Executives
Ali Haghighi-Mood – CEO
Vincenzo LiCausi – VP of Finance and Administration, and CFO
Cambridge Heart, Inc. (CAMH) Q2 2008 Earnings Call Transcript August 7, 2008 4:30 PM ET
Operator
Thank you for joining Cambridge Heart's second quarter 2008 conference call. On the call today from Cambridge Heart is Dr. Ali Haghighi-Mood, Chief Executive Officer and Mr. Vincenzo LiCausi, Chief Financial Officer.
Before we begin, the company has asked me to remind everyone that today's call will include statements and remarks considered as forward-looking under the provisions of the Private Securities Litigation Reform Act of 1995. These statements and remarks are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated and indicated. For a more detailed discussion of the risks and uncertainties of the company's business, please refer to the company's statement filed with the Securities and Exchange Commission, including the company's most recent Annual Report on Form 10-KA.
At this time I would like to introduce Dr. Ali Haghighi-Mood.
Ali Haghighi-Mood
Thank you, Karen. Good afternoon, everyone, and thank you for joining our second quarter earnings call. Alongside me is Vincenzo LiCausi, our Chief Financial Officer.
In our last call, we introduced a new technology placement program for our MTWA product to better align economic interests and needs of the company with those of the physician community we serve. We launched the program with a new sales approach that allows us to partner with our physician customers more efficiently – more effectively and efficiently. Although it will take some time to fully realize the benefit of this selling strategy, we believe that the program will allow us to more effectively penetrate the market place and expand our footprint. Before discussing the progress we have made with our new initiative, I would like to turn the call over to Vincenzo who will review the Q2 financial results.
Vincenzo LiCausi
Thank you, Ali. Revenue for the second quarter of 2008 totaled $927,000 down 65% compared to revenue of $2,653,000 reported in the second quarter of 2007. For the first six months of the year, total revenue was $2,104,000, down 60% over the same period in 2007.
Alternans revenue for the second quarter of 2008 was $614,000, which accounted for 66% of total revenue compared to 84% in the same period last year. For the first six months of 2008, Alternans revenue totaled $1,614,000, which accounted for 77% of total revenue compared to 87% in the same six-month period last year.
Equipment sales as a percent of total revenue for the second quarter was 40% versus 69% in 2007. Equipment sales as a percent of total revenue for the first six months ended June 30, 2008 was 48% versus 70% in 2007.
Gross margin as a percent of revenue for the second quarter was 43% compared to 64% for the same period last year. Year-to-date gross margin was 48% compared to 64% in 2007. The reduction in gross margin was primarily due to lower sales volume relative to our fixed costs in manufacturing.
SG&A expenses were $1.1 million lower in the second quarter of 2008 versus 2007. The year-to-date SG&A expenses in 2008 decreased $2.8 million compared to 2007's SG&A expenses for the same six-month period. The decrease in SG&A expenses was due to less commissions as a result of lower sales, fewer sales headcount, and less selling and marketing cost in connection with the co-marketing agreement with St. Jude Medical.
The company's overall loss from operation for the quarter was $2,630,000, an increase of approximately $200,000 when compared to last year's second quarter operating loss of $2,423,000. For the six months, the operating loss was $5,178,000, a decrease of nearly $500,000 compared to the same period last year.
The net loss for the second quarter of 2008 was $2,559,000 or $0.04 per share compared to $2,203,000 or $0.03 per share for the same period last year. For the first six months of this year, the net loss was $4,941,000 compared to a net loss of $5,358,000 in 2007. Year-to-date net loss per share for both 2007 and 2008 was consistent at $0.08 per share.
The company ended the second quarter with $2,934,000 of cash, net of $500,000 of restricted cash and investments of $8,838,000 reported on a fair value basis.
In light of recent developments in the financial markets, I'd like to comment on the status of our investments. The company's investments consist of auction rate securities with triple-A credit rating and are backed by student loans mostly guaranteed by the U.S. Department of Education. As you know, the asset backed securities market has been experiencing liquidity issues during the past few months. Historically, student loan backed auction rate securities have been reliable and liquid for over 23 years. Although the underlying debt instruments are secure, credit and liquidity constraints in the financial markets have led to failed auctions. Many companies including Cambridge Heart have had difficulties selling these investments, thereby resulting in a reclassification from current to long-term assets and a mark down in carrying value to reflect the impact of the present illiquidity.
As a result, the company recognized an impairment of $412,000 recorded as a temporary unrealized loss in other comprehensive income. At this time the write-down has not impacted the P&L. However, if the impairment is deemed to be other than temporary, the company may have to take a charge to its earnings.
In this regard, the company has taken steps to address its working capital needs. First, we secured a revolving line of credit with Citigroup Global Markets for borrowings of up to 50% of the par value of the company's auctions – investments in auction rate securities, which as of June 30, 2008 was $9,250,000. As of the end of the second quarter, the company had drawn down $2.5 million on this line of credit, which is included in the reported ending cash balance.
Secondly, we are actively engaged with Smith Barney Citigroup to resolve this liquidity issue. Just this morning Citigroup along with the New York Attorney General and the SEC announced a settlement requiring Citigroup to buy back auction rate securities from its customers at par. It's too soon to say how this will impact us but we are very encouraged by this development.
In addition, there are discussions about possibly repackaging these securities with other investment instruments that would be more attractive to potential buyers. This program has not yet been formalized and would require some time before it gains traction in the marketplace.
The company's cash used by operations totaled $1,242,000 in the second quarter and $2,239,000 year-to-date compared to $1,647,000 and $4,361,000 in 2007. The decrease in cash burn was primarily due to lowering selling costs as previously described. We believe that given the current and expected rate of cash used in operations relative to our borrowing capacity and with the potential solutions for liquidating our investments, at this time we are currently not planning on raising capital during the next twelve months. Ali will provide additional color to this momentarily.
In terms of debt the company ended the quarter with total liabilities of $4,304,000, an increase of $2.3 million compared to the prior quarter. This increase is due to the $2.5 million drawdown on the line of credit that I just mentioned. Our share count remains relatively the same at 64.7 million common shares issued and outstanding and 76.9 million common equivalent shares outstanding on a fully diluted basis.
Now I'd like to turn the call back over to Ali.
Ali Haghighi-Mood
Thank you, Vincenzo. First, I would like to provide my views on our capital needs going forward. We continuously assess our cash position and capital requirements for the future. In addition to the cash resource as Vincenzo mentioned, I would like to add that our cash flow will be directly impacted by the rate at which our new sales and marketing initiatives progress, our ability to establish synergistic alliances or distribution partnerships and our ability to curtail the cost of selling. We will assert our needs to raise capital in the future based on the execution and timing of this sales and strategic initiatives. Cash may well be required if sales targets are not met. If the company does have to identify other sources of capital, we will be very mindful of any dilutive effect to our shareholders.
As most of you will recall, we introduced our new placement program on our last conference call. We are now involved in a new kind of selling incorporating new and better ways to approach our physician partners and to work closely with them as a consultative organization. While many capital equipment companies are often described as having a hit-and-run approach, we are focused on providing comprehensive service to help customers integrate MTWA technology into their practice.
To ensure the success of this new approach, we are rebuilding what is now a dedicated and unrestricted sales team and retraining them on this program. We are also rebuilding our sales pipeline with a refined target profile that we feel will shorten the sales cycle. We believe that these fundamental changes will be beneficial for Cambridge Heart but recognize that they will take time to bear out. Our Q2 results reflect this time line along with the overall economic landscape, which has slowed purchasing decisions. That said, we believe that our new placement program once fully in place will help minimize the financial disruption with a more predictable pattern of growth.
The response to our new approach is positive and we believe that the result of the second quarter should not be considered an indication of its overall effectiveness. We are beginning to see signs that our new initiatives are gaining traction and, in fact, we have placed more systems to date in the current quarter than we did in the entire second quarter.
While we are seeing progress, we recognize that organic growth takes time. For this reason, we are simultaneously pursuing other options to more rapidly expand our footprint. These include distribution channels to other medical device companies experienced in capital equipment sale and diagnostic services and with a customer base similar to that of Cambridge Heart. While the outcome with regard to such potential opportunities is not certain, we are actively pursuing these options. We look forward to having the opportunity to share development in this area as progress is made.
With regard to St. Jude Medical, our original agreement has now been amended to make it non-exclusive. I'm pleased to say that we continue to work jointly with them on educational symposia, co-marketing initiatives, and trade shows, including the upcoming Heart Failure Society of America meeting in September and the AHA Scientific Session in November. We'll also continue to cooperate with St. Jude – with St. Jude sales force to support existing customers and to identify new opportunities.
One of the highlights of the second quarter came in May when CMS issued the final determination regarding the National Coverage Determination for MTWA technology. We are very pleased that CMS reiterated that MTWA testing is covered only when the Spectral Analytic Method is used. We believe this decision reaffirm that the unique clinical utility of our test validates our marketplace and confirms our contention that MTWA will play an important role in the future of cardiac diagnostics.
Another important highlight of the second quarter was the MTWA analysis presented by Dr. Stefan Hohnloser at the Annual Scientific Session of the Heart Rhythm Society in May. Dr. Hohnloser presented data on 6,000 patients, which showed MTWA to be a highly accurate predictor of arrhythmic events in clinical trials, which did not use ICD shock as a surrogate endpoint. Dr. Hohnloser, Director of Electrophysiology at J.W. Goethe University in Frankfort, noted that MTWA is a consistently accurate predictor of sudden cardiac death and cardiac arrest in patients who do not already have implanted ICDs, the precise population for whom MTWA is intended.
This MTWA analysis is an important validation to our technology and we believe that it helped to remove any lingering confusion in the marketplace that may have been created from studies like MASTER.
In June, we announced the licensing of an important package from MIT with broad claims regarding the measurements of T-Wave Alternans from inter-cardiac signals. Such a feature may allow device to monitor dynamic changes in arrhythmics vulnerability and potentially prevent sudden cardiac death by initiating therapies before an arrhythmia begins. Currently implantable defibrillators treat these rhythms only after they have been initiated by delivering a high-energy shock to the patient. We believe this new patent is a valuable addition to our extensive intellectual property portfolio. We are currently exploring opportunities to capitalize on this asset through partnership with major players in the CRM space.
In summary, we believe that MTWA technology continues to prove its value to physicians and patients as a life saving tool and we are embarked on a series of new tactical and strategic initiative to expand its clinical use. We are optimistic that this initiative will help us to achieve our ultimate goal that is to reduce the impact of sudden cardiac death and at the same increase shareholder value through revenue growth and sustained profitability. So I'll update you on the progress we make on this initiative, which we believe will demonstrate their effectiveness, in the coming quarters.
This concludes our prepared comments. Now I would like to open the line for Q&A.
Question-and-Answer Session
Operator
(Operator instructions) There are no questions at this time.
Ali Haghighi-Mood
Since there are no live questions at this time, I would like to take an opportunity to respond to some common questions that we have received from our investors through our website and our Investor Relation line. We often receive questions regarding our relationship with St. Jude Medical, especially what are the terms of the new agreement and what are the minimums and associated remedies under the original agreement?
Regarding the minimums, per our agreement with St. Jude Medical, some of the details of the co-marketing agreement are confidential. We understand that our investors are very interested in this information, but we cannot share these details per our contractual obligations at this time.
Regarding the amendment, the original co-marketing agreement helped us to address the EP community and disseminate our message to a broader audience. However, we did not meet expectations regarding sales performance. The new agreement allows us to maintain co-marketing initiatives with St. Jude while assuming full responsibility for the sales process. The main component of the new agreement is its non-exclusivity.
Our sales team has no restriction regarding their sales activities and can approach any account they believe is an appropriate sales target. St. Jude's remains the only CRM partner with whom we will co-sponsor events and co-brand marketing materials. Through this agreement we continue to work with them to identify accounts and promote the technology.
Regarding the time frame of six months for 300 systems, these terms are benchmarks, which will give us enough experience under the new arrangement to access our performance. We are pleased with the current level of collaboration and look forward working with them at the upcoming HFSA and AHA meetings.
Another common question relates to Investor Relation and what we are doing to improve communication with our shareholders. We are pleased to announce that we have engaged an investor relations firm, Allen and Caron, the group with extensive experience in the medical devices space. We are actively working with them on a communication plan and they will serve as an additional resource for investors to supplement to our IR line and website. The contact information for Allen and Caron is included in our latest press release.
We have also received many questions regarding our new placement program and how it's been received in the marketplace. In general, we view the program – the new program as more than just another financing option for our customers. Cambridge Heart sees this as an opportunity to adjust our sales process with the aim of partnering with our customers to more successfully integrate T-Wave Alternans technology into their practices.
The new approach has been well received by our sales reps and customers and we believe that the results of the second quarter are not a good indication of its overall effectiveness. We are beginning to see signs that our new initiatives are gaining traction; and in fact, as I mentioned, we have placed more systems so far this quarter than we did in the entire second quarter.
We have several examples of practices who were convinced of the clinical utility of the test but were not prepared to make a significant upfront capital outlay. The new program remove this hurdle and allowed them to acquire the technology. The current ratio of direct sales versus the new placement program is 70/30, but this may not be an indicative of the split going forward. Ideally we would like to have a bigger share of the direct sales in the short term because of its impact on our capital – our working capital. Long term, however, due to it’s built-in utilization mechanism, the placement program will provide a more steady and predictable revenue stream.
In addition, the new placement program is preferred from the gross margin point of view. We will be able to give you a better indication of the ratio and its impact on our financials as the program matures. And finally we are also commonly asked about our cash position and whether or not we will have to raise money in the near future.
As we discussed during the prepared comments period, we continuously assess our cash position. Our cash flow will be directly impacted by how fast we can place systems, the timeline for establishing distribution partnership, and our ability to control selling costs. We will access our need to raise capital in the future based on the execution and timings of these parameters. Cash may well be required if sales do not ramp in a timely manner.
At this time we have sufficient inventory in-house, which was built up in connection with St. Jude's co-marketing agreement to support the initial phase of our new sales approach. I want to reiterate that neither management nor the Board is interested in selling stock at this level and we are acutely aware of the dilutive impact of such a move.
To conclude the call, I would like to thank everybody for calling in today. We look forward to our call with you around the middle of November to share the progress of our ongoing initiatives. Thank you.
Operator
Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.
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