Q3 2023 Stereotaxis Inc Earnings Call
Participants
David Fischel; CEO & Chairman of the Board; Stereotaxis, Inc.
Kimberly Peery; CFO; Stereotaxis, Inc.
Neil Chatterji; Analyst; B. Riley Securities, Inc.
Adam Maeder; Analyst; Piper Sandler & Co.
Joshua Jennings; Analyst; TD Cowen
Alexander Nowak; Analyst; Craig-Hallum Capital Group LLC
Frank Takkinen; Analyst; Lake Street Capital Markets, LLC
Presentation
Operator
Good morning. Thank you for joining us for Stereotaxis third quarter 2023 earnings conference call. Certain statements during the conference call and question-and-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 company 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 assume no duty to update these statements. (Operator Instructions) As a reminder, today's call is being recorded. It is now my pleasure to turn the floor over to your host, David Fischel, Chairman and CEO of Stereotaxis.
David Fischel
Thank you, operator, and good morning, everyone. We are continuing to make significant progress in our efforts to deliver commercial results, drive our comprehensive innovation strategy towards commercialization and maintain financial discipline.
On 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 recognized revenue on two Genesis robotic systems in the quarter. Our system backlog and a 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 and system orders through down current system backlog to $13 million. We have seen several tenders and contracts advanced nicely in recent weeks and expect to end the year with multiple additional orders. We're seeing particular strength in capital activity out of Europe, where we seem to be benefiting from our enhanced commercial leadership and team in newer fluoroscopy solution and greater market appreciation for the upcoming availability of our innovations, including MAGiC mapping, integrations and vascular devices.
In contrast, we have seen several projects in China delayed as a countrywide anti-corruption drive seems to have 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.
The loss of royalty revenue has remained the primary drag on our recurring revenue. So, we continue to see residual pressure on procedures from the catheter shortage JMJ, had in the first half of this year and their competitive behavior. This pressure firm, 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 our proprietary ablation catheter called MAGiC, a smaller self-shielding robot that frees us from the extensive planning and construction requirements, a family of interventional guidewires and guide catheters that expand the benefits of our robots into new endovascular indications, a digital surgery, hardware and software offering, enabling broad operating room connectivity and a full electrophysiology product ecosystem for China being built in collaboration with MicroPort.
A 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 and 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.
While 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, it 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 US physicians and patients. We determined that it would be reasonable to submit a PMA supplement submission in the US 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 Stereotaxis.
Its adoption will benefit from our expanding integration with Abbott and site 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 US at multiple highly prestigious hospitals.
The availability of EnSite integration in both Europe and the US provides our physicians with increased choice and improved workflow and procedure experience. We anticipate a continued shift in diversification towards Abbott EnSite system with a significant boost in joint adoption concurrent with the MAGiC launch.
Our second key innovation effort is the development of a smaller cell fielding robot that significantly enhances the accessibility of robotics. We discussed on the last call, our balanced approach to the timing of a regulatory submission such that approval of us of the robot aligns approximately with market availability of either MAGiC or Magnetic Guidewires.
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 do required regulatory testing.
Our experience 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 the availability of a much more accessible robust, something that can be installed without construction 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 interventional devices, Magnetic Guidewires 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 necessary 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 the over 1,000 guidewires needed for formal regulatory testing.
We now expect to a 5, 10-K submission during the second quarter of 2024. The combination of a highly accessible robot with a family of proprietary interventional devices for cardiac ablation and a broader range of procedures serves as a foundational product ecosystem to pioneer robotics across endovascular surgery.
Bringing it all together is a significant effort. We are 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 this innovation 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?
Kimberly Peery
Thank you, David, and good morning, everyone. Revenue for the third quarter of 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 & Johnson, system revenue of $3.5 million reflects revenue recognition on the delivery of two Genesis systems.
Recurring revenue for the quarter of $4.3 million, which predominantly impacted by the absence of the J & J Royal [food] and residual pressure on procedures. Gross margin for the third quarter of 2023, was 52% of revenue, with recurring revenue gross margin of 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 over low manufacturing volume.
Operating expenses in the quarter of $9.7 million include $2.6 million in non-cash stock compensation expense. Excluding stock compensation expense, adjusted operating expenses were $7.1 million, compared to the prior year's 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. The reduced use of cash flow benefited from continued attention to targeted expense reduction 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.
David Fischel
Thank you, Kim. We remain cognizant of the importance of maintaining financial strength, particularly in the current macro environment, we are pleased with our ability to deliver commercial results and advance our robust innovation strategy while maintaining financial discipline. We are confident in our ability to advance our innovation strategy to market funded 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 assault in Israel last month, we have several investors, partners and stakeholders impacted by the tragedy and ongoing work.
We share in their agreed with them and their loved ones, safety in the coming weeks, pray for the quick return of the kidnap hostages and pray for the safety and success of those battling of Barbara's and Evo that threatens our shared humanity. Will now take your questions. Operator, can you please open the line to Q&A?
Question and Answer Session
Operator
(Operator Instructions)
Neil Chatterji, B. Riley.
Neil Chatterji
Yes, good morning, and thanks for taking our questions. Maybe just on Europe, you mentioned kind of the new leadership there. Just curious, what maybe they're doing differently there to maybe drive increased activity or interest there?
David Fischel
Hi, Niel. Good morning, yeah, it's been very nice seeing 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 fairly late stages. Now there and I think it is a mix.
There's obviously product ecosystem aspects that are at play as a near term approval of MAGiC and kind of the anticipation of that among the physician base and also kind of we have a new x-ray solution that's available in Europe.
That's helpful. But I think said, Frank, who we are brought onto the team a year ago, he's now getting fully in stride in the business there. And then there is a type of just discipline and a process that is beneficial to 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. And so, it's really kind of been across Europe. There seems to be much more activity and going on now than in historical years.
Neil Chatterji
Great. And then maybe just one follow-up. I mean, just more broadly for the sales funnel, what do you maybe seeing in terms of the greenfield side versus replacement?
David Fischel
I think that still we have the replacement side is a natural easier, contributor, given we have those relationships and then and kind of that just makes it kind of 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 the top of funnel and to create visibility on our technology in the marketplace.
We still remain largely unknown or known only based on our reputation from 10 plus years ago in the marketplace. And that's something that we have to work to address. And as still a small player in this field, that's 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.
And we still see greenfield interest from multiple sites globally. Obviously, in China, the vast majority of the interest is greenfield, given that we have a very small existing installed base there. And I'd say 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 there's changes in the macro situation there, the political situation there. And in Europe, it is fairly mixed between greenfield and replacement cycles. I'd say the US is probably still slightly more replacement cycle than greenfield.
Neil Chatterji
Great. I appreciate the color.
I'll back in queue.
David Fischel
Thanks, Niel
Operator
Adam Maeder, Piper Sandler.
Adam Maeder
Hi, 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 you reiterate an expectation of double-digit revenue growth in 2023, but did see a comment of continued revenue growth in coming quarters. Can you square the two for us and perhaps there's no change in maybe I'm reading too much into it, but just wanted to ask for clarification there? Thanks.
David Fischel
Yeah, Hi, Adam. Good morning. So, given where we stand and I think that 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 double 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 blow-out quarter, obviously it can be impacted by one revenue recognition, more or less. And so, I just think it's better to focus on revenue growth in fourth quarter rather than year over year double digit revenue growth for the entire year.
Adam Maeder
I got it. Okay. Just, 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 4Q as well?
David Fischel
I wouldn't expect continued pressure on the disposable side. I think on the third quarter, we do have continued pressure as described and stay in the call from the competitive situation with Johnson & Johnson and the catheter shortages that existed by them. But I don't I think you should view that as a [nadir] on the recurring revenue side.
So, I wouldn't expect additional pressure there. 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 pace of two systems (inaudible) is a pace that kind of is the right one to model. I think there's chances sometimes for upside, but I wouldn't model that.
Adam Maeder
Okay. Very helpful. Thank you for that. And I guess I wanted to flip over to the update on MAGiC and US, kind of regulatory strategy. And I was just hoping to get some more color on the decision to use the PMA supplement route and just ask about the level of confidence in the successful outcome, I think previously you're planning on running an IDE 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 kind of led to this change in strategy? Thanks.
David Fischel
Sure. It's probably not appropriate at this stage to share much more than what we did in the prepared remarks and or to speculate that much. And we had mentioned previously being in dialogue with FDA on potential paths for Magic. And given those discussions and we had advisors as well consultants as well and physician.
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's a with merit to our approach and end 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'll obviously the 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 enrollment beyond what is needed for the CE Mark submission.
And so overall, we think that the strategy is one that may significantly accelerate access to the technology for US physicians and patients. And we think it's one that makes a lot of sense to do. So, I think kind of all that's probably right to say at this stage.
Adam Maeder
Yeah, understood. And that's helpful color.
Thank you, David.
David Fischel
Thanks, Adam.
Operator
Josh Jennings, TD Cowen.
Joshua Jennings
Good morning. Thanks for taking the questions. I wanted to just follow up on Adam's question and ask, are you taking parallel paths of looking at submission without a data set and then also planning on the clinical trial in case that pathway is not appropriate deemed by the FDA to be not appropriate?
David Fischel
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 that 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 is definitely something that we have had in mind. And I think that it is something that would be reasonable and accepted. And at the end of the day. It depends on obviously on just submission overall and strength of that submission. But the PMA supplement approach is one that carries significant advantages. And again, which has merit based on all of our discussions and understanding.
Joshua Jennings
Understood. And I wanted to ask just about to the replacement cycle and has any sense you can help us out just what percentage of the installed base is approaching 10 years or 10 years plus? And is this segment sizable and that does represent a low hanging fruit within the replacement channel, is that where your shelf versus focused and intact mode? Thanks a lot.
David Fischel
And so, by now the majority, I'd 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 of EP labs where we have now seen multiple labs that are 14, 15. I think even now we have a lab that is 16 years old and they have not yet gone through with a replacement of their lab.
And so they say brakes from all historical precedence from what we hear from x-ray manufacturers and other equipment. But it definitely seems like, that is the case. What we see if you look at I guess, companies like Intuitive Surgical, they seem to be able to drive or replacement cycle and 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. And it's just that it would require still the shutdown of the lab, architectural planning, contractors, construction and so if you do that, you very much should be exchanging the x-ray at the same time.
And so, that's where, there have been a couple of cases where the robot has driven the cycle. But for the most part, it's been driven by the x-ray timing and the hospital's plan to replace tax rate.
I think as you see us evolve to the next generation robot and to future generations potentially, obviously after that, I think that we kind of free ourselves from that time line and given the pace of innovation that we've been doing on the robot side, where you see almost every three, four, five 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 time line that seems to exist, right now.
But right now, we do have a majority of our sites are over 10 years now and age and so are very much ripe for replacement. But we have still seen that happen more in trickle than a gradual process rather than a full bolus.
Joshua Jennings
Understood. Thanks for that,
Operator
Alex Nowak, your line is open.
Alexander Nowak
All right. 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?
David Fischel
Hi, Alex. Good morning. And 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 marker resubmission.
And we are able to enroll up to 30 patients at each site and we are able to go actually up to even 10 sites if we would like. But 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 approval that additional sites. But we're really focused on these three sites that are very experienced. And then and we're able to move in a relatively fast fashion through the ethics committee approvals and work with us on the national submission. And so, with that, I would kind of see that we'll obviously work most expediently to enroll the 20 patients, and then will probably go up to 30 patients at each of these three sites.
Alexander Nowak
Okay. That makes sense. But reading through the commentary, it probably sounds like you'll have that data in hand first quarter and certainly before you get feedback from the FDA.
David Fischel
Yeah.
Alexander Nowak
Okay. That's perfect. And then on the Gen three system, the mobile robot, maybe update us on the internal work. I know there's always kind of constant improvement you can do before you submit to the FDA and kind of lock the system down to just some of the internal work you've been doing there. And then just remind us when can we see a launch as a launch kind of predicated a little bit on MAGiC approval as well? Thank you.
David Fischel
Yes, sure. So, yeah, when you look at a robotic system. These are complex, complex systems with the requirement of macro hardware and micro hardware, electronics and 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 still not developed at a surgical robot. So, it is a tough technical hurdle to build a robotic surgical system that actually can work well reliably robustly in the real-world environment. And 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 used the word refinement, there's various ways to refine the electronics of the system and 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 refinements, you find and address potential edge cases where you would otherwise have more failures in the field. And you would have to work harder during the manufacturing and during the installation and during the continued maintenance at Phases two to keep the system running well.
And we have, I believe, very top-tier 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 refinements and continue to make the 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 that's 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 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 the submission, and we would expect to have a FDA 5, 10-K approval, probably a reasonable time line is within about six months given and given the experience that we had with Genesis and given our kind of comfort with overall that process and it's a 5, 10-K submission.
And so, I think kind of that's our overall expectation for regulatory approvals. And you are correct that we need either the MAGiC catheter or Guidewire or guide catheter for vascular procedures that to be approved. So, the interventional devices that we are developing are all backwards compatible with Genesis systems, Niobe systems.
But the new robot that is, that does not require construction does depend on having these new interventional devices on the market and that it's led to some of the decision making on when to advance that robot towards approval, towards a submission.
Alexander Nowak
All right. Excellent. Very helpful. Thank you so much.
David Fischel
Thank you.
Operator
Frank Takkinen, Lake Street Capital Markets.
Frank Takkinen
Great. Thanks, taking the questions. 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 due to scale of manufacturing, if I'm right in remembering that. And then secondly, how should we think about any commercial organization changes after that event?
David Fischel
Sure. Hi, Frank. Good morning. So, you're right Citgo, which is then a German company. And is our contract manufacturer and partnering in the MAGiC catheter and they are as the ones that are ramping up the manufacturing capability for MAGiC. They've obviously been able to in the past, manufacture hundreds upon hundreds of the catheters that were necessary for the regulatory testing.
And we are working with them to make sure that they are in a good place for manufacturing for the commercialization. We want to have several hundred catheters available in inventory as finished goods inventory upon regulatory approval and so, we're working with them to make sure that it's possible. And then I think every manufacturing scale-up is obviously an effort and requires attention and it's difficult.
These are complex devices, class three devices with significant regulatory burdens as well. And but Citgo is a professional organization. They have many, many years of experience in manufacturing, thousands upon thousands of similar catheters. And so, I think we have a good partner there that has that experience and has the resources and infrastructure to be able to scale as appropriate.
From a commercial team perspective, I think I've mentioned in the past that we currently operate our commercial teams operate with, 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 EP space have one sales rep per hospital, if not even more.
And so that is something that is a structurally we're at a weakness to end 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 the bottom line. And so, as we bring the MAGiC catheter to market.
And we shift from making on average roughly $1,000 per procedure to making a several thousand, $3,000, $4,000, $5,000 per procedure. That does allow us to change our coverage in the field and to enhance and increase our sales team fairly significantly.
I think we've mentioned in the past, and that still is a plan that as 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 to the bottom line to do that.
Frank Takkinen
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 with looking to get an update on the capital markets, our capital equipment sales market. Clearly, it's tougher in a 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?
David Fischel
I think that we've done a relatively good job in bifurcating hospital awareness between the Genesis system and 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.
And but generally, I think we've done a reasonably good job in that bifurcating that awareness and channeling the people who are appropriate to channel to the Genesis system. And I think it is still a headwind macro environment, overall. So, we've been operating now for a few years in this macro headwind environment.
That said, I think we're still have a huge amount of opportunity ahead of us. We're 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 the contract negotiation. So overall, that feels good that we're able to make progress despite that headwind environment.
Frank Takkinen
Okay. That's helpful. I'll stop there. Thanks.
David Fischel
Thank you, Frank.
Operator
There are no further questions at this time. I'd like to turn the call back to David Fischel for closing remarks.
David Fischel
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.
Operator
This concludes today's conference call. Thank you for joining. You may now disconnect.
