Earnings Call: Q1 2021

May 10, 2021

Good morning. Thank you for joining us for the Stereotaxis First Quarter 2021 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 ks or 10 Q. We assume no duty to update these statements. At this time, all participants have been placed on a listen only mode. The floor will be open for questions and comments following the presentation. As a reminder, today's conference is being recorded. It is now my pleasure to turn the floor over to your host, David Fischel, Chairman and CEO of Stereotaxis. Thank you, operator, and good morning, everyone. I'm joined today by Kim Ferri, our Chief Financial Officer. Our last Call 2 months ago was an annual earnings call, and I used the occasion to provide a broader overview of our technology, clinical value, vision and strategy. We'll keep this quarterly call more brief. The highlight of the Q1 is Stereotaxis' return to robust double digit revenue growth with 50% year over year growth compared to the Q1 of last year. We have long discussed renewed adoption of robotic systems as the first Significant wave of revenue growth in our strategic innovation plan. We are pleased to reap the initial fruits of that strategy. During the Q1, we shipped the Genesis and Model S system to a hospital establishing a new robotic electrophysiology program in Europe as well as an IOVI system to a hospital establishing a new robotic electrophysiology program in China. In both of these cases, partial revenue recognition was triggered upon shipment of systems and the revenue reported reflects portion of the overall contract value from those two deals. We expect to install both systems late in the second quarter and to begin procedures in summer. On our last call, we reported on 3 additional system orders that had been received, 2 greenfield systems in the U. S. And a replacement cycle system in Europe. These remain on track for installation during the Q3. As mentioned on the last call, we will announce the names of these hospitals as they are ready to highlight their clinical and technological leadership in their communities. In the 2 months since our last call, We were pleased to receive an additional order for our Genesis robot and the Model S imaging system from an existing customer in the Midwest. The customer is part of a large hospital network and the terms of the order make it likely that an incremental Genesis system will be ordered from the network prior to year end. We continue to see significant interest in Genesis across geographies and at both potential new and existing hospital customers. The timing of any individual order remains difficult to predict, but we are pleased with the quality of discussions and remain confident in a robust pace of orders in the coming quarters. Despite a still challenging macro environment, our confidence in the Genesis opportunity is predicated upon 3 main factors. First, physicians continue to have great experiences with the Genesis system. Both Banner University and Helsinki University remain highly active with over 250 robotic procedures performed on Genesis to date. Physicians have started visiting both sites virtually or in person. During a recent in person visit, a physician summed up the typical feedback nicely. The combination of Genesis, Model S and Odyssey is very impressive. This visit very much exceeded my expectations. 2nd, from the bottom up, we continue to engage with customers in a robust fashion and build our commercial capabilities. In the past 2 months, we hosted over 38 physicians and administrators on 23 separate telerobotic test drives of Genasys. 30% of these visits were first discussions with greenfield opportunities. 3rd, we can sense a gradual sign in Stereotaxis' and visibility in the industry. While this is a perception and therefore less tangible, our visibility across conferences last month is a case in point. Just during the month of April, 2 separate live robotic procedures were broadcast from regional EP conferences, physicians presented our technology at 3 separate international conferences, and I had the opportunity to provide the keynote talk at an international conference on robotic surgery. At ERA, the European Heart Rhythm Association, our symposium was chaired enthusiastically by Professor Carl Heinz Cook, a pioneer of cardiac ablation therapy and the previous President of Era. We were also pleased to learn that the Society For Cardiac Robotic Navigation was invited to host a session at the Heart Rhythm Society's Annual Conference in July titled Robotics and Automation in Catheter Ablation. This is the first time SCRN has been formally included in the HRS program. While focused on successfully executing this first wave of growth, we continue to aggressively advance the second and third waves of our strategic innovation plan. Stereotaxis' advanced robotically navigated magnetic ablation catheter continues to progress meloxicically through the manufacturing and testing processes needed for submissions for European approval and a U. S. IDE study. The pandemic restrictions in Europe caused some manufacturing delays at our partner Osypka, but our current schedule puts us on track for CE Mark submission in Europe this September. The U. S. IDE application should take place shortly thereafter. We continue to work energetically on the 3rd wave of innovations that will accelerate our adoption in electrophysiology and expand our robotic technology into new adjacent markets. We believe we will be in a position to discuss these in more detail towards the end of this year. Kim will now provide some commentary on our financial results, and then I'll make a few financial comments as well before opening the call to Q and A. Thank you, David, and good morning, everyone. Revenue for the Q1 of 2021 totaled 8,600,000 a 50% increase from the prior year Q1. System revenue of $2,600,000 reflects initial revenue recognition on the delivery of a Genesis system to Europe and an Niobe system to China. Recurring revenue for the quarter was 5,800,000 compared to $5,500,000 in the prior year Q1. Procedure volumes were up slightly compared to the 4th quarter and up approximately 5% from the Q1 of 2020, but were still down approximately 15% from the Q1 of 2019. Procedures improved each month during the current quarter with procedures in March of this year down only 3% from March of 2019. Gross margin for the Q1 of 2021 was 70% of revenue with system gross margin of 45% and recurring revenue gross margin of 84%. Operating expenses in the quarter of $7,500,000 included $1,400,000 in non cash stock compensation expense. Increased non cash stock compensation reflects our higher stock price and the previously announced CEO performance stock plan. Excluding stock compensation expense, adjusted operating expenses were $6,200,000 consistent with the prior year Q1. Operating loss and net loss in the Q1 were $1,500,000 compared to $2,100,000 $2,000,000 in the previous year. Adjusted operating loss and net loss for the Q1, excluding non cash stock compensation expense, were $200,000 Negative free cash flow for the Q1 was $300,000 compared to $2,200,000 in the prior year Q1. At March 31, 2021, we had cash and cash equivalents of $44,100,000 I will now hand the call back to David. Thank you, Kim. We are pleased by our performance in the quarter, highlighted by a 50% increase in top line revenue. We continue to expect 2021 to be the start of a multiyear period of growth, and we reiterate our guidance of robust double digit revenue growth in 2021 with robotic system revenue of between $10,000,000 to $20,000,000 We continue to invest in the team, infrastructure and projects that are critical for both near and long term Success and are proud that we are able to do so while maintaining financial discipline. Our robust balance sheet allows us to reach profitability without the need for additional financings. We Our first question comes from Frank McAgentle with Lake Street Capital Markets. Please go ahead. Hey, thanks for taking my questions and congrats on the quarter. Hi, Frank. Good morning. Thank you. Absolutely. So first, I wanted to start with Recognition of installs, given you recognize the revenue this quarter, they're installing next quarter. Could you speak to The 3 systems you anticipate installing in the 3rd quarter on whether or not those will be recognized in the Q2 or Q3? And then I know this has been brought up before in previous calls, but could you just refresh our thinking on the timing between order recognition, Revenue recognition and then install? Sure. Let's we'll try to do it. The difficulty is that there's no one rule. And so depending on every individual contract with the hospital in every situation, Revenue recognition is somewhat driven differently. And so for the example, let's say, of both the European and the Chinese system that were sold, Those were shipped to distributors and based on the contract with the distributors, we were able to recognize Kind of a good portion of the revenue kind of upon shipment. And We probably, I believe, will have at least one additional of the installations that will take place in summer. We'll have one of those that likely Revenue recognition will take place in the Q2. Otherwise, I think that kind of some of the remainder recognition on multiple of these systems that were shipped and on the 2 remaining that will be shipped in the summer And installed in the summer will take place in the Q3. Perfect. And then if I can just ask a bigger picture question Jen, on the return to system sales, what do you believe is kind of standing in between you right now To being at a consistent 10 plus system sales cycle every year. So I think we're kind of trying to do many things from the bottom up To get to that type of situation, we obviously have the replacement cycle, which we've still not really benefited from. I think that is gradually going to become kind of much more meaningful of reality and those ten systems That kind of you're calling for, to some extent, can be driven just by the replacement cycle. Obviously, kind of we're also focusing, like I mentioned before, on building up our commercial capabilities, whether it's in the more traditional ways like Adding to the sales team or in some of the more kind of unique ways like our telerobotic test drives and ways To directly reach out and engage with potential customers. And then I think kind of the combination of that gives us confidence that that type of goal It's not a difficult goal to reach. And then again, I think there are ways where as we think about how Got it. And then just last one for me on the catheter with the submission coming up in the EU in September. Where does this place you assuming things go to plan from an approval standpoint? And how do you anticipate Your commercial investments to trend thereafter you receiving approval. So the European notified body, it can take a couple of months and it can take longer. We're doing it under the new MDR, which generally has had a longer review timeline, but we run the benefit that Our manufacturing and partner and who's kind of involved with us, very involved with us on the regulatory process in Europe, has actually been going through its own new MDR recertifications of various of its own ablation catheters. And so they, we have learned a lot through that process and I think we're going to kind of be very well prepped With a good submission working with exactly the same notified body for our own submission later this year. And so I would hope that sometime towards the end of this year, beginning of next year, we can have such approval And can commercialize the catheter in Europe. We're doing a lot of preparatory work in advance of the commercialization, not just On the regulatory manufacturing side, like I mentioned in the prepared remarks, but also on the commercial side, with individualized business plans for For every existing robotic customer we have in Europe and really kind of making sure that we should be in a position to launch well when we We will probably we will kind of we will see How we build up the commercial team upon launch, but we are cognizant that one of the models that exists in the is to have a sales rep almost at every hospital. And so I think kind of where we see the opportunity to grow robotic procedure volume Meaningfully by shifting to that type of model because that's something that that hospital would very much And benefit from that's the type of model that now is realistic and feasible with Next, we will go to Josh Jennings with Cowen. Please go ahead. Hi, thanks. Good morning and congratulations for the nice start to the year. David, I was hoping to just touch on the system revenue That range that sits out there $10,000,000 to $20,000,000 you're clearly on track to meet that range. But any updated thoughts About the range and how the sales funnel is shaping, I know you've given us a bunch in the call, but any incremental color would be appreciated. Just So when we initially presented the guidance, I think we were asked and we commented that kind of specificity is difficult in an early launch And you see that there is still lumpiness in when we receive orders and the timelines of when those orders convert into revenue. And so the range seemed appropriate given the bottom up assessment of opportunity set. And so that range still feels appropriate. It's hard to know exactly how it will play out. The orders that were announced today do set us up Nicely to be within the range, as you kind of noted. And we have a few more months, Probably kind of 3 more months 2, 3 more months in which we can receive orders and those could still translate into 2021 revenue. And so we'll have to see How that plays out, but I think that guidance range still of $10,000,000 to $20,000,000 feels like a good place to be. Excellent. And then just to follow-up on your comments on the Genesis replacement opportunity, I was hoping maybe you could share some more Intel on how you see that evolving, where it stands today. You just received a replacement order over the last couple of months in the U. S. And, just as you said, you could pretend the replacement opportunity could be a source of 10 plus System orders a year eventually, but was hoping to just get some more details on how you're seeing that replacement opportunity evolving And when do you think you can hit full stride in that replacement opportunity? Sure. So on the last Call, I mentioned that kind of it was an interesting observation how while originally I would have thought that replacement cycle Sales would be the 1st driver of kind of adoption of Genesis and it would be harder for us to get our traction Take more time for us to get our traction in that greenfield site. Obviously, we started off The gate kind of very well on the greenfield side and with relatively slow adoption on the replacement cycle, I think driven by the macro environment where hospitals Did not want to spend additional capital on replacing labs, replacing x rays unless it was Necessary, while they were more open to spending capital on strategically building out New labs, new capabilities for the hospital. We're starting to see more engagement on the replacement cycle side from various hospitals That our existing customers and are now kind of looking to replace their labs again after the kind of the halt that took place a year ago with COVID. I sense that most of those discussions are for 2022 budgets or 2022 planning. So I don't I think we might receive additional orders this year, but generally, I would think that kind of in 2022, We very much might have that kind of annualized kind of level of replacement cycle Revenue that kind of that you would think based on our installed base. Great. Thanks for sharing that. And my last question, just on the China opportunity, you shipped Niobe system to a new center. I I think it might be helpful just to kind of help us get our arms around the China opportunity. Sorry, a little bit of a broad question, but how do you see that Channel evolving, and any updates, maybe you could share or just remind us the installed base today. Can China be as big of an opportunity as Europe or the U. S. Over time? And what's the Approval pathway or any timing, maybe too early for timing, but for Genesis in China? Thanks for taking all the questions, David. Sure. Thanks a lot. It's actually it's a great question. Overall, China still is a small, small part of our overall business. We have about 5 systems there, so it's kind of single digit market share from an installed base perspective. But what we've seen in China is a lot of engagement with the physicians and customers there, Both in terms of their procedure volumes, they're highly, highly active. And I think that's partially also driven by robotics Enabling many more physicians there to do cardiac ablation procedures where otherwise they didn't have the they didn't receive the training Or they didn't have the ability to do complex cardiac ablation procedures. The training programs for electrophysiology there are still kind of And less refined than kind of in the U. S. Or Europe. And so we've seen kind of very high utilizations of our systems in China. And we've also seen kind of other companies which are kind of interested in working with us in China. And so we're going to be kind of prudent in anything we do. We don't kind of we will kind of advance things in a prudent fashion there. But overall, kind of I sense that there are actually very good opportunities in China to grow a robust kind of business and to collaborate with others. And I hope we'll be able to kind of to provide more updates in the coming quarters. Thank you. We will take our next question from Jason Wits with Northland. Please go ahead. Hi. Thanks for taking the question. First off, You mentioned that you had an existing customer had an order for a Genesis system. It sounds like that's Not a replacement, that's an addition. Do I have that correct? And what are they doing with their old Niobe system? No. So that is a replacement. Oh, that is a replacement. Okay. So you do have one replacement booked then this year thus far, just to be clear. We have actually we have One replacement one of the 5 orders that we discussed last time was a replacement cycle order in Europe, and this is now the second replacement cycle, which is the first one in the U. Okay. Thanks for clarifying. And then related to that, you said it sounds like they're also looking to add an additional system. Did I hear that correct? There's language in the contract, which makes it likely that the hospital system will acquire an additional robot this year. Okay. And then related to the I think you mentioned it was a 38 contacts and 23 visits this quarter. In terms of breakout, in terms of what our new customers, what our existing customers, can you give us a sense of what that might look like? Sure. So yes, it was 38 individuals on 23 separate telerobotic test drive visits And 30% of those visits, so I think it was 7 of them, were first discussions with greenfield opportunities. Okay. I think that's similar to what you were seeing last year or is it slightly different? Yes. The rate is overall similar. You're correct. And then, you mentioned kind of your longer term strategy plan. I think the third point, reputation build. Curious in terms of what you think Stereotaxis' current reputation is amongst users and what you're looking to move it to? So I think kind of on the reputation side, I think we've done well in the last few years in rebuilding our reputation among users. And in that kind of a big part of our effort over the last few years was really reengaging with our existing customers with existing roboticization practices And making sure they had the support and tools at their disposal to be highly successful and to be able to showcase So I think overall our engagement with existing customers has gone well. You obviously have a wide like in anything you Wide disparity of opinions out there, but I think we've overall done well and we're engaging with our existing customers. The big challenge for a company like us While we're highly differentiated in the field, we're still less than 1% market share. And so the vast majority of people just don't know us or might have heard the name Stereotaxis, But really don't have any good feeling or understanding for what we actually do, how our technology works, the clinical benefits of it. And so I think That's where broader visibility and awareness and generating that visibility in the community is a big part And so that's kind of really what we've been Also working to do and I think kind of things like April, which I don't know how it all bunched up there, but to have multiple live robotic procedures And to have kind of multiple talks either by us or by just physicians being invited to speak about their use of our technology, The fact that the Society For Cognitive Robotic Navigation was granted a session at the Heart Rhythm Society Annual Conference, Okay. Thank you. That's helpful. And maybe a longer term question and I'm not sure whether it's I'm trying to answer this, but when you get the catheter approved, would you be in a position and are you considering Bundling, basically instead of capital equipment doing a direct capital equipment sale, lumping in sort of minimum orders with catheters Into your plate, does that work on the business model or is that still is it still going to be capital equipment plus just per procedure volume is the way you're looking at it? So we want to accelerate adoption of robotics and make Establishing robotic electrophysiology and more broadly robotic interventional labs Much more accessible and affordable. With that being said, there is a value to robotic systems. And that value has been defined clearly by also other robotic players in the healthcare field, in the surgery field. And so you don't want The discount at all that value. But so if there are ways to retain that value while making it easier for hospitals to go through At budget cycles or to use the finances that they have available from 1 bucket instead of another bucket, I think that's definitely something that should be done. And while it's difficult to do with our current disposable given the ASP procedure, as you have an ablation catheter, you can enable those types of revenue models Or adoption kind of models. And so that's definitely something that we'll have in mind as a way to accelerate adoption. Okay. That's helpful. And maybe Requisite question, I think most medtech companies are being asked this quarter. In terms of monthly procedure volumes, Did you see an improvement as the months progressed? Or how would you characterize the trend this month in terms of month to month performance as COVID sort of improves. Yes. So kind of Kim did mention it in her prepared remarks that We did see an improvement from kind of January to February to March, with March being down about, I think, 3% from March of 2019. Obviously, versus 2020, we expect a variable we expect high growth or good growth in volumes versus 2019, March of 2021 was down 3%. And so I don't know yet if we'll get back to growth over pre pandemic levels, But we're gradually kind of filling the gap that was caused over the last year. Got it. Thank you very much. Thank you. Thank you. Our next question is coming from Steven Seyfried with Felt and Company, please go ahead. Gentlemen, thanks for a nice quarter. Congratulations on the growth. That's very exciting. And just wanted a clarification on the revenue side of things. You mentioned the $10,000,000 to $20,000,000 in revenue. Is that for 2021? Yes, that's system revenue for 2021. So that's guidance for system revenue in 2021. Okay. So that's system only, correct? Yes. Okay. And since no one else has asked, I'll just ask regarding the lawsuit that's been out there. It's a very generic statement. I don't know what I can't imagine what their is Castella Law. Anyway, do you have any color on that or what their claims are or I mean, I think the performance of the company has been outstanding. So do you folks, can you comment on what they might be after here? Sure. I think they did kind of state it, so it is in the public record. And I'm kind of We're kind of in we're obviously disappointed kind of to see the lawsuit. And The lawsuit kind of is around the stock compensation plan that was placed for me earlier this year by the Board and that is up for shareholder vote in our upcoming shareholder meeting in a couple of weeks. They feel that there was limited transparency and I guess kind of in that and are calling for additional information and to make sure that that was done in a proper fashion. And We are in a period where there is increased focus on corporate governance and executive compensation that reflects And is aligned with performance, and I think that focus is great, and it makes the markets a much better place. And I think that And in implementing a stock plan that is fully tied to performance and in being transparent with shareholders throughout that process. But whenever you do something that is not the standard thing, even if in my view and the Board's view, It is more aligned with shareholders. It's more tight to performance. It's ultimately better for shareholders than the standard thing. I think whenever you do something that differs from the norm, It sometimes kind of drives that type of behavior. And so again, it's disappointing, but I I hope kind of we can resolve it and we'll obviously make sure that it doesn't distract us from our core focus, which is advancing the technology, enabling physicians to treat patience better. We'll kind of that's this is a side issue. Okay. That's great. It sounds like you're not concerned about it. And I would agree that Your compensation structure puts you on the same side as the investors. We're all on the same side on this. And if I understand what you're saying is that this is a bit out of normal in terms of compensation and that maybe This firm to want clarification, I guess. Is that accurate? That's what it seems like. We're still in the early stages, so we'll have to see how it goes. But yes, that's what it seems like. Thank you. And your commentary matches what I've heard From the majority of shareholders on the plan and again, we kind of in some ways I have this feeling I think we and the Board tried to establish something that was very much shareholder friendly, But again, sometimes different people have different views. Okay. Thank you for answering that. And Again, great quarter and look forward to what we do there at Campo. Thanks for taking my call. Thank you. Thank you. That concludes today's question and answer session. Mr. Fischel, at this time, I will turn the conference back queue for any final remarks. Okay. Thank you very much for your questions and for your continued support and interest in Stereotaxis. We look forward to working hard on your behalf in the coming months and speaking again next quarter. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.