Earnings Call Transcript - STXS Q3 2023

Operator, Operator

Good morning. Thank you for joining us for Stereotaxis' Third 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 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.

David Fischel, Chairman and CEO

Thank you, operator, and good morning, everyone. We are continuing to make significant progress in our efforts to deliver commercial results, drive our comprehensive innovation strategy towards commercialization, and maintain financial discipline. On the commercial front, our revenue in the quarter continued to benefit from the adoption of Genesis by both Greenfield new accounts and existing upgrade customers. We recognized revenue on two Genesis robotic systems in the quarter. Our system backlog and a pipeline of engaged customers supports this pace of system revenue in the coming quarters and the potential for growth beyond it. The net effect of revenue recognition and system orders drew down current system backlog to $13 million. We have seen several tenders and contracts advance nicely in recent weeks and expect to end the year with multiple additional orders. We're seeing particular strengths in capital activity out of Europe, where we seem to be benefiting from our enhanced commercial leadership and team in newer fluoroscopy solutions and greater market appreciation for the upcoming availability of our innovations, including MAGiC, mapping integrations, and vascular devices. In contrast, we have seen several projects in China delayed as a countrywide anti-corruption drive seems to have broadly frozen hospital capital purchasing activity. The contributions and growth in system revenue has allowed us to demonstrate year-over-year revenue growth despite the loss of royalty revenue, which we stopped receiving at the start of this year. The loss of royalty revenue has remained the primary drag on our recurring revenue that we continue to see residual pressure on procedures from the catheter shortage Johnson & Johnson had in the first half of this year, and their competitive behavior. This pressure from our technological and commercial dependency reinforces the importance of bringing our innovation strategy to market. We are actively driving our broad-based comprehensive innovation strategy forward. As a reminder, our innovation strategy includes a proprietary ablation catheter called MAGiC, a smaller self-shielding robot that frees us from the extensive planning and construction requirements, a family of interventional guide wires and guide catheters that expand the benefits of our robots into new endovascular indications, a digital surgery hardware and software offering enabling broad operating room connectivity, and a full electrophysiology product ecosystem for China being built in collaboration with MicroPort. A European clinical study of MAGiC is awaiting approval to enroll patients in the near term. We submitted all the required clinical trial documentation to the national health authorities and hospitals at three separate sites in Europe. We are supposed to receive responses from each of these three national authorities between mid-November and mid-December, at which point patient enrollment should follow shortly thereafter. While we only need data from 20 patients at one site to resubmit MAGiC for CE Mark regulatory approval, we are advancing these three sites in parallel to reduce the risk of delays at any one site and to allow for more comprehensive clinical experience and data collection that will support the commercial launch of MAGiC. Shifting to the U.S., on our last call, we mentioned exploring alternative regulatory paths for MAGiC with the FDA with an intent to accelerate access for U.S. physicians and patients. We determined that it would be reasonable to submit a PMA supplement submission in the U.S. for MAGiC using our existing data. We plan to make this submission prior to year-end, and the FDA then has 180 days to respond. While there are no guarantees with any regulatory submission, given the discussions we have had, we believe there's merit to this approach, which could significantly accelerate availability of MAGiC to the physicians and patients that would benefit from it. MAGiC offers significant clinical, commercial, financial, and strategic benefits to Stereotaxis. Its adoption will benefit from our expanding integration with Abbott and site mapping system. After announcing our collaboration at the Heart Rhythm Society Conference and celebrating the first joint procedures in Europe this summer, we were pleased to announce the first joint procedures last month in the U.S. at multiple highly prestigious hospitals. The availability of EnSite integration in both Europe and the U.S. provides our physicians with increased choice and an improved workflow and procedure experience. We anticipate a continued shift in diversification towards Abbott and Safe system with a significant boost in joint adoption concurrent with the MAGiC launch. Our second key innovation effort is the development of a smaller self-shielding robot that significantly enhances the accessibility of robotics. We discussed on the last call our balanced approach to the timing of a regulatory submission, such that the approval of our robot aligns approximately with market availability of either MAGiC or magnetic guide wires. We currently plan to make the submission in the first quarter at around the same time as when we will submit the MAGiC CE mark application. This should lead to the robot having regulatory clearance prior to a compatible interventional catheter or wire being available, and we are using this time prior to submission to continuously refine the system and to require regulatory testing. Our experience selling Genesis gives us daily visibility into the timeline shifts and hospital construction delays that slow adoption even at sites that are most motivated to build a robotic program. This experience reinforces our confidence that the availability of a much more accessible robot, something that can be installed without construction will serve as a significant structural improvement to the pace and scale of adoption. Our third key innovation effort is expanding the clinical use of our robotic platform beyond electrophysiology to a range of challenging endovascular procedures, including the treatment of stroke, heart disease, peripheral vascular disease, and cancer. We have been working hard to develop the right interventional devices, magnetic guide wires, and guide catheters that would allow for that broad indication expansion. That development process has not been easy as our contract manufacturer faced various challenges in transitioning from building good prototypes to being able to actually build devices with the quality, consistency, and scale that would be necessary for regulatory approval and commercialization. We seem to have overcome the last challenge in that manufacturing process and expect to spend the next few months building the over 1,000 guide wires needed for formal regulatory testing. We now expect a 510(k) submission during the second quarter of 2024. The combination of a highly accessible robot with a family of proprietary interventional devices for cardiac ablation and a broader range of procedures serves as a foundational product ecosystem to pioneer robotics across endovascular surgery. Bringing it all together is a significant effort. We are making broad methodical progress across the late stages of this comprehensive innovation strategy. We see the light at the end of the tunnel and are excited by the impact this innovation strategy will have. Kim will now provide commentary on our financial results, and then I'll make a few financial comments as well before opening the call to Q&A.

Kimberly Peery, CFO

Thank you, David, and good morning, everyone. Revenue for the third quarter of 2023 totaled $7.8 million, up 2% from $7.7 million in the prior year third quarter. Growth in Genesis robotic system revenue offset discontinued royalties from Johnson & Johnson. System revenue of $3.5 million reflects revenue recognition on the delivery of two Genesis systems. Recurring revenue for the quarter of $4.3 million was predominantly impacted by the absence of the J&J royalty and residual pressure on procedures. Gross margin for the third quarter of 2023 was 52% of revenue, with recurring revenue gross margin of 80%, and system gross margin of 18%. Recurring revenue gross margin remains consistent with recent quarters and system gross margins continue to reflect significant allocation of overhead expenses over low manufacturing volume. Operating expenses in the quarter of $9.7 million include $2.6 million in non-cash stock compensation expense. Excluding stock compensation expense, adjusted operating expenses were $7.1 million compared to the prior year’s adjusted operating expenses of $6.9 million. Operating loss and net loss in the third quarter were $5.6 million and $5.4 million compared to $5.1 million and $4.9 million in the previous year. Adjusted operating loss and net loss for the third quarter, excluding non-cash stock compensation expense, were $3 million and $2.8 million. Negative free cash flow for the third quarter was $1 million. The reduced use of cash flow benefited from continued attention to targeted expense reduction and the buildup in inventory from previous quarters. At the end of the third quarter, we had cash and cash equivalents of $23 million and no debt. We expect to end the year with $22 million in cash and no debt. I will now hand the call back to David.

David Fischel, Chairman and CEO

Thank you, Kim. We remain cognizant of the importance of maintaining financial strength, particularly in the current macro environment. We are pleased with our ability to deliver commercial results and advance our robust innovation strategy while maintaining financial discipline. We are confident in our ability to advance our innovation strategy to market, fund its commercialization, and reach profitability without the need for additional financings. Before opening the call to questions, I want to take a moment on a personal note to recognize the tragic terrorist assault in Israel last month. We have several investors, partners, and stakeholders impacted by the tragedy and ongoing war. We share in their grief, wish them and their loved ones safety in the coming weeks. Pray for the quick return of the kidnapped hostages and pray for the safety and success of those battling the barbarism and evil that threatens our shared humanity. We'll now take your questions. Operator, can you please open the line to Q&A?

Operator, Operator

Your first question comes from Neil Chatterji with B Riley. Your line is open.

Neil Chatterji, Analyst

Hi, good morning. Thanks for taking my question. Maybe just on Europe, you mentioned kind of the new leadership there. Just curious, what maybe they're doing differently there to drive increased activity or interest?

David Fischel, Chairman and CEO

Good morning. So yeah, it's been very nice seeing the pace of activity in Europe. In the prepared remarks I mentioned that we have several tenders or processes that have been moving forward fairly in the late stages now there. And I think it is a mix. There's obviously product ecosystem aspects that are at play as the near-term approval of MAGiC and the anticipation of that among the physician base. Also, we have a new X-Ray solution that's available in Europe that's helpful. But I think that Frank, who we brought onto the team a year ago, has now got to fully in stride in the business there. And there is a type of discipline and process that is beneficial to things. It has been beautiful watching him and the team broadly work there. And we're seeing it across the region from different countries all from the west to the east, south to the north. So, it's really kind of been across Europe. There seems to be much more activity going on now than in historical years.

Neil Chatterji, Analyst

Great. And then maybe just one follow up. I mean, just more broadly for the sales funnel, what are you seeing in terms of just the greenfield side versus replacement?

David Fischel, Chairman and CEO

I think that still we have the replacement side is a natural easier contributor given we have those relationships and that just makes it kind of a much more natural, easy process. On the Greenfield side, I think we still have a lot of work to do as a company to build the top of funnel and to create visibility on our technology in the marketplace. We still remain largely unknown or known only based on our reputation from 10 plus years ago in the marketplace. And that's something that we have to work to address. As still a small player in this field, that’s something that will take time. And I think as we build up our commercial team with the launch of the new product, that will help significantly. We still see Greenfield interest from multiple sites globally, and obviously in China, the vast majority of the interest is Greenfield given that we have a very small existing installed base there. I'd say that actually is going very nicely in terms of the pipeline being built up. We just see that even things that are late stage seem to be frozen until there are changes in the macro situation and the political situation there. In Europe, it is fairly mixed between greenfield and replacement cycle. I'd say the U.S. is probably still slightly more replacement cycle than Greenfield.

Operator, Operator

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

Adam Maeder, Analyst

Hi, guys, good morning. Thank you for taking my question. Wanted to start with one on the forward expectations and some of the language. I didn't see you reiterate an expectation of double-digit revenue growth in 2023, but did see a comment of continued revenue growth in coming quarters. Can you square the two for us? And perhaps there's no change and maybe I'm reading too much into it, but just wanted to ask for clarification there. Thanks.

David Fischel, Chairman and CEO

Yes. Hi, Adam. Good morning. So, given where we stand, and I think that we are confident in growth in the coming quarters, including the fourth quarter, obviously. We are not certain that we will reach annualized double-digit revenue growth based on our results in the fourth quarter. And so, I think that it would be better to model year-over-year revenue growth in each of the coming quarters rather than the fourth quarter being a blowout quarter. Obviously, it can be impacted by one revenue recognition more or less, and so I just think it's better to focus on revenue growth in the fourth quarter rather than year-over-year double-digit revenue growth for the entire year.

Adam Maeder, Analyst

Got it. Okay. And maybe just to push a little bit more, I mean, it sounds like it's maybe a function of just timing of capital. Is that fair or is there something on the disposable side that we should be thinking about for 4Q as well?

David Fischel, Chairman and CEO

I wouldn't expect continued pressure on the disposable side. I think on the third quarter we do have continued pressure as described in the call from the competitive situation with Johnson & Johnson and the catheter shortages that existed. But I don't think that you should view that as a nadir on the recurring revenue side. So, I wouldn't expect additional pressure there. The third quarter's also naturally light just given the summer holidays and some of the geographies. But on the capital side, I think that pace of two systems a quarter is the right one to model. I think there are chances sometimes for upside, but I wouldn't model that.

Adam Maeder, Analyst

Okay. Very helpful, thank you for that. And I guess I wanted to flip over to the update on MAGiC and us kind of regulatory strategy. I was just hoping to get some more color on the decision to use the PMA supplement route and just ask about the level of confidence in a successful outcome that I think previously you were planning on running an IDE study, so, how did you get comfortable that this is the right strategy and that a trial is no longer needed? What can you share from your discussions with the FDA that kind of led to this change in strategy?

David Fischel, Chairman and CEO

It's probably not appropriate at this stage to share much more than what we did in the prepared remarks or to speculate. We had mentioned previously being in dialogue with the FDA on potential paths for MAGiC. Given those discussions, and we had advisors as well, consultants as well, and physician users as well. In some of those discussions, we felt it would be reasonable to submit a PMA supplement using our existing data. There is obviously no guarantee with any regulatory submission, but we believe there's a good merit to our approach. With a filing before year-end, we will get feedback or a decision from the FDA by the middle of next year, which is a relatively quick turnaround process. In the interim, we'll be collecting human data from our trial in Europe, which will enroll beyond just the number of patients needed for CE Mark submission. So, having the three sites in Europe allows for enrollment beyond what is just needed for the CE Mark submission. Overall, we think that the strategy is one that may significantly accelerate access to the technology for US physicians and patients. We think it's one that makes a lot of sense to do. So, I think that's probably right to say at this stage.

Operator, Operator

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

Josh Jennings, Analyst

Hi, good morning. Thanks for taking my question. I wanted to just follow up on Adam's question and ask are you taking parallel paths looking at submission without a data set, and then also planning on the clinical trial in case that pathway is not deemed appropriate by the FDA?

David Fischel, Chairman and CEO

Hi, Josh. Good morning. I think that the data that we collect in Europe has an opportunity to be very helpful, and so there is awareness that depending on how the review of the PMA supplement goes, there are ways to enhance the PMA supplement and still keep it as a PMA supplement with enhanced data. I think that is definitely something that we have had in mind, and I think that it is something that would be reasonable and accepted. At the end of the day, it depends on the strength of that submission overall, and the PMA supplement approach is one that carries significant advantages and again, which has merit based on all of our discussions and understanding.

Josh Jennings, Analyst

Understood. And I wanted to ask just about the replacement cycle and is any sense you can help us out just what percentage of the installed base is approaching 10 years or 10 years plus, and is this segment sizable and does it represent the low-hanging fruit within the replacement channel? And is that where your Salesforce is focused and intact mode? Thanks a lot.

David Fischel, Chairman and CEO

Yes. By now the majority, I'd say a significant majority of our installed base has X-Ray and systems that are 10 years old or more. I think that there is still this extension of the life of EP labs where we have now seen multiple labs that are 14 years, 15 years. I think even now we have a lab that is 16 years old and they have not yet gone through with a replacement of their lab. This breaks from all historical precedents from what we hear from X-Ray manufacturers and other equipment. It definitely seems like that is the case. What we see, if you look at a company like Intuitive Surgical, they seem to be able to drive a replacement cycle much quicker based on continuous innovation in new robotic technology. Given that our robots are tied to our construction process still at this stage and very much tied to the X-Ray that is in the lab, it's very hard for us to drive a replacement cycle, different from the replacement cycle of an X-ray. It just would require still a shutdown of the lab architectural planning, contractors' construction. If you do that, you very much should be exchanging the X-Ray at the same time. There have been a couple of cases where the robot has driven the cycle, but for the most part, it has been driven by the X-Ray timing, and the hospital's plan to replace the X-Ray. As you see us evolve to the next generation robot and to future generations potentially, obviously after that, I think we will be able to drive replacement cycles at a much quicker pace than the 10 to 15-year timeline that seems to exist right now. Right now, the majority of our sites are over 10 years now in age, and so they are very much ripe for replacement. But we have still seen that happen more in trickles and a gradual process rather than a full bolus.

Operator, Operator

The hospital plans to replace the X-Ray. As we move towards the next generation of robots and potentially future models, we anticipate being able to accelerate replacement cycles beyond the current 10 to 15-year timeline. Currently, most of our sites are over 10 years old, making them very suitable for replacement. However, replacements have been occurring gradually rather than all at once.

Alex Nowak, Analyst

Good morning, everyone. So how quickly can you collect the data in Europe on the three sites? And what are the number of patients per site? Is it 20 per site?

David Fischel, Chairman and CEO

Alex, good morning. So, the trial is structured such that we can capture the acute clinical data from 20 patients as soon as that is available. That will then be submitted for CE Mark resubmission. We are able to enroll up to 30 patients at each site, and we are able to go actually up to even 10 sites if we would like. But we've really focused on these three primary ones up front. The trial can also be converted into a post-approval follow-up trial. We will probably use the same protocol to enroll patients after we have CE Mark approval at additional sites, but we really focused on these three sites that are very experienced and were able to move in a relatively fast fashion through the ethics committee approvals and work with us on the national submission. I would kind of see that we'll obviously work most expediently to enroll the 20 patients and then we'll probably go up until 30 patients at each of these three sites.

Alex Nowak, Analyst

But reading through all the commentary it probably sounds like you'll have that data in hand per quarter certainly before you get feedback from the FDA.

David Fischel, Chairman and CEO

Yes.

Alex Nowak, Analyst

And then on the gen three system, the mobile robot you maybe update us on the internal work. I know there's always kind of constant improvement you can do before you submit to the FDA and kind of lock the system down. So just some of the internal work you've been doing there. And then just remind us when could we see a launch and the launch kind of predicated a little bit on MAGiC approval as well?

David Fischel, Chairman and CEO

Sure. When you look at a robotic system, these are complex systems requiring macro hardware, micro hardware, electronics, firmware on the boards, control software, UI software, all working very well together. This complexity leads to most companies not being able to really develop surgical robots. We've obviously demonstrated now that capability for many years. We've gone through, as we go through kind of, when I talk about using the word refinement, there are various ways to refine the electronics of a system. The tolerance of the mechanical aspects of the system, the control software where you have a system that works very well, but as you go through more refinements, you find and address potential edge cases where you would otherwise have more failures in the field. We believe we have very top-tier gross margins on our service contracts as you see from our financial statements. We want to maintain those, and it’s through those kinds of refinements that you can have good product performance in the field, which is beneficial for our customers and beneficial for us. From a commercial launch perspective, with a submission in the first quarter, we would expect to have CE Mark very rapidly post-submission. We would expect to have FDA 510(k) approval. A reasonable timeline is within about six months given the experience that we had with Genesis. You are correct that we need either the MAGiC catheter or our Guidewire or guide catheter for vascular procedures to be approved. The interventional devices that we are developing are all backwards compatible with Genesis systems and AOB systems. However, the new robot that does not require construction depends on having these new interventional devices on the market, which has influenced some of the decision-making on when to advance that robot towards approval.

Operator, Operator

Your next question comes from the line of Frank Takkinen with Lake Street Capital Markets. Your line is open.

Frank Takkinen, Analyst

I was hoping you could talk a little bit to some of the events that would occur following clearance or approval of the catheter namely manufacturing capability. I believe that's on your partner there, but are they prepared when that occurs to scale up manufacturing, if I'm right in remembering that. And then second, how should we think about any commercial organization changes after that event?

David Fischel, Chairman and CEO

Sure. Hi, Frank. Good morning. So, you're right, which is a German company, and is our contract manufacturer and partner in the MAGiC catheter. They are the ones ramping up the manufacturing capability for MAGiC. They've obviously been able to manufacture the 100 catheters necessary for the regulatory testing. We are working with them to make sure that they are in a good place for manufacturing for commercialization. We want to have several hundred catheters available in inventory upon regulatory approval. We're working with them to make that possible. As every manufacturing scale-up is an effort and requires attention, it's difficult. These are complex class three devices with significant regulatory burdens as well. They have many years of experience manufacturing thousands upon thousands of similar catheters. I think we have a good partner that has the experience and the resources to scale as appropriate. From a commercial team perspective, I've mentioned in the past that we currently operate our commercial teams in some ways with a hand behind their back. Typically, we have one clinical support person, one sales person per three or four hospital customers. Many competitors in the EP space have one sales rep per hospital, if not even more. This puts us at a structural weakness, and going to that type of model would not be financially sustainable long-term with our current revenue structure. We could increase revenue, but it would come at the detriment of the bottom line. As we bring the MAGiC catheter to market and shift from making roughly $1,000 per procedure to making several thousand, $3,000, $4,000, $5,000 per procedure, we can enhance our sales team significantly. We plan to move toward a model of one person per hospital account, which can be done in a financially sustainable fashion. This carries benefits to both the top line and bottom line.

Frank Takkinen, Analyst

And then maybe for my second one, I think we touched on a lot of these individual points, but hoping you could cover it in detail start to finish, but looking to get an update on the capital markets or capital equipment sales market. Clearly, it's tougher in a higher interest rate environment, but what are you hearing out there right now for the orders that are in the funnel hoping to convert soon? Is there any inclination for them to wait for the mobile robot, or is that really not quite on their radar yet?

David Fischel, Chairman and CEO

I think that we've done a relatively good job in bifurcating hospital awareness between the Genesis system and the mobile robots. A few cases where that has come into play or where we've discussed it proactively with a hospital where it makes sense. Generally, I think we've done a reasonably good job in separating that awareness and channeling the appropriate people to the Genesis system. It is still a headwind macro environment overall. We've been operating now for a few years in this macro headwind environment. That said, I think we still have a huge amount of opportunity ahead of us. We still have a very small market share, and we are able to find opportunities. I'd say that we are advancing multiple of them through late stages of contract negotiation. Overall, that feels good as we are able to make progress despite the headwind environment.

Operator, Operator

Alright, there are no further questions at this time. I'd like to turn the call back to David Fischel for closing remarks.

David Fischel, Chairman and CEO

Okay. Thank you all for your questions. We appreciate your continued support and wish everyone a healthy and peaceful end of the year. We'll work hard to end the year on a strong note, and look forward to talking soon. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for joining. You may now disconnect.