FY 2014 Q3 Earnings Release Conference Call Transcript

FY 2014 Q3 Earnings Release Conference Call Transcript

This transcript is provided by Stereotaxis, Inc. only for reference purposes. Information presented was current only as of the date of the

conference call, and may have subsequently changed materially. Stereotaxis, Inc. does not update or delete outdated information contained in this transcript, and disclaims any obligation to do so.

William C. Mills, Stereotaxis

Chief Executive Officer: Good day and thank you for joining us for a review of our third quarter 2014 performance. With me on the call today is Marty Stammer, our CFO. Following our prepared remarks, we will open up the call to questions.

Overall, we are pleased with our progress in the third quarter. By quarter end, we had accomplished several important milestones in major global markets and

expanded our installed base with the completion of five new Niobe ES system deployments. These installs contributed to an 89% sequential improvement in system revenue and already have demonstrated a strong commitment to active utilization.

Procedures grew year over year and our newest product enhancement, Ablation History, continued to improve operator performance. We also further narrowed the gap to breakeven through steadfast expense management, which resulted in our lowest reported

operating expenses $7.7 million since our IPO in 2004.

Our team is fully committed to strengthening the fundamental drivers of our business

brand expansion in key global markets, clinical adoption and significant product innovations while exercising fiscal discipline.

With respect to global

markets, our development efforts in Japan are off to a solid start. In September, we secured our first order for the Niobe ES system from a leading hospital in Osaka, which will be fully reflected in revenue results following shipment and

installation, and is expected to be complete in the first quarter of 2015. The hospital plans to situate the Niobe lab in a newly constructed, state-of-the-art facility, describing the project as a commitment to safer, better quality services

through the latest innovations.

At the same time, we established a business office in central Tokyo under the leadership of a new Japan Business

Director. Bringing 20 years of experience in sales, marketing and organizational management for Japan-based operations of global medical technology companies, the Business Director will guide our near-term priorities alongside our in-country

distributors while developing long-term market goals to drive growth.

Consistent with these priorities, we are focused on closing additional sales

opportunities in Japan, expanding our sales funnel, establishing Niobe reference sites to build clinical evidence and improving hospital reimbursement related to the Stereotaxis platform, part of which includes working toward additional product

approval. In the third quarter, we submitted the application for our Odyssey solution in the Niobe lab to the Pharmaceuticals and Medical Devices Agency, Japan s equivalent to the U.S. Food and Drug Administration. We also are preparing for

regulatory submission of our Vdrive system.

When we look at the worldwide electrophysiology (EP) market, we see North America, Europe, China and Japan

performing 90% of all EP procedures. Establishing a foothold in Japan has been a critical step in our global expansion into these larger market geographies, and we believe there is tremendous opportunity in Japan for the unique capabilities of our

robotic navigation platform.

In the U.S., we received FDA clearance of our Vdrive system with V-Loop variable loop catheter manipulator, the second

Vdrive product to enter the U.S. market. We anticipate action soon on our V-CAS catheter advancement system, which was submitted for review in June. With the launch of V-Loop in addition to V-Sono, U.S. physicians can now realize the potential of

the Vdrive duo robotic navigation system, which can eliminate manual manipulation of the two most commonly repositioned diagnostic tools used during ablation procedures: variable loop and ICE catheters.

Also during the quarter, we installed two new Niobe ES system sites in the U.S., both serving the greater Denver area and representing our first programs in

the state of Colorado. These systems have the opportunity to set a new standard for complex ablations among a population of approximately 3 million residents.

Our remaining three installs in the third quarter were completed in our EMEA region and include the largest EP site in Russia. Located in the third most

populous city in Russia, the hospital has the highest EP ablation throughput in Russia about 1,700 each year and is active in clinical research and associated international publications. Since launch in September, the Niobe ES lab has

averaged 2.5 procedures per day and been featured on major television networks eager to illuminate the story of the new, unique treatment option now available in Russia.

This site is a great example of what we hope to achieve with each launch of a Niobe system a program that not only hits the ground running but

maintains a steady pace of utilization. We are well aware of the importance of an effective launch process and have implemented new training techniques and clinical resources to ensure a strong start at each new account. Likewise, we have become

more adept at targeting the most significant accounts and triaging adoption issues by understanding exactly where the physician is in the learning pathway, how the platform does and does not resonate with him or her and addressing any specific

concerns. We also continue to leverage the experiences of proficient users in communicating and demonstrating the benefits of our system in particular patient cases. Our worldwide procedure volume, while down 6% on a sequential basis primarily due

to the annual summer holidays in Europe, increased 2% year over year from the same quarter last year.

Just as we are focusing our energies on top global

markets and select accounts in each, we are committed to aligning our resources with technology advancements that we believe will deliver long-term value to our customers and, ultimately, our shareholders. One such innovation, Ablation History,

continues to demonstrate a positive impact on procedure efficiency, as well as some unexpected positive results.

Utilized in more than 1,300 procedures to date, physicians have seen a significant improvement in their ability

to track therapy delivered during EP procedures with Ablation History. Rather than relying on a discrete point-by-point graphic representation of lesion-related data as is the case with existing approaches, Ablation History takes advantage of data

visualization techniques to render an intuitively-accessible, continuous display of the power-time parameters used in characterizing ablation intensity. While the intent is to assist physicians in identifying gaps in lesion lines, many physicians

are claiming that they are achieving first-pass isolation of the pulmonary veins more easily and reliably with Ablation History. In other words, rather than merely highlighting potential gaps, it is helping prevent gaps.

In the words of one physician, By relying on the continuous and consistent contact that Niobe creates, Ablation History provides me the information I

need to maximize the efficiency of ablation. This past week, we released an enhanced version of Ablation History that allows physicians to more precisely control the display of Watt-seconds delivered. The next step is a clinical study on the

Watt-seconds required to most effectively treat different locations of the heart anatomy.

With that, I would like to turn the call over to Marty to

provide details of our third quarter 2014 financial results.

Martin C. Stammer, Stereotaxis Chief Financial Officer: Thanks, Bill, and good

afternoon, everyone.

Revenue in the third quarter was $8.9 million, down 18% from $10.8 million in the year ago third quarter but up 10% sequentially

from $8 million in the second quarter of 2014. System revenue of $2.2 million compared to $4.4 million in the third quarter of 2013 and $1.2 million in the second quarter of this year. During the third quarter, we recognized revenue of $900,000 on

five Niobe ES system installations and one Niobe ES system upgrade, $1.1 million in Odyssey solution sales and $200,000 in Vdrive system sales.

capital orders totaled $1.5 million compared to $600,000 in the second quarter and $1.8 million in the year ago third quarter. Orders included one Niobe ES system, an ES system upgrade and two Odyssey solutions. At quarter end, our active backlog

Recurring revenue was $6.7 million in the quarter compared to $6.4 million in the 2013 third quarter and $6.9 million in the 2014

second quarter. We believe our new, higher levels of recurring revenue are sustainable with continued progress in driving utilization and maintaining strong service revenue.

In the third quarter 2014, gross margin was $6.5 million, or 73.6% of revenue, compared to $7.3 million, or 67.7% of revenue, in the year ago quarter.

Operating expenses in the third quarter were $7.7 million compared to $8.4 million in the year ago period, an 8% improvement and our lowest reported operating

expenses in 10 years. As Bill indicated, we are mindful of the strategic importance of every economic decision, which has created a culture of expense discipline and focused execution with the goal of continuing to narrow operating losses and

generate the best return for our shareholders.

Operating loss in the third quarter was $(1.2) million compared to $(1.1) million in the third quarter of 2013.

Interest expense was $800,000 compared to $7.6 million in the 2013 third quarter, which was primarily related to a one-time, non-cash expense on capital transactions in August 2013.

Net income for the third quarter of 2014 was $23,000, or less than 1 cent per share, compared to a net loss of $(56.9) million, or $(4.49) per share, reported

for the third quarter of 2013. The 2013 third quarter included a non-cash, mark-to-market adjustment and accelerated amortization of convertible debt discount as a result of transactions with convertible note holders and other equity investors.

Excluding this charge, the net loss for the 2013 third quarter would have been $(3.3) million, or $(0.26) per share. Excluding mark-to-market warrant revaluation, the net loss for the 2014 third quarter would have been $(2.0) million, or $(0.10) per

share. The weighted average diluted shares outstanding for the third quarters of 2014 and 2013 totaled 20.5 million and 12.7 million, respectively.

On September 30, 2014, we had cash and cash equivalents of $8.7 million, compared to $10.6 million on June 30, 2014. In the third quarter, cash burn

was $2.3 million compared to $1.6 million in the prior year quarter. During the quarter, we raised $500K through our previously announced ATM facility. At quarter end, total debt was $18.4 million, related to Healthcare Royalty Partners long-term

I will now hand the call back to Bill.

Mr. Mills: Thanks, Marty.

As we move toward the

end of 2014, we are pleased with the progress of our activities in Japan and with our opportunity to bring the Vdrive system to the U.S. Our global network is expanding, along with the clinical evidence accumulating around our path-breaking

solutions for the EP market. We are using every tool at our disposal to more fully engage physicians on the superior performance of our platform. We will continue to enhance the efficacy, efficiency and usability of our technology, while working to

achieve profitability and position the company for future growth.

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

QUESTION AND ANSWER SECTION

Operator: Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone key pad. If you re using a speakerphone,

please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that s *1 and we do have our first question from Saroj Kalia with Northland Securities.

Suraj Kalia with Northland Securities: Gentlemen, good afternoon. Congrats on the quarter.

Mr. Mills: Thank you, Suraj. Good afternoon.

Mr. Kalia: So, Bill, I have a few directional questions, if I may. Now that you all have a business

director in Japan and agreements with Hokushin and Medix, I know last quarter you had talked about, if I remember correctly, Japan being almost 40% of the U.S. procedure volume. What is the initial feedback you are getting? And I m not

specifically asking for guidance I guess when we look at the next four to six quarters, what are your people on the ground, distributors and direct, telling you is achievable ?

Mr. Mills: Suraj, it s a good question, but one that I m afraid we don t yet have enough information to answer. You know, our

installation won t occur for a short while. That would be it suffices to say at this point in time the unit is not installed and not operating, so we don t yet have cases being performed and as a consequence, can make no estimation as

to the velocity of the case volume that we re likely to see, and we really aren t in a position to ask for their opinions.

though, is to try to address this market by establishing we re looking at two exceptionally well-situated facilities that can serve as reference sites or centers of excellence to establish the paradigm in Japan as to how an enlightened

user approaches the prospect of using Niobe in their complex cases, and we re focusing our energies on those two accounts. We ve announced one of them, obviously. We ll hopefully be sharing with you further progress as we go forward

and situating those two accounts, but our approach here is to make certain that centers of excellent quality, whose opinions will be respected and taken on board by other potential users in the community in Japan, will be well-situated and

well-supported to have favorable case experience as they begin their operations and move forward into a sense of equilibrium.

When we get into that part

of the experience curve with those folks, I think we and they both will be able to make better estimates, or really any informed estimates, at that point of what sort of a trajectory we might expect to see from those facilities. But we do know, as

you pointed out, that although Japan is a substantial fraction represents a substantial fraction of the activity that the U.S. represents in terms of case volume, a site is a site and there are natural limits to utilization in a site

because you can only use it for the time that it is physically available to you. So, with luck, what we ll find is that we can approach the kind of utilization rates that I mentioned. We were very pleased to see in our recent start-up in Russia

where we, as I think I said, more colloquially, hit the ground running and sustained these early high utilization rates which really approach the ceiling of throughput in a facility doing procedures of that sort, so we re hoping to provide the

same level of support in Japan and as a consequence, have the same very favorable experience when they do, in fact, start performing cases, which won t be too long from now.

Mr. Kalia: Fair enough. Bill, I know it has just been a few weeks since you received the V-drive and V-Loop clearance. Any color you can shed from

the field, in terms of utilization, in terms of clinical feedback? How it s being perceived in the field?