Q4 2005 Curon Medical, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day and welcome, everyone, to this Curon Medical Fourth Quarter 2005 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the President and Chief Executive Officer, Mr. Larry Heaton. Please go ahead, sir.

LARRY HEATON, CEO, CURON MEDICAL: Thank you. Good afternoon and Happy Groundhog's Day to everyone. Before we go ahead with any further remarks, our lawyers have asked me to inform everyone listening to this conference call that certain of the matters that we will discuss today or answers that we might give to any questions could constitute forward-looking statements that are subject to risks or uncertainties relating to our future financial or business performance. Our actual results could differ materially from those anticipated in these forward-looking statements. The factors that might effect our results are detailed in our periodic filings with the SEC, including but not limited to, those risks and uncertainties listed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations: Factors That May Effect Future Results" in our quarterly report on Form 10Q for the fiscal quarter ended September 30, 2005, filed with the SEC on November 10, 2005. You can access this document in the SEC's EDGAR database found at www.sec.gov. Please note that we are under no obligation to update any of the forward-looking statements discussed today.

So, thank you for joining us this afternoon and spending some time to hear a little bit more about Curon Medical, our Company, our products and its prospects. Before we go any further, I'll just introduce the folks that are here with me on the conference call and that would be Alistair McLaren, our Chief Financial Officer, and our Controller, [Raji Pichai].

To overview or to review the results of the fourth quarter of 2005, we'll highlight the following areas: financial results, a restructuring plan update, a litigation update, sales performance and then, separately, the Secca system and the Stretta system.

Begin with sales. Curon Medical had sales or revenue of 1,022,000 in the fourth quarter. This reflects an increase of 37% compared to sales of 745,000 in the third quarter of 2005 and is essentially the same level of sales as the 1,010,000 sold in the same quarter in 2004.

Units broke out as following: for the fourth quarter, unit sales were 11 Stretta Control Modules and four Secca Control Modules, plus the placement of two additional Stretta Control Modules and seven Secca Control Modules for evaluation. So, in total, we deployed 15 of Stretta Control -- I take that back -- 13 Stretta Control Modules and 11 Secca Control Modules during the quarter. In addition, since our last conference call, we have upgraded the Stretta Control Modules of six customers to the newer version, which enables a shorter procedure time.

Sales of disposables were 452 Stretta disposable catheters and 246 Secca disposable Handpieces. We'll be looking at these sales figures in greater detail in just a moment.

From an earnings standpoint, net loss for the quarter was $0.08 per share versus the third quarter of 2005 loss of $0.02 per share and the fourth quarter 2004 loss of $0.17 per share. The potential liability on the balance sheet related to certain warrants was essentially unchanged, as our share price was similar at the end of the third and fourth quarters of 2005. This compares to the previous quarter's non-operating gain of $0.05 per share. So, in the third quarter, we had a non-operating gain of $0.05 per share. In the fourth quarter, it had no impact. As of the end of December of 2005, we had approximately 3.3 million in cash and cash equivalence on hand.

Last quarter, we announced on this call a restructuring initiative and I'd like to give you an update on that plan now. During the fourth quarter, we executed the restructuring plan that was outlined on the call last quarter. Our objective for the restructuring was to improve margins and reduce operating expense by significantly reducing the overhead associated with in-house manufacturing at relatively low volumes.

The resulted reduction in our workforce, along with reductions in related expenses were expected to enable improvements in both cost of goods and operating expense levels. We are pleased to report that thus far, our restructuring effort has been successfully executed and is on track for attainment of our objectives. Our outsourced manufacturing partner, Life Sciences Outsourcing or LSO in Brea, California, has done an excellent job of getting up and running with both our Secca and Stretta disposable products, manufacturing their first products for finished goods inventory a bit ahead of schedule just before the end of the year. They are currently ramping production to required levels.

As their experience grows with the products, we have the potential for further improvements in gross margins, which we estimate will begin at the 50% level and grow from there as yield improves, larger lot sizes are undertaken and volume driven economies can be realized. Thus, we expect our partnership to continue, even with growth beyond levels at which an in-house manufacturing effort could be economically sustained, as long as margin improvements at our outsourced manufacturer outpace our expectations of what we could achieve with in-house margins.

The reduction in force was accomplished on schedule, enabling future reductions in personnel expense, both in cost of goods and operating expense categories. Subsequent to our reduction in force, we have also seen exit the company a few individuals who …