Earnings Call: Q2 2021

Aug 10, 2021

Quarterly report

Good morning. Thank you for joining us for Stereotaxis Second Quarter 2021 Earnings Conference Call. Certain statements during the conference call, a 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 take today. These risks are described in detail in our public filings within 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 call is being recorded. It is now my pleasure to turn the floor over to your host, David Fischel, Chairman and CEO of Stereotaxis. Thank you, operator, and good morning, everyone. I'm joined today by Kim Perry, our Chief Financial Officer. In the Q2, we delivered robust growth And our strongest absolute revenue since 2015 as we continue to benefit from a return of robotic system sales. Year over year comparisons are inflated by a particularly depressed Q2 of 2020, but current quarter revenue was up approximately 70% year over year, Up 5% sequentially and up 33% from the Q2 of 2019. Renewed adoption of robotic systems It's the first significant wave of revenue growth in our strategic innovation plan. We are pleased to read the initial fruits of that strategy and are confident the strategy will lead to a multiyear period of sustained robust growth. System revenue reported in the quarter Reflect shipments of the Genetys and Model S system to a hospital establishing a new robotic electrophysiology program in the United States As well as the Niobe system to a hospital establishing a new robotic electrophysiology program in China. As discussed on prior calls, Partial revenue recognition is often triggered upon shipment of systems and the revenue reported reflects a portion of the overall contract value from these two deals. During the Q2, we received 2 orders for robotic systems. 1, as previously discussed, to a U. S. Hospital And other to one of the most prestigious medical centers in China, FUWAI Beijing. FUWAI Beijing is a very large cardiovascular hospital With 17 cath labs performing over 50,000 interventional procedures a year, they are establishing a new robotic electrophysiology program After observing our success in other practices and conducting a head to head study that showed significantly lower rate of Silent strokes in robotic versus manual maturation procedures. This was our second order from China this year And these two orders will be the 1st new robotic systems in China in nearly 10 years. This is a reflection of the renewed interest And acceptance that we are experiencing globally and the specific high level of customer and strategic interest we are seeing in China. Thus, China is emerging as a 3rd geographic pillar for our business. We believe that emerging relationships with strong strategic partners in China may allow for broad adoption of our technology in that geography. We will enter into any relationship in a prudent fashion It enhances our long term opportunity and look forward to sharing additional details when appropriate. I recognize the uneven pace of orders announced on any individual quarterly call makes projections difficult, but we continue to see significant interest in Genesis. During the quarter, we hosted 35 separate telerobotic visits, 13 of which were to new potential customers. Over the last 9 months, we received 7 orders for robotic systems, 5 of which were from greenfield customers establishing new robotic programs. We are now seeing increased activity from multiple hospitals that delayed lab replacement projects during the depth of the pandemic. We expect 2022 to reflect a near normalized level of replacement cycle projects. Orders received in the remainder of 2021 early 2022 are expected to result in approximately a doubling of system revenue next year and contribute to robust double digit revenue growth in 2022. As we grow our business, we are investing in establishing the commercial, operational and technological foundations that will allow for long term growth. Commercially and operationally, we continue to expand our Fellows program, are pleased to welcome several experienced new leaders across various roles in our organization and are on track to move into an expanded new headquarters at year end. 2 weeks ago, we were particularly excited to announce the addition of Doctor. Miriam Khurey as an independent board member. Her long term experience in executive leadership at Intuitive Surgical is highly beneficial as we look to positively transform interventional medicine with robotics as Intuitive has done across laparoscopic surgeries. Technologically, we are aggressively advancing the second and third waves in our strategic innovation plan. Stereotaxis' advanced robotically navigated magnetic ablation catheter represents the 2nd wave in our strategic innovation plan. The catheter has been progressing through the manufacturing and testing processes necessary for submissions for European approval and the U. S. IDE study. Supply chain challenges, however, have caused some manufacturing delays at our partner Osypka. Most recently, in July, CIPCO received a force majeure letter from a supplier of a specific epoxy glue delaying previously confirmed shipments. This seems to be a global phenomena and we've been addressing disruptions like this with grit and creativity, but they have a disruptive impact. We now expect to complete manufacturing and testing of the hundreds of catheters needed for our regulatory submissions and complete those submissions for European approval and the U. S. Pivotal trial early next year. We believe that will allow for revenue contribution from the catheter in Europe in 2022 and a potential U. S. Regulatory approval in 2023. We continue to work energetically on a 3rd wave of innovations, both independently and with new partners 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 present several of these in more detail at the end of this year and given our progress, this should lead to several regulatory filings and product launches In 2022. We are confident in the positive impact these innovations will have on patients, physicians, providers and on Stereotaxis' financial and strategic foundation. Kim will now provide some commentary on our financial results and then I'll make a few financial comments as well before Thank you, David, and good morning, everyone. Revenue for the Q2 of 2021 totaled $9,100,000 an approximately 70% increase from the prior year 2nd quarter, a 5% increase sequentially and a 33% increase from the Q2 of 2019. System revenue of $2,700,000 includes the delivery of a Genesis system in the U. S. And the delivery of a Niobe system to China. Recurring revenue for the quarter was $6,100,000 compared to $5,100,000 in the prior year's Q2. The increase in recurring revenue reflects the rebound in procedure volumes from the depth of the pandemic in last year's Q2. Gross margin for the Q2 of 2021 was 72% of revenue with system gross margin of 48% and recurring revenue gross margin of 86%. Operating expenses in the quarter of $9,900,000 included $2,800,000 in non cash stock compensation expense. This increased non cash stock compensation does not reflect increasing numbers of securities granted, but is driven by an increasing stock price and accounting for the previously announced CEO Long Term Performance Plan. Excluding stock compensation expense, adjusted operating expenses were $7,200,000 This compares to $5,300,000 in the prior year's Q2 and is up from $6,200,000 sequentially. The increase in adjusted operating expenses primarily reflects measured hiring across key functions in the company and R and D project spending. Operating loss and net loss for the Q2 of 2021 were $3,400,000 $1,200,000 Compared to $1,900,000 in the prior year, net loss in the current quarter reflects A favorable $2,200,000 adjustment for the forgiveness of the Paycheck Protection loan. Adjusted operating loss and adjusted net income, Excluding non cash stock compensation expense were negative $600,000 and positive $1,600,000 for the quarter, both compared to the prior year adjusted operating and net loss of negative $1,000,000 Negative free cash flow for the 2nd quarter was $100,000 compared to $1,200,000 in the prior year's Q2. At June 30, we had cash and cash equivalents of $44,200,000 consistent with the beginning of the year. I will now hand the call back to David. Thank you, Kim. As mentioned in today's press release, we now expect robotic system revenue of approximately $11,000,000 for 2021 based on the orders we have received to date. We expect orders received during the remainder of 2021 and in early 2022 to result in approximately a doubling of system revenue in 2022 compared to 2021 and contribute to robust double digit overall revenue growth in 2022. Stereotaxis remains in the early phases of a multiyear turnaround as we establish the foundations for significant adoption of robotics in electrophysiology And across Interventional Medicine. We are advancing our strategy in a methodical fashion and are pleased that we are able to advance multiple in tandem while maintaining financial discipline. We are and expect to continue increasing our investment in our team, infrastructure and technology, but have been able to do so while continuing to run the company near breakeven. This is best reflected in the essentially identical cash position we have maintained over the last four quarters. Our robust balance sheet allows us to continue these investments and reach profitability without the need for additional financings. We look forward to now taking your questions. Operator, can you please open the line to Q and A? Thank We take the first question from Adam Mater at Piper Sandler. Hi, David. Hi, Kim. Thanks for taking the questions here and congrats on the solid quarter. First, just wanted to start with the system guidance and the commentary on 2022. So first, David, can you just bridge us to the $11,000,000 in system sales for this year? It sounds like those orders have been executed and we Firm install dates in the back half of the year, but wanted to confirm that. And then second, as we think about 2022, you expect roughly a double And system revenues, maybe just talk a little bit more about the visibility there and the capital funnel and what kind of gives you the confidence that Revenue should double next year. And then I had a follow-up. Sure. Hi, Adam. Good morning. So when we look at the revenue guidance This year, the capital system revenue guidance for this year, that is reflective of the orders that we have received to date and that we're confident will be recognized as Revenue to date, at least the portion of those systems that will be recognized as revenue today this year still. And so that gives us kind of the confidence in that number. There is Some potential for upside to that number, but again given kind of that we're already in August, The likelihood of having significant upside to that number is low. The confidence in the 2022 guidance The preliminary guidance for 2022 is that there is we do have significant Activity with multiple sites and we do have confidence from that activity that next year should be A more or less normalized level of replacement cycle revenue. This year, we're having very little replacement cycle revenue And just from the delta between what we have this year and what would be a more normalized level, that would amount to several systems and High single digit, low double digit system revenue just from the replacement cycle. And so that along with the continued pace of Discussions with new potential customers gives us confidence that we should be able to have quarters like the ones we announced last March In the coming quarters and that shouldn't be a surprise to us. And again, that should lead to kind of Nice revenue trajectory as we go into next year. Got it. That's very helpful. Thanks, David. And for the follow-up, maybe just wanted to ask A little bit about how you see the back half of the year playing out from a top line perspective. Just any color around Quarterly cadence or progression of sales both on the system side in terms of revenue recognition and then on the disposable side where AF volumes have snapped back nicely here in Q2, but then we also have Delta and potentially some seasonality in Q3. So Just any broad strokes around how you're thinking about the back half of the year? And thanks so much for taking the questions. Sure. So if we look at the last two quarters of the year, I would kind of think that system revenue should be relatively Similar between the Q3 and Q4, getting us to that $11,000,000 guidance and procedure disposable revenue, It is tough to estimate how that's going to go. Overall, we see the rebound, the gradual rebound back towards normality That you described, we have heard incrementally some pressure, particularly in a few southern states over the last few weeks with the rebound in Delta. Generally, it seems like hospitals are well prepared and that, that shouldn't have a big disruptive impact, But there's definitely a little bit of disruption out there in the world. It probably shouldn't have a big impact on our overall recurring revenue, But it's very hard kind of to estimate exactly what to see. And so generally, I would kind of think of numbers that are similar to what we've reported Just now, that's kind of fair for the back half of the year. Got it. Thanks so much. Thank you. We will take the next question from Josh Jennings at Cowen. Hi, good morning, David. Thanks for taking the questions. I was hoping to start off with the 3rd wave of innovation and the updated comments you provided or Outlook on new indications, filings and then even product launches in 2022. No, you're not going to disclose exactly what these new indications will be, but can you help us just bridge It seems like an accelerated timeline, but what type of clinical data do you need, if any, for these filings and for these approvals, But also to drive commercial traction and should we be expecting data for these new indications in the coming months or before these filings? Sure. Great question. And so I guess maybe one preliminary comment Is that the discussion of the next wave of innovations will not be exclusively a discussion of new indications. So there are There will be an aspect of that about how we are expanding into adjacencies to the electrophysiology space and Starting to address new clinical applications, but there will also be multiple updates related to electro Physiology or more general technology updates. And so I think kind of you have to think about it broader than just expanded indications. On the specific questions of clinical data, for most of the technologies that we're talking about, there is not Requirement for clinical data in the way that you would typically think about it in a larger study in humans In order to pursue regulatory approval, and so you should not expect that we're going to have a press release announcing some clinical data in the next few months And related to those, I think you're right that particularly as you think about new indications, building up Clinical literature is important as you go through the adoption phase. And so that will be something that we do focus on with Initial adopters who are really the kind of leaders in that adoption in the field, but that will be something that will happen kind of during the course of the initial launch. Understood. Thanks for that help there. And thinking about the high level Commentary on system revenues doubling in 2022, does that assumption bake in potential Demand from these new indications or this 3rd wave of innovation that's going to tack on next year? No, that does not. So the revenue guidance and commentaries is based on our existing business, the electrophysiology business. We expect, as kind of mentioned in the call, we expect regulatory submissions And initial revenue from this 3rd wave of innovation, but that would not be something that we would kind of include in guidance at this point. Understood. And then lastly, just you commented about this Beijing Center and the order for Niobe After they performed a study that I believe you stated that demonstrated a reduction in asymptomatic cerebral Emboli events, robotic magnetic navigation ablation versus manual ablation. Is that some data that has been published and can Stereotaxis build on that? It seems like if that Can be proven and it could be a big deal in terms of sparking even further demand in the electricity audit community. Thanks for taking the questions. Sure. I agree that it's a dramatic data and pairs nicely with all the other safety benefits that we've shown over The study has not yet been published, so I have to be somewhat careful in not sharing too much details, but we've seen all the data And the abstract of it, and it's been submitted for publication by the authors, but it showed a very dramatic difference between The rates of silent strokes in manual ablation versus in robotic ablation, and it was a nicely designed study. Every patient Had pre op MRI, post op MRI, they looked for the differences between those two images to kind of discern The rate and severity of the silent strokes and again it was kind of very, very dramatic differences between the two arms and a relatively large number of patients. So I hope that it gets published in the near term and And we can point the investment community to and obviously more importantly our customers and physician community to that data, but we have to wait until it gets published. And maybe just one quick follow-up to this side, but just mechanistically, I mean, I think it makes sense why you could see that reduction in silent Strokes are asymptomatic cerebral emboli, but can you just give us a refresher on why robotic magnetic navigation catheters And maybe continuous contact with the MyoKardium could deliver a lower rate of Ovembly? Thanks a lot. So the authors will discuss that better than I can in their publication, but I think kind of a couple of things that you can think about. One is kind of the stability of the ablation against the wall and kind of the reduced risk Of knocking off emboli as you're navigating, those seem to be kind of 2 of the drivers. And again, that's kind of driven by The mechanistic design of a magnetically driven ablation catheter gives it that stability against the beating heart and Gives it kind of the softer shaft, which makes it less likely to cause harm. Great. Thanks a lot, Dave. Thank you. The next question comes from Frank Tackinnon at Lake Street Capital Markets. Hey, thanks for taking my questions. Just wanted to start with fiscal year 2022 system guidance. I Wanted to ask a little bit more specifically, how many orders do you have in hand right now to be recognized in 2022? And then If you could just bridge us to that double of how many more additional orders you need between now and call it mid-twenty 22 To get to the double in system sales in fiscal year 2022. Sure. Hi, Frank. So we've announced To date, this year, 7 orders for robotic systems, all of which will have at least their initial revenue recognition in 2021. So there will be a portion of that revenue that gets recognized in 2022, but the predominant Amount for each of those 7 systems will be in 2021. And so it's orders that we expect to come in, in the coming months From, let's say, now through the middle of next year, that will generate The 2022 guidance. And we don't obviously have any of those orders yet. Those are ones that will take place now through the middle of 2022. And so that is that's the way we're looking at things. And if you look at kind of roughly than the math, you're looking at Low to mid double digit systems in order to get to that type of revenue. Got it. Okay. That makes sense. And then I just wanted to ask a little bit more on the mix of greenfield Versus new systems expected in fiscal year 2022, I hear your comments about getting back to a more normalized replacement cycle in 2022. To me, that Sounds like almost the entire fiscal year 2022 guidance. So I just wanted to understand kind of how you're thinking about new Versus Greenfield more specifically in fiscal year 2022? Sure. So if you look at, let's say, a low to mid teens System number next year and you look at, let's say, this year, we've had, As I mentioned, 5 out of the 7 systems have been greenfield systems. If you'd look at a roughly looking at it, if you look at, let's say, similar numbers Greenfield systems and then a replacement cycle that is in the mid to high single digits number of systems replacement cycle That would get you to a low teens number of systems for next year and that feels overall like a reasonable assumption. Again, we're going to work hard on trying to increase the number of greenfield systems. We recognize the long term value from that. But kind of when we look through both from the bottom up and from the top down what feels reasonable that feels like a reasonable way To project. Perfect. Crystal clear. Last one for me. Just wanted to ask on the margin profile Of the 3rd or the second and third innovations, looking at your current recurring revenue margin 80% plus consistently, Do you feel the both the catheter as well as the broader innovation strategy are going to provide products with similar gross margins if they're in the disposable side of the business? The disposables the new disposables that we develop will be top tier medical device gross margin products. I'm not sure if they will always be 85%. They might be tiny bit south of that, at least at lower So volumes, but they will be top tier gross margin medical device products. And so I wouldn't expect significant moves And gross margin. Perfect. That's all for me. Thanks for taking my questions. Thank you. We will take the next question from Jason Withers at Northland. Hi, thanks for taking the questions. First off, just a clarification, I You mentioned 2023, was that for U. S. Approval or was that for U. S. IDE, if you could just clarify? That was for a potential U. S. Approval. So what does that can you walk us through kind of the Timing in terms of ID submission and review, etcetera, that's assumed in that 2023 number? Sure. So if we submit a U. S. IDE application in the beginning of 2022 And start a trial, start enrolling patients, let's say, in the middle of the year and it should be a relatively rapid enrollment, Relatively rapid follow-up, you can have data, let's say, 6 to 9 months later With then a submission for PMA approval kind of immediately on the heels of that, the last follow-up and that would be kind of the timeline that gets you into a 20 23 submission to the FDA and potential approval. Okay, very helpful. Also, it sounds like you've made some recent hires, you're building beefing up the organization. Is this To support the current business or is this anticipation of sort of the expansion that you've mentioned in terms of for 2022? It's really kind of looking out as we think about a business and wanting to build a business that can Do much more and they can grow to much more sizable scale, you want to have the infrastructure To do that growth and part of infrastructure is having the team and that is kind of capable and competent and works well together. And so obviously on the commercial side, we're looking at how can we build a commercial team that can really scale Both as new innovations come out and as we have increased system sales and to help drive new system sales. On the R and D side, we have a team that has been able to do amazing amounts with relatively in a relatively lean fashion. And so any ways to accelerate the various innovations that are taking place is, I think, a good use of shareholder capital. And then operationally, we want to modernize And really set the foundation for a company that can be in order of magnitude larger. And so that explains things like our move to the new office And across operations, this desire to modernize and improve things. And we've been fortunate to find some individuals who have joined us recently and that we think will play a good role in that. Okay. That's a lot of helpful color there. Does that imply that you're willing to sort of increase the burn somewhat? Or Is this still going to you've kind of had a philosophy to kind of keep it relatively breakeven, kind of follow revenues in terms of your spending. It sounds like you're getting a bit more aggressive Next year, am I summarizing that correctly, your thinking? Or how would you think about Your spending profile for this year? Yes. I would think that generally we're going to we feel comfortable in drivers of growth and kind of drivers of an improved business. And so we're really looking at it over a Longer term period, what's the right thing for the overall business. We're not going to be the type of company that burns significant amounts of money in any way where there's Concern over our financing position, but as you see over the last year, we've been Flat. We've had no burn rate now essentially for 4 quarters in a row. That's while we've been both Growing the business and increasing our investments in operations. And so I think kind of we'll try to do something similar. I don't want kind of anyone to hold us to any specific quarter that we're always going to maintain exact breakeven because we're not managing the business in that way. If we find opportunities to invest It's more in something that's a positive ROI for the business. We'll do that if And if that leads to a quarter where we have a small burn, so be it. We'll keep managing things from a macro Where Stereotaxis is in a very stable financial position and where all of these investments are prudent investments that actually have a meaningful impact on long term growth. Okay. That's very helpful. And then maybe just a quick follow-up. I know you mentioned you're going To look for it has some launches into some adjacencies outside of EP, it's probably hard to project since but is there a possibility that we'll see Some contribution, a meaningful contribution even in 2022? Or how should we be thinking about these launches and how they Play a part in CeraTax's performance next year? I wouldn't want to Guide for meaningful revenue and so that's why I think in the guidance, in the revenue guidance, we haven't kind of anticipated meaningful revenue from these launches in 2022, But we should expect some initial revenue, some initial real world experience. Okay, great. Thank you. I'll jump back in queue. Thank It appears there are no further questions at this time. Mr. Fischel, I'd like to turn the call back to you. Okay. Thank you very much for your questions and your continued support. We look forward to working hard on your behalf in the coming months and speaking again next quarter. Thank you very much.