Q3 2023 Stereotaxis Inc Earnings Call
Okay.
Good morning, Thank you for joining us for stereo taxes third quarter 2023 earnings conference call.
Certain statements during the conference call and you didn't answer period to follow may relate to future events expectations and as such constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Such statements involve known and unknown risks uncertainties and other factors, which may cause the actual results performance or achievements of the company in the future to be materially different from the statements that the companys executives may make today.
These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q, we.
We assume no duty to update these statements at this time all participants have been placed on a listen only mode. The floor will be opened for questions and comments following the presentation.
As a reminder, today's call is being recorded.
It is now my pleasure to turn the floor over to your host David Houdeshell, Chairman and CEO of stereo, Texas.
Thank you operator, and good morning, everyone.
We are continuing to make significant progress in our effort to deliver commercial results drive arc comprehensive innovation strategy towards commercialization and maintain financial discipline.
And the commercial front our revenue in the quarter continued to benefit from the adoption of Genesis by both Greenfield new accounts and existing upgrade customers we.
We recognized revenue on to Genesis robotic systems in the quarter.
Our system backlog.
Pipeline of engaged customers supports this pace of system revenue in the coming quarters and the potential for growth beyond it.
The net effect of revenue recognition in system orders drew down current system backlog to $13 million.
We have seen several tenders in contracts advanced nicely in recent weeks and expect to end the year with multiple additional orders.
We're seeing particular strength and capital activity.
Well, we seem to be benefiting from our enhanced commercial leadership and team in Newark, Fluoroscopy solution and greater market appreciation for the upcoming availability of our innovations, including magic not be integrations and vascular devices.
In contrast, we have seen several projects in China delayed at the Countrywide Anticorruption drive seems to broadly frozen hospital capital purchasing activity.
The contributions and growth in system revenue has allowed us to demonstrate year over year revenue growth. Despite the loss of royalty revenue, which we stopped receiving at the start of this year.
Lots of royalty revenue has remained the primary drag on our recurring revenue, but we continue to see residual pressure on procedures from the catheter shortage J&J had in the first half of this year and they're competitive behavior.
Pressure from our technological and commercial dependency reinforces the importance of bringing our innovation strategy to market.
We are actively driving our broad based comprehensive innovation strategy forward.
As a reminder, our innovation strategy includes a proprietary ablation catheter called magic.
Smaller self shielding robot that frees us from the extensive planning and construction requirements.
Family of Interventional guide wires and guide catheter that expand the benefits of our robots into new Endovascular indications.
Digital surgery hardware and software offerings, enabling broad operating room connectivity.
And a full electrophysiology product ecosystem for China being built in collaboration with Michael Port.
Hey, European clinical study of Magic is awaiting approval to enroll patients in the near term we submitted all the required clinical trial documentation to the national health authorities in hospitals at three separate sites in Europe.
We are supposed to receive responses from each of these three national authorities between mid November and mid December at which point patient enrollment should follow shortly thereafter.
We only need data from 20 patients at one site to resubmit magic for CE Mark regulatory approval. We are advancing these three sites in parallel to reduce the risk of delays at any one site and to allow for more comprehensive clinical experience and data collection that will support the commercial launch of magic.
Shifting to the U S.
On our last call, we mentioned exploring alternative regulatory paths for magic with the FDA with an intent to accelerate access for U S physicians and patients.
We determined that it would be reasonable to submit a PMA supplement submission in the U S for magic using our existing data.
We plan to make this submission prior to year end and FDA, then has 180 days to respond.
While there are no guarantees with any regulatory submission given the discussions we have had we believe there is merit to this approach, which could significantly accelerate availability of magic to the physicians and patients that would benefit from it.
Magic offers significant clinical commercial financial and strategic benefits to stereotactic.
Its adoption will benefit from our expanding integration with Abbott and mapping system.
After announcing our collaboration at the Heart Rhythm Society conference and celebrating the first joint procedures in Europe. This summer we were pleased to announce the first joint procedures last month in the U S at multiple highly prestigious hospitals.
The availability of handset integration in both Europe and the U S provides our physicians with increased choice and an improved workflow and procedure experience.
Anticipate a continued shift in diversification towards Abbott and takes system with a significant boost enjoined adoption concurrent with the magic launch.
Our second key innovation effort is the development of a smaller self shielding robot that significantly enhances the acceptability of robotics.
We discussed on the last call our balanced approach to the timing of our regulatory submission such that approval of our of the robot aligns approximately with market availability of either magic or magnetic guide wires.
We currently plan to make the submission in the first quarter at around the same time as when we will submit the magic CE Mark application.
It should lead to the robot, having regulatory clearance prior to a compatible interventional catheter or wire being available and we are using this time prior to submission to continuously refine the system and to required regulatory testing.
Our experienced selling Genesis gives us daily visibility into the timeline shifts and hospital construction delays that slow adoption even at sites that are most motivated to build a robotic program. This experience reinforces our confidence that the availability of a much more accessible robot something that can be installed without <unk>.
<unk> will serve as a significant structural improvement to the pace and scale of adoption.
Our third key innovation effort is expanding the clinical use of our robotic platform beyond electrophysiology to a range of challenging endovascular procedures, including the treatment of stroke heart disease peripheral vascular disease and cancer.
We have been working hard to develop the right intervention devices magnetic guide wires and guide catheters that would allow for that broad indication expansion.
That development process has not been easy as our contract manufacturer faced various challenges in transitioning from building good prototypes to being able to actually build devices with a quality consistency and scale that would be next the theory for regulatory approval and commercialization.
We seem to have overcome the last challenge in that manufacturing process and expect to spend the next few months building to over 1000 guide wires needed for formal regulatory testing. We now expect a five 10-K submission during the second quarter of 2024.
The combination of a highly accessible robot with a family of proprietary intervention devices for cardiac ablation and a broader range of procedures serves as a foundational product ecosystem to pioneer robotics across endovascular surgery.
<unk>. It all together is a significant effort, we're making broad methodical progress across the late stages of this comprehensive innovation strategy, we see the light at the end of the tunnel and are excited by the impact of innervation strategy will have.
Kim will now provide commentary on our financial results and then I'll make a few financial comments as well before opening the call to Q&A Kim.
Thank you David and good morning, everyone.
Revenue for the third quarter at 2023 totaled $7 8 million up 2% from $7 7 million in the prior year third quarter.
Growth in Genesis robotic system revenue offset discontinued royalties from Johnson and Johnson.
System revenue of $3 5 million reflects revenue recognition on the delivery of two Genesis system.
Recurring revenue for the quarter of $4 3 million, which predominantly impacted by the absence of the J&J royalty and residual pressure on procedures.
Gross margin for the third quarter of 2023 was 52% of revenue with recurring revenue gross margin at 80% and system gross margin of 18%.
Recurring revenue gross margin remains consistent with recent quarters and system gross margins continue to reflect significant allocation of overhead expenses overload manufacturing volumes.
Operating expenses in the quarter at $9 7 million include $2 6 million and noncash stock compensation expense, excluding stock compensation expense adjusted operating expenses were $7 1 million.
Compared to the prior years adjusted operating expenses of $6 9 million.
Operating loss and net loss in the third quarter were $5 6 million and $5 4 million compared to $5 1 million and $4 9 million in the previous year adjusted operating loss and net loss for the third quarter, excluding noncash stock compensation expense were 3 million.
And $2 8 million.
Negative free cash flow for the third quarter.
It was $1 million.
Okay.
The reduced use of cash flow benefited from continued attention to targeted expense reductions and the buildup in inventory from previous quarters.
At the end of the third quarter, we had cash and cash equivalents of $23 million and no debt. We expect to end the year with $22 million in cash and no debt I will now hand, the call back to David.
Thank you Kim.
We remain cognizant of the importance of maintaining financial strength, particularly in the current macro environment. We.
We are pleased with our ability to deliver commercial results and advance our robust innovation strategy, while maintaining financial discipline we.
We are confident in our ability to advance our innovation strategy to market fund its commercialization and reach profitability without the need for additional financing.
Before opening the call to questions I wanted to take a moment on a personal note to recognize the tragic terrorist default in Israel last month.
We have several investors partners and stakeholders impacted by the tragedy and ongoing war.
Sure in their grief with them in their loved one safety in the coming weeks pray for the quick return of the kidnapped hostages and create for the safety and success of those battling barbarism, an evo that threatens our shared humanity.
We will now take your questions. Operator can you. Please open the lines for Q&A.
At this time I would like to remind everyone. If you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of Neil Chatterji with B Riley Your line is open.
Hey, guys. Good morning, Thanks for taking our questions.
Maintenance is done.
On Europe, you mentioned kind of the new leadership there. So just curious what what maybe they are doing differently there to maybe drive increased activity or interest there.
Hi, Neil good morning.
So that's been very nice.
The pace of activity in Europe.
In the prepared remarks, I mentioned that we have several tenders or processes that have been moving forward fairly in a fairly late stages now there and and I think it is a mixed Thursday, theres, obviously product ecosystem aspects that are at play.
Near term approval of magic in anticipation of that.
Among the physician base.
Also kind of we have a new X ray solution. That's available in Europe. That's helpful. But I think that Franco who we brought onto the team a year ago. He has now gotten fully in stride and the business there and there is a type of discipline and process that is beneficial to <unk>.
Things and so it has been beautiful watching him and the team broadly work there and we're seeing it across the region from different countries.
The outlook from the west to the east South to the North So it's really kind of been there across Europe, there seems to be much more activity going on now than in historical years.
Great and then maybe just one follow up.
I mean, just more broadly for the sales funnel.
What are you may be seeing in terms of the the greenfield side versus replacement.
I think that still we have the replacement side is is a natural easier.
<unk>, given we have those relationships and then.
And kind of.
And that just makes it a much more natural easy process on the Greenfield side I think we still have a lot of work to do as a company to build that top of funnel and two to create visibility on our technology in the marketplace, we still remain largely unknown or or only based on our.
Reputation from 10, plus years ago in the marketplace and Thats something that we have to work to address.
<unk> is still a small small player in this field.
Thats something that will take time and I think as we build up our commercial team with the launch of the new products that will help significantly.
We still see greenfield interest from multiple sites.
Globally, obviously in China, the vast majority of the interest is.
As Greenfield given that we have a very small existing installed base there.
I would say that that actually is going very nice in terms of the pipeline being built up we just see that even things that are late stage seem to be frozen on ice until until there are changes in the macro situation there the political situation there.
And in Europe.
It is fairly mixed between Greenfield and.
And replacement cycle I'd say the U S is probably still slightly more replacement cycle than greenfield.
Great I appreciate the color.
Back in queue.
Thanks Bill.
Your next question comes from the line of Adam <unk> with Piper Sandler Your line is open.
Hey, guys. Good morning, Thank you for taking the questions.
Wanted to start with one on the forward expectations and some of the language.
I didn't see reiterate in expectation of double digit revenue growth in 2023, but.
Did you comment of continued revenue growth in coming quarters.
Can you square the two for us and perhaps there is no change in.
Maybe I'm reading too much into it but just wanted to ask for clarification there. Thanks.
Thanks.
Yeah, Hi, Adam Good morning, So given where we stand and.
I think that we are we are confident in growth in the coming quarters and including the fourth quarter, obviously and we are not certain that we will reach annualized.
<unk> digit revenue growth based on our results in the fourth quarter and so I think that it would be better to model year over year revenue growth in each of the coming quarters, rather than the fourth quarter being a blowout quarter obviously.
Can be impacted by one revenue recognition.
More or less and so I just think it's better to focus on revenue growth in the fourth quarter rather than year over year.
Double digit revenue growth for the entire year.
I got it okay.
That's helpful color, David and maybe just to push a little bit more I mean.
It sounds like it's maybe a function of just timing of capital is that fair or is there something on the disposable side that we should be thinking about for <unk> as well.
I wouldn't expect continued pressure on the disposable side I think on the third quarter. We do have continued pressure as described.
In the call from from the competitive situation with Johnson <unk> Johnson in the catheter shortages that existed, but but I don't think that you should I think you should view that as a nadir.
On the recurring revenue side, so I wouldnt expect additional pressure there in the third quarter is also naturally light just given the summer holidays, and some of the geographies and but on the capital side I think that that pace of two systems corridor is a pace that kind of is the right one to model I think theirs.
Transit, sometimes for upside, but I wouldnt model that.
Okay very helpful. Thank you for that and.
I guess I wanted to flip over to the update on Magic and U S regulatory strategy.
And I was just hoping to get some more color on the decision to.
To use the PMA supplement route and just ask about the level of confidence in a successful outcome.
I think previously you are planning on running an <unk> study so.
How did you get comfortable that this is the right strategy and that a trial is no longer needed.
What can you share from your discussions with FDA that that kind of led to this change.
<unk> strategy. Thanks.
Sure.
Probably not appropriate at this stage to share much more than what we did in the prepared remarks.
Or to speculate there in March.
We had mentioned previously being in dialogue with FDA on potential paths for magic.
Given those discussions and we had.
Advisers, as well consultants as well as physician as.
Physician users as well in some of those discussions we felt it would be reasonable to submit a PMA supplement using our existing data. There is obviously no guarantee with any regulatory submission, but we believe there is.
With merit to our approach.
And with a filing before year end, we will get feedback or a decision from FDA by the middle of next year, which is a relatively quick turnaround process.
In the interim we will obviously be collecting human data from our trial in Europe.
Which will enroll beyond just the number of patients needed for CE Mark submission.
So having the three sites in Europe allows for enrolment beyond what is needed for the CE Mark submission and so overall, we think that this strategy is one that may significantly accelerate access to the technology for for U S physicians and patients and we think it is one that makes a lot of sense to do so.
I think kind of that so thats, all thats, probably right to say at this stage.
Yes understood. That's helpful color. Thank you David.
Thanks, Adam.
Your next question comes from the line of Josh Jennings with TV Cowen Your line is open.
Hi, good morning, Thanks for taking the questions I wanted to just follow up on Adam's question.
Are you taking parallel paths looking.
Looking at.
Mission with our data set and then also planning on a clinical trial in case that pathway.
Not appropriate deemed by the FDA to be not appropriate.
Hi, Josh good morning, and I think that the data that we collect in Europe has.
An opportunity to be very helpful and so there is awareness.
Depending on how the review of the PMA supplement goes there are ways to enhance the PMA supplement and still keep it as a PMA supplement with enhanced data and so I think that that is there but that is definitely something that we have had in mind and I think that it is something that would be a reasonable and accepted and at the end of the day at <unk>.
On obviously on the on the submission overall and the strength of that submission, but the PMA supplement approach is one that carries a significant advantages.
And again, which has merit based on all of our <unk>.
Our discussions and understanding.
Understood I wanted to ask just about the.
The replacement cycle and.
Any any sense you can help us out just what percentage of the installed base.
It's approaching 10 years or 10 years, plus and as this segment sizable and it does represent the low hanging fruit within the replacement channel and is that where your sales force is focused on an attack mode. Thanks a lot.
So by now the majority I would say a significant majority of our installed base has X rays and systems that are 10 years old or more and I think that there is still this extension of the life life of EP lab, where we have now seen multiple labs that are.
Our 14 15, Inc. Even now we have lab that is 16 years old and they have not yet gone through with the replacement of their labs and so they say breaks from all historical precedence.
What we hear from X ray manufacturers and and other equipment, but it definitely seems like that is the case, what we see if you look at companies like intuitive surgical they seem to be able to drive a replacement cycle.
<unk> much quicker based on continuous innovation in new robotic technology.
Given that our robots are tied at our construction process still at this stage and very much tied to the X Ray that is in the lab, it's very hard for us to drive a replacement cycle.
Different from the replacement cycle of an X ray.
It's just that that it would require still a shutdown of the lab.
Architectural planning contractors construction and so if you do that you you're very much should be exchanging tax rate at the same time.
And so that's where and there have been a couple.
Cases were aware of the robot hits, driven the cycle, but for the lowest part of it's been driven by the X Ray timing in the hospitals plan to replace tax rate I think as you see.
Evolve to the next generation robot and to future generations potentially obviously after that.
I think that we kind of free ourselves from that timeline and given the pace of innovation that we've been doing on the robot side, whereas you see almost every 345 years, we are able to come out with a new robot I think that we will be able to drive replacement cycles at a much much quicker place that then 10 year to 15 year at <unk>.
It seems to exist right now, but and but right now we do have a majority of our sites are over 10 years now and age.
And so are very much are ripe for replacement, but we have still seen that happening more in trickles in a gradual process rather than a full bolus.
Understood. Thanks, a lot.
Alex <unk> your line is open.
Alright, great. Good morning, everyone. So how quickly can you collect the data in Europe on the three to three sites and what are the number of patients per site is at 20 per site.
Hi, Alex Good morning, Ed. So we the trial is structured such that we can.
Capture the acute clinical data from 20 patients as soon as that is available and that will then be submitted.
For that's part of the CE, Mark and Resubmission.
We are able to enroll up to 30 patients.
At each site and we are able to go actually up until even pen.
If we would like that we've really focused on these three primary ones upfront and the trial can also be converted into a post approval and follow up that trial. So we will probably use the same protocol to enroll patients. After we have CE Mark approved.
At additional sites, but we're really focused on these three sites.
Our very experienced in and we're able to move in a relatively fast fashion through the ethics Committee approvals and work with us on the national submissions and so I'd say that would kind of see that we will we will obviously work most expediently to enroll 20 patients and then.
That will probably go up till 30 patients at each of these three sites.
Okay that makes sense, but reading through all the commentary probably it sounds like youll have that data in hand first quarter.
Or does it get feedback from the FDA.
Yes.
Okay, Alright, Thats perfect and then on the Gen three system mobile robot.
Maybe update us on the internal work I know Theres always kind of constant improvement you can do before you submit to the FDA kind of lock the assistant.
Just some of the internal work you've been doing there and then just remind us when could we see a launch and is a large kind of predicated a little bit of magic approval as well.
Thank you.
Yeah sure so.
When you look at our robotic system. These are complex complex systems with <unk>.
The requirement of macro hardware and micro hardware electronics.
Electronics.
Firmware on.
The board's control software UI software, all working very very well together and it's that complexity, which leads to most companies not being able to really develop surgical robots and as you've seen obviously in the field. There's companies that have spent billions and billions of dollars and are still not developed.
Surgical robot. So it is a it is a tough technical hurdle to build robotic surgical system that actually can work well reliably robustly.
In the real World environment.
We've obviously demonstrated now that capability with for many years and.
We've gone through as we go through kind of when I talked about we use the word refinement there is various ways to refine.
The electronics of the system.
The tolerance of the mechanical aspects of the system.
The control software, where you have a system that can work very well, but as you go through more and more refining you find and address potential edge cases, where you would otherwise has more failures in the field and you would have to work hard.
During the manufacturing and during the installation enduring that continued maintenance phases to keep the system running well.
We have I believe very.
Top tier at gross margins on our service contracts as you see from our financial statements and then and we want to maintain those and it's through those kind of refinement and continue to make our products better and better that you can have that type of good performance of the product in the field, which is obviously beneficial for our customers and beneficial for us.
And so I think thats the way to kind of to think about what refinement really means and we continue to do that also post commercialization. So as the Genesis system has gone through multiple refinements.
Over the last few years, and then and so that's kind of a healthy thing to do from a commercial launch perspective.
With a submission in the first quarter, we would expect to have CE Mark.
Very rapidly post.
Our submission in.
And we would expect to have.
The FDA five 10-K approval, probably a reasonable timeline is within about six months given that and given the experience that we had with Genesis and given our kind of comfort with overall that process.
And it's a five 10-K submission and so I think kind of that's our overall.
The expectation for regulatory approvals and you are correct that we need either the magic catheter.
<unk>, our guide wire or guide catheter for vascular procedures that can be approved so.
Intervention devices that we are developing are all backwards compatible with Genesis systems and <unk> systems.
But.
The new robot that is that does not require construction does depend on having these new intervention devices on the market and that has led to some of the decision making on and.
On when to advance that robot towards approval towards a submission.
Alright excellent very helpful. Thank you so much.
Thank you.
Your next question comes from the line of Frank Kennon with Lake Street Capital markets. Your line is open.
Great. Thanks for taking the question I was hoping you could talk a little bit to some of the.
Events that would occur following clearance or approval of.
The catheter, namely manufacturing capability I believe that's on your partner there but.
Are they prepared when that occurs to scale up manufacturing if I'm right in remembering that and then secondly, how should we think about any commercial organization.
<unk> after that event.
Sure Hi, Frank Good morning, So so you're right.
<unk>, which is a German company.
And as our contract manufacturer and partnering in magic catheter and.
They are the ones that are ramping up the manufacturing capability for for magic, they've obviously been able to in the past manufacture hundreds upon hundreds of catheters.
Where necessary for the regulatory testing and.
And we are working with them to make sure that they are in a good place for us.
Manufacturing for.
The commercialization, we wanted to have several hundred catheters available inventory.
Inventory upon regulatory approval and so we're working with them to make sure that as possible and then and then net.
I think every manufacturing scale up is is is obviously.
And afterwards and requires attention and as difficult as these are complex.
Devices class III devices with significant regulatory burden as well.
But.
His professional organization they have many many years of experience manufacturing thousands upon thousands of them.
Of similar catheters, and so I think we are a good partner there that has that experience.
And has the resources and infrastructure to be able to scale.
As appropriate.
From a from a commercial Keane perspective, I think I've mentioned in the past that.
We we currently operate our commercial teams operate.
In some ways a hand behind their back and we typically have one.
Clinical support person one salesperson.
For every three or four hospital customers and many of our competitors in the E&P space have one sales rep per hospital, if not even more.
And so that is something that is.
Actually we are at a weakness too and going to that type of model with our current revenue structure would be not financially sustainable in the long term and so we could increase revenue, but it would come at the detriment of at the bottom line and so as we bring the magic catheter to market and we shipped.
Making on average roughly $1000 per procedure to making at several thousand $345000 per procedure that does allow us to change our our coverage in the field and to enhance and increase our sales team fairly significantly. So I think we've mentioned in the past and Thats still is.
The plan that is magic comes to market, we will move much more towards the model of one person per hospital account and that can be done in a very financially sustainable fashion and so it obviously carries benefits both to the top line and the bottom line to do that.
Okay. That's helpful. And then maybe for my second one I think we touched on a lot of these individual points, but hoping you could cover it in detail start to finish but looking to get an update on the capital markets are capital equipment sales market clearly, it's tougher in higher interest rate environment, but what are you hearing out there right now.
For the orders that are in the funnel, hoping to convert soon and is there any.
Inclination for them to wait for the mobile robot or is that really not quite on their radar yet.
I think that we've done a relatively good job in.
Bifurcate in hospital awareness at between Genesis system and in the mobile robot. So there are a few cases, where that has come into play or where we've discussed it proactively with a hospital, where it makes sense, but generally I think we.
We've done a reasonably good job in that bifurcated that awareness and channeling the people who are appropriate to channel to the Genesis system.
And I think we are it is still a headwind macro environment. Overall, so we have been operating now for a few years in this macro headwind environment.
I think we're still.
We still have a huge amount of opportunity ahead of us, whereas still have very small market share.
And so we're able to find opportunities and I'd say that.
We are advancing multiple of them and kind of through late stages of contract negotiation. So overall that feels feels good that we're able to make progress despite that headwind environment.
Okay. That's helpful I'll stop there thanks.
Thank you Frank.
There are no further questions at this time I'd like to turn the call back to David Fisher for closing remarks.
Okay. Thank you all for your questions and we appreciate your continued support and wish everyone a healthy and peaceful end to the year, we will work hard to end the year on a strong note and look forward to talking again soon thank you.
This concludes today's conference call. Thank you for joining you may now disconnect.
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