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Stereotaxis, Inc. (NASDAQ:STXS)

Q2 2011 Earnings Conference Call

August 8, 2011 4:30 PM ET

Executives

Greg Gin – IR

Mike Kaminski – President and CEO

Dan Johnston – CFO

Analysts

Tao Levy – Collins Stewart

Steven Lichtman – Oppenheimer

Spencer Nam – Madison Williams

Sameer Harish – ThinkEquity

Jose Haresco – JMP Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Stereotaxis second quarter 2011 conference call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) Today’s conference is being recorded, August 8, 2011. I would now like to turn the conference over to Greg Gin. Please go ahead.

Greg Gin

Thank you, operator. And good afternoon, everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the second quarter of 2011, which ended on June 30, 2011. Before we get started, we would 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 including, 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 qualify the forward-looking statements made in this call, we refer you to the company’s recent public filings filed with the SEC, specifically the Form 10-K for the fiscal year ended December 31, 2010. 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 of our control. In addition, these orders and commitments may be revised, modified or canceled, either by their express terms as a result of negotiations or by project changes or delays.

Now I’d turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis.

Mike Kaminski

Thank you, Greg. Good afternoon, everyone. Thank you for joining us today on our second quarter 2011 conference call. We have a lot of important information to review today. So I’d like to spend a few moments going over the agenda. I will start with prepared remarks with a review of the factors that impacted our second quarter performance.

Then I’ll discuss the company’s transition plan, as outlined in the afternoon’s press release that is designed to build rapid adoption of our new Epoch robotic platform, capitalize on the Odyssey opportunity, and substantially conserve financial resources. We will then review the financial results and provide details of the financial impact of the restructuring before open it up to calls.

Let me get started. Second quarter was a challenging quarter for Stereotaxis and reflects the beginning of a period of significant transition for the company. Revenue was down 22.7% from the second quarter of 2010. Gross margin in the second quarter was 69.7%, up 250 basis points from a year ago. Global new capital orders were $4.4 million and were comprised of two Niobe systems as well as $1.7 million in orders related to Odyssey.

Operating expenses increased due to the impact of marketing expenses for two major medical meetings associated with the release of our Epoch platform. The bright spot for the quarter were marked momentum and interest in Epoch, which is designed to significantly enhance the efficiency for all robotic EP procedures and whose market adoption will significantly contribute to the growth and profitability in the future. The second was the 17.9% growth in recurring revenue, which reflects the continued growth in the clinical procedures and the pipeline momentum for the Odyssey system in the standard EP lines.

While we are disappointed with our systems revenue and new capital order performance in the second quarter, we believe we clearly understand the drivers for our results and on a path to turn this around. Our financial performance in the quarter and year-to-date is mainly driven by soft Niobe revenue and the related impact on the Odyssey business and the emergence of the larger standard lab Odyssey deal, which take longer to closer but significantly increase our growth potential.

With our key focus on building top-line growth, we are mindful of conserving resources during the transition period. Therefore, we are embarking on an aggressive and immediate action plan to implement and rebalance and reduce the level of spending. This plan will focus on aligning our operating expenses with a revenue growth expectation, minimizing the cash burn while continuing to drive investments in R&D.

2011 has become a transition year for the company, one in which we need to regenerate robotic market demand in EP, continue to expand in the promise of the Odyssey product and rebalance our spending so we can invest in strengthening our value in the market but lower our burn rate. Accomplishing this will position us for a strong 2012 and beyond.

I’ll now turn to discussing the business segments in detail starting with our robotic business and the exciting introduction and the market reaction to the Epoch platform. There are two factors impacting Niobe II revenue. First, the market’s demand for a more efficient solution for complex ablation procedures has caused mix and sometimes negative reviews in our installed base, thus slowing the sales momentum of the current Niobe product.

Second, the introduction of the Epoch and the positive market reaction is causing a rapid shift away from the current Niobe II. We clearly underestimated the rate of market shift and forecasted a slower transition. And although this shift ultimately is very positive to the company, in the near-term it will cause a disruption to our system orders and revenue expectations.

Let’s start with Niobe II trends. The market feedback from users has been mix even after we have invested in developing the scientific proof regarding safety and efficacy, revising our training, improving customer site support, and expanding our physician peer-to-peer education. It became apparent that the Niobe product made fundamental product improvements. After multiple discussions with users, we determined that the primary barrier in driving adoption was the inefficiency of the remote case in the long learning curve. Our new Epoch platform is designed to address these barriers. And thus far, the market response suggests we have succeeded.

The first slide highlights the benefit of the Epoch platform and why market interest thus far has been exceptionally strong. As a reminder, the Epoch platform includes the new magnitude navigation capability, the expansion of the platform to include a mechanical arm called Vdrive, and the Odyssey Vision user interface. In several dimensions from speed and continuous movement of catheter positions, the new capability to precisely move a diagnostic device and the ability to improve the reach and contact force, Epoch is a major improvement to our robotic solutions.

The lab test and early market feedback has confirmed that this new platform will significantly improve the efficiency of our system for complex ablations. Our goal is to be better than the best hands in the world. Additionally, the new Epoch interface is designed to shorten the learning curve for physicians. The exact impact will vary by physicians, but early testing supports efficiency improvements up to 30 minutes shorter for an AFK.

We are very pleased with the significant level of interest in recent symposiums and at our exhibit booth, with physicians clearly interested in understanding how this platform will meet their needs. We are focused on converting this strong interest into orders as quickly as possible and are aggressively following up on the high level of physician interest at HRS and neuropath to generate new leads for system placements and refocus on improved utilization that with accounts that have historically been underperformers.

The next slide highlights the market interests. We do site visits as a leading indicator of clinicians’ and hospital’s commitment to make a purchase decision. As this chart demonstrates, in 2010, we averaged approximately two site visits per month. We preannounced Epoch at an internal training meeting in January, and the sales force immediately realized the dramatic improvement that this will bring to the EP lab productivity.

The Epoch platform was introduced to the market in May at the HRS Show, and immediately we received requests to come to our office to see it firsthand. Since the release of the product in May, we have scheduled 36 site visits. The 36 are made up of both installed base and Niobe customers looking at an Epoch upgrade and prospective new purchases. The Epoch upgrade price can be substantial, therefore may take longer cycle to secure the money.

Now turning to the newest part of the Epoch platform, the Vdrive. As previously stated, we believe the Vdrive will accelerate utilization by expanding the capability of the platform to control diagnostic devices, leading to improved efficiency of the entire procedure. The product began shipping in Europe in late first quarter. We have a total of six sites that either have installed or in the process of installing the product. We have completed approximately 200 cases with an average incremental price of $600 per patient.

The next slide provides an overview of the market feedback regarding the Vdrive presented by European users at a recent symposium. As you can see, the market feedback continued to be very positive, leading to physicians envisioning this arm in many innovative applications. Our current plans are to expand this arm to a dual-head platform, designed to hold multiple devices, which is scheduled to be released late this year in Europe. The combination of LASSO sheath or deflectable sheath will allow physicians to perform a more efficient and more precise fully remote procedure.

The feedback is consistent with our expectation that this product when fully released will significantly change the adoption curve for AF. The Vdrive allows the physician to perform an efficient fully remote procedure with variable contact force for difficult areas. As a reminder, we will use commercially available devices for LASSO and fixed-curve sheath, but the deflectable sheath is a Stereotaxis’ proprietary device. This is designed to replace an existing deflectable sheath at a cost point comparable to the many alternatives.

We currently have CE Mark for the single-head Vdrive in Europe. In the US, it will take longer as the Vdrive is currently under 510(k) review. We are finalizing the plan with the FDA, and our current expectation is the first embodiment of the LASSO version will be available in mid-2012 and the dual-drive in late 2012 or 2013.

Now let’s talk about how we see the positive momentum in site visits and funnel growth translate into increased platform orders and ultimately into revenue. Our discussions with customers suggest the first wave of change will be upgrades to the installed base, followed by accelerated decisions from prospective customers looking to market references. While the site visits will increase the sales pipeline and budget activity in the short-term, we do not have an updated point to review the timing of conversion to revenue. Therefore we expect the following from Epoch.

First, we expect key sites and top users will upgrade to the Epoch platform and their initial feedback gives us confidence that we’ll experience an increasing utilization rate based on efficiency improvements and the corresponding increase in revenue per day. Secondly, the stronger utilization among Epoch users will accelerate market interest and new orders leading to the increased Epoch revenue and margin per system. Third, the collateral positive impact will be an increased market awareness of Odyssey supporting standard lab pipeline improvement. We expect to deliver the first models of Epoch upgrades in Q4 and all models by the first half of 2012.

Turning now to the Niobe backlog, we have conducted a thorough review to identify orders that are not projected to come to revenue in a reasonable amount of time. We’ve reduced our backlog by seven systems to a total of 20 systems that we expect to go to revenue in the next 18 months.

Thus, to summarize the Epoch platform, the early reaction among key opinion leaders is extremely positive. Epoch is designed to enable a faster, more efficient and dynamic control for all devices of robotic-assisted EP procedures while maintaining the Niobe’s recognized benefits and safety, radiation reduction and clinical outcomes.

At the Europace Meeting, physicians discussed their experience with the Vdrive and add-on module for Epoch that can be used to robotically and remotely manipulate a growing array of devices, such as the LASSO diagnostic catheter and sheath to enable enhanced procedure efficiency. Thus we are confident that the recently released Epoch full solution addresses the market demand for improved procedure efficiency and will lead the renewed momentum in our technology.

Moving now onto utilization, the recurring revenue in the quarter, we are very pleased with the continued growth, but believe we can do better than this growth rate. Let me start with a brief update on the current Niobe proof of value. The next two slides highlight several scientific publications regarding safety and efficacy that our system provides in performing complex left-sided ablation. In the first slide, the two diagrams demonstrate the value of our system for safety, which is apparent in both adverse events and radiation reduction for both the patient and the caregiver.

The next slide reflects the Niobe’s clinical efficacy for VT and AF. As you can see with these slides, our scientific evidence regarding the safety and efficacy is substantial. At the HRS meeting in May, a leading physician stated that he now believes the Stereotaxis is the better alternative for his patient than his hands even though he is an experienced and excellent clinician. The science was strengthened during the second quarter with an impressive result from several presentations at the HRS and Europace symposium.

Utilization continues to reflect different adoption trends in sites installed before 2008 and those installed after the irrigated catheter returned to market. We now have over 60 sites performing on average over 2.5 cases per week. This customer distribution is much broader than can be seen two years ago when a handful of sites contributed to a majority of the cases performed. The interesting trend is that the usage tears largely by installation timeframe. We expect Q3 to have the normal seasonality reflected in European summer month vacations and anticipate a positive inflection on usage once the full Epoch, including Vdrive, is available.

In summary, the Niobe II adoption is continuing based on strong scientific evidence. The positive utilization trend gives us confidence that the foundation of science along with our Epoch improvements and efficiency will position us well to become the standard of care for complex ablation.

Let us now turn to the Odyssey business. We remain bullish about the long-term opportunity for the Odyssey business segment for all interventional suites. Odyssey seamlessly integrates multiple data streams into synchronized patient records, condenses the record and can transmit it over low-bandwidth networks and maintain patient confidentiality. We are convinced that this will provide the information needed at the time required to change how labs interact and how the supply base provides clinical support.

The Odyssey revenue in the first half of 2011 was $4.3 million and new orders were $4.1 million. New orders were impacted by the slowing momentum in the Niobe orders for the first half of the year and the increase in the standard lab deal size causing a longer decision process by half. Additionally, in the first half, we began shifting sales resources to focus on Odyssey standard labs. This new focus in building stronger customer interest will take a few quarters to bring new prospects to the sale process.

Even in a short period of time though, we’ve seen the standard lab Odyssey sales pipeline is gaining momentum. Some leading indicators are, since April 1, we’ve generated new quotes valued at $14 million, the average proposal for standard labs is $520,000 or twice as large as the Odyssey deals sold in Niobe room. There are several new deals in the sales pipeline greater than $1 million in size.

In regards to our second quarter Odyssey expansion with Biosense, we are even more optimistic around the opportunity to leverage their strong market presence and establish the Odyssey interventional network. In the second quarter, we launched the product over 30 key sales personnel in both Europe and North America who will become the lead interface with the several hundred salespeople Biosense employed. I’m pleased to announce that we received our first Odyssey order in July for two rooms in the US, which is just the beginning of what will become a very positive partnership for our business.

In conclusion, we are investing in the right product improvements, processes and personnel to set the stage for future growth. However, the financials that we released today clearly illustrates that we are facing short-term challenges. Our mission is to accelerate the company’s top-line growth in 2012 and control expenses to drive long-term profitability. It begins with an operating expense reduction and rebalancing to lower our cost structure in order to minimize our cash burn. We will immediately take action to lower our operating cost by 15% to 20% in order to rebalance spending.

Secondly, we are working diligently to ensure that we execute an introduction of Epoch in the second half of 2011 and early 2012. We are focused on converting the strong interest in orders as quickly as possible and are aggressively following up on the high level of physician interest at HRS and Europace to generate new leads for system placements and to refocus on improved utilization with accounts that have historically been underperformers. Thirdly, it’s important to note that we will not cut product improvement. We are committed to continue to develop our value and to capitalize on the growth opportunity.

We’ll focus new product development in three key areas. First, the Odyssey platform improvements, which expand our product capabilities and continue to extend our market differentiated position. These investments will be focused on both short-term product improvements and long-term strengthening of our technological position. Second, the Vdrive disposable expansion into multiple devices, which improves the Epoch value and captures market innovation. Third, the continuation and improvements in the simplicity of the user interface for their Epoch platform.

Before I turn this over to Dan to go through the financial results, we announced today that Dan will be leaving our company as the Chief Financial Officer in mid-August but will remain as a consultant through the end of the year. A search for Dan’s replacement has begun, and we’re confident that we’ll secure a world-class candidate in a timely manner. On behalf of Stereotaxis’ employees, I want to publicly thank Dan for all his contributions to our organization and wish him the best as he pursues his new career.

With that, Dan?

Dan Johnston

Thanks, Mike, and good afternoon. As Mike stated, revenue for this year’s second quarter was $11.6 million, a decrease of 23% from the $15 million of revenue in the prior year. Systems revenue at $5 million was down 47% compared with $9.4 million a year ago. Systems revenue for both Niobe and Odyssey businesses was weak versus last year. We recognized revenue on three Niobe systems versus seven systems a year ago. Odyssey systems revenue was $1.6 million, down 39% from a year ago. All Niobe systems taken to revenue this quarter were placed in North America.

Recurring revenue grew 18% versus the second quarter of last year to set another record of $6.6 million. The growth was driven by an increase in procedures as well as strong pricing. Sequentially, total revenue increased by $1.4 million or 13% from the first quarter of 2011. New capital orders for the second quarter totaled $4.4 million. We booked one Niobe in Europe and one Niobe in the US. New Odyssey capital orders were about $1.7 million with a lion’s share of these new orders within Niobe lab.

Moving on to backlog, in 2009, we began the process of reporting the backlog that was active and could be seen as moving into revenue in the foreseeable future. We have generally viewed this as an 18-month forward-looking window. With lots of momentum around the Niobe II platform, we have challenged each product in backlog and its ability to hit this 18-month window.

As a result of this evaluation, we have identified certain projects which have either stalled or for which circumstances have changed the point that the certainty is now too low to include these projects in this metric. As such, we are removing seven Niobes from our active backlog. The value of these Niobe projects is $8.4 million, and the associated Odyssey elements are $1.6 million.

So rolling forward from our first quarter metric of $44 million in active backlog, we added $4.4 million in new orders and we’ve subtracted $5 million in systems revenue for the period. And we’re also subtracting the $10 million in backlog in moving these projects to inactive. This brings active backlog to $33 million at June 30, 2011 and represents 20 Niobe systems. The seven systems that have been moved to inactive backlog are regionally dispersed. In that, two were in North America, two were in Europe, two were in Asia Pacific, and one was in the rest of the world region.

Gross margin for the second quarter was $8.1 million versus $10.1 million a year ago. Gross margin percentage was up 2.5 points given the strong mix, with record recurring revenue. Operating expenses in the recent second quarter were $17.6 million, an increase of 12% compared to the $15.8 million in the second quarter of last year.

In bridging the $1.8 million increase, approximately two-thirds or $1.3 million of the increase in operating expenses occurred in sales and marketing. $600,000 of the increase is related to increased spending around the Epoch rollout at HRS and Europace and $600,000 relates to higher commercial spending in general.

Almost half of this increase in commercial spending is currency related and the other half is headcount and travel related. The $600,000 increase in general and administrative cost represents an increase around spending for training and regulatory efforts. The net result was an increase in our operating loss to $9.5 million compared with $8.8 million in the first quarter of 2011 and $5.7 million in the second quarter of last year.

Other income includes the mark-to-market gain related to the outstanding warrants we have, which must be adjusted accordingly under derivative accounting rules. Interest expense for the quarter is just under $800,000, $500,000 of which is non-cash. As such, we reported a net loss of $9.7 million or $0.18 per share versus a net loss of $3.9 million or $0.08 a share in the second quarter a year ago.

Average shares outstanding for the second quarter were 54.8 million compared to 49.9 million in the same quarter last year, reflecting the issuance 4.6 million shares as part of our follow-on stock offering completed in November of 2010.

For the six months of 2011, revenue decreased 15% to $21.8 million from $25.6 million a year ago. Gross margin decreased 14% to $15.3 million or 70.1% of total revenue compared to $17.8 million or 69.4% of total revenue through the first half of 2010. Operating expenses were up $3.9 million year-to-date driven by higher sales, market and training costs.

The operating loss increased to $18.3 million from $11.9 million last year. The net loss for the first six months of 2011 was $19.2 million compared with $12.3 million in 2010. On a per share basis, the loss per share was $0.35 per diluted share in the recent six months versus $0.25 loss per share in the same six months of 2010.

Turning onto overall liquidity, we had a cash burn of $5.9 million for the quarter, which is an improvement from the $11 million that we used in Q1 of 2011. Year-to-date 2011 we have used $16.9 million of cash versus $14.2 million during the same period a year ago. Our net liquidity and debt position is essentially the same as a year ago. This year, at June 30, we had cash of $23.3 million, while last year we had $22.0 million at the same time. We had a total debt outstanding of $30.5 million at June 30, 2011 versus $26.7 million a year ago. As such, net debt is up about $2.5 million at $7.2 million versus $4.7 million a year ago.

Before I close, I’d like to add some color to my decision to leave Stereotaxis. It’s a decision that’s based upon personal and professional goals that will take me in a different direction. More importantly, my decision was timed to allow the company to build momentum into the future. I do not want to disrupt in the future. Stereotaxis has ramped a momentum with such a move during this important time. Obviously, I wish the team all the best and I agree to stay through a transition period until we find new financial leadership.

With that, I’ll turn it back to Mike.

Mike Kaminski

Thank you, Dan. Regarding financial guidance, we announced on our press release that we’ve withdrawn previous financial guidance for 2011 and are temporarily suspending providing financial guidance until we have predictability to the ramp in our magnetic platform business. We believe this is a prudent course of action given the corporate development that we discussed today in an uncertain timeframe that impacted – the Epoch will impact our business.

With that, operator, I’d like to open it up to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from the line of Tao Levy with Collins Stewart. Please go ahead.

Tao Levy – Collins Stewart

Hey, good afternoon.

Mike Kaminski

Good afternoon, Tao.

Tao Levy – Collins Stewart

First off – first of all, Epoch, you mentioned that now you’re not expecting that until the fourth quarter. I thought installations were going to start in the third quarter. Any reason for the delay?

Mike Kaminski

The full rollout won’t be until the fourth quarter. I think we were anticipating we’d get some hardware out in the third quarter, but the software will come out in the fourth quarter, so then we’ll see the full clinical benefits of them. I think it’s actually in December. So it’s sitting right in the last month.

Tao Levy – Collins Stewart

So there’s nothing in terms of being able to install if that’s necessarily been delayed?

Mike Kaminski

No. I think it’s just the timing of getting all the software validated and out into the market. It will push us right to the December timeframe.

Dan Johnston

Yes, Tao, I think this is not a change. This is how we’ve always characterized. We may have not been clear, but there is always the physical elements that we thought can move in the third quarter. The programming elements would not be available till the fourth quarter.

Mike Kaminski

Yes. Part of that, Tao, too the Vdrive of course, I went through the different schedule for that. So that will come out in Europe at the end of this year and the LASSO and dual-head and then the US will be staggered based on the approval through the 510(k) process.

Tao Levy – Collins Stewart

Got you. Okay. And the cost to operate from Niobe II to Epoch from, say, one of your higher volume customers?

Mike Kaminski

The list price is 290. The Vdrive list price in Europe, which is only released, is 200,000.

Tao Levy – Collins Stewart

That’s upgrade from Niobe II to the Epoch, the software and all of that stuff, is 290?

Mike Kaminski

That’s the first element. That’s just the platform upgrade and then the Vdrive is in addition to that.

Tao Levy – Collins Stewart

Got you. And then just the last question, I guess in – with the Biosense Webster relationship, you indicated that you took in a couple orders here in July. Who is focused on selling that primarily now? Is it – obviously they are doing their part, but you also have reps selling the Odyssey or supervising and making share that they are selling the Odyssey or supervising, making sure that they are selling that? Are they transitioning – are your reps transitioning to a different part of the selling effort?

Mike Kaminski

They are – for lack of better words, we train the trainer. We’ve taken their lead, kind of key salespeople, trained them, they are going to be responsible to help provide the interface to the rest of the sales force, or we have a group of what I would call regional managers. They work with those lead trainers, and then our people use the opportunity to sell in the interventional labs and IR labs. So we expand the sale beyond the EP. Again our relationship with Biosense is they are right to sell it with an EP and we are obviously maintaining the right jobs out of EP.

Tao Levy – Collins Stewart

Have you sold any outside of EP yet?

Mike Kaminski

Yes, we have sold a few. Those are – most of standard lab deals obviously include EPIC and some cases IR. They’re going to across multiple –

Dan Johnston

Do larger deals –

Mike Kaminski

And do larger deal, as I talked about. That’s what is causing – it's exciting in one aspect, but it’s causing them to have more decision makers involved, bigger deals and it takes a longer period of time to close that. So we will see – we anticipate seeing some of those come to fruition in the last half of the year. There will be a big momentum gain.

Tao Levy – Collins Stewart

Okay, great. Thanks.

Operator

Thank you. Our next question comes from the line of Steven Lichtman with Oppenheimer. Please go ahead.

Steven Lichtman – Oppenheimer

Thanks. Hi, guys.

Mike Kaminski

Hi, Steven.

Steven Lichtman – Oppenheimer

So just following up on the last question, in terms of this past quarter with Odyssey being light, was it the transition that caused it, because you also mentioned the slower Niobe placements, but that’s been occurring for the last couple quarters and Odyssey has been strong. What over the last couple of months has caused the Odyssey slow down?

Mike Kaminski

So I think two things. I do think that the Niobe slowdown has caused some pull on the Odyssey business. But I think the bigger issue is these big deals haven’t transpired, and I think we’ll see those in the last half of the year. So you’re going to start seeing the deal size go up, I believe, and you’ll see sales outside of this EP suite. Obviously, Biosense wasn’t in the original plan and that will be an upside for our business as well. And we think that will kick in in the last half of the year as well. We’ll begin to see some momentum – really see most of the momentum I think with the Biosense relationship in 2012, but we should see some this year.

Steven Lichtman – Oppenheimer

And what’s the difference in terms of deal size? Why would it be a bigger deal through the Biosense versus with a Niobe? What’s the delta there?

Mike Kaminski

I don’t know that we know the answer between Biosense and us. I think I’d anticipate the same size. The deal that’s bigger, the standard lab deals, just are – and our pipeline of standard lab deals because they are going outside of EP. They include EP and IC in most cases.

Steven Lichtman – Oppenheimer

Okay, got it. And then in terms of – this is my follow-up question, second question, in terms of the cost savings, you obviously said not R&D, so where exactly will you be targeting the cost saves and over what period of time should we be assuming that in our model?

Mike Kaminski

Yes. We’re going to go through a kick of the process, Steve. We’re going to go through that in the next 30 days. It will have to be all facets. We’re going to obviously protect those growth drivers and then the value creators. But it will require every department as we go through that. Now I fully anticipate having this completed by the beginning of fourth quarter so that we’re running at a reduced rate in Q4.

Steven Lichtman – Oppenheimer

Okay. Great. Thanks, guys.

Mike Kaminski

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Spencer Nam with Madison Williams. Please go ahead.

Spencer Nam – Madison Williams

Hey, thanks for taking my questions. How are you guys doing?

Mike Kaminski

Hey, Spencer.

Spencer Nam – Madison Williams

Great. So, question I have on this Epoch rollout, is that the relationship between Epoch and the Vdrive and whether there could be sort of a tendency for the customers to wait for the Vdrive to be approved before they jump on board with Epoch upgrade, I mean, how should I think about that? How critical is the Vdrive to the success of Epoch and the full potential realization of Epoch here?

Mike Kaminski

Well, I think there’s two parts to Epoch, right – three parts, right? One is the basic system improvements make it much more responses. So it moves faster. It’s a more efficient movement of the catheter. The software is simpler. So the basic interface in the responsiveness of the system is better. The Vdrive definitely provides a lot of capability. And what it does is if you think about a day’s environment, a physician doing AF is different than a physician doing VT. If they are doing VT – performing a VT case, they are sitting remotely, largely don’t use other devices. They position a sheath, use one catheter to map and ablate.

And now conversely, if they are doing AF, they have a LASSO catheter, they may have an ICE catheter, they may have other devices that they are manipulating at that time they are doing the AF procedure. So in that case, the physician has to get up when he’s at that point, glove, go back in a room, reposition the LASSO, come back, sit down and do the remote case. So I think the whole workflow is much more simplified with Vdrive.

Now, the interesting part is – and that’s the LASSO and the ability to move the diagnostic devices. The sheath actually I think will provide an efficiency of how they move the catheter and an ability to have more variable contact force, which in certain cases has a lot of capabilities to the system. So I think that component obviously will bring some substantial as well. So obviously Europe will see the benefit of that. There will be a marked improvement with just the Epoch system upgrade this fall in the US, but the full capabilities won’t be seen in the US till mid-to-late 2012.

Dan Johnston

Spencer, I’d add to that that I think you’d be able to see the order rates in the US pick up based upon the strength and performance in Europe. So while the regulatory environment may lag, you’d still have the opportunity to see at least Niobe pick up, maybe not the whole Epoch suite, but I think people would gain some confidence over the next 12 months in North America as well.

Mike Kaminski

Spencer, one other thing too is that’s one of the reasons that the site visits at St. Louis are so telling that is people are taking time to come here because they can experience the whole system and use. I mean, obviously if it’s not released, the only place to see it is in St. Louis. So people we had from Europe, we’ve had a lot from the US who had enough interest to take time out to come see us to look at the full release and the value of the full release. It’s been very positive.

Dan Johnston

And I think you could measure that, the excitement on the floor of HRS. I didn’t go to Europace, but I probably had a visit with probably 15 physicians in the last month and a half myself, and we’ve really struck a chord with efficiency. I mean, this is really what they have been looking for.

Spencer Nam – Madison Williams

So – I think I get all of that. I guess what I’m still trying to figure out though is whether we – what is the possibility that we get to fourth quarter, call that is in January, February of next year, and you guys still feel like the customers are not really moving towards upgrade and that the upgrade cycle really will heat up only until after Vdrive is approved. So I want to understand – I understand the value proposition of Epoch and then the subsequent Vdrive upgrade. But is it really – are you going to be able to make a real case for your customers only after Vdrive is approved? Which means that the whole next 12 months would be somewhat sluggish and that the real potential of Epoch will not be really felt in the Americas, in North America until next – second half of next year. I’m trying to understand how I should think about Epoch itself without Vdrive, how much you guys think that will get the customers excited. Not just excitement, but how confident you guys are that you will turn those excitements into orders versus post-Vdrive? I totally understand that Vdrive is going to really make this exceptional platform. But until then, are we going to see something that’s going to be material here?

Mike Kaminski

Yes. So let me answer that in a couple different ways. One is definitely interest is there. We’re seeing proposals go up. The timing of the decisions, it’s early and we – it's too early to prognosticate how soon that inflection will happen. Right? But I do obviously believe that bringing people here will answer many of the questions that they have on is the value there. It would be a better reassurance if they saw it in clinical use, but as Dan pointed out, I think you will first see that in Europe. I think they will see that as they emerge into late this year, they will have the European physicians discussing the value that they have, obviously the benefit of Odyssey as we can begin to discuss in a network with pretty low cost.

Spencer Nam – Madison Williams

Got it. And my second question is – well, I guess that was the first part of the question. The second question part of the question is the – your burn rate right now, and with this – with cut in spending and where the current cash reserve is, how much – how far can you guys go with the current cash reserve?

Mike Kaminski

We’re looking at the cash right now, Spencer. And that’s why I made a statement. The first step is let’s get our burn in line with our – where we think the top line has come out. We’re going to do that very quickly. And then we’re going to look at the cash and look at the options for non-dilutive cash raise. And we’re going through those – Dan and I are initiating those right now, and there is several that we’re pursuing. And it’s still early to talk about those, but as we transpire here, we’ll keep everybody abreast with what that amounts to.

Spencer Nam – Madison Williams

Great. Thanks much.

Mike Kaminski

Thank you, Spencer.

Operator

Thank you. Our next question comes from the line of Sameer Harish with ThinkEquity. Please go ahead.

Sameer Harish – ThinkEquity

Hi, guys. Good afternoon.

Mike Kaminski

Hi, Sameer.

Dan Johnston

Hi, Sameer.

Sameer Harish – ThinkEquity

Yes. I just wanted to follow up on the line that Spencer was asking about. Just in terms of – it seems like Vdrive has a couple of different iterations. Can you – if we are talking about really sort of addressing the bigger market with AF with Vdrive, is the LASSO catheter, I think, is the first version of the Vdrive that’s coming out going to be enough to gain some of that, your confidence in building that market, or is the dual – I think what you’re telling is the dual-drive version of it the more important one for driving AF? What are the thoughts around that?

Mike Kaminski

The LASSO will jumpstart it. Dual drive will come out in the fourth quarter in Europe. So it’s almost simultaneous. Dual drive won’t be able till later in the year in the US, which will be closer to when we – or later in 2012, sorry, when we anticipate the approval of the deflectable sheath, which would really be the product that’s using the dual drive. So I think at times while with just the ability to have the disposables available in the US. Obviously it would be beneficial to have them both, but they will get – today what they do is, mainly in the US, use the LASSO as to reposition. And in Europe, there are some sites that have LASSO, but more often then use the sheath. So I think the single can be advantageous in either market. The dual obviously gives them the option to have a little more variable to that.

Sameer Harish – ThinkEquity

Okay. And in terms of software behind the Vdrive, is the software upgrades that you are putting in place for Epoch to be launched fourth quarter, will that include the automation for Vdrive, or will there be additional software needed for that?

Mike Kaminski

No, that includes – and that includes some other feature enhancements for both platforms. So it gives you the modularity to put a Vdrive on the Epoch system and the software is already embedded.

Sameer Harish – ThinkEquity

Okay. And just a quick question about Odyssey. So, it sounded like the rest on the J&J side have been trained and you are getting the startup in traction there. Any feedback from the J&J reps in terms of what they are getting from clients, what their feelings are around Odyssey, and kind of where in their pitch process is Odyssey coming about? Is that early in their discussions, or is it considered an add-on to like a CARTO system, or kind of just where are they positioning it? Thanks.

Mike Kaminski

I think it’s early in the sales process with Biosense. I can tell you there is a lot of excitement between our sales force and theirs. Obviously, for 30 people to show up in St. Louis to be trained, there is obviously a commitment and an excitement behind it. I think we’re working with them kind of site-by-site, and it’s a little bit right now every site is a little different. But the first order was – I think there was one – I believe there was one CARTO – new CARTO, and one room without that. But there is a standard lab and a CARTO lab. But I think it will emerge that. Obviously they have a strong presence in any CARTO lab. They can leverage that presence to expand it beyond that. And I think that’s the real benefit. We think they can drive us into having a sheath for Odyssey Visions and many of labs than we can do individually and then we can connect the backbones together to the Odyssey Cinema, really create a network.

Sameer Harish – ThinkEquity

Great. And forgive me if you’ve mentioned this. I just wanted to ask a question on the Phillips side. Are there still some systems that remain deferred due to the Phillips delay, or are those resolved at this point?

Mike Kaminski

Yes, it’s resolved. We installed our Phillips system that we talked about, I believe, in May. I think it was in that timeframe that we discussed. It was in the second quarter.

Sameer Harish – ThinkEquity

Okay. Thank you.

Operator

Thank you. (Operator instructions) Our question comes from the line of Jose Haresco with JMP Securities. Please go ahead.

Jose Haresco – JMP Securities

Hi, guys, good afternoon.

Mike Kaminski

Hi, Jose.

Jose Haresco – JMP Securities

More on the Niobe to Epoch transition. Should we expect the 20 units in backlog to eventually all move to Epoch? Is that essentially what you are going to be trying to do over the next few quarters or so?

Mike Kaminski

That’s the intention. We’re –

Jose Haresco – JMP Securities

Okay. And I guess if you just qualitatively, are those – does everybody who is using in the backlog are what you’ve seen and promote the Epoch or is it 50% or 75% of them?

Mike Kaminski

Yes. I don’t know that I have a number –

Dan Johnston

I didn’t follow the question, Jose. Say it again.

Mike Kaminski

Of the 20 in backlog, how many have seen the Epoch?

Dan Johnston

I don’t know.

Mike Kaminski

I don’t know the answer to that, Jose. I know that the sales process is going to them and saying, hey, before you get this installed, let’s talk about the new platform that’s coming on.

Jose Haresco – JMP Securities

Okay. Should we – I guess as you guys have removed seven of that backlog from the current – from the current number, is that – if you guys could just give more color as some of the reasons for that. Is this an economically driven decision? Was this because of all the headlines, you have obviously been exposed to in the last few months? Was it you really didn’t want to wait that long for the Epoch? (inaudible) What are your customers actually saying that what impacted decision that seven of these units were not going to turn into revenue in 18 months?

Mike Kaminski

Yes. I think there is a multitude of reasons in there. One, there’s a couple of the systems have just delayed the buildings outside of that 18-month window. I think some of them lost physicians, couple of them I think the CEO has left to kind of the capital.

Dan Johnston

That really does – the sales team has – they feel like resell the opportunity, and at that point in time, I think just there’s too much uncertainty for us to call it active.

Mike Kaminski

Yes. So we didn’t move it to inactive. Obviously if it comes back in, we won’t count it as a new order.

Dan Johnston

That’s a good point, Mike. We don’t – that's one of the – we have this status of inactive when things do – and they do pop back and forth from time to time, we don’t count it as new order.

Jose Haresco – JMP Securities

Okay. All right. Thanks, guys.

Mike Kaminski

Thank you, Jose.

Operator

Thank you. Our next question comes from the line of Tao Levy with Collins Stewart. Please go ahead.

Tao Levy – Collins Stewart

Hey, guys, just a couple more follow-ups. You kind blamed Epoch a little bit for some of the order delays. But how about the overall capital equipment environment? Have you seen any changes of late, or the EP department, the hospitals, still engaged in looking to construct different rooms, refurbish, et cetera?

Mike Kaminski

I’d have to say that our experience in Q2 is pretty positive because of what we’re seeing in site visits. I mean, people are really coming in here to make purchase decisions. I don’t know that I stay close to the total capital market, but I think in EP, it’s still very positive trend. CEOs still look at it as a major piece of cardiology growth. They are still spending money. Obviously sites visits are picked up for. So we see a microeconomic trend that’s very positive.

Tao Levy – Collins Stewart

Okay. But within the EP, it’s not like a couple years ago where they weren’t – your sales guys pretty much weren’t going into the hospitals because they weren’t ordering or buying anything?

Mike Kaminski

No, ours sales guys – in fact, if you would ask them today, their funnel is strengthening quite a bit from the beginning of the year to today, that the amount of real active discussions around purchase decisions is getting better.

Tao Levy – Collins Stewart

And if a hospital is going to place an order for the Epoch or upgrade it, how does that get recognized? Is that something that goes into the order right now and then when you get it installed it becomes revenue, or you’re not taking orders for Epoch?

Mike Kaminski

No, it will go into order. It would just go into backlog and then when we install it, it would –

Dan Johnston

It is an upgrade; we won’t count it as a new system. It’s just counted as an incremental piece of the overall profile, but we’ll recognize revenue when it shifts.

Tao Levy – Collins Stewart

But it’s not in the –

Dan Johnston

We’ll put it in the backlog as the order comes in.

Mike Kaminski

Yes. It will go in – yes, that’s a good point, Dan. It won’t go into the system sale. It will go in almost as an accessory. It will have counted as more dollars and we’ll call those out.

Tao Levy – Collins Stewart

But it will go into that backlog number?

Mike Kaminski

Yes, it will.

Tao Levy – Collins Stewart

So, were there any in the backlog number for the quarter?

Mike Kaminski

We had one Epoch upgrade that came in in Q2.

Tao Levy – Collins Stewart

Great, thanks.

Operator

Thank you. At this time, I’d like to turn the conference back to management for closing remarks.

Mike Kaminski

Well, thank you, everybody. Obviously it’s an important time for our company where we believe we’re on the right month, where we’ve generated a lot of market momentum with Epoch. Odyssey, we think, is almost an untapped potential, but we have some hard work to do here in the next few months and for the balance of the year to reposition the company. And we’re passionately committed to get that done. So we look forward to the next call and to talking to you in the future. Thank you.

Operator

Ladies and gentlemen, this concludes the Stereotaxis second quarter 2011 conference call. Thank you for your participation. You may now disconnect.

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