Q2 2006 Curon Medical, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen, and welcome to the Curon Medical 2006 second quarter conference call. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session following today's presentation.

Please note this call is being recorded. I would now like to turn the presentation over to the Company's President and Chief Executive Officer - Mr. Larry Heaton. Please go ahead, Sir.

LARRY HEATON, PRESIDENT AND CEO, CURON MEDICAL: Thank you. Good afternoon and welcome. Thank you for spending some time with us this afternoon as we discuss Curon Medical's second quarter 2006 performance. Before we go ahead with any further remarks I would like to inform everyone listening to this conference call that certain of the matters we will discuss today or answers 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 affect our results are detailed in our period 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 Affect Future Results and our quarterly report on Form 10-Q for the fiscal quarter ended March 31st, 2006 filed with the SEC on May 15, 2006.

You can access this document on 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.

I would like to take just a moment to introduce the people who are with me here on the call as we may turn to them during the Q&A session. Alistair McLaren, our Chief Financial Officer; our Controller [Raji Peshi]; Steve Barton, our Vice President of Operations and Carlos Babini, Executive Vice President of Sales and Marketing and President - Int'l.

To review the results of the second quarter we will highlight the following areas. Financial results - including sales, margins, earnings and balance sheet; production update; sales performance and we will get into detail on the Stretta system and then the Secca system.

With respect to our financial results on the top line, Curon Medical had sells of 1,108,000 in the second quarter. This compares to sales of 1.1 or 1.152 million in the second quarter of 2005 and 536,000 sold in the first quarter of 2006. From a unit perspective in the second quarter unit sales were 13 Stretta control modules and four Secca control modules plus the placement of one additional Stretta control module and six additional Secca control modules for evaluation.

In addition since our last conference call we have upgraded the Stretta control modules of three customers to the newer version, which enables a shorter procedure time. Sales of disposables were 435 Stretta disposable catheters and 188 Secca disposable hand pieces. We also had some back orders in these areas and we will talk about those in details in a moment.

We will be looking at these sales figures overall in greater detail as well in just a moment.

Margins. Gross margins for the second quarter totaled $345,369 or 31% of sales. This marks only the second time in the Company's history that we generated positive gross margins in the first meaningful margins on the percentage basis. This was primarily a result of us outsourcing disposable manufacturing and working through the accompanying transition period.

With the transition essentially completed in the second quarter, as we look to future orders we expect gross margins to be in at around 50% and rise from that level.

Earnings. Net loss for the quarter was $275,000 or $0.03 per share versus the second quarter 2005 loss of $3,746,000 or $0.45 per share and the first quarter 2005 income of $914,000 or $0.02 per share. This swing was primarily attributable to the impact of the intellectual property licensing transaction with BARRX for 2,928,000, net of no discount reported in the first quarter of 2006. And Novasys for 650,000 which was booked in the second quarter.

The impact of the change in options accounting was an expense of 177,000. The potential liability on the balance sheet related to certain warrants decreased in the first quarter as our share price fell, accounting for a non operating gain of 1,168,000.

As of the end of June 2006, we had approximately 1.7 million in cash and cash equivalents on hand. Subsequent to the end of the quarter we received the final installment of $1 million due to Curon from BARRX Medical from the previously reported IP transaction enhancing our cash balance.

We believe the cash burn for the quarter will now fall in the 1 to 1.5 million range. You may note that our cash burn for last quarter was essentially $1 million. Of course we received in cash 650,000 from Novasys, which would make our operating burn about 1.6 million - very close to the low end of the 1.5 to 2.0 million estimate we gave on last quarter's call.

We have previously disclosed the going concern opinion published in our 10-K report and the highlighted need to raise additional cash to secure future -- to sustain future operations. If we're not able to raise additional funding and or don't reduce our burn rate we will not have sufficient cash to operate the Company through the fourth quarter of 2006.

As discussed on previous conference calls, management's objective has been to secure additional funds to enable us to build value in the Company, while considering the impact on existing shareholders from various types of financing. With this in mind, we executed the previously announced IP transaction with BARRX and Novasys. We're currently considering various other forms of securing additional funds; clearly the comments I make about our future plans are contingent on our successfully addressing the cash situation, prior to the end of the fourth quarter.

Production. We reported on last quarter's call that our outsourced manufacturing partner had successfully begun production of the Secca and Stretta disposable products, actually manufacturing their first products or finished goods inventory - a bit ahead of schedule - just before the end of the year and were in the process of ramping production to required levels.

As we reported on that call, at the end of the first quarter we experienced a disruption in the flow of products to finished goods primarily the result of delays in the availability of certain component parts, upon which outside vendors needed to perform certain additional operations upon, to produce the final component parts needed for the final assembly of our finished products. This disruption resulted in a back order situation for us that began in March.

As a result, at the end of the first quarter we had orders that were unshipped totaling approximately $106,000. …