Stereotaxis (STXS) Q2 2021 Earnings Call Transcript

Stereotaxis (STXS -2.27%)
Q2 2021 Earnings Call
Aug 10, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for joining us for Stereotaxis second-quarter 2021 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's executives may take today.

These risks are described in detail in our public filings within 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 -- Chairman and Chief Executive Officer

Thank you, operator, and good morning, everyone. I'm joined today by Kim Peery, our chief financial officer. In the second quarter, we delivered robust growth and our strongest absolute revenue since 2015 as we continue to benefit from a return of robotic system sales. Year-over-year comparisons are inflated by a particularly depressed second quarter of 2020, but current quarter revenue was up approximately 70% year over year, up 5% sequentially and up 33% from the second quarter of 2019.

Renewed adoption of robotic systems is the first significant wave of revenue growth in our strategic innovation plan. We are pleased to reap the initial fruits of that strategy and are confident the strategy will lead to a multiyear period of sustained robust growth. System revenue reported in the quarter reflects shipments of the Genesis and Model S system to a hospital establishing a new robotic electrophysiology program in the United States as well as a Niobe system to a hospital establishing a robotic electrophysiology program in China. As discussed on prior calls, partial revenue recognition is often triggered upon shipment of systems and the revenue reported reflects a portion of the overall contract value from these two deals.

During the second quarter, we received two orders for robotic systems. One, as previously discussed, to a U.S. hospital and other to one of the most prestigious medical centers in China, Fuwai, Beijing. Fuwai, Beijing is a very large cardiovascular hospital with 17 cath labs performing over 50,000 interventional procedures a year.

They're establishing a new robotic electrophysiology program after observing our success in other practices and conducting a head-to-head study that showed significantly lower rates of silent strokes in robotic versus manual ablation procedures. This was our second order from China this year, and these two orders will be the first new robotic systems in China in nearly 10 years. This is a reflection of the renewed interest and acceptance that we are experiencing globally and a specific high level of customer and strategic interest we are seeing in China. Thus, China is emerging as a third geographic pillar for our business.

We believe that emerging relationships with strong strategic partners in China may allow for broad adoption of our technology in that geography. We will enter into any relationship in a prudent fashion that enhances our long-term opportunity and look forward to sharing additional details when appropriate. I recognize the uneven pace of orders announced on any individual quarterly call makes projections difficult, but we continue to see significant interest in Genesis. During the quarter, we hosted 35 separate telerobotic visits, 13 of which were to new potential customers.

Over the last nine months, we received seven orders for robotic systems, five of which were from greenfield customers establishing new robotic programs. We are now seeing increased activity from multiple hospitals that delayed lab replacement projects during the depth of the pandemic. We expect 2022 to reflect a near normalized level of replacement cycle projects. Orders received in the remainder of 2021 and early 2022 are expected to result in approximately a doubling of system revenue next year and contribute to robust double-digit revenue growth in 2022.

As we grow our business, we are investing and establishing the commercial, operational and technological foundations that will allow for long-term growth. Commercially and operationally, we continue to expand our fellows program, are pleased to welcome several experienced new leaders across various roles in our organization and are on track to move into an expanded new headquarters at year-end. Two weeks ago, we were particularly excited to announce the addition of Dr. Myriam Curet as an independent board member.

Her long-term experience in executive leadership and Intuitive Surgical is highly beneficial as we look to positively transform interventional medicine with robotics as Intuitive has done across laparoscopic surgeries. Technologically, we are aggressively advancing the second and third waves in our strategic innovation plan. Stereotaxis' advanced robotically navigated magnetic ablation catheter represents the second wave in our strategic innovation plan. The catheter has been progressing through the manufacturing and testing processes necessary for submissions for European approval and the U.S.

IDE study. Supply chain challenges, however, have caused some manufacturing delays at our partner, Osypka. Most recently, in July, Osypka received a force majeure letter from a supplier of a specific epoxy glue delaying previously confirmed shipments. This seems to be a global phenomenon, and we have been addressing disruptions like this with grid and creativity, but they have a disruptive impact.

We now expect to complete manufacturing and testing of the hundreds of catheters needed for our regulatory submission and complete those submissions for European approval and the U.S. pivotal trial early next year. We believe that will allow for revenue contribution from the catheter in Europe in 2022 and a potential U.S. regulatory approval in 2023.

We continue to work energetically on the third wave of innovations both independently and with new partners that will accelerate our adoption in electrophysiology and expand our robotic technology into new adjacent markets. We believe we will be in a position to present several of these in more detail at the end of this year. And given our products, this should lead to several regulatory filings and product launches in 2022. We are confident in the positive impact these innovations will have on patients, physicians, providers and in Stereotaxis' financial and strategic foundation.

Kim will now provide some commentary on our financial results, and then I will make a few financial comments as well before opening the call to Q&A.

Kim Peery -- Chief Financial Officer

Thank you, David, and good morning, everyone. Revenue for the second quarter of 2021 totaled $9.1 million, an approximately 70% increase from the prior-year second quarter, a 5% increase sequentially and a 33% increase from the second quarter of 2019. System revenue of $2.7 million includes the delivery of a Genesis system in the U.S. and the delivery of a Niobe system to China.

Recurring revenue for the quarter was $6.1 million compared to $5.1 million in the prior-year second quarter. The increase in recurring revenue reflects the rebound in procedure volumes from the depth of the pandemic in last year's second quarter. Gross margin for the second quarter of 2021 was 72% of revenue with system gross margin of 48% and recurring revenue gross margin of 86%. Operating expenses in the quarter of $9.9 million included $2.8 million in noncash stock compensation expense.

This increased noncash stock compensation does not reflect increasing numbers of securities granted, but is driven by an increasing stock price and accounting for the previously announced CEO long-term performance plan. Excluding stock compensation expense, adjusted operating expenses were $7.2 million. This compares to $5.3 million in the prior-year second quarter and is up from $6.2 million sequentially. The increase in adjusted operating expenses primarily reflects measured hiring across key functions in the company and R&D project spending.

Operating loss and net loss for the second quarter of 2021 were $3.4 million and $1.2 million compared to $1.9 million in the prior year. Net loss in the current quarter reflects a favorable $2.2 million adjustment for the forgiveness of the paycheck protection loans. Adjusted operating loss and adjusted net income, excluding noncash stock compensation expense, were negative $0.6 million and positive $1.6 million for the quarter, both compared to the prior-year adjusted operating and net loss of negative $1 million. Negative free cash flow for the second quarter was $0.1 million compared to $1.2 million in the prior-year second quarter.

At June 30, we had cash and cash equivalents of $44.2 million, consistent with the beginning of the year. I will now hand the call back to David.

David Fischel -- Chairman and Chief Executive Officer

Thank you, Kim. As mentioned in today's press release, we now expect robotic system revenue of approximately $11 million for 2021 based on the orders we have received to date. We expect orders received during the remainder of 2021 and in early 2022 to result in approximately a doubling of system revenue in 2022 compared to 2021 and contribute to robust double-digit overall revenue growth in 2022. Stereotaxis remains in early phases of a multiyear turnaround as we establish the foundations for significant adoption of robotics in electrophysiology and across interventional medicine.

We are advancing our strategy in a methodical fashion and are pleased that we are able to advance multiple fronts in tandem while maintaining financial discipline. We are and expect to continue increasing our investment in our team, infrastructure and technology, but have been able to do so while continuing to run the company near breakeven. This is best reflected in essentially identical cash position we have maintained over the last four quarters. Our robust balance sheet allows us to continue these investments and reach profitability without the need for additional financings.

We look forward to now taking your questions. Operator, can you please open the line to Q&A?

Questions & Answers:

Operator

Thank you. [Operator instructions] We take the first question from Adam Maeder at Piper Sandler.

Adam Maeder -- Piper Sandler -- Analyst

Hi, David. Hi, Kim. Thanks for taking the questions here, and congrats on the solid quarter. First, I just wanted to start with the system guidance and the commentary on 2022.

So first, David, can you just bridge us to the $11 million in system sales for this year? It sounds like those orders have been executed, and we have firm install dates in the back half of the year, but wanted to confirm that. And then second, as we think about 2022, you expect roughly a double in system revenues. Maybe just talk a little bit more about the visibility there and the capital funnel and what kind of gives you the confidence that revenue should double next year? And then I have a follow-up.

David Fischel -- Chairman and Chief Executive Officer

Sure. Good morning. So when we look at the revenue guidance for this year, the capital system revenue guidance for this year, that is reflective of the orders that we have received to date and that we're confident will be recognized as revenue to date, at least a portion of those systems that will be recognized as revenue to date, this year still. And so that gives us kind of the confidence in that number. There's some potential for upside to that number.

But again, given kind of that we're already in August, the likelihood of having significant upside to that number is low. The confidence in the 2022 guidance or the preliminary guidance for 2022 is that there is -- we do have significant activity with multiple sites. And we do have confidence from that activity that next year should be a more or less normalized level of replacement cycle revenue. This year, we're having very little replacement cycle revenue.

And just from the delta between what we have this year and what would be a more normalized level would amount to several systems and high single digit, low double-digit system revenue just from the replacement cycle. And so that, along with the continued pace of discussions with new potential customers, gives us confidence that we should be able to have quarters like the ones we announced last March in the coming quarters, and that shouldn't be a surprise to us. And again, that should lead to kind of nice revenue trajectory as we go into next year.

Adam Maeder -- Piper Sandler -- Analyst

Got it. That's very helpful. Thanks, David. And for the follow-up, maybe I just wanted to ask a little bit about how you see the back half of the year playing out from a top line perspective. Just any color around quarterly cadence or progression of sales, both on the system side in terms of revenue recognition and then on the disposable side, where AF volumes have snapped back nicely here in Q2, but then we also have delta and potentially some seasonality in Q3.

So just any broad strokes around how you're thinking about the back half of the year. Thanks so much for taking the questions. 

David Fischel -- Chairman and Chief Executive Officer

Sure. So if we look at the last two quarters of the year, I would kind of think that system revenue should be relatively similar between the third quarter and fourth quarter and getting us to that $11 million guidance. And procedure disposable revenue, it is tough to estimate how that's going to go. Overall, we see the rebound, the gradual rebound back toward normality that you described.

We have heard incrementally some pressure, particularly in a few southern states over the last few weeks with the rebounding delta. Generally, it seems like hospitals are well prepared and that, that shouldn't have a big disruptive impact. But there's definitely a little bit of disruption out there in the world. It probably shouldn't have a big impact on our overall recurring revenue.

But it's very hard kind of to estimate exactly what to see. And so generally, I would kind of think of numbers that are similar to what we've reported just now as kind of fair for the back half of the year.

Adam Maeder -- Piper Sandler -- Analyst

Got it. Thanks so much. 

Operator

[Operator instructions] We will take the next question from Josh Jennings at Cowen.

Josh Jennings -- Cowen and Company -- Analyst

Hi. Good morning, David. Thanks for taking the questions. I was hoping to start -- so I'm going to start off with the third wave of innovation and the updated comments you provided or outlook on new indications, filings and then even product launches in 2022. I know you're not going to disclose exactly what these new indications will be.

But can you help us just bridge? It seems like an accelerated time line. But what type of clinical data do you need, if any, for these filings and for these approvals, but also to drive commercial traction? And should we be expecting data for these new indications in the coming months or before these filings?

David Fischel -- Chairman and Chief Executive Officer

Sure. Great question. And so I guess, maybe one preliminary comment is that the discussion of the next wave of innovations will not be exclusively a discussion of new indications. So there will be an aspect of that about how we're expanding into adjacencies to the electrophysiology space and starting to address new clinical applications, but there will also be multiple updates related to electrophysiology or more general technology updates.

And so I think kind of you have to think about it broader than just expanded indications. On the specific question of clinical data, for most of the technologies that we're talking about, there is not requirement for clinical data in the way that you would typically think about it in a larger study in humans in order to pursue regulatory approval. And so you should not expect that we're going to have a press release announcing some clinical data in the next few months related to those. And I think you're right that, particularly, as you think about new indications, building up clinical literature is important as you go through the adoption phase.

And so that will be something that we do focus on with initial adopters who are really the kind of leaders in that adoption in the field, but that will be something that will happen kind of during the course of the initial launch.

Josh Jennings -- Cowen and Company -- Analyst

Understood. But thinking about the high-level commentary on system revenues doubling in 2022, does that assumption bake in potential demand from these new indications or this third wave of innovation that's going to tack on next year?

David Fischel -- Chairman and Chief Executive Officer

No. That does not. So the revenue guidance and commentary is based on our existing business, the electrophysiology business. We expect, as kind of mentioned in the call, we expect regulatory submissions and initial revenue from this third wave of innovation, but that would not be something that we would kind of include in guidance at this point.

Josh Jennings -- Cowen and Company -- Analyst

Understood. Thanks for that help there. And then -- and lastly, just you've commented about this Beijing Center and the order for Niobe after they performed a study that, I believe you stated that demonstrated a reduction in asymptomatic cerebral emboli events to robotic magnetic navigation of vision versus manual ablation. Is that some data that has been published and can Stereotaxis build on that? It seems like if that can be proven in it could be a big deal in terms of sparking even further demand in the electrophysiology community.

Thanks for taking the questions. 

David Fischel -- Chairman and Chief Executive Officer

I agree that it's a dramatic data and pairs nicely with all the other safety benefits that we've shown over time. The study has not yet been published, so I have to be somewhat careful in not sharing too much detail, but we've seen all the data and the abstract of it, and it's been submitted for publication by the authors. But it showed a very dramatic difference between the rates of silent strokes in manual ablation versus in robotic ablation and it was a nicely designed study. Every patient had pre-op MRI, post-op MRI.

They looked for the differences between those two images to kind of discern the rate and severity of the silent strokes. And again, it was kind of very, very dramatic differences between the two arms in a relatively large number of patients. So I hope that it gets published in the near term, and we can point the investment community, too, and, obviously, more importantly, our customers and the physician community to that data, but we have to wait until it gets published.

Josh Jennings -- Cowen and Company -- Analyst

And maybe just one quick follow-up. Sorry, but just mechanistically, I mean, I think it makes sense why you could see that reduction in silent strokes or asymptomatic cerebral emboli, but can you just give us a refresher on why robotic magnetic navigation catheters and maybe continuous contact with the myocardium could deliver a lower rate of emboli? Thanks a lot.

David Fischel -- Chairman and Chief Executive Officer

So the authors will discuss that better than I can in their publication. But I can kind of add a couple of things that you can think about. One is kind of the stability of the ablation against the wall and kind of the reduced risk of knocking off emboli as you're navigating. Those seem to be kind of two of the drivers.

And again, that's kind of driven by the mechanistic design of a magnetically driven ablation catheter, gives it that stability against the beating heart and gives it kind of the softer shaft, which makes it less likely to cause harm.

Josh Jennings -- Cowen and Company -- Analyst

Great. Thanks a lot. 

Operator

The next question comes from Frank Takkinen at Lake Street Capital Markets.

Frank Takkinen -- Lake Street Capital Markets -- Analyst

Hey. Thanks for taking my questions. Just wanted to start with fiscal year '22 system guidance. Wanted to ask a little bit more specifically how many orders do you have in hand right now to be recognized in 2022? And then if you could just bridge us to that double of how many more additional orders you need between now and, call it, mid-2022 to get to the double in system sales in fiscal year '22?

David Fischel -- Chairman and Chief Executive Officer

Sure. Hi, Frank. So we've announced to date this year, seven orders for robotic systems, all of which will have at least their initial revenue recognition in 2021. So there will be a portion of that revenue that gets recognized in 2022.

But the predominant amount for each of those seven systems will be in 2021. And so it's orders that we expect to come in, in the coming months from, let's say, now through the middle of next year that will generate the 2022 guidance. And we don't obviously have any of those orders yet. Those are the ones that will take place now through the middle of 2022.

And so that's the way we're looking at things. And if you look at kind of roughly then the math, you're looking at low to mid-double-digit systems in order to get to that type of revenue.

Frank Takkinen -- Lake Street Capital Markets -- Analyst

Got it. OK. That makes sense. And then I just wanted to ask a little bit more on the mix of greenfield versus new systems expected in fiscal year '22.

I hear your comments about getting back to a more normalized replacement cycle in 2022. To me, that sounds like almost the entire fiscal year '22 guidance. So I just wanted to understand kind of how you're thinking about new versus greenfield more specifically in fiscal year '22?

David Fischel -- Chairman and Chief Executive Officer

Sure. So if you look at, let's say, a low to mid-teens system number next year, and you look at, let's say, this year, we've had, as I mentioned, five out of the seven systems have been greenfield systems. If you'd look at a -- roughly looking at it, if you look at, let's say, similar numbers of greenfield systems and then a replacement cycle that is in the mid- to high single digits number of systems replacement cycle, that would get you to a low teens number of systems for next year, and that feels overall like a reasonable assumption. Again, we're going to work hard on trying to increase the number of greenfield systems.

We recognize the long-term value from that. But kind of when we look through both from the bottom up and from the top down, what feels reasonable, that feels like a reasonable way to project.

Frank Takkinen -- Lake Street Capital Markets -- Analyst

Perfect. Crystal clear. Last one for me. I just wanted to ask on the margin profile of the third, or the second and third innovations.

Looking at your current recurring revenue margin, 80% plus consistently, do you feel both the catheter as well as the broader innovation strategy are going to provide products with similar gross margins, if they're in the disposable side of the business?

David Fischel -- Chairman and Chief Executive Officer

The disposable, the new disposable that we developed will be top-tier medical device gross margin products. I'm not sure if there will always be 85%. They might be tiny bit south of that, at least at lower volumes at initial volumes, but they will be top-tier gross margin medical device products. And so I wouldn't expect significant moves in gross margin.

Frank Takkinen -- Lake Street Capital Markets -- Analyst

Perfect. That's all for me. Thanks for taking my questions.

Operator

Thank you. [Operator instructions] We will take the next question from Jason Wittes at Northland.

Jason Wittes -- Northland Securities -- Analyst

Hi. Thanks for taking the questions. First off, just a clarification. I think you mentioned 2023, was that for U.S.

approval? Or was that for U.S. IDE, if you could just clarify?

David Fischel -- Chairman and Chief Executive Officer

That was for a potential U.S. approval.

Jason Wittes -- Northland Securities -- Analyst

So what does that? Can you walk us through kind of the timing in terms of IDE submission and review, etc., that's assumed in that 2023 number?

David Fischel -- Chairman and Chief Executive Officer

Sure. So if we submit U.S. IDE application in the beginning of 2022 and start a trial -- start enrolling patients, let's say, in the middle of the year, and it should be a relatively rapid enrollment, relatively rapid follow-up, you can have data, let's say, six to nine months later with then a submission for PMA approval kind of immediately on the heels of the last follow-up. And that would be kind of the time line that gets you into a 2023 submission to the FDA and potential approval.

Jason Wittes -- Northland Securities -- Analyst

OK. Very helpful. Also, it sounds like you've made some recent hires. You're beefing up the organization.

Is this to support the current business? Or is this anticipation of sort of the expansion that you've mentioned in terms of for 2022?

David Fischel -- Chairman and Chief Executive Officer

It's really kind of looking out as we think about a business and wanting to build a business that can do much more and that can grow to much more sizable scale. You want to have the infrastructure to do that growth. And part of infrastructure is having the team that is kind of capable and confident and works well together. And so obviously, on the commercial side, we're looking at how can we build a commercial team that can really scale both as new innovations come out and as we have increased system sales and to help drive new system sales.

On the R&D side, we have a team that has been able to do amazing amounts with relatively -- in a relatively lean fashion. And so any ways to accelerate the various innovations that are taking place is, I think, a good use of shareholder capital. And then operationally, we want to modernize and really set the foundation for a company that can be in order of magnitude larger, and so that explains things like our move to the new office and across operations, this desire to modernize and improve things. And then -- and we've been fortunate to find some individuals who have joined us recently that we think will play a good role in that.

Jason Wittes -- Northland Securities -- Analyst

OK. That's a lot of helpful color there. Does that imply that you're willing to sort of increase the burn somewhat? Or is this still going to -- you've kind of had a philosophy to kind of keep it relatively breakeven, kind of follow revenues in terms of your spending. It sounds like you're getting a bit more aggressive next year.

Am I summarizing that correctly your thinking? Or how would you think about your spending profile for next year?

David Fischel -- Chairman and Chief Executive Officer

Yes. I would think that generally, we're going to -- we feel comfortable investing in drivers of growth and kind of drivers of an improved business. And so we're really looking at it over a longer-term period what's the right thing for the overall business. We're not going to be the type of company that burn significant amounts of money in any way where there's concern over our financing position.

But as you see, over the last year, we've been flat. We've had no burn rate now essentially for four quarters in a row. That's why we've been both growing the business and increasing our investments in operations. And so I think kind of we'll try to do something similar.

I don't want kind of anyone to hold us to any specific quarter that we're always going to maintain exact breakeven because we're not managing the business in that way. If we find opportunities to invest more in something that's a positive ROI for the business, we'll do that. And if that leads to a quarter where we have a small burn, so be it. We'll keep managing things from a macro perspective, where Stereotaxis is in a very stable financial position and where all of these investments are prudent investments that actually have a meaningful impact on long-term growth.

Jason Wittes -- Northland Securities -- Analyst

OK. That's very helpful. And then maybe just a quick follow-up. I know you mentioned you're going to look -- to have some launches into some adjacencies outside of EP.

It's probably hard to project since -- but is there a possibility that we'll see some contribution, a meaningful contribution even in 2022? Or how should we be thinking about these launches and how they play a part in Stereotaxis' performance next year?

David Fischel -- Chairman and Chief Executive Officer

I wouldn't want to guide for meaningful revenue. And so that's why I think in the guidance, in the revenue guidance, we have kind of anticipated meaningful revenue from these launches in 2022. But we should expect some initial revenue, some initial real-world experience.

Jason Wittes -- Northland Securities -- Analyst

OK. Great. Thank you I'll jump back in queue.

Operator

Thank you. [Operator instructions] It appears there are no further questions at this time. Mr. Fischel, I'd like to turn the call back to you.

David Fischel -- Chairman and Chief Executive Officer

OK. Thank you very much for your questions and your continued support. We look forward to working hard on your behalf in many months and speaking again next quarter. Thank you very much.

Operator

[Operator signoff]

Duration: 38 minutes

Call participants:

David Fischel -- Chairman and Chief Executive Officer

Kim Peery -- Chief Financial Officer

Adam Maeder -- Piper Sandler -- Analyst

Josh Jennings -- Cowen and Company -- Analyst

Frank Takkinen -- Lake Street Capital Markets -- Analyst

Jason Wittes -- Northland Securities -- Analyst

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