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Stereotaxis, Inc. (NASDAQ:STXS)

Q1 2012 Earnings Call

May 08, 2012 08:30 a.m. ET

Executives

Gregory Gin - VP, EVC Group

Mike Kaminski - CEO

Sam Duggan - CFO

Analyst

Steve Lichtman - Oppenheimer Securities

Operator

Ladies and gentlemen standing by and welcome to the Stereotaxis Q1 2012 Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Greg Gin of EVC Group. Please go ahead, sir.

Greg Gin

Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the first quarter which ended on March 31, 2012.

Before we get started, we’d like to remind you that during the course of this conference call, the company may make projections and other forward-looking statements regarding future events or the future financial performance of the company, 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 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, 2011 and the quarterly filings for 2011. 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 some of these purchase orders and other commitments are subject to contingencies that are outside of our control. In addition, these orders and commitments maybe revised, modified, or canceled either by their express terms, as a result of negotiations or by project changes or delays.

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

Mike Kaminski

Good morning everyone, and thank you for joining us to review our first quarter 2012 performance. With me today is our Chief Financial Officer, Sam Duggan. Following our prepared remarks, we will open up the call for your questions.

As we outlined in our last call, our first priority in 2012 was to improve the balance sheet in order to keep our strategic plan moving forward. On Monday we announced that we’ve entered in to a definitive agreement to raise an additional 18.5 million through two financing transactions, consisting of 8.5 million subordinated debt, and a 10 million in common stock type transaction.

Upon closing of these transactions, we also expect to extend our credit agreement with Silicon Valley Bank through March 2013. Sam will review the terms in more details in his remarks.

In an effort to maximize this capital raised, we are implementing a cost reduction plan focused on growing top line and position as to achieve breakeven as quickly as possible. The plan will further reduce operating expenses not directly impacting top line growth by 15% to 20% by the fourth quarter of this year.

With a little operating spend and continued revenue growth through the new Epoch platform, we believe we can accelerate EBITDA breakeven. I would discuss some specifics of the plan following our review of the first quarter results.

During the first quarter, the Epoch Solution continued to build momentum. We installed 19 upgrades in addition to the six installed in Q4. At this pace we expect to achieve a milestone of 40 upgraded sites during the first half of 2012.

Two Niobe ES systems contributed to revenue during the quarter, and although there were no new Niobe ES orders in the quarter, we do expect to secure orders as the year unfolds and record type strengthens.

We have seen a marked increase in sales activities due to overwhelmingly positive response to the products clinical and operational [background]. We remain confident in our ability to recognize at least 10 new Niobe ES systems to revenue in 2012.

The Vdrive product continues to generate positive momentum in Europe, expanding our footprint and providing a clear differentiator in the robotic market. The Vdrive system provides a physician the ability to control all catheters [G] and complex EP procedures and the flexibility to change the pivot point of our magnetic catheter, thus improving navigation to specific sites.

To-date 80% of the upgraded Epoch sites in Europe has purchased the Vdrive, and are utilizing it in approximately 50% of all AF procedures. Sales of the Vdrive systems should significantly increase once the V-Loop is approved in the US. We are still on track to commercially release Vdrive in the US later this year.

Our Odyssey business contributed two main to revenue in the first quarter and generated 2.1 million in new orders. Approximately 30% of the orders were of Biosense distribution agreement.

We will continue to leverage this relationship to expand the Odyssey footprint in the interventional market. We are also presenting three significant enhancements to the Odyssey platform at the Heart Rhythm Society later this week. These upgrades are designed to improve the user interface and strengthen the remote communication of (inaudible) find information to physicians in remote sites.

Led by strong market reaction to the Epoch Solution along with higher mix of service and disposables, revenue in the first quarter was up 20% from prior year. It is evident that the Niobe ES system is having a significant impact on our robotic footprint.

More than 1250 cases have been completed on the new platform. In the 25 upgraded sites, overall EP volume grew 33% over prior year quarter, compared to the company growth rate of 16. This includes the multiple days that each lab was down to upgrade the system.

AF procedures in Epoch labs increased 48% versus 28% company wise, excluding sites that were at procedure capacity prior to upgrading, EP and AF volume grew 51% and 60% year-over-year respectively.

The net result of the quarter was strong top line growth and significantly lower operating expenses, which improved year-over-year operating loss by 52%. Operating spend was down 21% from prior year quarter.

As we continue to build on the excellent commercial performance and promise of the Epoch Solution, we are committed to focusing capital funds on a few revenue drivers, with a goal of achieving EBITDA breakeven within the next four quarters.

In that spirit, we’ve reevaluated our business model and we believe we can bring further efficiencies to several areas. Let me provide an overview.

We expect recurring revenue to go at or above the historic rates, thereby covering a growing portion of our operating expenses. At the same time, we believe capital revenue will rebound in 2012 with a minimum of 10 new Niobe ES systems added to revenue this year.

As we examine our sales pipeline, we found that many prospects are being heavily and positively influenced by the Epoch side in their local market. This is a result of the new Niobe user profile, the single physician operator and not-for-profit hospital who is driven by efficiency and outcomes.

We believe our clinical (inaudible) staff will positively influence ample interest, and we can leverage their presence by providing further efficiency to our capital sales resources.

Additionally and as I have mentioned, our Odyssey strategy is centered on leveraging the excitement of the technology in our robotic suite to expand it in to other care areas within that institution.

Outside of our robotic installed base, we can run Biosense and other relationships that have a much broader commercial footprint to increase the sales in independent labs.

In the area of R&D, we committed to continue to innovate and strengthen the value of our product offering. With the heavy investments of bringing the Epoch Solution to market behind us, we are moving to focus less costly incremental improvement that ensures market adoption and long term product success.

So in summary, our operating reduction plan includes leveraging the clinical sales force to help grow our capital sales; focus spending on R&D projects and exploring Odyssey innovation partners; and aggressively reducing general expenses including G&A, support function and discretionary spending that do not impact top line growth.

We have carefully evaluated each of these areas and believe this plan will accelerate operating breakeven without comprising our revenue growth strategies.

With these reductions and improved capital, we are positioned to achieve EBITDA breakeven on a quarterly revenue basis of approximately 15 million, with majority of the top line driven by recurring revenue.

I will now turn the call over to Sam to provide further details on our quarterly results, and recent financing. Sam

Sam Duggan

In the first quarter of 2012, revenue was 12.3 million compared to 10.3 million in the 2011 first quarter and 11.6 million in the fourth quarter. Impressive revenue of 2.8 million on two Niobe ES systems including 1.4 million of Niobe ES upgrades, and Odyssey revenue was 2 million.

System revenue grew 5.2 million in Q1 compared to 4.3 million in prior year quarter, and recurring revenue increased to 7.1 million; a 20% improvement year-over-year.

At quarter end we evaluated our asset backlog at 16.9 million, which included 8 Niobe system orders, compared to 19.9 million at the beginning of the quarter.

During the quarter, we added 3.3 million in new orders and converted 5.2 million in system revenues. The remainder of the difference is primarily due to changes in deferred revenue.

Gross margin was 8.5 million or 69.4% in Q1, compared to a margin of 70.6% in the year-ago quarter. Operating expenses in the first quarter was 12.7 million down 3.3 million from the year ago quarter. The decrease was principally related to reduced headcounts and discretionary spending in 2011.

The net loss for the first quarter was 5.8 million or $0.11 per share, compared to a net loss of 9.5 million or $0.17 per share reported for the first quarter of 2011.

In the first quarter, cash burn was 4.3 million, compared to 11 million in the prior year quarter and 14.8 million in the 2011 fourth quarter. The fourth quarter was impacted by the payoff of 3.1 million of remaining debt to Biosense Webster and increased working capital due to higher than normal shipments near the end of the quarter that drove accounts receivable.

At March 31, 2012 we had cash and cash equivalents of 10.5 million compared to 14 million at December 31. [Outseen] debt was 39.5 million versus 33.5 million a year ago, and included 14.8 million from the Cowen transaction completed in the 2011 fourth quarter.

We believe our lower cost structure will improve further with the new cost cutting strategy and a rebound system revenue will reduce cash flow in 2012. However, to provide immediate capitalization we have entered in to a definitive agreement to raise approximately 80.5 million in additional capital.

The financing which we outlined in our press release yesterday consist of the following. We expect to raise 10 million through the private offering of approximately 21.7 million shares of common stock and six year warrants to purchase another approximately 21.7 million shares in an exercise [practice] of $0.3361 a share.

We have placed approximately 8.5 million in to unsecured subordinated convertible promissory debentures. These will be convertible in to shares of common stock at the same price of $0.3361 per share following shareholder approval of the transactions.

In addition, we are issuing six year warrants to purchase common stock equal a 100% of the shares and [allotted] debentures of approximately 25.2 million shares. The debentures will incur interest at 8% per year and mature on May 7, 2014.

Net proceeds of these financings will be used to repay 7 million of our revolving credit facility guaranteed by Alafi Capital and Sanderling Venture Partners for working capital and for general corporate purposes.

At the completion of these transactions, we expect to extend our credit facility to Silicon Valley Bank through March 31, 2013. The line of credit will be increased from 20 million to 13 million after pay down of guaranteed portion, but otherwise as similar terms as previous agreements with Silicon Valley Bank.

Alafi and Sanderling have agreed to guarantee 3 million of the credit facility in exchange for warrants of purchase up to 2.3 million shares of common stock. These transactions are subject to standard closing conditions, but we just say completion by Thursday May 10.

With that I will turn the call back to Mike.

Mike Kaminski

First quarter results reflected the excitement we are seeing with the Epoch launch. We look forward to sharing the clinical success of the latest innovations for our Epoch platform at the upcoming HRS Congress this week.

In addition to the broad number of new products we are introducing, we are equally excited about the scientific presence we will have at the show. 11 invited podium presentations in 13 submitted aspects, featuring our products will be included in this year’s programs.

The event gives us tremendous opportunity to drive the catheter market awareness and interest in the safety and efficacy of our robotic technology. We are committed to providing innovative solutions for the EP market and to ensuring the long term success of our business model.

Thank you for joining us on the call today and for your continued support. With that, Operator, we’d like to open it up for any questions.

Question-and-Answer Session

Operator

(Operator Instruction). Your first question is from the line of Steven Lichtman with Oppenheimer. Please go ahead.

Steven Lichtman - Oppenheimer Securities

Just on the 10 revenue [placements] you expect for Niobe this year. Have you guys gotten any orders on the front, and what gives you the confidence that you are going to hit that 10 by the end of this year in terms of placements.

Mike Kaminski

Steve as we came in to the year, and in the last call we talked about we had a backlog of 10 systems and we anticipated 8 of the 10 would go to revenue this year from backlog. Two of those went to revenue in Q1. We did not secure any new orders, nor did we really anticipate that unfolding this early in the year, but we have a lot of interest that’s building and we’ll see those orders start accumulating as the year unfolds.

So we fully anticipate that we’ll fill the other two with new orders and that we’ll be in a good position to get all 10 and build backlog for 2013 as we emerge out of the (inaudible).

Steven Lichtman - Oppenheimer Securities

I know last year you did a lot of cleaning up in terms of the backlog and sort of really nailed down what you felt was true backlog. Was there any movement in terms of removal of anything in the backlog over this past three months or no?

Mike Kaminski

The only net change was those that went to revenue versus those that were new in books, no cancellations.

Sam Duggan

Nothing removed from the backlog.

Steven Lichtman - Oppenheimer Securities

I may have missed this, but in terms of some of the cost saving programs, and one other thing that I think you mentioned was securing additional partners from Odyssey from a distribution perspective. What type of partners are you looking for and how was that going to be different and through what you have is with us a strong supporter in Biosense.

Mike Kaminski

We think there is such a broad opportunity for Odyssey in the interventional market that there is partnering opportunities for both outside of EP as well as just innovative partners, and we are exploring all those options right now; recognizing that some of the heavy lifting for R&D could come from somebody else, some other partners that are looking to get in to that innovative line.

Steven Lichtman - Oppenheimer Securities

Lastly, relative to the regulatory pathway in the US --. (Technical Difficulty)

Sam Duggan

It sounds like Steve might have got cut off. Can we go to the next question operator?

Steven Lichtman - Oppenheimer Securities

The last question was, just on the Vdrive timeline. Are you guys still on track in the US on Vdrive.

Mike Kaminski

Yes. We anticipate beginning an IDE trial, which will be a very quick, a very simple trial on the V-Loop and then we still are forecasting that we’ll have it released in the US this year.

Operator

(Operator Instruction). There are no additional questions. Please continue.

Mike Kaminski

Alright. Operator with no additional questions, and of course if anybody is in Boston at the HRS Congress, please stop by the booth, we’d love to share the latest in innovation, and look forward to (inaudible) in August. Thank you very much for participating. Thank you operator.

Operator

Ladies and Gentlemen that does conclude our conference for today. If you’d like to listen to a replay of today’s conference, please dial 303-590-3030 or 1800-406-7325, followed by the access code of 4536824 and the “#” sign.

Thank you for your participation, you may now disconnect.

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