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Executives

Todd Kehrli - MKR Group

William Mills - Chairman and Interim Chief Executive Officer

Marty Stammer - Chief Financial Officer

Analysts

Rosemary Liu - Oppenheimer & Company

Stereotaxis, Inc. (STXS) Q2 2013 Earnings Conference Call August 8, 2013 9:00 AM ET

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Stereotaxis Second Quarter Earnings 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, Thursday, August 8, 2013.

And I would now like to turn the conference over to Todd Kehrli with the MKR Group. Please go ahead.

Todd Kehrli - MKR Group

Thank you, operator, and good morning everyone. Thank you for joining us this morning for Stereotaxis’ conference call and webcast to review financial results for its 2013 second quarter ended June 30, 2013.

Before we get started, we would like to remind you that during the course of this conference call, the company might make projections and other forward-looking statements regarding future events or the future financial performance of the company. These include, without limitation, statements regarding future operating results, growth opportunities, and other statements that reflects Stereotaxis’ plans, prospects, expectations, strategies, intentions, and beliefs. These statements are subject to many risks and uncertainties that could cause the actual results to differ materially from expectations.

For a detailed discussion of the risks and uncertainties that affect the company’s business and that qualify the 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, the quarterly Form 10-Q filings and the Form 8-K filed today. 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 backlog, 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 of some of these purchase orders and other commitments are subject to contingencies that are outside the company’s control. In addition, these orders and commitments maybe revised, modified, or canceled either by their expressed terms, as a result of negotiations or by project changes or delays.

With that said, I’d now like to turn the call over to William Mills, Chairman and Interim CEO of Stereotaxis. Go ahead.

William Mills - Chairman and Interim Chief Executive Officer

Good morning, everyone and thank you for joining us for a review of Stereotaxis’ second quarter 2013 performance. Joining me today is our CFO, Marty Stammer. Following our prepared comments, we will open up the call to your questions.

During the second quarter, we achieved sequential revenue growth in total revenue of 16% driven by a nearly 50% increase in system revenue from the first quarter through a more fully staffed account team focusing on the execution of clinical adoption plan that we outlined in our last call, the improved utilization rates in strategic regions. We also held operating expenses to targeted levels and significantly reduced our operating loss to $1.8 million, representing a 51% sequential improvement. In July, we achieved an important milestone with FDA clearance of our Vdrive Robotic Navigation System with V-Sono ICE Catheter Manipulator, a potentially significant boost to our U.S. market opportunities. At the same time, we continued to pursue options to improve our cash position.

Today, we are pleased to announce that we have entered into transactions with each of our existing convertible debt holders, which involve the exchange of notes into shares of common stock and the exercise of warrants to purchase additional shares. The result for Stereotaxis is a cash infusion of approximately $8.5 million. Marty will cover the details of the transactions later.

While this gives immediate relief to our cash position, we continue to search for a more long-term solution to our liquidity challenges, which have been previously disclosed. To that end, we have engaged Gordian Group a financial advisor with extensive expertise and experience in assisting companies with complex liquidity issues to strengthen the balance sheet and maximize stakeholder value. Along with continuing to improve operational results, this remains our top priority.

Now, let’s review a few details of the quarter. Revenue in Q2 totaled $9.7 million and includes $2.2 million realized on two Niobe ES systems and two upgrades. This compares to total revenues of $8.4 million in the first quarter during which we converted one ES order to revenue. New capital orders improved to $4 million, a 67% increase over the first quarter. During Q2, we secured two Niobe ES orders, both in our U.S. market. One of these orders was the second system sale to a leading national healthcare provider, which is one of four major integrated delivery networks in the United States to invest in ES or the Epoch Solution in the past year.

In other geographies, our capital pipeline in Europe, particularly Eastern Europe, continued to strengthen. Our attendance in June at Europace, the European Society of Cardiology, yielded constructive discussions with numerous prospective customers, many of whom were paired up with existing users on the strengths of our technology and our new products in development. Time and again, we received positive feedback about Stereotaxis’ clinical value for EP ablations within the European cardiology community. In the Asia-Pacific region, the first Niobe ES procedure was performed in China in early May. The physicians of this renowned clinical teaching hospital have expressed their excitement about the advancements of ES, and as a result, other accounts in China have expressed their desire to upgrade to the new system, demonstrating the power of customer validation.

As we announced on our last call, we’ve received Shonin or regulatory approval of Niobe in Japan in the first quarter. In the second quarter, we received confirmation that the latest Niobe ES system can be marketed immediately. The final step to be received before commercialization is reimbursement approval, which we expect by the end of this year. In the meantime, we are working to select an in-country distributor and to recruit for the operational support we will need. With more than 38,000 EP procedures performed each year, the Japanese market represents a significant growth opportunity for us.

When we look at clinical adoption in our installed base around the globe, we made encouraging progress during the quarter with the targeted physician plan we outlined earlier this year. As we have discussed, the plan focuses on engaging or reengaging physicians that represents the greatest potential for volume growth and on pushing for a faster pace of adoption. As part of this effort, we are working to better identify each physician’s individual needs, motivation, and perceived barriers to utilization. In targeted regions, we also converted some open account manager positions to new territory assistants, who are focused solely on driving clinical adoption. This is proving to be a very cost efficient, effective approach to eliminating coverage issues and has improved utilization rates in several regions.

As I noted earlier, we received exciting news in late July, which we believe could further boost our U.S. market opportunities. The FDA has cleared our Vdrive with V-Sono system. First launched in Europe in 2011, the Vdrive platform has proven to be a valuable asset to a growing number of robotic EP labs and has been used in over 2,100 clinical cases to-date. We continue to enhance Vdrive based on customer feedback and recently rolled out several new and improved design features. The Vdrive platform is designed to manipulate accessory devices such as variable loop catheters, steerable sheaths and ultrasound catheters during EP procedures, allowing single operator workflow and more precise stable catheter control. The Vdrive with V-Sono disposable remotely controls compatible Intracardiac Echocardiography or ICE catheters providing better, more efficient ultrasound imaging of the heart. While clinically validated, Vdrive utilization in Europe has been limited by a less than favorable reimbursement environment. This should be less of an issue in the U.S. market.

Currently, 82% of EP labs in the U.S. have ICE systems, utilizing over 68,000 ICE catheters each year. That number is growing at an annual rate of 15%. We expect the Vdrive with V-Sono system to not only positively impact our Niobe labs, but based on preliminary clinical input, we believe that future versions could bring similar benefits to additional interventional cardiology and hybrid labs. Another important milestone we have in our sites is the FDA clearance of the V-Loop circular catheter manipulator. To-date, we’ve enrolled 60% of the intended 120 patients in the clinical trial necessary for 510(k) submission of Vdrive with V-Loop.

Now, I would like to turn the call over to Marty to provide further details on our second quarter financial results and recent capital transactions. Marty?

Marty Stammer - Chief Financial Officer

Thanks, Bill and good morning everyone. First, let me discuss the transactions with convertible noteholders that we announced today. Yesterday, holders of all of our convertible subordinated notes exercised outstanding warrants to purchase an aggregate of 2.5 million shares of common stock for cash at an exercise price of approximately $3.36 per share and converted a portion of their notes into shares of common stock.

In a separate transaction, the holders exchanged the balance of their convertible notes for shares and additional warrants to purchase the same number of shares also at approximately $3.36 per share. The convertible notes held by these holders were extinguished, and we issued shares at a combined rate of $3 per share in these transactions. As a result of these transactions, we are issuing a total of 5.2 million shares of common stock and will receive an aggregate of $8.5 million in cash from the warrant exercise. In addition, $8.1 million of convertible subordinated notes have been retired.

In connection with the exchange, we amended the terms of the original securities purchase agreement under which the notes and warrants were issued to remove certain ongoing covenants. We also intend to conduct a rights offering to all existing stockholders, in which our stockholders may elect to purchase a specified fraction of a share for each share of stock held as of the record date for the offering at a price of $3 per share. No record date has been set for the rights offering at this time. We entered into these transactions with the assistance of Gordian Group in order to help alleviate our immediate liquidity concerns. On June 30, we had cash and cash equivalents of $4.1 million compared to $9.6 million at March 31.

Our outstanding debt was $29.9 million, including $18.5 million related to Healthcare Royalty debt. On July 31st, we secured a one-month extension of our revolving line of credit with Silicon Valley Bank and received a waiver of covenant testing as of July 31st. In conjunction with this extension, Alafi and Sanderling extended their guarantees of $3 million on a run. We have increased our cash position by approximately $8.5 million as a result of the transactions. However, we expect to have negative cash flow from operations throughout 2013 and therefore continue to evaluate operating expense levels while exploring various options with our financial advisors to mitigate operational and financial risks.

Turning to the results for the second quarter, revenue in the quarter was $9.7 million, down from $10.5 million in the year ago quarter, but up 16% sequentially from $8.4 million. System revenue of $3.3 million compares to $3.9 million in the prior year quarter, but is up 49% sequentially from $2.2 million in Q1. In the second quarter, we recognized revenue of $2.2 million on two Niobe ES systems and two upgrades along with $1.1 million in Odyssey sales. Recurring revenue of $6.4 million compares to $6.6 million in the 2012 second quarter and $6.2 million in the first quarter. Utilization declined 11% from the year ago quarter and was down 2% sequentially.

Gross margin was $7.3 million, or 74.6% of revenue compared to 69% in the year ago quarter and 73.9% in the first quarter. During the quarter, we continued disciplined management of operating expenses, focusing on initiatives that positively impact revenue or customer satisfaction, improving inventory turnover and carefully scrutinizing discretionary spending. Operating expenses in the second quarter were down $2.9 million, or 24% year-over-year and $790,000 on a sequential basis with the sequential decrease driven largely by reduced non-cash compensation and severance charges.

Operating loss in the quarter narrowed to $1.8 million on improved revenue and operating expense levels. This represents a 62% reduction from the prior year quarter and a 51% reduction from Q1. Interest expense increased by $300,000 year-over-year and $200,000 sequentially primarily related to the non-cash amortization of the debt discount on the subordinated convertible debentures.

Other income for the 2013 second quarter included an $890,000 gain primarily related to mark-to-market conversion features of the warrants and subordinated convertible debt associated with the $18.5 million financing from May of 2012. Second quarter 2012 results included a $9.2 million gain and first quarter 2013 a $600,000 gain related to these instruments.

Net loss for the second quarter of 2013 was $3 million or $0.37 per share, compared to net income of $2.8 million or $0.32 per share reported for the second quarter of 2012 and a net loss of $4.9 million or $0.61 per share for the first quarter. The weighted average diluted shares outstanding for the second quarters of 2012 and 2013 totaled $8.2 million and $9.3 million respectively and 8 million shares for the 2013 first quarter. Excluding this the adjusted net loss for the 2012 second quarter would have been $6.2 million or $0.91 per adjusted diluted share with (60.7) million diluted shares outstanding. Excluding mark to market warrant revaluation and amortization of convertible debt discount related to the financing, the net loss for the 2013 second quarter would have been $3.2 million or $0.39 per share, and $5 million or $0.63 per share for the first quarter.

At quarter-end our active backlog was relatively unchanged at $8.4 million, as we added $4 million in new orders, shipped systems worth $3.3 million and removed one Niobe ES order from backlog during the quarter. Niobe ES system that was removed was expected to go to revenue in 2014, but was canceled due to changes in our ownership at the hospital.

In the second quarter, cash burn was $2.2 million compared to $4.2 million in the prior year quarter and nearly 50% improvement and $1.1 million in the first quarter. The sequential increase in cash burn was primarily due to lower revenues and receivables in the first quarter resulting in lower collections in the second quarter.

Lastly, I want to share an update on our NASDAQ listing status. As you know, in June, we received the determination letter from NASDAQ, denying our request for an extension to achieve compliance with NASDAQ Global Market requirements. In response, we requested a hearing with the Listing Qualifications Panel, which was held on July 25th. In the hearing, we requested a transfer to the NASDAQ Capital Market and presented our plan for complying with its applicable listing requirements. If granted, we could have until December 16th of this year to reach compliance. Although, we do not have the results of the hearing at this time, we intend to pursue our plans to achieve compliance with Capital Market criteria and to report our progress to the Panel no later than August 15, 2013, as requested by the Panel.

With that, I will turn the call back to Bill.

William Mills - Chairman and Interim Chief Executive Officer

Thanks Marty. As we move into the second half of the year, we have reason to be hopeful that the positive trends we are seeing in capital sales and clinical adoption will continue to improve our top line results. With the clearance of our first Vdrive product in the U.S., we are excited to begin marketing its unique clinical value at what we believe will be a very receptive audience. Above all we are committed to strengthening our balance sheet for the benefit of each of our stakeholders especially the thousands of patients each year who depend on Stereotaxis technology to realize a better quality of life.

Now, we will open up the call to your questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from the line of Steven Lichtman with Oppenheimer & Company. Please go ahead.

Rosemary Liu - Oppenheimer & Company

Hi, guys. This is Rosemary in for Steve. Can you hear me okay?

William Mills

We can. Good morning, Rosemary.

Rosemary Liu - Oppenheimer & Company

Good morning. Congrats on the Vdrive approval in the U.S., first of all. Can you just walk us through how you will be rolling out Vdrive at U.S. accounts over the next few quarters and how this approval will affect your conversation with potential new accounts. Basically, any color you can give to help frame how much of a catalyst this is for the U.S. business that would be really helpful.

William Mills

Yeah. So it’s a great question. It’s an important topic, Rosemary, and we are excited about it. And I think the steps that we’ll be taking will involve, first off, the generation of broad market interest, which has begun. We are notifying customers regarding the clearance through various media and communications means we are launching a V-Sono webinar and exploring certain nationwide promotional opportunities that all of these initiatives are occurring within the next 90 days or 90 to 120 days. Beginning this month, we are – and this is very important building reference sites in which we are selecting three early adoption sites, where we can intensify early training and support and partner on the product and value feedback considerations and monitor early success. And once those reference sites have been tuned to our collective satisfaction, we will start broad-selling in Niobe labs in early September, early next month. So, these will all then lead to the ongoing adoption of the product, but it’s an important launch for us, it’s one that we want to get right. And so we will be taking these sort of deliberate steps in the short-term to make sure that we have everything in place. So, as you know, we have some experience in clinical utilization of the device in Europe and we have learned a lot from that and refined the product already as a result of some of those experiences, but we will be building on that in the U.S. here. And as I mentioned earlier on, I think we believe the U.S. is a more attractive market for a variety of reasons for this family of products and specifically for V-Sono. So, we will be excited to begin the rollout over the coming weeks.

Rosemary Liu - Oppenheimer & Company

Yes, definitely. Thanks so much for that color. Also how far away is the opportunity to expand Vdrive beyond those Niobe labs that you mentioned and what do you need to get there?

William Mills

Well, that too is a very good question. I mean, we have two thrusts I think with moving Vdrive forward. First, will be we will be adding the FDA willing, of course, and these are subject to review by FDA and to their granting us the opportunity to do it, but we will be looking for additional catheter manipulation capabilities to add the Vdrive within the Niobe environment. But your question really is in the longer term, will Vdrive constitute a standalone or Vdrive with Odyssey perhaps constitute a standalone opportunity in labs, where the workflow would be favorably impacted by that? And I guess, I would tell you we very much believe that, that is the case. We have regulatory work to do before we get there, but we very much believe strategically that, that is an opportunity to expand beyond the core Niobe labs footprint that we currently are focused on and that can only enlarge the market I think rather substantially, but we don’t want to get ahead of ourselves there yet. We have additional work to do before we are prepared to access that market.

Rosemary Liu - Oppenheimer & Company

Okay, that makes sense. Also on the new capital orders on 2Q, definitely a much stronger uptake there are you seeing any changes in terms of the hospital CapEx landscape?

William Mills

People generally react to a question like that based on their most recent experience. And so I think emotionally, our inclination is to point toward some gathering strength and some improvement. The performance on a quarter-to-quarter basis is always the result of a number of cross-cutting and detached influences I think on performance. So, I would tell you that I think that we feel as though we are gathering strength in those markets. We are addressing the issues internally that might have held us from achieving further improved results in the past. And at the same time, we feel particularly here in the U.S. markets as though we are looking at a market that, that will support our continued improvement going forward. But generally speaking when a customer commits to the concept of Niobe and makes the determination and allocates the resources to go in that direction, we find that that is a – that that is something that they can generally complete. I think that the capital cycle is largely with us in that connection, so.

Rosemary Liu - Oppenheimer & Company

That’s helpful, Bill. Also regarding your sales force comments from earlier in the call...

William Mills

Yeah.

Rosemary Liu - Oppenheimer & Company

Can you maybe expand some more on these new initiatives and how they are influencing productivity, and maybe, some more color on utilization dynamics today and where you think they can go with these initiatives?

William Mills

Well, as we mentioned earlier, our principal effort here is focused on increasing efficiencies and coverage in the field by putting the right skill mixes in the field at the right place and having those skill mixes matched more appropriately to the tasks that need to be accomplished. And with the introduction of our territory assistance into the equation here, we’ve – we believe achieved a much more efficient model of coverage. I think, I had mentioned on the last call that – the question was asked, it may have been Steve actually that asked the question, how long does it take to have an impact in the field when you repopulate and retune the field force that is responsible for animating the utilization activity. And I think my answer was, well, it’s not an instant response, there is a period of induction where those people spin up and engage. But I would say that we are very much encouraged that that process is a finite one. We are seeing the results on an individual basis as that – as those individuals are settled into their territories and engaged fully with their customers. So, we are pleased with the adjustment to our model, we will continue to emphasize these sorts of refinements to it. And the results so far are encouraging to us. And I think we’ll continue to see that manifest itself. Marty, are there any other dynamics that you think, we ought to point out to Rosemary in that regard, anything I have overlooked at the – at the high level.

Marty Stammer

No, I think that pretty well covers it.

William Mills

Okay, I hope that?

Rosemary Liu - Oppenheimer & Company

Okay. Thank you. Also, just quickly switching gears a bit on to Niobe ES upgrades, do you think we are nearing the end of the life cycle here in terms of upgrades, or was there anything particular in the quarter, or how should we be thinking about that going forward?

William Mills

Well, there is a life cycle; there is a finite pool obviously of earlier generation systems that ultimately would be upgraded. So, I think we’ve worked through the majority of those upgrade opportunities, but not all of them, I think it’s fair to say, I can’t give you a specific quantification, ultimately we don’t know whether – what traction of existing installations of Niobe II will choose to not upgrade in the future, but it’s a decision that they could make at any time during the life of the system. So, we have to look at it as a closed ended opportunity, because it certainly is. There is a finite number, it’s a dwindling number. We have been upgrading as I said, the majority of these systems, and there will be customers left at the end that for whatever combination of reasons ultimately make the determination not to upgrade. But the growth in the ES platform base then will come primarily or ultimately exclusively from new system sales. So, you are right, it is a closed ended pool. We will ultimately get to the end of that pool, we are not there yet, but we have done a lot of the work in that direction.

Rosemary Liu - Oppenheimer & Company

Okay, got it. And finally, for me on China, that first procedure performed is very exciting. Can you remind us of the opportunity here, and basically, what are the next steps with this market?

William Mills

Well, China as we have said for sometime on a demographic and a dynamic basis is a, it’s an enormous potential opportunity for us. And I am convinced that we would be well-served by being able to bring additional resources to bear perhaps through a partnership in our support of that territory opportunity, which is very large and is especially large in juxtaposition to the resources that we can currently put against that. So, as you know, we have installations in China. We are beginning to scratch the surface in that market, but we are going to need to focus on opportunities to bring additional resources to bear there to even begin to exploit that opportunity. I think that both China and Japan are substantial opportunities for us going forward. The Japanese market, although we are a little later to enter is probably a more straightforward market for us to participate in. And it’s a little bit more structured in some respects. It may accommodate our entry in a more linear fashion, but China at the end of the day, will probably turn out to be an even larger market still. So, the opportunities are large compared to our resources to exploit them, but we are very much in the process of trying to bring a better balance to that opportunity, because they are significant for us.

Rosemary Liu - Oppenheimer & Company

Okay, thanks so much guys for taking the questions.

William Mills

Thank you, Rosemary.

Operator

Thank you. I am showing no further questions in the queue at this time. I’d like to turn the call back over to management for closing remarks.

William Mills - Chairman and Interim Chief Executive Officer

Well, thank you everyone. I see the market has opened a couple of minutes ago. So, I think people probably want to get to their day, but we very much appreciate your attention and your support and we will look forward to speaking with you in the near future. Everyone have a good day.

Operator

Thanks you. Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today’s call, please dial 303-590-3030 or 1-800-406-7325 with access code 4635474. Thank you for your participation. You may now disconnect.

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