Jim Byers – SVP, MKR Group, Inc.
Bill Mills III – Chairman and Interim CEO
Marty Stammer – CFO
Steven Lichtman – Oppenheimer & Co.
Stereotaxis, Inc. (STXS) Q1 2013 Earnings Call May 13, 2013 4:30 PM ET
Good day ladies and gentlemen, thanking you for standing by. Welcome to the Stereotaxis first quarter 2013 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, Monday, May 13, 2013. And I would now like to turn the conference over to Jim Byers at MKR Group. Please go ahead.
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 2013 first quarter ended March 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 qualified forward-looking statements made on this call, we refer you to the company's periodic and other public filings filed with the SEC, including the Form 10-K for the fiscal year ended December 31, 2012 and quarterly Form 10-Q filings.
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 Bill Mills, President and Interim CEO.
Thank you and good afternoon everyone. Thank you for joining us for a review of our first quarter 2013 performance. With me today is Stereotaxis’ CFO Marty Stammer. Following our prepared remarks we will open up the call for your questions.
After an encouraging 2012 for the company, revenue momentum slowed in the first quarter as we worked to fill several open positions in our capital, sales and clinical adoption teams. These vacancies impacted procedure growth at certain accounts as well as new order activity.
During the quarter, revenue totaled $8.4 million with revenue of $1.4 million realized on one Niobe ES system and several upgrades, $800,000 in Vdrive and Odyssey system sales and $6.2 million in recurring revenue. This represents an overall revenue decline of 32% from the year ago quarter. Moreover utilization in the Niobe ES sites fell 6% and overall utilization was down 12% compared to the year ago first quarter.
I'm pleased to note that we now have filled open positions within our sales organization and completed training for the new hires. With fully staffed capital and account management teams we’re focused on accelerating clinical adoption of our magnetic and robotic platforms and leveraging the growing evidence around their clinical and economic benefits to generate new orders.
As we touched on in our last call, one of the primary initiatives of the first quarter involved assembling a cross-functional taskforce to address improved clinical adoption of our technology. Ultimately the goal for every customer site is operational independence from Stereotaxis’ support and full utilization of our technology in the treatment of complex cases. While we recently surpassed 60,000 procedures on our magnetic catheter navigation platform far exceeding cases performed on all other EP technologies combined there are still a significant number of potential cases in our install base to capture.
To that end, the group was tasked with evaluating three main questions and the driving greater utilization in our install sites. First, what problems are standing in the way of full clinical adoption by physicians? Second, how do we determine the physicians with the greatest potential for procedure growth and influence among other physicians? And third, how do we strengthen the value proposition and learning path for physicians?
The team came away with several conclusions and an aggressive action plan centered on one, positioning the value proposition based on each physician’s individual needs and motivation; two, pushing for a faster pace of adoption by converting some area manager positions to new territory assistant roles focused exclusively on supporting physician independence. And three, ensuring that efforts are directed where there is the greatest potential for adoption and volume growth. We’re confident that with new understanding, focused messaging tools and resources we can be successful in driving greater utilization in our install sites during the year.
Furthermore we continue to leverage our product champions more than 460 physician users to date in engaging new customers. With over 60,000 procedures performed, our Niobe system is the runaway leader in remote ablation treatment of complex arrhythmias. The safety of our technology is well established and the evidence continues to grow on its efficiency and efficacy. Over 200 peer-review articles have been published on the advantages of remote and magnetic navigation of a manual techniques, including faster procedures, higher cute success rates, fewer complications and more long-term benefits.
In such countries as Finland, Stereotaxis technology has become the standard of care in EP. All five of that’s country’s teaching hospitals who hold 90% market share in atrial fibrillation cases now routinely use and train all fellows on the epic platform. To provide further evidence of the strong value of our innovations we are preparing for our first-ever randomized multicenter study in Europe and have selected four sites for the initial phase.
Our technology milestones and clinical results were shared with participants of HRS this last week at Heart Rhythm Society and were very well received. In addition, several physicians spoke to their positive experiences with Stereotaxis technology, including its impact on reducing procedure time and increasing patient volume. We also previewed several enhancements to the Epoch platform in development, part of our strategic five-year roadmap that continues to refine our Niobe ES and Vdrive systems and increase automation of robotic enabled devices.
There is little doubt in the minds of many physicians that robotics provide significant value to interventional procedures and that Stereotaxis platform offers the most comprehensive EP solution. Our task at hand is to personalize the transition to robotics for every physician while spreading the commercialization of our technologies across the globe.
In the first quarter, we were excited to receive regulatory approval of the Niobe system in Japan, one of our stated objectives for the year. This approval allows us to begin marketing efforts in the region, including setting up a local infrastructure with in-country distributors, sales and clinical resources. With reimbursement approval expected by year-end, we can then secure customer accounts.
The Japanese market represents a major growth opportunity for Stereotaxis. Japan's economy ranks third globally behind the U.S. and China and its medical devices market is the second largest in the world following the U.S. In order to provide for an incentive for the development and use of more innovative medical devices in the country's health-care system, the government has created a very attractive reimbursement environment.
Additionally, along with the highest life expectancy among developed nations at 82.9 years Japan has a rapidly aging population. Seniors, our primary patient target, represent 23% of the total population and are expected to reach 40% over the next 50 years. The rate of complex EP oblations is anticipated to rise with the aging population. There are currently 570 hospitals performing about 38,000 EP procedures annually. By 2018 this number is expected to increase over 42.5 thousand procedures per year.
For obvious reasons, the Japanese people are very mindful of radiation risk making the demonstrated safety benefits of procedures on the Niobe system particularly appealing. The Niobe system will likely make its first formal debut during the HRS meeting taking place in Tokyo in July.
In addition to Japan market entry, another of our strategic objectives in 2013 is to secure approval of the Vdrive platform in the U.S., and we move closer each day. We've enrolled 45% of the intended 120 patients in a clinical trial of the V-loop circular catheter manipulator, as well as submitted findings of our enhanced preclinical trial of V-Sono ICE catheter manipulator for final FDA 510(k) review. U.S. approval of the Vdrive system should boost procedure volume in North American accounts and open up our robotics platform to a new set of users.
Now I’d like to turn the call over to Marty to provide further details on our first quarter financial results. Marty?
Thanks Bill and good afternoon everyone. Revenue in the first quarter was $8.4 million, down from $12.3 million in 2012 first quarter and $12.2 million in the fourth quarter. System revenue declined to $2.2 million from $5.2 million in the prior year quarter and $5.6 million in the fourth quarter. In the first quarter we recognized revenue of $1.4 million on one Niobe ES system and five upgrades, $100,000 on one Vdrive system and $700,000 on Odyssey sales.
Recurring revenue of $6.2 million was down from $7.1 million in the 2012 first quarter and $6.6 million in the fourth quarter due to lower procedure volume. As Bill discussed, revenue in the first quarter was impacted primarily by open positions in several of our sales territories that have now been filled.
Gross margin was $6.2 million or 73.9% of revenue compared to 69.4% in the year ago quarter and 65% in the fourth quarter. Despite challenges to revenue performance in the quarter we continued to demonstrate disciplined management of operating expenses. Operating expenses in the first quarter were down $2.9 million or 23% year-over-year and as expected up sequentially by $1 million. We continue to expect full year operating expenses to remain consistent with 2012 level.
Operating loss in the quarter was $3.6 million, a 14% improvement from the prior year quarter. On a sequential basis operating loss increased by $2.7 million impacted by lower revenue in the first quarter. Interest expense increased to $1.9 million in the first quarter compared to $1.4 million in the prior year quarter. The $500,000 increase is primarily related to the non-cash amortization of the debt discount on the subordinated convertible ventures.
Other income for the 2013 first quarter included a $600,000 gain primarily related to mark-to-market conversion features of the warrants and subordinated convertible debt associated with the $18.5 million financing that occurred in May of 2012. First quarter 2012 results included a $200,000 loss related to the changing market value of certain warrants issued in December of 2008.
Net loss for the first quarter of 2013 was $4.9 million or $0.61 per share compared to a net loss of $5.8 million or $1.06 per share reported for the first quarter of 2012. The weighted average shares outstanding for the 2013 first quarter and 2012 first quarter totaled 8 million and 5.5 million respectively. Excluding the mark-to-market gains and losses included in the other income and the amortization of the convertible debt discount, the first quarter 2013 adjusted net loss would've been $5 million or $0.63 per share.
At quarter end our active backlog was relatively unchanged at $8.6 million as we added and shipped one new Niobe ES during the quarter. In the first quarter cash burn was $1.1 million compared to $4.3 million in the prior year quarter, a 73% improvement and $77,000 in the 2012 fourth quarter. Our lower cash burn in the 2012 fourth quarter was aided by approximately $1 million in prepayment for system.
At March 31st, 2013 we had cash and cash equivalent of $9.6 million compared to $7.8 million at December 31, 2012. Outstanding debt was $32.5 million, including $18.6 million related to the healthcare royalty debt. On March 29, 2013, we received an extension of our revolving line of credit with Silicon Valley Bank through June 30, 2013. In conjunction with this extension, we also extended our agreement with Alafi and Sanderling which guarantees $3 million of our loan.
As previously mentioned, the board and management team continue in discussions with multiple entities on strategic and financing alternatives in order to strengthen the balance sheet. We hope to report more on these activities soon.
With that. I will turn the call back to Bill.
Thanks Marty. As Marty noted, our immediate priority for the second quarter in addition to driving revenue improvement is engaging strategic and financial alternatives to support our long-term goals. We’re an innovation driven company and we’re dedicated to continue to innovate to change the face of EP medicine while working to maximize shareholder return.
With that, I’d like to open up call for your questions.
(Operator Instructions) Our first question comes from the line of Steven Lichtman with Oppenheimer & Co.
Steven Lichtman – Oppenheimer & Co.
Bill, if you could talk to the dynamics on the procedure side a little bit more, so you lost a few salespeople. So did those accounts prefer to go away from you, did they slow down, maybe a little bit more on the dynamics on the underutilization side?
Steve, well, yeah it was at least a few of this force that we were missing during at least a portion of the period. In certain accounts and the accounts vary across the spectrum of dependence on this type of a system, some accounts are fully independent and more or less indifferent to the support presence that they may or may not this receive. But in the accounts that are dependent or at least partially dependent on that type of support we do see a softening, not necessarily a complete cessation but a softening of utilization, because it’s not just the intra procedural benefits that some of them may enjoy. It’s keeping the procedure top of mind and keeping this tool top of mind when the physicians approach these patients who might be candidates for this sort of tools and approaches.
So it varies across the spectrum. We've learned through experience that when our territories are not covered adequately that our procedures will soften. And we've also learned that those are reversible phenomenon when we repopulate those territories. So we're trying to put a little bit of a more effective presence out there by making sure we have the right resources at the right level, and that means not over specifying them, just as well as it means not underspecifying those resources in the field.
Steven Lichtman – Oppenheimer & Co.
And on that point, in terms of the people that you've brought on, help us to think about the ramp back up as in some of these accounts, are they seeing you enough people to hit the ground running you think and these accounts will kind of ramp back up their utilization pretty quickly, should we be more measured in terms of thinking about the overall procedure number coming back over the next couple of quarters?
Yeah I think there is a relatively quick snapback. It’s not a square way, but I think it's a relatively quick snapback. I think the folks that are there in the field now are trained, the placements that they are interacting with have used the system before. So it’s not a cold start. It’s sort of a process of bringing this tool back to top of mind in procedures where it is applicable. And so there really shouldn't be a prolonged downstroke if you will to the cycle. I think we can look forward to being able to measure their impact in the immediate quarter and hopefully beyond that as well. So it should not be a long induction period I think.
Steven Lichtman – Oppenheimer & Co.
And then just turning on to systems, you talked during your prepared remarks about physician champions. Maybe you could talk a little bit about your interaction with C-suite hospital, beyond getting the physician buy, what are you hearing from CEOs and CFOs, what about their willingness right now to spend the capital or what else they may be looking for it to sort of flip them in terms of Epoch being a must have in their hospital?
Well, it is a good question but it's part of a complex web of issues, because of course, the CEO and CFO and C-suite generally is important, very important part of the buying decision. But there are variety of other inputs that are crucial in this process as well. So we certainly want to make it easy for the CEO and CFO to make an affirmative decision but very typically it’s going to be driven very heavily as well by the physician champion, the person who is going to be using this tool is going to have to be lobbying for this. And all of the stars have to align in order to complete the sale of this magnitude.
So when we can -- I expect in the C-suite we will benefit from additional resources in our company when these folks look out over the next 10 years, they want to be able to count on the ongoing support for complex systems that we’re going to be needing to offer to them. We're also going to want account on the ongoing enhancements and upgrade for the systems. As you know we can make a big difference with our periodic software upgrades and so they’re going to take a long-term view. These are systems that last in the order of a decade and they are going to want to be sure that they understand not just today’s dynamic but how the system will evolve over the course of that period. It’s a multi-part decision (inaudible). We need to be able to target effectively and persuade all of these involved parties.
Steven Lichtman – Oppenheimer & Co.
And then just lastly from me, Japan, can you remind us as to what the distribution is going to look like there? So when reimbursement does turn on, how quickly we could start generating revenue there?
Well, there is a parallel track of activity there. So you're right, it will turn on after the reimbursement piece is in place. But we will need partners on the ground. We will need distributors to work with us in that geography. We’re not going to be able to do that ourselves. We will absolutely need partners differently than what we do in the U.S. or in Europe, and we are working the distribution and distributor selection and involvement part of that equation in parallel with the -- not serially but in parallel with the reimbursement activity.
So we’re hopeful that come year-end we will have the pieces in place that we need to as we said in the prepared remarks to begin to generate customer traction in that market which we’re very much looking forward to.
There are no further questions at this time. Please continue with closing remarks.
Okay. Well, thank you operator. Everyone again thank you for your attention this afternoon. We appreciate your being with us and we look very much forward to being with you again on our next call. Have a good evening.
Ladies and gentlemen this does conclude our conference for today. If you wish to listen to a replay of today’s call, you may access the replay at any time by dialing 303-590-3030 or 1-800-406-7325 and entering access code 4613866. Thank you for your participation. You may now disconnect.
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