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Cardica, Inc. (NASDAQ:CRDC)

Q4 2014 Results Earnings Conference Call

August 07, 2014, 04:30 PM ET

Executives

Bernard A. Hausen – President, CEO and Co-Founder

Robert Y. Newell – CFO and VP-Finance

Analysts

Tao Levy - Wedbush

Charles Haff - Craig-Hallum Capital Group

Operator

Good day, ladies and gentlemen and welcome to Cardica’s Fiscal 2014 Fourth Quarter and Full Year Financial Results Conference Call. My name is Sarah and I will be your operator for today. At this time all participants are in listen-only mode. And later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Mr. Bob Newell, Chief Financial Officer of Cardica.

Robert Y. Newell

Good afternoon and thank you for participating in our fiscal 2014 fourth quarter and full year financial results conference call. Earlier today we issued a press release including our financial results. So please refer to the release for complete details.

This conference call will include forward-looking statements, including all statements regarding continued clinical and other developments, future product features, future regulatory clearances, commercial launch and use of products in our planned MicroCutter product line, including our MicroCutter XCHANGE 30 and XCHANGE 45, including the timing thereof and our expectations regarding future support for and sales of our automated anastomosis products.

The words expect, believe, plan, continue, intend, will and similar words are intended to identify these forward-looking statements. Any statements contained in this conference call that relate to future events, results or predictions are forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including those set forth in our press release of today, as well as other risks detailed from time-to-time in our reports filed with the U.S. Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter-ended March 31, 2014 under the caption Risk Factors.

We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements. You are encouraged to read our reports filed with the SEC, available at www.sec.gov. This call is the property of Cardica and any rebroadcasting of this call without the expressed written consent of Cardica is prohibited.

At this time I’d like to turn the call over to Bernard Hausen, Cardica’s President and CEO for a corporate update.

Bernard A. Hausen

Thank you, Bob. Good afternoon and thank you for participating on our call today. During fiscal 2014 we achieved many foundational milestones necessary to set the stage for commercial growth of the MicroCutter Franchise. It has been an exceptional year. We worked with a wide range of surgeons in Europe to solicit feedback and make necessary improvements to the XCHANGE 30 which is the world’s first and only 5 millimeter surgical stapler that articulates to 80 degrees.

We complete a clinical trial demonstrating the safety of the MicroCutter. With this data we secured 510(k) clearance for the device and cartridges in the United States. We hired a skilled sales team in the U.S. and technically trained distributors in Europe to bring this product to surgeons in the most effective way possible. We maintained a presence at key medical meetings. All of these accomplishments have one ultimate goal, to benefit the patient by minimizing invasiveness, facilitating new procedures and reducing recovery time.

I would like to share some examples of how the MicroCutter XCHANGE 30 is changing clinical practice to the benefit of our patients. These cases demonstrate the wide applicability and truly enabling nature of this device. The first case, a leading pediatric surgeon at a world renowned academic center used the MicroCutter in a natural orifice transluminal endoscopic surgery commonly known as NOTES procedure. NOTES is a surgical technique that allows scar-less operations to be performed with an endoscope pass through natural orifice, typically the mouth, urethra or anus.

In this case an 18 year old patient with Crohn's disease with a J-pouch created in a previous surgery that did not use the MicroCutter. J-pouch allows elimination of intestinal content after the removal of parts of the intestine. Unfortunately, as some times happens, this patient developed a narrowing of the connection between the reservoir and the anus. The surgeon had tried to dilate this stricture several times without success. The next step would have been to perform an open surgery, as he could access the site any other way even microscopically. Using the MicroCutter he was able to dissect and resect parts of the obstructing scar tissue thereby freeing up the passage for the intestinal content. The small shaft diameter and the ability to articulate up to 80 degrees were the essential features in the MicroCutter that allowed the successful completion of this unique procedure through a natural orifice. Importantly this saved the patient a full surgery and weeks of having a colostomy bag to collect intestinal content outside his body while an open surgical site healed.

In the second example, leading surgeon at world renowned academic medical center used the MicroCutter to correct Zenker's diverticulum. In this case the weakest portion of the pharyngeal wall had bulged out to form a balloon-like sac at the upper end of the esophagus at the junction of the [farings] to the esophagus. The surgeon performed this procedure through the mouth by splitting the entry in to the sac with the MicroCutter creating a much wider opening preventing food from getting caught in the sac and allowing it to thereby pass unobstructed.

Third, several pediatric surgeons have used the MicroCutter to perform lung lobotomies in very small patients with one recent case in a nine month old infant. In this case, the infant had intralobar sequestration which is a congenital abnormality of the lung that renders it dysfunctional. This procedure is often surgically quite challenging, as it requires careful division of blood vessels and the bronchus of the abnormal part of the lung, especially within the confined environment of the rib case of the pediatric patients. We have received encouraging and positive feedback from the pediatric surgeons in these cases where the small diameter and large degree of articulation of MicroCutter truly make a difference with the patients.

In our last case I’ll discuss today Dr. Juan-Carlos Verdeja completed a laparoscopic appendectomy procedure with virtually no perceptible scar by using the MicroCutter XCHANGE 30 together with the growing surgical technique called micro-laparoscopy where a three-millimeter laparoscope was use Dr. Verdeja was able to remove the appendix from a 55 year old woman through her belly button with two additional three-millimeter incisions for the [inaudible] camera. The patient was able to go home the same day with no complications.

As you can see in each of these cases the MicroCutter truly made a difference in the life of these patients. In one case it prevented an open surgical procedure and weeks enduring a colostomy bag. In other cases it is enabling procedures in which stapling has been not possible in the past.

Turning to our commercial progress we continue to work with surgeons who have a clinical interest in getting this device in to the hospital to champion the product with hospital value analysis committees. While we are still within the early days of the launch in the U.S. we are making very good progress with these VACs, with 38 having improved to MicroCutter as of June 30, 2014. Once approved by the VAC the hospital is able to evaluate the MicroCutter in surgical procedures or can immediately begin purchasing the device.

Within our sales team for the United States we currently have three full time sales representatives who each have extensive backgrounds in surgical stapling and in introducing new surgical devices, and Liam Burns, our Vice President Sales and Marketing of these callings on accounts.

In addition, three cardiac sales representatives are trained on the MicroCutter and now offer both the cardiac products and the MicroCutter to hospitals in their territories. As we build a solid customer base and begin to see revenue growth and product line extension we plan to add three to four sales representatives per quarter.

For manufacturing, with the product performing well today we believe that by the end of calendar 2014 our weekly production capacity will be 250 devices and a 1,000 cartridges. Recently we further expanded our presence in Germany and hired a Sales Director for this territory. We believe this will be the most efficient way to bring the MicroCutter into Germany given the market dynamics and price sensitivity.

In Japan our partner Century Medical continues to work with the Ministry of Health to enable potential market clearance of the XCHANGE 30 in this significant market. Century anticipates market clearance within this calendar year.

Turning to product development we are working to expand the MicroCutter product lines so that the device can be used in additional surgical procedures moving forward. We are developing the XCHANGE 30 with a shorter shaft, which we believe will be ideal for procedures in more confined spaces particularly pediatric patients. We remain on track to introduce the short shaft in the current quarter. The XCHANGE 45 is a laparoscopic surgical stapler designed with an 8 mm shaft diameter and a 45 mm stapler networks with the larger green cartridge necessary to staple thicker tissue like that of the rectum or stomach.

The XCHANGE 45 also works with blue and white cartridges. Pending 510(k) clearance from the FDA and CE Mark the XCHANGE 45 will expand the total available market for the MicroCutter product line. We expect to have this product in humans by the end of calendar 2014. We intend to offer surgeons a full product line of surgical staples that will avoid the need for 12 mm trocars thereby reducing the invasiveness and the risk of abdominal hernias associated with the use of these larger trocars.

We believe the MicroCutter is well positioned within the surgical market as a whole. The MicroCutter meets an expanding need by enabling less invasive procedures where stapling is the gold standard, in cases of confined surgical spaces and where alternative tools such as clips have been used but stapling is preferable. [Our business of] PAS-Port System continues to consistent sales particularly in Japan and Germany.

We have seen a slight increase in C-Port xA sales and a renewed interest in totally endoscopic coronary artery bypass also called TCAP procedures. While this is positive for Cardica there is a significant learning curve to perform the procedure effectively. That said there are several surgeons who persevere and have become key opinion leaders and mentors to other surgeons in the field. We do believe that TCAP will ultimately become the procedure of choice but also believe that this process will take time. Cardica continues to be on the cutting edge of facilitating truly minimally invasive surgical procedures.

At this time I’d like to turn the call over to Bob for a discussion of our financial results, Bob?

Robert Y. Newell

Thanks, Bernard. For the fiscal 2014 fourth quarter total revenue was approximately $1 million compared to $872,000 for the same period of fiscal 2013. Total product sales for the fiscal 2014 fourth quarter were approximately $1 million compared to $771,000 for the same period in fiscal 2013. Total worldwide sales for the MicroCutter XCHANGE 30 were approximately $300,000 with revenues split fairly evenly between the United States and Europe. Note that this is the first full quarter of revenue from sales of the MicroCutter in the U.S. We have 15 U.S. hospitals ordering the MicroCutter XCHANGE as of June 30. Moving forward we will not provide the number of hospitals ordering product. Due to competitive reasons we will continue to provide the number of VAC approvals.

During the fiscal 2014 fourth quarter we shipped 1,062 PAS-Port systems, bringing cumulative worldwide shipments of our PAS-Port systems to over 37,000 units. We shipped a 118 C-Port systems during the quarter with cumulative worldwide shipments now over 14,300 units.

Cost of product sales were approximately $1.3 million for the fiscal 2014 fourth quarter, compared to $915,000 for the same period in 2013. The increase in cost is primarily due to obsolescence write-offs of parts inventory of approximately $150,000 based on design changes and scrap costs of approximately $240,000 related to early manufacturing of the MicroCutter.

R&D expenses for fiscal 2014 fourth quarter approximated $1.8 million compared to approximately $2.3 million for the fiscal 2013 fourth quarter. The decrease in R&D expense is due primarily to lower expenses for prototype parts and materials and the completion of the European MicroCutter clinical trial.

Selling general and administrative expenses for fiscal 2014 fourth quarter were approximately $2.4 million compared to approximately $1.4 million in the same period of fiscal 2013. The increase in SG&A expense was primarily due to the hiring of additional sales and marketing staff and MicroCutter sales representatives and increase in MicroCutter demo and sample expenses as part of our marketing and training efforts, increased marketing efforts for the MicroCutter and stock option compensation expense related to the amortization of the fair value options.

Total operating costs and expenses for the fiscal 2014 fourth quarter were approximately $5.5 million compared to approximately $4.6 million for the same period fiscal 2013. For fiscal 2014 fourth quarter our next loss before the deemed non-cash preferred stock dividend was approximately $4.7 million or $0.06 per share.

GAAP net loss allocable to common shareholders for the quarter included a deemed non-cash preferred stock dividend of $1.9 million resulting in a net loss allocable to common stock holders of $6.6 million or $0.08 per share for the quarter. The deemed dividend relates to the recent public offering and is based on the difference in the closing price per share on the commitment date of $0.95 and the underlying conversion price of $0.85 for the preferred stock in the follow-on offering. This is called a beneficial conversion feature.

I would like to point out that the deemed dividend is an accounting convention and is a one-time non-cash charge and has no impact on stockholders equity. Cash and short term investments at June 30, 2014 were approximately $42.8 million compared to approximately $2.9 million at March 31, 2014. During the quarter we raised approximately $44.5 million in net proceeds to an unwritten public through an underwritten public offering of common and preferred stock. This equity capital raise strengthens our balance sheet significantly. We further improved our balance sheet during the last quarter when Century Medical agreed to extend the due date of the $4 million loan to us for two years from September 2016 to September 2018.

I will now turn the call back to Bernard.

Bernard A. Hausen

Thank you, Bob. While we have accomplished significant corporate product and financial milestones in fiscal 2014 we believe the year ahead will be one of continued growth. We expect to continue to book revenue from commercial sales of the XCHANGE 30 in Europe and the United States. We expect to further refine, improve and expand the MicroCutter product line in the months to come. We are pleased with the market uptake of the product today, particularly in the focus tissue range within which the MicroCutter operates safely and effectively. Our desire is to expand this tissue range as much as possible.

Efforts have been ongoing for many quarters to this end and we intend to launch a new iteration of the XCHANGE 30 by the end of the current quarter that will expand this capable tissue range by approximately 30%. We believe this will provide surgeons with a product that is more robust and versatile. We are currently in a transition phase from the existing product to the new iteration. We also plan to introduce a short shaft MicroCutter XCHANGE 30 later this quarter. We plan to submit regulatory documentation for the XCHANGE 45 for both 510(k) and CE Mark clearances and begin use in humans by the end of 2014.

We plan to submit regulatory documentation for the XCHANGE 45 for both 510(k) and CE Mark clearances and begin human by the end of 2014. Also we expect market clearance of the MicroCutter XCHANGE 30 in Japan in calendar 2014. We look forward to keeping you apprised of our progress in the months ahead. It is an exciting time for Cardica. At this time we would like to open the call for questions.

Question-and-Answer Session

Operator

Okay, (Operator Instructions). And our first question comes from Tao Levy from Wedbush.

Tao Levy - Wedbush

Hi, good afternoon.

Bernard A. Hausen

Hey Tao.

Tao Levy - Wedbush

Hi, just a couple of quick questions. So first off I looked at the 15 U.S. hospitals that are ordering, were they -- are there more hospitals that are performing procedures than are ordering, so it’s closure to that 38 VACs that you have gone through. This is again as of the end of June.

Bernard A. Hausen

Yeah, the typical process in most of the U.S. hospital is that once it’s through the VAC they are asking for free product for a number for a number of trail cases to evaluate the product and at the end of that there is a reassessment and either ordering or not ordering depending on the vote of the surgeons involved. So obviously out of the 34 there is the majority of which have or are trialing 15 have ordered to-date as of June 30.

Tao Levy - Wedbush

Perfect, okay. And out of the ones who that have evaluated the product any that have not to go through with the order, I am sorry the one who are through the VACs, any who have not decided to order the product and kind of what’s been the pushback?

Bernard A. Hausen

Yeah we have some hospitals that have decided not to order based on the price negotiations, we had with them or they have asked for discounts without volume commitments that we could not commit to at this point and that we will revisit at some later time point.

Tao Levy - Wedbush

Okay, great. Thank you.

Bernard A. Hausen

Thanks Tao.

Operator

Our next question comes from Charles Haff from Craig-Hallum.

Charles Haff - Craig-Hallum Capital Group

Hi, thanks, can you hear me okay?

Bernard A. Hausen

We can.

Charles Haff - Craig-Hallum Capital Group

Congratulations on a nice start to the XCHANGE 30. A couple of questions I had for you. What kind of surprise you either positively or negatively this quarter since you had the launch so recently. I know this is kind of a new experience for you with this product so I am just kind of wondering maybe what surprised you versus your projections.

Bernard A. Hausen

The positive feedback we have received from surgeons on the product it is just being reiterated almost every time we go in front of the surgeon or into a hospital, not just on the surgeons the entire OR stuff that look at it say, wow that’s small, how can that be so small. Can you even do this and then when its gets used in a case that’s very rewarding and that’s what we were hoping for. But there are still little bit of element of surprise in there. And negatively I guess the process that has now been established in hospitals for getting new product be it as beneficial for patients as it maybe such as the case for XCHANGE 30 is so prolonged and quite difficult and it’s -- I wouldn’t say it’s an obstacle but it definitely impacts the timing of how we can push product into a hospital.

Charles Haff - Craig-Hallum Capital Group

Okay. And following-up and your last point, Bernard the ones that the hospitals that had VAC approvals and were receiving free product but how long is the typical time that it takes for them to flip over to ordering as a paying customer how long does that process usually take?

Bernard A. Hausen

It varies significantly from a few days to even months.

Charles Haff - Craig-Hallum Capital Group

Okay.

Bernard A. Hausen

We can bridge, some time we can bridge that period by doing what’s called a trunk stock. We bring in product for the case and then we bill the hospital for products used. But so that’s one way the surgeon doesn’t too frustrated and we kind of circumvent the process a little.

Charles Haff - Craig-Hallum Capital Group

Okay, and then my last question is regarding the XCHANGE 45 and the regulatory path there. Any updates that you can give, I mean I image that the XCHANGE is a pretty solid predicate since it’s very similar but anything else that we should be aware of in terms of the regulatory process that could be a risk or do you feel highly confident that you are going to get that approval?

Bernard A. Hausen

I think the XCHANGE 30 is an excellent predicate for the 45 as you pointed out correctly. But it is a different product. It is going to require a 510(k) submission and with that all the uncertainties that come with any submissions to a regulatory body. We are not expecting any surprises; we are definitely not expecting having to perform a clinical trial for it. So I think there should be well managed, and I think we have a very good regulatory strategy to get through this whole process in the time we are announcing at this call.

Charles Haff - Craig-Hallum Capital Group

Okay, great. Thanks for taking my questions.

Bernard A. Hausen

Absolutely.

Robert Y. Newell

Thank you, Charles.

Operator

Great. Our next question comes from [Faisal Shafi from SOX].

Unidentified Analyst

Hi, good afternoon.

Bernard A. Hausen

Hi. How are you?

Unidentified Analyst

Very well. I had a question for you. My question is regarding your operation cost and some of your cost that you had there as you are growing as an organization. Have you found any opportunities to kind of reduce some of those cost and streamline some of the processes? I know you mentioned you are looking to increase your production, looking at some of that which should generally increase the cost of any projects or thoughts down the road that you look at or may be in the works?

Robert Y. Newell

We are spending a lot of effort on reducing product cost. And ironically, sometimes that end up hitting the current product cost. I mentioned part of the cost of goods sold this quarter included a $150,000 write-off of obsolete inventory part. Those parts were written off because we’ve designed new parts at a lower cost and which we’re currently using in the product. So that effort is ongoing. And we have some very significant goals to drive cost down for our device. We are already making very good progress in driving the cost down for our cartridge.

Unidentified Analyst

Okay, great. And then another question, I don’t know how much you can touch on this. But as far as any outstanding AR or anything on the aging balances, is there any efforts or…

Bernard A. Hausen

I am hesitant to say this; we have never had a write-off. So our AR is very good. Our customers always pay us, sometimes they are little slow but they always pay us. So our AR is very solid.

Unidentified Analyst

That’s good to know. Thank you so much.

Operator

(Operator Instructions). All right. It looks like there are no further questions. So I’ll turn it back to Barnard Hausen for closing remarks.

Bernard A. Hausen

Thank you for joining our call today. We look forward to seeing you or some of you at the Wedbush Investor Conference August 12th in New York or and the Craig-Hallum Conference in September 18th also in New York. Bye.

Operator

Thank you so much. This does conclude today’s conference. Thanks for your participation. You can disconnect and have a wonderful day.

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