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Executives

Jim Byers – Senior Vice President, MKR Group, Inc.

Michael P. Kaminski – President and Chief Executive Officer

William C. Mills III – Chairman and Interim Chief Executive Officer

Martin C. Stammer – Interim Chief Financial Officer

Analysts

Steven Lichtman – Oppenheimer & Co.

Stereotaxis, Inc. (STXS) Q4 2012 Earnings Call Transcript March 5, 2013 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, thanking you for standing by. Welcome to the Stereotaxis Fourth Quarter and Full Year 2012 Financial Results Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today, Tuesday, March 5, 2013. At this time I would now like to turn the conference over to Jim Byers at MKR Group. Please go ahead, sir.

Jim Byers

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for the Stereotaxis conference call and webcast to review financial results for its 2012 fourth quarter and full year ended December 31, 2012.

Before we get started, we'd like to remind you that during the course of this conference call, the Company may make projections and other forward-looking statements regarding future events or the future financial performance of the Company. These include, without limitations, statements regarding future operating results, growth opportunities, and other statements that reflect Stereotaxis' plans, prospects, expectations, strategies, intentions and beliefs.

These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. For a detailed discussion of the risks and uncertainties that affect the Company's business and maybe a part of the forward-looking statements made on this call, we refer you to the Company's periodic and other public filings with the SEC, including its Forms 10-K and Forms 10-Q.

The Company's projections and forward-looking statements are based on factors that are subject to change, and therefore these statements speak only as of the date they are given. The Company assumes no obligation to update any projections or forward-looking statements.

In addition, regarding orders and backlogs, there can be no assurance that the Company will recognize revenue related to its purchase orders and other commitments in any particular period or at all because some of these purchase orders and other commitments are subject to contingencies that are outside the Company's control.

In addition, these orders and comments may be revised, modified or canceled either by their expressed terms, as a result of negotiations or by project changes or delays. Now, with that said, I would like to turn the call over to Mike Kaminski, President and CEO of Stereotaxis.

Michael P. Kaminski

Thank you, Jim. Good afternoon, everyone, and thank you for joining us for a review of our fourth quarter and full year 2012 performance. With me today is our Board Chairman, Bill Mills; and Interim CFO, Marty Stammer. Following our prepared remarks, we'll open up the call for your questions.

I'd like to first, hand the call over to Bill for a few remarks. Bill?

William C. Mills III

Thanks Mike and hello everyone. Before Mike and Marty review the results of an encouraging 2012 for the Company, I want to briefly address the other news that we reported this afternoon.

As stated in our press release, Mike has decided to resign from the Company effective April 12 to accept a position as a Division President of a Company in an unrelated field. We're sorry to see him go, but know that it's a great opportunity for him to lend his many talents to another organization.

Serving as President and CEO since January 2009, Mike has led Stereotaxis through a critical period of transition from an early commercial phase to the mainstream EP market, effectively translating our superior science to commercial success. Under his direction, the Company has experienced double-digit revenue growth and significantly improved bottom line performance. The Board and I are grateful to Mike for his 11 years of service and unwavering commitment to the Company's important contribution to medicine.

The Board will begin an immediate search for an experienced executive who can continue to drive the Company forward. Upon Mike's departure, the Board has appointed Director Euan Thomson and me to lead an interim office of the Chief Executive in which I will serve as Interim CEO and Euan will provide support and guidance in certain areas.

We will also rely on the Senior Executive Committee of Stereotaxis to help us ensure continuity during the transition. Furthermore, we will retain Mike as an advisor to the Company through October of next year to assist with our ongoing strategic initiatives. I have proudly served as a member of the Stereotaxis Board of Directors for 13 years, and alongside my colleagues on the Board, I am resolved to ensuring effective leadership that will deliver increasing value to each of our stakeholders.

Thank you. Now, I will give the call back to Mike. Mike?

Michael P. Kaminski

Thank you, Bill. It is a bitter-sweet move, because I truly believe in the long-term vision of the Company and its potential to change the face of interventional medicine. It's been a privilege to have the opportunity to lead Stereotaxis and I have gained valuable experiences and lifelong friends during my time with the Company. But as Bill said, I am eager to start a new chapter of my career and I'm pleased to serve the Company in an advisory role over the next several months. I want to thank the Board, the management team, and the employees for all their support for the many years.

Now let's talk about the substantial progress we made in 2012. Revenue for the full year grew 11%, reflecting increased sales and customer upgrades of our unique Epoch Platform and operating loss improved to our best results since taking the Company public in 2004. As anticipated, much of this progress occurred in the second half of the year, with considerably improved run rates for several metrics compared to the first two quarters.

Through significant cost reductions in every area of our business, we reduced total year operating expenses 31% or $19 million and cash burn 68% or $26 million from 2011. As a result, operating loss narrowed by 67% in 2012, a $21 million year-over-year improvement.

During the second half of the year, we lowered operating expenses 28%, cash burn 56%, and operating loss 79%, compared to the first half of the year. And in the fourth quarter, we achieved our best quarterly financial performance in eight years, reducing operating expenses 32% year-over-year, improving cash burn 99% to a record low of $77,000, and reducing operating loss to another record of $880,000, an 81% improvement. At the same time, we continue to build interest in our robotic EP innovations and translate market enthusiasm into new or upgraded Niobe Epoch Solution sites.

During the year, we achieved our Niobe ES shipment target, which allowed us to receive another $2.5 million in funding under our agreement with Healthcare Royalty Partners, formerly Cowen. We also upgraded half of our installed base in North America and Europe. To-date 74 of our total 166 global sites have installed a new ES system and 15 of these centers have also installed a Vdrive.

This considerable market traction resulted in a 26% improvement in system revenue for 2012. Additionally, in the second half of the year, new capital orders improved 96% over the same period in 2011 and 86% over the first half of the year. The goal for every installed site is full adoption of our technology in the treatment of complex EP procedures.

In Niobe ES sites, utilization grew 19% from 2011. For sites employing both Niobe and the Vdrive procedures grew 28%. While these are impressive annual results, the rate of procedure growth declined to 9% in the fourth quarter and overall utilization in all sites was less than expected during the year as we focus more resources and efforts on ES upgrades and ES customers. Our installed base represents approximately 15% of the total complex ablation market.

To fully capture market potential and sustain procedure momentum going forward, we assembled a task force to analyze and address the barriers to the next level of clinical adoption and independence by physicians. The main takeaway from this initiative was the recognition that adoption is a personal change for a physician and as such we should tailor training to fit his or her situation, individual preferences, and motivation.

In other words, we need to move away from one-size-fits-all approach to conveying a value proposition in supporting adoption to individual approaches. To that end we are calibrating our training process to provide a clearly defined benchmark learning path that individualizes to each physician. By acknowledging the time needed to walk a physician down this path, we also are creating tiers of account management, dedicating more cost-effective territory assistant physician to support adoption, while allowing account managers to focus their efforts on client relationships and business development.

Furthermore, to provide clinical evidence of the strong value of our latest platform, we're preparing for randomized, multicenter study in Europe comparing the efficacy of the Niobe ES versus manual catheters for the treatment of AF. We should begin initial enrollment for the acute phase of the trial before summer and hope to review the acute results at HRS in 2014. Furthermore, we have a one-year follow-up data from our first multi-center VT study and expect these sites to share this impressive result at this year's HRS.

Given the strong utilization trends at ES sites with Vdrive, as well as the 30% increase in Vdrive usage in 2011, it's clear that the diverse capabilities of the Robotic Navigation system significantly enhanced the Niobe lab. With approval of the Vdrive in the U.S., we can expect to accelerate both revenue procedures in our North American installed base. We're working vigorously to secure FDA market clearance of the Vdrive modules, V-Sono, and V-Loop.

In response to additional FDA requirements for approval of V-Sono, we have developed an enhanced preclinical trial, which we expect to complete in the first quarter. Given the additional work needed on V-Sono, we elected not to submit to V-CAS ablation catheter manipulator for FDA approval in 2012 as we had previously planned. Instead, we are focused on V-Sono and V-Loop in the clinical trial, which we began in the third quarter of 2012.

We have ramped up the patient enrollment in the trial, which is studying the effects of V-Loop versus manual navigation of the circular mapping catheter at five clinical sites and have targeted a final report in Q3.

Now, I'd like to turn the call over to Marty to provide further details on the quarterly and full year results. Marty?

Martin C. Stammer

Thanks Mike, and good afternoon, everyone. Revenue in the fourth quarter was $12.2 million, up from $11.6 million in both the 2011 fourth quarter and the third quarter of 2012. System revenue improved to $5.6 million from $4.2 million in the prior year quarter and $5 million in the third quarter.

In the fourth quarter, we recognized revenue of $3.6 million on three Niobe ES systems and upgrades, $300,000 on three Vdrive systems and $1.7 million in Odyssey sales. Recurring revenue of $6.6 million was down from $7.4 million in the 2011 fourth quarter and was slightly higher than the $6.5 million recorded in the 2012 third quarter.

Compared with the prior year quarter, disposable revenue was down due to decreased utilization driven by those sites not upgraded to Niobe ES, as well as significant sales in the 2011 fourth quarter associated with the launch of the Epoch Platform. Royalty income were lower than last year, due to contractually lower royalty rate of 14%, which went into effect on January 1, 2012 and compares to a rate of approximately 16% in the prior year period.

Gross margin was $7.9 million or 65% of revenue in the fourth quarter compared to a margin of 71.4% in the year ago quarter and 69.8% in the third quarter. The reduction in gross margin from the prior year was driven by shifts in mix from recurring revenue to system revenue and from QuikCAS disposables to lower margin Vdrive disposables, as well as lower margins on distributor sales of Odyssey.

Operating expenses in the fourth quarter were down $4.1 million or 32% year-over-year and down $200,000 sequentially. The year-over-year decrease was principally the result of reduced headcount and related travel expenses, as well as lower consulting and discretionary spending. The fourth quarter also realized $400,000 in positive adjustments, primarily related to non-cash stock compensation. Operating expenses are expected to be higher on a sequential basis in the first quarter of 2013, but we expect full-year operating expenses to remain consistent with 2012 levels.

Operating loss in the quarter was reduced to $900,000 compared to $4.6 million in the prior year quarter and slightly lower sequentially. This represents an 81% improvement over the prior year quarter and our lowest reported operating loss as a publicly traded company.

Interest expense increased to $2 million in the fourth quarter compared to $1.1 million in the prior year quarter. The rise was primarily related to the Healthcare Royalty Partners financing in November of 2011, and additional $2.5 million in Healthcare Royalty borrowings in August 2012, and the issuance of $8.5 million in subordinated convertible debentures in May 2012.

Interest expense includes the amortization of the debt discount on the subordinated convertible debentures totaling $600,000 in the 2012 fourth quarter. This amortization is expected to be $500,000 in the first quarter of 2013.

Other expense for the 2012 fourth quarter included a $1.4 million loss primarily related to mark-to-market conversion features of the warrants and subordinated convertible debt associated with the $18.5 million financing in May of 2012.

Fourth quarter 2011 results included a $200,000 gain in other income related to the change in market value of certain warrants issued in December of 2008. Net loss for the fourth quarter was $4.3 million or $0.55 per share, compared to a net loss of $5.5 million or $1 per share reported for the fourth quarter of 2011.

The weighted average shares outstanding for the fourth quarter of 2012 and 2011 totaled 7.8 million and 5.5 million shares respectively. Excluding the mark-to-market gains and losses, included in other income, and the amortization of the convertible debt discount, the fourth quarter 2012 adjusted net loss would have been $2.3 million or $0.29 per share, and the 2011 fourth quarter adjusted net loss would have been $5.7 million, or $1.04 per share.

At quarter end we valued our active backlog at $8.9 million compared to $13 million at the beginning of the quarter. During the quarter, we added $4.2 million in new orders consisting principally of $2.8 million for two Niobe ES orders and upgrades, $1.2 million in Odyssey orders, and $200,000 in Vdrive, and converted $5.6 million in revenue.

We removed two projects from backlog valued at $3.3 million as we could not establish a predictable timeframe for when they would move to revenue. However, one remains an active project in our sales pipeline.

In the fourth quarter cash burn was $77,000 compared to $14.8 million in the prior year quarter and $3.6 million in the 2012 third quarter. The low cash burn in the 2012 fourth quarter was aided by approximately $1 million in prepayments for systems.

As we look to the first quarter of 2013, we expect our cash burn to be above fourth quarter 2012 level, but remain at or below prior 2012 quarter levels, primarily due to cost reduction efforts implemented in the first half of 2012.

At December 31, 2012, we had cash and cash equivalents of $7.8 million compared to $9.9 million at September 30. Outstanding debt was $29.1 million including $16.2 million related to Healthcare Royalty debt.

On January 31, 2013, we borrowed an additional $2.5 million from Healthcare Royalty upon completion of our second milestone relating to Niobe shipments for the 2012 fiscal year.

Mike shared the positive full year result, but I wanted to reiterate the strength of the second half of the year versus the first as it truly was a tale of two six month periods. In the second half, capital orders increased 86%, operating expenses decreased 28%, cash burn was reduced 56%, and operating loss improved by 79% over the first half of the year. This reflects the additional cost controls put in place during the first two quarters of the year, along with the increasing momentum of Epoch sales throughout the year, and sets us on a strong trajectory for 2013.

Along with these significant operational and financial improvements, we recognized the need to strengthen our balance sheet. As we announced in the third quarter, the Board and management team are currently reviewing all possible strategic and financial alternatives.

Currently, we are in advanced discussions with multiple companies on the sale of non-core assets or geographic rights of our products, and hope to report more on these activities in the near future.

With that, I’ll turn the call back over to Mike.

Michael P. Kaminski

The strategic initiatives we employed in 2011, including launching the Epoch platform, improving operations, and managing expenses to considerably lower cost structure produced positive results in 2012. We achieved double-digit top line growth and significantly improved bottom line, which provides a strong foundation on which to build in 2013.

During the first half of 2013, we expect to receive government clearance of our Niobe technology in Japan, a highly anticipated market opportunity. As I mentioned earlier, we’re actively pursuing Vdrive approval in the U.S., which we believe will boost procedure volume in North American accounts and open up our robotics platform to a new set of users. And as Marty noted, we are in discussions with multiple companies concerning various geographic rights of our products, and the sale of non-core assets.

We believe we are well-positioned to fully leverage each of these opportunities for revenue growth while continuing to provide new products and enhance training that drive utilization. And by maintaining operating expenses at their current level, we also believe we can continue to grow top line leading to improved bottom line results, and the achievement of positive free cash flow in the near future.

As the clinical evidence grows, there’s little doubt in the minds of many physicians that robotics provide significant value to interventional procedures and that Stereotaxis is a clear market leader. We continue to penetrate the broader commercial EP market with our enhanced technology and hear from physicians that it’s changed the way they practice their interventional medicine. Our adopted physicians have tested Epoch platform’s consistent performance in addressing complex ablations safely, precisely and efficiently.

We are focused on helping each of our customers maximize the potential of their robotic suite in their EP lab. Part of this includes leveraging those success stories and gaining traction with more mainstream cardiovascular institutions as we began to see in 2012.

So to outline our expectations for 2013, first continue to achieve top line growth, primarily occurring in the second half of the year. Second, expand our global footprint with Japanese approval of the Niobe technology in the first half year. Third, manage operating expenses at current levels and continue to reduce cash burn for improved cash flow and bottom line performance. And fourth, strengthen our balance sheet through strategic and financing alternatives.

When we look further out, we know that driving full adoption throughout our installed base will continue to build our global interest in robotics, sets us on a path to $100 million top line company.

With worldwide complex EP procedures expanding at double-digit annual growth rates, we have a tailwind of a robust market on this path. Our long-term vision remains an innovative company built on life-changing technology for a global marketplace, delivering a substantial improvement in results, and our shareholders should benefit and expect the high quality products and services that the customers see.

Through our investors, our dedicated employees’ base, I say thank you for believing in the vision.

With that thence, I will open it up to any questions.

Question – and – Answer Session

Operator

Thank you, sir. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions) We have a question from the line of Steven Lichtman with Oppenheimer & Co. Please go ahead.

Steven Lichtman – Oppenheimer & Co.

Thank you. Hi guys. Mike you focused a lot on our efforts to improve disposable growth looking forward. I’m curious on the systems side, new system placements this year were relatively flat versus last year. I know you guys mentioned removing two from backlog. What are you hearing on that side of the fence, what you are hearing from hospitals is, is there cautiousness because of uncertainty out of DC that’s preventing them from pulling the trigger on new systems?

Michael P. Kaminski

No Steve, we hear EP, and the microcosm of EP is very positive news, I think globally, right. It’s growing I think mostly in the U.S. I feel like we’re making money, I think outside of the U.S. they got a long waiting list. I don’t see the capital discussions going on as much as it is in the priority of what they want to invest in, in the hospital budget.

I think as we mentioned the tearing of getting the installed base excited by the upgrades of ES, builds markets momentum for people who are in the perspective client list to look at buying. We’re seeing the U.S. kind of come back to life, and the interest is building I think at – and the greater European market is very strong, think about the old eastern block has been very strong, and the market is growing, and of course Asia is just opening up. So we’re pretty bullish on kind of the turning of the quarter of market interest to buying new Niobe system, and I think you’ll see that emerge and unfold in ‘13 and ‘14.

Steven Lichtman – Oppenheimer & Co.

You talked about a goal of growing the top line in ‘13. Do you anticipate that being on both the systems and disposable lines? You anticipate both being sort of equal drivers next year or this year?

Michael P. Kaminski

Yeah, I think both will grow, and particularly I think the waiting of that depends on the approval of the Vdrive. If we can get the Vdrive cleared in the U.S., I think you’ll see an accelerated growth with that. So I think that I’ve to look at Marty, I mean the plan shows both growing.

Martin C. Stammer

Yes, that’s correct.

Michael P. Kaminski

I think the capital probably because of the rebounding maybe at a little higher rate because you get a little – with Japan coming on and one order worth $1.5 million it tends to bump at a higher rate.

Steven Lichtman – Oppenheimer & Co.

And is the timing on Vdrive the reason for your commentary about second half better than first, does that address the delta?

Michael P. Kaminski

I think kind of the recovery of the U.S., kind of some of the tiering of just when capital orders will come in and go to revenue, plus the Vdrive, plus the Japanese approval. So I think if you get the Japanese approval in the first half seeing that translate to revenue will be delayed some quarters. I think as that emerges. But in total 2013, I think will shape up to be a very strong year. I think it will just be weighted a little more towards the back-half.

Steven Lichtman – Oppenheimer & Co.

Okay, great. And on the post-market study that you reference that we’d see at HRS ‘14, what are the metrics being collected, what are the endpoints that we could look forward to for that study?

Michael P. Kaminski

We’re still refining the protocol. We are talking to some physicians over there. We’re looking at enrolling in about five sites, and there’s some – obviously, they’re being acute and a chronic endpoint.

The question now is, should we do persistent or purchase more or both. So we’re talking to different physician groups about which is the best approach. But we have – part of the reason that we’re engaging in this is, we have a lot of physicians saying, they believe the efficacy on our platform is phenomenal, and look to do a study to highlight that. So we’re aligning with the physicians to put some science behind that statement.

Steven Lichtman – Oppenheimer & Co.

And just lastly for HRS, ‘13, any incremental data points that we should be looking forward to this year?

Michael P. Kaminski

Yeah, we’ll have the VT results out this year, so we got some pretty significant VT results in a one-arm study to a multi-center single-arm study with Stereotaxis, and that will be reviewed, and they have chronic results on that. So we had acute that we put out a while back, and we’ll have the chronic results, and then there are some single-site studies that are emerging, but that’s why we see the positive results of that, we’re going to sponsor the multi-site study this summer.

Steven Lichtman – Oppenheimer & Co.

Got it. Okay, great. Thanks guys.

Michael P. Kaminski

Okay. Thanks, Steve.

Operator

Thank you. Gentlemen, at this time I’m showing no further questions. I’d like to turn the conference back over to you for any closing remarks.

Michael P. Kaminski

Well, I want to thank everybody. Certainly, I want to thank all the shareholders. I have really enjoyed my time here, and I’m very bullish on what this Company will achieve in the upcoming years, and I remain very enthusiastic about robotics and interventional medicine.

Thank you for this call, and we’ll set up the next call in May. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, if you’d like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 303-590-3030 using the access code of 4604310 followed by the pound key. This does conclude the Stereotaxis fourth quarter and full year 2012 financial results conference call. Thank you for your participation. You may now disconnect.

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