-end. They are ramping up training for their commercial team ahead of the launch, and we are implementing a thorough training program for all members of the MicroPort EP clinical sales team. Our final key innovation is our digital surgery platform aimed at broad operating room connectivity. The Sync cloud-based connectivity app is currently in limited release, during which we are incorporating additional features as we await the launch of the Synchrony-integrated lab display. Synchrony will begin formal regulatory testing in a couple of months, with submissions planned for later in the third quarter. This initiative aligns synergistically with our core strategy, and early feedback has been very positive, indicating potential for it to become a substantial independent business in the coming years. We will hold a future event to fully showcase this technology. These innovations are significant advancements in clinical, commercial, and strategic terms. They enhance the care we provide to patients, improve the experience for physicians, and strengthen our ability to scale our business sustainably with a healthier revenue and cost structure. As we integrate these components, we are positioning ourselves for multiple opportunities for impactful growth in 2025 and beyond. I want to acknowledge the Stereotaxis team for their hard work in driving this progress. It is impressive what our small team has accomplished in terms of innovation, quality of work, and advancing multiple projects simultaneously in a financially responsible way. We truly have expertise and capabilities that are unmatched. Reflecting on our journey of innovation in recent years and strategizing for the future, it has become evident that we lack in-house capabilities for developing interventional disposable medical devices. While our reliance on various contract manufacturing partners has been a reasonable solution, it is not ideal for a future where we aim to drive extensive innovation and manufacturing of a wide range of interventional devices working alongside our robots. Looking ahead, I am very enthusiastic about APT joining Stereotaxis and contributing their expertise. Our acquisition of APT is strategic and synergistic. I was introduced to APT by respected electrophysiologists using their differentiated, manually navigated diagnostic catheters and seeking a robotically steered version for Genesis. As we engaged with APT's team, we were impressed by their expertise and the quality of their work, leading us to collaborate on a unique high-density mapping catheter—the first magnetically robotically steered diagnostic catheter for our robotic users. Our collaboration evolved to include a vascular guidance catheter. Earlier this year, we saw the chance to bring APT into Stereotaxis, which made commercial and strategic sense, and we secured agreement on a transaction that ensures our long-term alignment and financial prudence. Commercially, APT currently relies on distributors and sales agents globally for selling its catheters, with a significant portion of sales coming from outside the U.S. There is substantial potential for these high-quality catheters in the U.S., but this requires a dedicated sales team, which Stereotaxis can provide with practical and messaging synergies. Stereotaxis already has over 20 skilled individuals in the field across the U.S. focused on treating complex arrhythmias. APT's catheters are expected to deliver additional value and revenue in the practices our team already connects with and can help open doors at centers focused on complex arrhythmias for robotics adoption. We anticipate APT to contribute around $5 million in annual revenue in the first year after the acquisition. Strategically, our previous lack of in-house catheter development and manufacturing capabilities has been limiting. APT's team and expertise will significantly enhance Stereotaxis's future innovation efforts, particularly for developing a wider array of interventional devices navigated by our robots across various endovascular procedures. We warmly welcome the APT team to Stereotaxis and look forward to their contributions as vital parts of our mission. While we are not disclosing specific financial terms of the acquisition, a significant portion of the consideration is based on achieving key regulatory and commercial milestones, including approvals for specific robotically steered catheters in electrophysiology and endovascular applications, and revenue milestones expected to unfold over the next five years, which are tied to meaningful growth and adoption of APT catheters. The initial and milestone payments may be made entirely in stock. We expect to finalize the acquisition in the third quarter, pending standard closing conditions.

Thank you, David, and good afternoon, everyone. Revenue for the first quarter of 2024 totaled $6.9 million, a growth of 5% from $6.5 million in the prior year first quarter. System revenue for the first quarter was $2.6 million and recurring revenue was $4.3 million compared to $1.8 million and $4.7 million in the prior year first quarter. System revenue in the quarter reflects revenue recognition on the delivery of a Genesis system and partial revenue recognition of other ancillary systems. Recurring revenue continues to be pressured by Johnson & Johnson catheter shortages. Gross margin for the first quarter of 2024 was 58% of revenue. Recurring revenue gross margin was 76%, and system gross margin was 27%. Operating expenses in the quarter of $8.7 million included $2.6 million in noncash stock compensation expense. Excluding stock compensation expense, adjusted operating expenses were $6.1 million compared to prior year adjusted operating expenses of $6.9 million. The lower adjusted operating expenses reflect natural reductions in spending on various R&D projects as they have neared fruition and a general effort to be financially prudent across the organization, partially offset by increased clinical trial and regulatory spending. Operating loss and net loss for the first quarter of 2024 were $4.7 million and $4.5 million compared to $5.6 million and $5.3 million in the previous year. Adjusted operating loss and adjusted net loss for the quarter, excluding noncash stock compensation expense, were $2.2 million and $1.9 million compared with $3 million and $2.7 million in the previous year. Negative free cash flow for the first quarter was $2.3 million. At March 31, we had cash and cash equivalents of $18.2 million and no debt.

Thank you, Kim. We're continuing to advance our technology and strategy in a financially prudent fashion. The first quarter is generally the highest cash burn quarter of the year, and we expect the remainder of the year to have a lower rate of cash utilization, even incorporating the expenses associated with acquiring, integrating and operating APT. Estimating revenue in any given period remains a challenge, and we are still too early in the quarter to provide a reliable estimate for this quarter. As we look out at the full year, we continue to expect modest double-digit revenue growth for the full year, driven by revenue recognition of system backlog and new system orders and not incorporating contribution of revenue from APT. We look forward to now taking your questions. Operator, can you please open the line?

And your first question comes from Frank Takkinen with Lake Street Capital Markets.

Congrats on the progress. I was hoping to start with one on APT. Maybe just talking about current catheters you have in development MAGiC and the guidewire, is there any immediate synergistic help that they can provide with any of these products? Are those pretty much form factors locked down, sticking with Osypka for manufacturing and APT is more for future developments, such as the robotic mapping catheter? I'm kind of curious how it can impact the business today.

Frank, thanks for the question. So we obviously have a good long-term relationship with existing contract manufacturing partners, and we don't plan to make any changes. We plan to have continued long-term relationships with those partners. So this acquisition is really not relevant for the MAGiC catheter or the guidewire at this stage. We're really looking toward both the diagnostic EP catheter, the guide catheter, and then a series of additional disposable sterile interventional devices as we look towards the future.

Okay. Fair enough. That makes sense. And then maybe shifting over to the PMA change related to the MAGiC catheter. Can you give a little bit more background on the switch from a PMA supplemental to a full PMA and how that might impact needed data for that submission and timelines?

Sure. So from a timeline for the submission, that is kind of is the same as what it was before. The FDA converted it internally on their side from the PMA supplement to a traditional PMA. There are certain things that are not allowed during the PMA supplement but are supported by a traditional PMA, like, for example, auditing manufacturing facilities as part of the review process, and that was important to do, and those help drive the decision for the conversion. And so we had a good collaborative discussion with FDA after they received our PMA supplement submission and as discussing some of what would be important in order to allow FDA to do a comprehensive review, they felt that that change would be beneficial. And as I described in my prepared remarks, we anticipate still the existing data that we've been collecting to be sufficient for the submission, and so that is obviously helpful in the overall timeline and process. And so I think we've been fortunate to be able to have collaborative relationships with the regulators, both in the U.S. and Europe, and to be able to kind of advance things in a fashion that is looking for the right solutions that allow a comprehensive review in a timely fashion.

Okay. Got it. And then last one, maybe just on the capital equipment environment. Any update you can provide there as it relates to installation timelines, construction variability, ordering patterns or hesitancies around it, given some of the macro elements?

Nothing major to speak about there. I think that we're still kind of in this middle ground. There's obviously challenges and headwinds, both in the macro environment and given our product ecosystem. There's also the tailwinds of general interest and demand in our technology and watching our innovation strategy come closer to fruition. And so I think there's that balancing act to both of those. We're able to create some progress, given the gives and takes there. It's obviously not the type of scale of progress that we ultimately want to be able to show. And that's why we have our innovation strategy and look forward to being able to actually start to bring that out into the world.

Your next question comes from the line of Jason Wittes with ROTH MKM.

Congratulations on the progress with all the submissions. I wanted to follow up on the PMA conversion to a traditional PMA. How does that impact the timing? Are there a few extra months added, both for the conversion to a traditional PMA and any additional steps required for the full submission?

Thank you, Jason. As I mentioned in our previous call, we see the submission to the FDA as part of an ongoing dialogue and collaborative engagement in the regulatory process, rather than just a one-time event where we submit and wait for the outcome. Over the last two months since our last call, we've experienced a positive interaction with the agency regarding our submission. I was particularly impressed with the quick review and the follow-up call that allowed us to brainstorm on the best path moving forward. The transition to traditional PMA documentation and the payment for that application have already been completed, and we are currently undergoing the initial review of the traditional PMA application. The statutory timeline for this process is typically six months, but there may be pauses during inquiries. However, I view this as more of a process, and given our engagement so far, I am optimistic about finding ways to ensure this important device becomes available to patients and physicians in the U.S.

That's helpful. Regarding the APT acquisition, it seems like a strong addition from a technological perspective for your company. You mentioned they offer a number of unique catheters, and it appears they are primarily sold in Europe at this time. Is the strategy to adapt those unique catheters for the robotics platform and sell them alongside the robotics products? Additionally, do you plan to market the manual components in the U.S. as well?

Sure. So a little bit more color there. APT makes a series of diagnostic manually navigated handheld catheters used in cardiac ablation procedures. It has some catheters that have high-quality construction but, from a design perspective, are relatively similar to existing catheters out there. And then they have a few catheters that are fairly differentiated in providing additional clinical value in specific styles of cardiac ablation procedures. They sell the catheters globally. I say that, actually, their strongest region is a few countries in Asia. And then they have a decent amount of sales in Europe, and they have their weakest geography being the U.S., which is interesting given typically sales in the U.S. outshine other geographies. We currently in robotic cardiac ablation procedures, manual handheld diagnostic catheters are always being used. There are no robotically steered diagnostic catheters that are available now or have ever been available. It's purely the ablation catheter, which is robotically steered. And so there's definitely the opportunity for their existing manually navigated catheters to be used in robotic procedures as they currently are and to be used more broadly in non-robotic procedures in the U.S. at the accounts that we already call upon and where we have relationships. There is a specific diagnostic catheter that we have worked with, and that was, to some extent, the start of our relationship with APT, that we've been working with to make robotically steered. That is in the late stages of development and will be exciting to bring to market. That'll be the first time there's a robotically steered, high-density diagnostic catheter available to our community. And so that is definitely part of the strategy, but there is value to be had both in synergies, both from the existing portfolio of manual catheters and from that robotically steered variant in the future.

Got it. And then just one more for APT. I think you mentioned the initial payment is going to be through stock issuance. The additional milestones, are those cash or stock payments?

Those are all stock-based payments paid upon the milestones.

Your next question comes from the line of Adam Maeder with Piper Sandler.

Congrats on the deal. I wanted to follow up on the last line of questioning and ask about the commercial synergies. So for complex AF ablation procedures today and I guess specifically for complex arrhythmias, how many of those cases or what percentage of those cases use diagnostic catheters? And then I'd also be curious to hear a little bit more about the competition on the diagnostic catheter side. Who are you going to compete with there? And why does the APT technology win? And I have a follow-up or 2.

Thank you for the question, Adam. Diagnostic catheters are essential in nearly every cardiac ablation procedure and are widely used. Certain high-density mapping catheters, like PENTARAY or an HD grid catheter, have significantly boosted commercial growth for companies such as J&J and Abbott. Additionally, there are various catheters that are positioned in the blood vessels around the coronary arteries and the heart, providing electrogram data from those areas. These catheters compete with others that are primarily placed in the coronary sinus or surrounding vessels during procedures. Some catheters are particularly unique in their design and capabilities, adding value in complex cases, including ventricular tachycardia and pediatric cases. Our focus is not to offer a wide range of products for every cardiac ablation procedure but to concentrate on enhancing the most intricate cases and providing distinct value to the electrophysiology field. The messaging of these catheters reflects that goal. We do not aim to be a generic supplier of catheters but instead want to deliver differentiated value. Furthermore, we anticipate strong commercial and strategic synergies by developing in-house manufacturing capabilities, which will significantly enhance our business model going forward compared to what we've previously addressed.

Got it. That's a very helpful color, David. And then just one quick clarification. The $5 million revenue contribution from APT, did I interpret that correctly as being for calendar year 2025? Or is that for 12 months from close, which I think is expected in Q3?

That would be for the first year post closure. So it might be 3 months, 4 months, or 5 months before the end of this year, but kind of for the first year of full option.

Okay. Understood. And just one last one. Just curious, from an APT standpoint, do they have any pipeline initiatives that are targeting pulsed field ablation or any catheter IP that could potentially be helpful there? And if not, just curious kind of how the company is thinking about pulsed field ablation, the importance there to potentially adding that to the portfolio over the long term?

Sure. Thank you, Adam. APT has undertaken some work in pulsed field ablation with a well-known hospital in the United States. They possess some intellectual property related to this and have conducted various clinical trials involving a unique catheter developed in collaboration with the physicians at that facility. Therefore, this acquisition includes beneficial assets in the pulsed field ablation sector. Additionally, we have been collaborating with several companies to investigate robotically steered catheters that can deliver pulsed field ablation during procedures, applicable in both the atrium and the ventricle. We also have a couple of animal studies scheduled with two different companies in the next one to three months. There’s significant progress being made in this area. When we have something more substantial, such as a timeline for when the first pulsed field ablation catheter could potentially reach the market or start human studies, we will provide further updates.

Your next question comes from the line of Josh Jennings with TD Cowen.

I was hoping for another APT follow-up, just with the high-density mapping or all the diagnostic mapping catheters in the portfolio. Are they integrated into a high-density or 3D anatomic mapping system? Or are they compatible with current mapping systems that are out and commercialized? Or how does that whole integration work and play out as you advance this platform?

Josh, very good question. APT's catheters are currently compatible with a range of mapping systems out there. You're correct that the primary high-density mapping catheters, like an HD grid or PENTARAY, generally have to be fully integrated with the mapping system. There are though ways to pin various secondary diagnostic catheters - things like a coronary sinus catheter - into the various mapping systems without it being fully integrated but being compatible. And so that is very much a part of this industry, and that's how the catheters are currently being used.

I wanted to ask about the pipeline as we move forward and work on getting the mobile system approved. You mentioned some points in your prepared remarks, David. How is the pipeline looking in the U.S. and internationally as we are in the second quarter of 2024 compared to a year ago?

Overall, we are very pleased with the progress being made on the robot development. The device is performing well during testing, and we are systematically working through all required tests. We have started sharing the system with visitors at our office, and it is increasingly resembling a real commercial system as we receive covers and LED lights. From a pipeline perspective in the field, Europe appears to be the first region where we expect the MAGiC catheter and the new robot to receive approval, leading the way in pipeline development. This progress is supported by the availability of a modern X-ray system in Europe, with the first installation completed in Italy. The pipeline looks promising. However, we have not yet aggressively commercialized or marketed this new ecosystem, which offers a robot that does not require construction and can be adopted in various ways, including capital sales, leases, or placements with disposable commitments. We are looking forward to doing that and are preparing to ensure we have a solid pipeline when we are ready to proceed more fully, but we haven't moved forward until we receive the necessary approvals.

And then maybe just a similar question or a follow-up question on just China, the collaboration with MicroPort. And just when should we be expecting orders to start flowing through to their sales force and that combined effort?

MicroPort continues to anticipate Genesis approval in the summer and aims to have its catheter integrated with its mapping system by the end of the year. This approval will be crucial for facilitating capital activity. The full ecosystem, including the catheter, will enable the broader MicroPort sales team to actively engage in commercial activities. Although MicroPort has a relatively smaller capital sales team that is poised to be motivated and effective once Genesis is approved, we are currently training all members of the approximately 100-person MicroPort EP clinical sales team in both group and one-on-one sessions. The approval of the catheter will be a key driver for this team to engage with their customers and promote the adoption of their mapping system and catheter portfolio, leveraging the robot as a unique advantage. I see this process unfolding in two phases and am particularly optimistic about the second phase, while acknowledging there will be some influence from the first phase as well.

All right. That concludes our Q&A session. I will now turn the conference back over to David Fischel for closing remarks.

Okay. Thank you very much for your questions. We look forward to working hard on your behalf to realize key milestones prior to when we speak next quarter. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now disconnect.