Cardica Inc. (CRDC) Q3 2015 Earnings Conference Call May 6, 2015 4:30 PM ET
Executives
Bob Newell - CFO
Bernard Hausen - President and CEO
Analysts
Mark Rosen - Craig Hallum
Todd Mitchell - UBS
Operator
Good day, ladies and gentlemen and welcome to the Fiscal Third Quarter Cardica Financial Results Conference Call. My name is Derek, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will facilitate question-and-answer session at the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to Mr. Bob Newell, Chief Financial Officer of Cardica. Please proceed.
Bob Newell
Good afternoon and thank you for participating in our third quarter financial results conference call.
This conference call will include forward-looking statements, including all statements regarding continued clinical and other developments, future product features, future regulatory approvals, 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 MicroCutter products and 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.
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 results reported filed with the U.S. Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter ended December 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 permission 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 Hausen
Thank you, Bob. Good afternoon everyone and thank you for participating in our call.
During the quarter, we continue to work diligently to bring the fourth generation of MicroCutter XCHANGE 30 to the market both in Europe and United States. As you know the MicroCutter XCHANGE 30 is our surgical cutting and stapling device with 5 mm shaft diameter.
Our overarching objective is to provide our customers with surgical stapling capabilities that do not exist today. Our customers, our surgeons practicing multiple specialties with a wide range of needs, offering a surgical stapler that is significantly smaller with greater articulation allow the surgeon to use a smaller port with the potential to significantly reduce trauma to the patient. However, there are also challenges to ensure that the device functions reliably and consistently across a wide spectrum tissue types and thicknesses. I am pleased to report that we continue to make good progress working methodically to address each challenge we face.
At the end of March, following clinical feasibility and approximately 250 deployments in over 100 patients, we introduced modified version of the third generation MicroCutter XCHANGE 30 in Europe. A product compatible with only white cartridge. We are now selling in Europe primarily to our distributors but also through our sales manager in Germany. Our controlled commercial release target surgeons who have been strong at the kits of the MicroCutter device with their institutions and who truly understand the game changing nature of our surgical stapler.
Importantly, we continue to collect clinical data on the completed commercial procedures. To-date, majority of procedures perform with the reintroduced device have been for thoracic or solid organ operations. These surgeries often require significant numbers of vascular deployments. While we have been pleased with the improvements and performance to-date we do want to continue to enhance our vascular performance to further improve human cases, performance while maintaining functionality and reliability.
Turning to the United States we submitted a 510(k) application to the Food and Drug Administration to expand the current IIFU for the XCHANGE 30 to include vascular indications. This submission has been primarily based on intensive bench comparisons to existing staplers with similar indication. The submission was further enhanced by including clinical data from hundreds of vascular deployments performed in Europe.
Currently in United States the XCHANGE 30 is indicated for using small and large colon transactions as well conductivity. A majority of these cases are performed as using the blue cartridge for thicker tissue. By seeking to expand our clearance in the United States to include vascular indications pending FDA clearance we will be able to begin to capture this growing market opportunity. We believe this will help us as we pursue approval from hospital value analysis committees and also in proactively talking to surgeons about the capabilities of the MicroCutter.
Turning to the blue cartridge we continue to address the issues related to our voluntary withdrawal from the end of last year. There is a very good understanding of what factors have impacted performance of the generation through product and what changes are required to improve product performance especially in thicker tissues. We believe we are on track to relaunch XCHANGE 30 with both the white and blue cartridge capability within the next three to five months both in United States and Europe. As we get with the white cartridge we will conduct a clinical evaluation prior to the decision to resume commercial sales. We will announce the initiation of this clinical feasibility assessment. We are taking a comprehensive approach to addressing the changes presented by a device that works with both, the blue and white cartridge and is on the miniaturized scale when compared to traditional surgical staplers. At this time we have thoroughly characterized all component capabilities, the component variability and the resulting design interactions in blue cartridge and the device.
In addition, we have made significant improvements in the strength of materials we use and made design changes which we believe will ensure safe, reliable and repeatable deployments in a wide range of tissue thicknesses.
Turning to our corporate progress. We have hired a new Vice President of Operations who will join us on May 12. We appreciate the significant contribution of Fred Bauer who has served Cardica so well in these past six years and we wish him well in his retirement. At the same time we are pleased to welcome Greg Watson to our management team. Greg brings significant experience and ability to us with over 25 years of medical device manufacturing experience from both small and large corporations. We believe he is the right person with the right skill set for our needs.
At this time, I'd like to turn the call over to Bob to review our financial results. Bob?
Bob Newell
Thanks Bernard.
As Bernard mentioned, Q3 was primarily a clinical evaluation period of the MicroCutter XCHANGE 30 with the white cartridge in Europe which impacted our financial results.
For the fiscal 2015 third quarter total revenue was $564,000 compared to $934,000 for the same period fiscal 2014. Total products sales for the fiscal 2015 third quarter were $548,000 compared with $916,000 for the same period in fiscal 2014. During the fiscal 2015 third quarter we shipped 965 PAS-Port systems bringing cumulative worldwide shipments of our PAS-Port systems to over 40,000 units.
We shipped 40 C-Port systems during the quarter with cumulative worldwide shipments now over 14,600 units. Cost of product sales was $807,000 for the fiscal 2015 third quarter compared to $1.4 million for the same period of 2014, cost of product sales includes approximately $150,000 for scrap and obsolete inventory cost for the MicroCutter. R&D expenses for the fiscal 2015 third quarter were $1.9 million compared to $1.7 million for the same period in 2014 the increase in expansions is primarily due to the clinical valuation of the XCHANGE 30 in the third quarter.
Selling, general and administrative expenses for the fiscal 2015 third quarter were approximately $2.5 million compared to approximately $2.1 million in the same period of fiscal 2014. Total operating cost and expenses for the fiscal 2015 third quarter were approximately $5.3 million compared to approximately $5.2 million for the same period of fiscal 2014. Net loss for the third quarter of fiscal 2015 was approximately $4.8 million or $0.05 per share, net loss for the third quarter of fiscal 2014 was $4.4 million or $0.09 per share.
Cash, cash equivalents and investments at March 31, 2015 were approximately $29 million compared to $33.6 million at December 31, 2014. I will now turn the call back to Bernard.
Bernard Hausen
Thank you, Bob. Our key objectives for calendar 2015 are to use Europe as an important area of commercial learning continue to improve the performance of the MicroCutter XCHANGE 30, obtain FDA clearance and enter the U.S. vascular transaction market and turn into development once we have completed the XCHANGE 30 improvements we expect to reinitiate development of the XCHANGE 45 implementing much of the knowledge currently gained during our improvement efforts of the XCHANGE 30. We look forward to keeping you apprised of our progress, this time we are ready to open the call for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] And our first question will be coming from the line of Todd Mitchell from UBS.
Todd Mitchell
Hey Bob and Bernard thank you for time how are you guys doing?
Bernard Hausen
Hey.
Todd Mitchell
Could you first of all explain I think the word or a phrase you used the modified version can you explain that and regarding the generation four product what modified version is?
Bernard Hausen
The efforts we are doing Todd are to strengthen the structure in the factor to deal with large variety and variability in tissue thickness is that our product is exposed to. We’ve been doing that since generation one the big step was from generation two to generation three major components had been stiffen, strengthened material changed, design changes all to accommodate the enormous forces that actually occur within the jaws as you are clamping on big tissue we are talking 200 to 300 PSI a force that needs to be generated to take tissue that for example is 3 mm in thickness down to a thickness of 0.5 mm which is where the staples will perform adequately with these types of forces you are quite vulnerable if your design is as small as ours 5 mm footprint doesn’t give you that many options and we have to be quite innovative, creative and trying to find changes that will provide more and more steepness strength to attain these types of forces. So we talk about modify what we mean where multiple components continue to refine and change to increase the force we can apply to the jaws and thereby compress tissue to the desired types reliably and safely.
Todd Mitchell
Okay. Along those lines I guess I am just trying to understand where are we on this generation four product in the sense of in previous calls as you give examples of surgeons that have commented on the product talked about the product how it is working where we would regarding getting some key opinion leaders telling us how the product works and giving us understanding because the generation three product was working well until it did reduced it in thousands of deployments from my understanding and I were in the generation four product. Can you give us some examples of surgeons that are working with the product what the feedback has been?
Bernard Hausen
No, right now the only product on the market is the generation three that is limited to being used with white cartridges only and here is a very good examples, I recommend you go to the website either of www.microlobectomy.com and you'll see a large number of examples of how the product is used in minimal invasive lung surgery, very illustrative, well narrated on cts.net which is the biggest form for cardiothoracic surgeons worldwide with over 40,000 members there are examples of the product being used. So for this version that's out right now generation three wide only we have…
Todd Mitchell
Generation four.
Bernard Hausen
No, generation three is the one that is on the market.
Todd Mitchell
Okay.
Bernard Hausen
As we alluded in the call right now is the one we are working on we are saying that in the three to five months we will in patients using white and blue cartridges.
Todd Mitchell
Okay, okay, sorry. Okay, - okay. And congratulations on the higher and Fred he was great. So Greg Watson, where was he? What company does he work?
Bob Newell
He’s been with a number of companies both large and small. He was at Therox for number of years which is smaller medical device company. He also worked at Baxter International and Urinac Everwoods and also at Beck and Dickinson. He had as we mentioned over 25 years progressive manufacturing experience then VP in a number of companies and he is a real good hire for us. Fred choose you know he will hard too hard to fail but Greg is a real good man.
Todd Mitchell
Okay, all right. Where are we regarding R&D replacing?
Bernard Hausen
Yeah, right now. We are operating with a long-term employee, the director of R&D and consultant who is acting VP and these two gentlemen are the leads in implementing the changes that we described for the generation four product. This is working very well and I have a lot of confidence in that team. Our search for a permanent member as a VP is ongoing.
Todd Mitchell
Okay, okay. On another note here regarding and granted you guys are developing the technology here and this has been a total reset regarding not a total reset but we've had lot of changes the white, the blue, the curve, the short shaft, all of those things have kind of been set back here but probably trying to advance a better product but respect of the market here and I am not asking as to comment on the market necessarily but here you guys carry a $40 million market cap with about $29 million to $30 million in cash, which gives you about $10 million to $11 million in IP or valuation for your IP. I mean is there something wrong here or am I seeing something that's not correct or any thoughts on that?
Bernard Hausen
I have a lot of thoughts but maybe some of them probably shouldn't be put on the air, but just a comment about what you said earlier the short shaft, the curve type, those are still available under the white cartridge, hasn’t been any regression on that. So I just think I mean I am speculating people are disappointed with what’s happened but it definitely does not change the value it does not change the opportunity in our eyes that we have or in the eyes of our Board and we are focused on realizing that value as well as we can and I think the way we do it is by executing on the plan that we have getting a vascular indication done with the FDA in the U.S. and finishing this generation four as Bernard has indicated we’ve taken steps to make sure we have the adequate runway the adequate capital to accomplish those goals and I think if we do we will have a very significant valuation.
Todd Mitchell
Okay. One last comment here and I will jump back in the queue but is there any reason why there has not been some substantial insider buying in the company and the reason I ask that is because this is a public company and you guys have been fortunate with what your progress has been unfortunate regarding raising capital but there has been I am surprised that there has not been some substantial insider buying is there a reason behind that?
Bob Newell
We have windows when you can purchase and also there is sometimes judgments made that it’s appropriate for insiders not to purchase.
Todd Mitchell
Okay. I just find it little interesting it sounds like such as great opportunity, so I appreciate all of your time and best of luck with things guys.
Bernard Hausen
Thank you, Todd.
Operator
The next question will be from the line of Mark Rosen, Craig Hallum.
Mark Rosen
Hi Bob, Bernard thanks for taking my questions I am in for Charles Haff he apologize for not being able to make into the call.
Bernard Hausen
Yes -.
Mark Rosen
Just a real question from me, you guys talked about the 510-K application that you guys gave to the FDA what’s the typical timeline that in terms of when it submitted to when your filling is started getting the progress that you want to see?
Bernard Hausen
So once they accept your submission they have a checklist they go through there is a 90 day clock on it, and typically after part of that 90 day you get your first question some are just offline and some are actually officially given to you as a cause in the 90 day review period and then within that period you need to respond and hopefully by the end of the 90 day time period all questions have been satisfactorily answered and the FDA can clear often that is not the case it requires more data to be obtained and that kind of postpone things. So right now we are saying we feel that within this calendar year we can get the clearance from the FDA.
Mark Rosen
Okay, great. And then just a quick housekeeping question, what was the operating cash flow in the quarter and how do you see that kind of trending through the rest of ‘15?
Bob Newell
This past quarter there was $4.6 million of negative cash flow there are a number of factors influencing that one was the restructuring that we did another was paying a number of legal bills we had from the previous quarter, the goal of our restructuring was to get our burn rate down to goal of $3.2 million per quarter we expect to do that by the not this quarter but the following quarter this quarter will certainly be less negative cash flow than the last quarter. And we have two years based on that effort we have two years of cash now.
Mark Rosen
Okay, great. Well that’s all I got guys, thanks again for taking my questions.
Operator
Your next question will be from the line of Kevin Cutler, Bronson Capital [ph].
Unidentified Analyst
Hey guys.
Bernard Hausen
Hey Cutler.
Unidentified Analyst
Hey I was just curious with the changes with the R&D in manufacturing person looks like leaving and I was just wondering where are you adding kind of skill sets on the - scopic instrumentation side to the team which would seem to be kind of the space where you would want to add expertise? And I don’t know if Craig Watson has any of that I mean Greg Watson comes I think from Therox which I think was where your former Chairman came from and I see he comes from Baxter but he doesn’t have laparoscopic implementation. So just maybe other people that are using but you are helping, I can understand that.
Bernard Hausen
Our consultant R&D has that experience and from the production prospective I think you don’t really need to have built the exact instrument for you need to be familiar with the process of medical device manufacturing and have in experience in making parts that require microscopes to be assembled maybe as an adjunct. And as we see that Greg Watson have that skill set. So that is good set.
Unidentified Analyst
Got you, okay. And then I think you called the end of factor the 200 to 300 PSI that these stapling under dose. Was it just from past conference call, when you angle or use the articulation 80 degrees does that typically stress is that when the pressure is greatest on the shift or is it equal whether industry when it is just straight when the stapling just a 180 degree down ahead of the shift?
Bernard Hausen
The ladder.
Unidentified Analyst
Okay. And so it is less when it straight?
Bernard Hausen
No, it is the same, it doesn’t matter.
Unidentified Analyst
Okay, it doesn’t matter. Okay, great. That was my question.
Bernard Hausen
Thank you, Kevin.
Operator
At this time I am no further questions in the queue. I would like to turn the call back over to Mr. Bernard Hausen for any closing remarks.
Bernard Hausen
Thank you very much for being on the call. I look forward to talking to you in a quarter from now. Thank you.
Operator
Ladies and gentlemen that concludes today’s conference call. We thank you for your participation. You may now disconnect. Have a great day.
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