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CAS Medical Systems Inc (NASDAQ:CASM)

Q4 2013 Earnings Conference Call

March 06, 2014 10:00 AM ET

Executives

Don Markley - IR

Tom Patton - President and CEO

Jeff Baird - CFO

Analyst

Suraj Kalia - Northland Securities

Carter Dunlap - Dunlap Equity Management, LLC

Operator

Welcome to the CAS Medical Fourth Quarter 2013 Conference Call. At this time, all participants are on a listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded today, March 6, 2014.

I would now like to turn the conference over to Mr. Don Markley, sir you may begin.

Don Markley

Thank you. This is Don Markley with LHA. Thank you for participating in today’s call. Joining me this morning from CAS Medical Systems are Tom Patton, President and Chief Executive Officer; and Jeff Baird, Chief Financial Officer. Earlier this morning, CASMED issued financial results for the 2013 fourth-quarter and full-year. If you have not received this news release or if you’d like to be added to the company’s distribution list, please call LHA in New York at 212-838-3777 and speak with Carolyn Curran.

Before we begin, I would like to remind you that to the extent management’s statements or comments represent forward-looking statements, I refer you to the risks and other cautionary factors in today’s press release as well as the company’s most recent SEC filings. Importantly, this conference call contains time sensitive information that is accurate only as of the date of the live call, March 6, 2014. CASMED undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

Now, I’d like to turn the call over to Tom Patton.

Tom Patton

Thank you, Don. Good morning, everybody and thanks for joining us today to discuss our fourth quarter and full-year financial results. We’re very pleased with our 2013 finish and how we are positioned to move forward in 2014. The results we announced today are at the high end of the ranges we discussed when we announced preliminary results back on January 8. In short, the new FORE-SIGHT ELITE monitor and disposables are achieving their market acceptance we hoped for, and even a little better than we hoped for.

We set the bar pretty high in the fourth quarter by shipping 90 monitors which is almost equal to the number of monitors shipped in the three previous quarters combined. At the close of the year the cumulative total of FORE-SIGHT monitor shipped reached 935, which represents a 26% increase over the close of 2012. Of the U.S. Q4 placements of the FORE-SIGHT into new accounts, 45% of those accounts with the hospitals were Cerebral Oximetry is being utilized largely for the first time, and was 55% for accounts we took from competitors.

As always we also ship monitors to many of our current accounts where FORE-SIGHT utilization is expanding. In addition the 35% increase in U.S. disposables sales for FORE-SIGHT in Q4 was particularly gratifying as it indicates good sense of utilization with each monitor. Each of these facts leads us to believe that we continue to expand the market for Cerebral Oximetry with our best in class products. Worldwide sales of our Tissue Oximetry products were up 16% in 2013 compared to 2012. Our overall sales were down 3% due to lower sales of traditional monitoring product.

As the old legacy Vital Signs products were phased out, the launch of the new 740 SELECT Vital Signs Monitor occurred somewhat later than initially hoped. As you know a significant portion in this business has traditionally been to the Veterans Administration hospitals and the new product launch missed the sales cycle which peaked in the government’s fourth quarter fiscal year-end of September 30, corresponding to our third quarter.

We also lost out on to some regional VA contracts biz as our legacy 740 products didn’t even meet the required specifications. This has been unfortunate causing a large drop in our VA business. But in the meantime we’ve been busy entering new markets with new distribution partners including significantly better access to the non-VA hospitals and better access to the outpatient surgery markets such as that for oral surgery.

We were pleased that by the fourth quarter 2013 sales through those new channels made up for the missed opportunities in the VA business leaving overall Q4 sales of Vital Signs monitoring nearly level with a very strong prior year fourth-quarter. Our OEM sales declined in 2013, principally due to the agreement we have reached with the key customer early in the year under which price reductions were exchanged for five years agreement that strengthened our long-term relationship and cemented CASMED’s positions as their exclusive provider of non-invasive blood pressure measurement technology.

Year overall 2013 OEM decline was also partially due to some lower end-user sales of our OEM Partners monitoring products. While we are now offering a new and exciting MAXIQ non-invasive blood pressure technology platform that we have launched in Q3, and already have one new and one converted customer on the platform, the OEM sales cycle can be lengthy as we work our way into third-party development programs. Regardless, we are encouraged by our customers’ responses to the MAXIQ and we believe that we can grow that business over time and improve margins as more customers move to the new platform.

Now I’ll turn the call over to Jeff to review the financial results

Jeff Baird

Thanks Tom and Good morning everyone. First let’s view our fourth quarter results. We reported net sales of $5.9 million for the fourth quarter of 2013 which was essentially flat compared with the fourth quarter of 2012.

Total FORE-SIGHT Oximetry sales were $2.6 million, an increase of 17%, over the fourth quarter of last year. FORE-SIGHT’s disposable sensor sales reached $2.2 million and increase of 26% compared with the fourth quarter of 2012. As Tom mentioned the worldwide cumulative number of FORE-SIGHT monitor shipped as of December 31, 2013 were 935 monitors, a 26% increase from December 31 of 2012. Company shipped a net 90 monitors from our last fourth quarter of this year. All other sales were $3.3 million for the fourth quarter, a decrease of $0.5 million or 10% compared with the fourth quarter of 2012, lower sales of OEM products, neonatal supplies and service revenues were largely responsible for the decline.

The company recorded a net loss applicable to common stock holders from the fourth quarter of 2013 of $3.5 million or $0.19 per common share compared with a net loss applicable to common stock holders of $2.4 million or $0.18 per common share for the fourth quarter of 2012. The increased net loss of $1.1 million resulted from several factors including lower gross margin due to product mix, accelerated depreciation of FORE-SIGHT first generation monitors in customer sites and manufacturing variances, and increased operating expenses due to expanded sales personnel, recruitment fees, severance costs, medical device excise taxes and trade show expenses partially offset by reduced R&D cost and legal fees.

Now let’s turn to our 2013 operating results. For the year we reported total net sales of $21.9 million 3% decrease compared with sales of $22.6 million reported for 2012. Worldwide tissue Oximetry sales were $9.1 million compared with $7.8 million for 2012 an increase of $1.3 million or 16%.

Oximetry sales were led by a 20% increase in worldwide sales of disposable sensors. Traditional monitoring sales were $12.9 million in 2013 a decrease of $2 million or 14% compared to the 2012. Lower sales of vital signs monitors VA into our international distributors, partially offset towards the end of the year by increased vital signs monitor sales and new hospital and oral surgery market partners.

Gross margin for 2013 was 34.5% compared to 40.2% for 2012. Several factors were responsible for this reduction including product mix within the traditional monitoring products and charges related to the transition to our new FORE-SIGHT ELITE product line including asset impairment charges, accelerated depreciation of place monitors at customer sites and inventory obsolescence adjustments for the legacy FORE-SIGHT monitors.

In 2014, shipments of our lower cost FORE-SIGHT ELITE monitor and sensors to both new customers and to existing customers for product upgrades should significantly improve our gross profit margin particularly as we move into the second half of the year. Operating expenses for 2013 were $18 million an increase of $1.5 million compared to 2012. Sales expenditures related to tissue Oximetry contributed significantly to the increase, including additional cost for U.S. field sales personnel.

While R&D expenses appear to have increased in 2013 over the prior year on a net basis after accounting for NIH grants and state R&D tax credits received last year actual R&D spending was down slightly in 2013. Also medical device excise tax accounted for $300,000 of the operating expense increase in 2013. We have made changes to our spending days turning to fourth quarter including several headcount reductions which we estimate lower operating expenses in 2014 by approximately $1 million, depending upon the opportunities we see for additional investments in the second half of the year.

Our cash balances as of December 31, 2013 were $8.2 million compared to $10.5 million at December 31, 2012. Our July 2013 public offering of common stock and our May 2013 Bank debt refinancing with available borrowings from our line of credit are expected to adequately support our cash needs.

With that financial overview I’ll turn the call back over to Tom.

Tom Patton

Thanks Jeff, we talked earlier about our strong fourth quarter FORE-SIGHT results, that Q4 momentum seems to have largely carried into early 2014. While we may have had some pent up demand in Q4 from customers who delayed purchases from early in the year or perhaps more likely where sales reps activity slowed in anticipation of the lead launch. We also have reason to believe that the strong order flow in Q4 and into Q1 reflects the extraordinary level of accuracy and ease of use of the ELITE. The selling enthusiasm of our distribution team further strengthened by positive customer feedback and the outstanding performance of monitor they are getting and the growing body of clinical data and publication supporting the use of streamline symmetry. So, our number of monitory ship might not reach two-four levels in the next few quarters, we don’t think it would be maturely below that very high benchmark. We feel that we have entered 2014 prepared on many levels to capitalize on the opportunity we have created with the introduction of our FORE-SIGHT ELITE technology.

First, more than just a remake of our product offerings, this product gives us the opportunity to remake our income statement and cash flows. The lower manufacturing cost we anticipated for the ELITE are being achieved as such we expect to see significantly improved gross margins in 2014 particularly in the second half of the years the number of installed FORE-SIGHT ELITE monitors becomes material to revenues. The lower cost of the ELITE technology especially in comparison to the extraordinary cost of the legacy FORE-SIGHT monitor dramatically reduces the investment required by CASMED, in other circumstances where monitors are placed with customers and therefore significantly accelerates and improves the return on our invested capital.

The end result is both enhanced gross margins and lower capital cost. On the commercial front, under the guidance of our new Chief Commercial Officer, Brian Wagner, who joined us in October? Already in early January this year we hired four new direct sales reps in the U.S. to handle territories where we have been under represented by independent distributors. This brings our total number of U.S. reps from 5 to 9. Later in the year, we will look to further invest in that U.S. distribution as opportunities arrives. Also with ELITE now in the market, our attention to the international opportunity has never been stronger. The lower cost of the new ELITE monitors and sensors makes us much more competitive overseas.

As such we are actively engaging distribution partners in the largest European and Asian markets. We also hope to announce the hiring of new international sales leader soon to manage those efforts. We will also continue to educate the industry on the effectiveness of symmetry in achieving better patient outcomes with the ultimate goal of making a standard of care in wide range of procedures. Therefore our growth strategy calls for continued investment and use of cash but at a lower consumption rate as we move through 2014 and experience increased revenues, improved margins and lower operating expenses, as such we expect the ratio of our quarterly cash earned, the cash on hand to remain at comfortable levels at year end.

In summary, I will go back to what I said at the beginning of the call; I think we are very well positioned for 2014. We now have the right products across the broad. We captured new business and market share, improve our margins, dramatically increase the return on invested capital and significantly reduce our quarterly cash consumptions. With that I will open the call to any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions)

Unidentified Company Representative

While we wait for the Q&A roster to be assembled, I would like to mention that I will be in Southern California next week, hopefully a warm and snow-free Southern California, presenting at the ROTH Investor Conference on Tuesday March 11. Hope to see you some of you there and for those that won’t be there, you will be able to catch the presentation via webcast. We are ready for the first question.

Operator

Our first question will come from the line of Suraj Kalia with Northland. Please go ahead with your question.

Suraj Kalia - Northland Securities

So, Tom and Jeff let me just kind of split the questions between the two of you. Tom, how many ELITEs were sold in the quarter and what was the distribution international versus domestic?

Tom Patton

I don’t have the exact number sold but the breakdown was about 65 domestic and the rest international.

Suraj Kalia - Northland Securities

And were these all ELITEs or were there any GEN 1s also?

Tom Patton

There were a couple, handful of GEN 1 monitors.

Suraj Kalia - Northland Securities

So, it’s just sort of legacy. If I use that train of, Tom, is it fair to say that your installs in China in Q4 would de minimis?

Tom Patton

Yes.

Suraj Kalia - Northland Securities

And would you care to characterize how you see China, now that you all have S&P approval shipping up in FY14?

Tom Patton

Yes, I think that we will continue to sale FORE-SIGHT monitors, the legacy monitors into China at, you call a nominal rate. There aren’t a lot of sensor utilization with those monitors. So I think it will have some impact but I’d call it nominal through 2014.

Suraj Kalia - Northland Securities

Fair enough. Tom you’re obviously, the business is changing and it has a sense of the turnaround. Am I jumping too far ahead currently in asking, where do you see sensor utilization exiting FY14? Do you still envision it around the $15,000 per year mark or do you think we could see some level of a step change exiting this year?

Tom Patton

Yes. I think it’s still about $15,000 per monitor per year in the U.S. Our international utilization is maybe half to a third of that. But a lot of times where we’re opening new accounts, signing up new distributors sometimes some of these accounts take a little time to get warmed up and continue to ramp. And so our expectation is that that on a per monitor basis, on a much higher monitor count but on a per monitor basis, the utilization will probably remain about the same.

Suraj Kalia - Northland Securities

Tom the nine reps that you’ll have right now you all had pretty significant voids in the U.S. in terms of coverage. Do these nine reps essentially mean for now the long hanging fruit at least there will be complete coverage and then you all could try to target more difficult accounts hiring more of the reps later? I guess I am just trying to understand productivity, additional four reps and how should we look at coverage in the U.S.?

Tom Patton

Yes. So I think the four reps gives us a greater and an enhanced effort, 100% of these reps time focusing on of these territories where we were underrepresented by independent distributors. I still think that we have a long ways to go before we are fully and adequately covering the geographies in the United States. And when we talk about the second half of this year moving into 2015 for additional representations that can mean taking your existing territories and splitting them; For example, we have just one rep in the entire State of Texas. So we’re getting very good coverage in Texas but it’s not I think nearly broad enough right now and we’ve got a lot of opportunity to expand that.

Suraj Kalia - Northland Securities

Fair enough. And I guess Jeff one last question probably for you, you all haven’t given fiscal ’14 guidance. Can you give us some color on how we should look upon the tissue Oximetry versus the vital science business for fiscal ’14?

Jeff Baird

Yes Suraj we typically haven’t given guidance as you know as we look into 2014 we look for continued strong growth in tissue Oximetry we hope to beat last year’s results and expect to do that. And as far as the traditional monitoring goes as you know it’s been little bit of difficult client for us to bring that business back we think we’ve regenerated it and we look itself to for steady results in ’14 versus ’13 for single digit growth.

Operator

(Operator Instructions) Our next question will come from the line of Carter Dunlap with Dunlap Equity. Please go ahead with your question.

Carter Dunlap - Dunlap Equity Management, LLC

Hi guys, I may have missed it I got on a bit late. Can you comment on what you know about the write-off of the GEN 1 and how it’s going to play out during the quarter now that you’ve got this many more shipments under your belt?

Tom Patton

So Jeff you want..

Unidentified Company Representative

We do not cover that Carter but Jeff will address that.

Jeff Baird

Sure. If you look at 2013 Carter we had several events that impacted our 2013 gross profit. We had in the third quarter we took an impairment charge of $400,000 as we look that the effect of upgrading the GEN 1 monitors with the ELITE monitors in 2014 and so we did a calculation that said that we’ve shorten the effect of life of those monitors and so we booked an adjustments in the third quarter. We also accelerated depreciation of those monitors in ’13 and in ’14 again because of the shorter lives we’ll have a several $100,000 of additional accelerated depreciation charges, gross profit in ’13 was also affected by inventory obsolesce related to the G1 monitors as well. So looking forward into ’14 I think the accelerated depreciation will have a de minimis impact on our ’14 results and as we move more customers into the ELITE monitor we’ll begin to see stronger gross margins as result of that.

Carter Dunlap - Dunlap Equity Management, LLC

So for ’13 just a recap had the onetime 400 plus whatever the impact of the accelerated and ’14 will just the accelerated number one impact onetime?

Tom Patton

That’s right.

Operator

There are no further questions at this time. I will turn the conference back over to management for any concluding remarks.

Unidentified Company Representative

Well thank you for participating in today’s call. As you can see, I think we’re very enthusiastic about where we’re in our prospects for growth. We appreciate your time to listen in on the call today and we look forward to speaking during May when we report our first quarter results. So thanks again and have a great day.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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