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Stereotaxis Inc. (NASDAQ:STXS)

Q1 2014 Earnings Conference Call

May 6, 2014 4:30 PM ET

Executives

Jim Byers – IR

William Mills – Chairman and CEO

Martin Stammer – CFO

Analysts

Jeffrey Cohen – Ladenburg Thalmann & Co.

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Stereotaxis First Quarter 2014 Financial Results Conference Call.

At this time, all participants will be in a listen-only mode. Later, we will be conducting question-and-answer and instruction will be given at that time. (Operator Instructions). I’d now like to turn the conference over to our host Mr. Jim Byers with MKR Group. Please go ahead, sir.

Jim Byers

Thank you operator and good afternoon everyone. Thank you for joining us this afternoon for the Stereotaxis conference call and webcast to review the financial results for its 2014 first quarter ended on March 31, 2014.

Before we get started, we’d 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 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 that qualify to be 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, 2013, the quarterly Form 10-Q filings and the Form 8-K filed today.

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 some of these purchase orders and other commitments are subject to contingencies that are outside of 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 delayed.

Now with that said, I’d like to turn the call over to William Mills, Chairman and CEO of Stereotaxis.

William Mills

Thank you, Jim. Good afternoon everyone and greeting San Francisco where we are excited to participating in this week’s Heart Rhythm Society Session. This was our 11th appearance what is without questions the largest assembly of cardiac researcher and specialist in the world and we are pleased to have impressive new product enhancements and clinical data this year. Joining me today from St. Louis is our CFO, Marty Stammer. Following our review of Stereotaxis first quarter 2014 performance, we will take your questions.

During the first quarter, we completed several significant steps toward realizing our strategic vision for our Robotic platform in Japan and Vdrive system in the U.S. while further strengthening our financial position. We achieved recurring revenue of $7 million, our highest since our market launch of the Epoch platform at the beginning of 2012. This increase primarily reflects our concentrated effort to better understand and address clinical adoption issues and needs in targeted size, which has resulted in two consecutive quarters procedure growth and while year-over-year total revenue remained unchanged, we made considerable strides in expanding our capital pipeline.

After expensive training and discussion with our new Japan distribution partners, we are even more confident in their skill and motivations they deliver our leading edge innovations to key hospitals and physicians in Japan. Focus in medical and Medix Japan are well respected are leading health institutions in the country and have deep expertise and promoting products that support the interventional cardiology and electrophysiology fields.

Together we will host a group Japanese EP physicians attending HRS this week at our Niobe labs in two U.S. University Hospitals where they have the opportunity to observe live demonstrations of the technology by experienced users. Additionally, during the breakfast implosion at HRS on Thursday, they along with dozens of other expected attendees will hear from international experts in cardiac ablation about how the Stereotaxis’ platform utilize now on approximately 70,000 procedures has impacted both their patient outcomes and bottom-line.

As we focus on building interest in the Niobe System among our sales targets in Japan, we are also working to maximize appropriate reimbursement of physicians performing Niobe procedures. In April, the Japanese Government established a reimbursement of 50,000 yen or about $500 per Niobe procedure under the technical fee for C 2 Medical Devices, in addition to separately approve reimbursement for Niobe-compatible magnetic catheters and standard physicians fee coverage.

The reimbursement coverage of C 2 medical devices is reviewed on a biannual basis in Japan. With the co-leaders at our distribution partners, both very adaptive navigating the country’s complex reimbursement system, we have developed an action plan to support more comprehensive reimbursement. Since no cardiac device or no cardiac treatment exists in Japan, a key part of our strategy involves gathering data from prospective clinical expectation in select prestigious Japanese medical centers. We will also be working to bring our remaining product lines to the strong market as quickly as possible including the Vdrive Robotic arm and its compatible disposables which we believe will be eligible for favorable consideration. Each of these will first require U.S. approval.

We also made substantial progress during the quarter to bring benefits of our Vdrive technology to the U.S. with the addition of three new installs during the quarter; we now have non-customer sites performing procedures with the Vdrive with VSono ICE catheter manipulator. Since receiving FDA approval last July, VSono has played a key role in more than a hundred ablation cases enabling more efficient, optimized use of the ICE catheter during Niobe procedures.

At quarter end, we submitted a 510(k) pre-market notification to the FDA for our V-Loop Variable Loop Catheter Manipulator. Files on completion of the clinical trial earlier this year. In the meantime, the first V-Loop cases were performed in Canada by Toronto Sunnybrook Health Sciences Centre, which is also the first facility to install the Vdrive dual system in North America. The dual system includes a second robotic arm offering remote control and manipulation of two compatibles devices at the same time.

Canadian hospitals now have the opportunity to utilize a full speed of Vdrive products with government approvals on the VSono disposable this past week. We look forward to our first occasion to highlight of Vdrive product line for HRS audience this week. Dr. Eugene Crystal, Director of Arrhythmia Services for Sunnybrook will be one of the featured presenters speaking to his team and his experience with our Robotic Navigation platform.

Our efforts to expand Vdrive’s global presence are also making a greater impact on the top-line with Vdrive continue to gain 30% system revenue in the first quarter. While first quarter revenue was unchanged year-over-year and system revenue declined 40% from the 2013 first quarter, we improved the current revenue by nearly 14% and substantially strengthened our capital pipeline. We also improved utilization for a second consecutive quarter, increasing procedure volume by 3% on a sequential business with Niobe ES comprising more than 90% of current usage.

With along with more normalized inventories of disposable to customer sites contributed to our significant recurring revenue results.

We have confidence in our strategic sales plans and resources to drive system growth and continued clinic adoption momentum for the balance of the year. Expanding product adoption requires ongoing innovation, particularly in the setting of advanced technology. For Stereotaxis, this includes enhancements that continually elevate user experience and capabilities leading improved patient outcomes.

One such enhancement that we’re proud is HRS is the latest user interface for the Niobe lab Navigon 4.5, which includes a very important new feature, ablation history. As the name indicates, this cardiac mapping function displays a history through iPhone catheters power output and ablation time at location assessed during Niobe procedure. With this feature, physicians can be trace their ablation-related activity and potentially identify gaps and vision lines on a real time basis. We believe this additional capability will assist physicians in visualizing the applied treatment, producing the need for touch-up at the end of the procedure and minimizing unnecessary tissue injury, which should lead to improve procedure efficiency and outcomes.

Critical to making thoughtful product improvements is understanding the challenges faced by customers. Through our new remote system support or RSS program which we have rolled out at more than 50 sites to-date, we are not only able to remotely monitor system performance but also access and mind procedure data. One of our earlier findings through internal study has been evidence of often faster procedure times for proficient users of the Niobe ES versus manual techniques as well as an accelerated learning curve to reach proficiency in complex AF cases.

The safety of the Stereotaxis’ technology has been well established as the gold standard in cardiac ablations and in ventricular tachycardia in general disease and redo AF. Its efficacy is second to none. Until now however, clones of superior procedure efficiency have been largely anecdotal. We look forward to sharing our system data with HRS participants and to further exploring RSS capabilities in tracking and trending technology performance as we continue to evolve our platform.

Now, I’d like to turn the call over Marty to provide more specifics on our first quarter financial results. Marty?

Martin Stammer

Thanks Bill and good afternoon everyone. Revenue in the first quarter was $8.4 million, unchanged from the year ago first quarter. System revenue of $1.3 million compares to $2.2 million in the first quarter of 2013.

During the first quarter, we’ve recognized Niobe revenue of $700,000 comprised of system installation revenue, one Niobe ES upgrade and a customer deposit for previously canceled Niobe ES order. We also realized revenue of $400,000 on four Vdrive shipments and $200,000 in Odyssey sales. New capital orders totaled $1.3 million and included one Niobe ES upgrade of Niobe 1 system, two Vdrive orders and three Odyssey system orders. At quarter end, our active backlog was $7.3 million.

Recurring revenue was $7 million in the quarter, a 13.6% increase from $6.2 million in the 2013 first quarter. As Bill mentioned, these results reflect a normalizing of customer inventory levels of disposables during the quarter as well as continued progress with our targeted clinical adaptation strategy.

Utilization declined 5% from year ago quarter but improved 3% sequentially, a second quarter of sequential volume growth. In the first quarter of 2014, gross margin was $6.7 million or 81% of revenue, compared to 74% of revenue in the year ago quarter. Higher gross margin in the current quarter was a result higher mix of recurring revenue. Operating expenses in the first quarter were $9 million, compared to $9.8 million in the year ago period, an 8.6% decline.

Operating loss in the first quarter was $2.2 million, a 38% improvement compared to $3.6 million in the first quarter of 2013. Interest expense declined to $800,000 in 2014 first quarter from $1.9 million in the 2013 first quarter. Net loss for the first quarter of 2014 was $4.1 million or $0.21 per share, compared to a net loss of $4.9 million or $0.61 per share reported for the first quarter of 2013.

Weighted average diluted shares outstanding for the first quarters of 2014 and 2013 totaled $19.4 million and $8 million respectively. Excluding mark-to-market warrant revaluation, the first quarter 2014 net loss would have been $3.1 million or $0.16 per share. Excluding mark-to-market warrant revaluation and the amortization of convertible debt discount, the first quarter 2013 net loss would have been $5 million or $0.63 per share.

On March 31, 2014 we had cash and cash equivalents of $11.3 million compared $13.8 million on December 31, 2013. In the first quarter, cash burn was $2.4 million compared $1.1 million in the prior year quarter. During the quarter, we received the $1.1 deposit for Niobe system from our Japanese distribution partners. At quarter end, total debt was $18.5 million all related to healthcare royalty partners’ debt, which matures on December of 2018.

In March, we ended the amended credit agreement with Silicon Valley Bank, which replace our existing $3 million credit facility with a $10 million revolving facility. This extended line of credit scheduled to mature on March 31, 2015 expands our financial capacity as we execute 2014 strategic plans. To-date, we have not drawn against this borrowing facility.

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

William Mills

Thanks Marty. As Marty mentioned, our expanded credit facility with SVB is an affirmation of the progress that we’ve made over the past year on many fronts, including strengthening our financial position. While our every intention is to maintain and improve debt position we have worked so hard to achieve, the larger facility give us greater financial flexibility as we continue to focus on growing new markets, exploring technology advancements and capitalizing our leading position in the robotic EP market.

With that, we’ll open your call for questions. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we’ll begin our question-and-answer session. (Operator Instructions). And our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Hi. Can you hear me okay, Bill and Marty?

William Mills

Yes. How are you?

Jeffrey Cohen – Ladenburg Thalmann & Co.

Fine. Just a couple of questions probably one for each of you. Firstly, if you can talk about this other income expense and what’s composition of 1.076 and second of all, if you talk about utilization trends for the quarter?

Martin Stammer

Sure, Jeff. So, I’ll jump in and talk about the other expense of the $1.1 million. We have once that are outstanding right now and as on a quarter-to-quarter basis these are mark-to-market, so this $1.1 million will vary as those are mark-to-market quarterly basis, either increase or decrease in value. In this specific quarter, they increased value which drive our liability up and consequently resulted in $1.1 million of non-cash expense on the income statement.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay, thanks. On the utilization?

William Mills

On utilization Jeff, I think that the trends that we’ve been seeing are generally favorable. I think numbers appear in part of list in the recurring revenue numbers that we’ve sighted. One of the interesting windows that we now have and will continue to expand upon are looking into utilization in all its various new answers is this RSS capability that I mentioned in my prepared comments. And I think that as we continued to gather the kind of data that are now made available to us in real time and in comprehensive and reliable way through this type of remote information gathering. We are seeing both improving trends in the utilization but also patterns that can help us to understand how we can best situate our technology against the needs of our customer base.

So, this is a long-term endeavor as we all know. What we’re doing here is nothing short of it attempting to change the practice of medicine from a resign which was conducted manually to one where increasing levels of automation are applied to these procedure and we think we’re centrally situated in that activity when it comes to the physiology lab. But, we’re now at the plant where we can have the kind of data that will be I think truly will be the one in terms of how we understand and analyze customer activity to help them do what they need to get done better and it will help us to build products and add future that will expedite that process as well.

So, we’re seeing favorable trends. I don’t want to see they’re built-on any on foundation because of course as we’ve said in the past quarters, we’ve invested considerably in a redeployment of field resources, that’s the focus on this area and that has been very important, fundamentally important I think to our gains here. What we also expect these are trends that will continue to extend that world and the investment will pay off overtime. So, we’re pleased with what we’re seeing but now we’re only part of the way through this of adding automation and all its attended benefits to the practice here.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay. One more from me. How many Vdrive systems are in use at this point and anymore clarity on your process for approval in the U.S.?

William Mills

Well, I think you’re probably talking about V-Loop approval in the U.S. So, that was submitted. We’ve been saying and I want to be very careful not just to be presumptuous or speak in any way for the FDA or the activity, but it would be certainly in keeping with what would be typically expected for us to receive that approval in the second half of this year, probably in the fourth quarter which is what we would expect. But not to presume that, we can’t do FDA’s job better than they can, but that would be what we would anticipate in that regard and I’m sorry the first part of your question again Jeff?

Jeffrey Cohen – Ladenburg Thalmann & Co.

How many V-loops are implied there?

William Mills

How many V-drives in the United States right now, I think we said over North America we said 9 now up and function that first month.

Martin Stammer

Yes. That’s correct and twice as many in EMEA.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay. About twice as many outside U.S.

Martin Stammer

Yes. Around 20 in Europe and those are the only two areas where the Vdrive is currently approved.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Perfect, guys. That’s it from me. Thanks very much.

Operator

(Operator Instructions). And it shows no further questions in the queue. Please continue.

William Mills

Thank you operator and thanks to each of you for continued support and I want to encourage those of you attending HRS this week to visit our display at 2002. A program will include wide simulations of the ablation history to all which I think you will enjoy and several physicians fielding questions about their success of the Stereotaxis platform and technology.

I hope to see you here in San Francisco if you can make it. Thank you, operator. Operator, that’s it for us.

Operator

Ladies and gentlemen that does conclude our conference for today. You may now disconnect.

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