Restore Medical Reports First Quarter Financial Results

Restore Medical, Inc. (NASDAQ: REST), developer of the innovative Pillar® Palatal Implant System — a proven and effective in-office treatment for people suffering from snoring and mild to moderate obstructive sleep apnea (OSA) that improves the lifestyles of patients and their bed partners by helping them to sleep better, feel better and live better — today announced financial results for the three months ended March 31, 2007.

Net sales for the first quarter of 2007 were $1.1 million, approximately equal to net sales of $1.1 million for the fourth quarter of 2006 and down 36% from net sales of $1.8 million for the first quarter of 2006. U.S. sales were $1.0 million for the first quarter of 2007, an increase of 8% from U.S. sales of $940,000 for the fourth quarter of 2006 and 12% below U.S. sales of $1.2 million for the first quarter of 2006. International sales were $111,000 for the quarter, compared with international sales of $166,000 and $599,000 for the fourth quarter of 2006 and the first quarter of 2006, respectively. Lower international sales in the first quarter reflect the Company’s previously announced decision to focus efforts on its higher margin U.S. business, and to manage, but not invest in, its lower margin international business.

Gross profit for the first quarter of 2007 was $856,000, or 76% of net sales, compared with gross profit of $1.2 million, or 66% of net sales for the first quarter of 2006. This improvement in gross margin was the result of increased production efficiencies, reduced manufacturing expenses and a revenue mix that favored higher margin U.S. sales.

The reported net loss for the first quarter of 2007 was $4.2 million, or $0.26 per share, compared with a net loss of $3.1 million, or $2.48 per share, for the first quarter of 2006.

“We have completed restructuring our U.S. sales organization and during the quarter, we began implementing a consultative sales approach with selected high-potential ENT sleep practices across the country,” said Bob Paulson, president and CEO of Restore Medical. “While the full benefit of these fundamental changes to our sales and marketing strategies will take some time to realize, we are very encouraged with the early indications of success we are seeing at several targeted accounts.”

Paulson continued, “We introduced a number of innovative programs during the quarter to support our new consultative sales approach to select high volume/high potential ENT sleep practices. For example, we coordinated our first ‘community health seminar’ at a leading medical center where approximately 150 individuals or couples suffering from snoring and/or obstructive sleep apnea were educated about their treatment options, including the Pillar Procedure, resulting in nearly 20% of attendees making an appointment with the physician presenter at the end of the seminar, and 80% of participants asking for additional information. We will use this program as a model for organizing similar programs throughout the country with selected key practices. We also launched a wide array of new marketing initiatives, including revised marketing and practice support materials designed to help our key physicians build their sleep practices. We continue to advance data from recent clinical studies, including Level 1 data, to provide the medical community with additional compelling clinical validation of the efficacy of the Pillar Procedure to treat snoring and mild to moderate OSA. We initiated a novel clinical study designed to evaluate the effectiveness of using Pillar implants in combination with Continuous Positive Airway Pressure (CPAP) to reduce CPAP pressure levels and improve patient compliance. In addition, post-procedure follow-up was completed on a 100 patient Level 1 multi-center trial Pillar placebo OSA clinical study, and the abstract reporting the results of this study was accepted for presentation at the Annual Meeting of the American Academy of Otolaryngology in September.

“We are confident that the successful execution of our consultative sales approach, combined with our new practice development and support initiatives and a growing body of Level 1 clinical data, will be the foundation for revenue growth in the latter half of 2007 and beyond. Because our cost structure is largely in place, we expect that sales growth driven by our new sales and marketing strategies will have a significant impact on our bottom line,” concluded Paulson.

Restore Medical had cash, cash equivalents and short-term investments of $19.3 million as of March 31, 2006, compared with $23.8 million as of December 31, 2006.

Financial Outlook

Consistent with previously issued guidance, the Company expects total operating expenses in 2007 to be approximately equal to 2006 operating expenses. The Company expects the annual growth rate of domestic sales in 2007 to be comparable to the annual growth achieved in 2006, with a modest improvement in revenue between the first and second quarters of 2007. International sales are expected to decrease in 2007 compared with 2006 as the Company focuses on managing, but not investing in, the lower-margin international business.

Forward-Looking Statements

Except for historical information, this press release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included in this press release that address activities, events or developments that Restore Medical expects, believes or anticipates will or may occur in the future, including, particularly, statements about its expected growth in net sales, sales force hires, future financial and operating results and financial guidance, are forward-looking statements. All forward-looking statements are based on assumptions made by Restore Medical’s management based on its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the Company’s control, and which could cause actual results or events to differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market demand and acceptance of the Company’s products, competitive factors, pricing and third-party reimbursement for the Company’s products, expansion and rate of success of the Company’s sales force, completion and results of clinical studies, ongoing regulatory compliance, success of new product development, general economic conditions and seasonal trends, and other risks and factors that are discussed in documents filed by Restore Medical with the Securities and Exchange Commission from time to time, including its Annual Report on Form 10-K for the year ended December 31, 2006. Forward-looking statements represent the judgment of the Company’s management as of the date of this release, and Restore Medical disclaims any intent or obligation to update any forward-looking statements.

Conference Call and Webcast Information

Management will be hosting an investment-community conference call today beginning at 4:30 p.m. Eastern time (3:30 p.m. Central time) to discuss these financial results, to provide a business update and to answer questions.

To participate in the live call by telephone, please dial 800-642-1381 from the U.S. or 706-634-7417 from outside the U.S. A telephone replay will be available for 48 hours by dialing 800-642-1687 from the U.S. or 706-645-9291 from outside the U.S., and entering reservation number 7297400.

Individuals interested in listening to the conference call via the Internet may do so by visiting www.restoremedical.com. A replay will be available on the Company’s web site for 30 days.

About Restore Medical and the Pillar Procedure

Restore Medical develops, manufactures and markets innovative medical devices to treat sleep-disordered breathing. The Company’s proprietary Pillar® Palatal Implant System is the only implantable palatal device to treat snoring and mild to moderate obstructive sleep apnea to be approved by the U.S. Food and Drug Administration and by Health Canada, and to have received the CE Mark for sale in the European Union. The Pillar Palatal Implant System is sold throughout the U.S. and Canada, and in various countries in Asia Pacific, Europe, South America and the Middle East.

For more information about Restore Medical, the Pillar Procedure and physicians who offer the Pillar Procedure in the U.S., visit the company’s website at www.restoremedical.com or www.pillarprocedure.com.

RESTORE MEDICAL, INC.

Condensed Statements of Operations

(Unaudited, in thousands, except share and per share amounts)

 

Three months ended

March 31

2007 

2006 

Net sales

$ 1,124 

$ 1,752 

Cost of sales (1)

268 

590 

Gross margin

856 

1,162 

Operating expenses:

Research and development (1)

1,052 

613 

General and administrative (1)

1,315 

1,517 

Sales and marketing (1)

2,734 

1,876 

Total operating expenses

5,101 

4,006 

Loss from operations

(4,245)

(2,844)

Other income (expense):

Interest income

284 

28 

Interest expense

(196)

(84)

Preferred stock warrant loss

- 

(163)

Other, net

- 

9 

Total other income (expense)

88 

(210)

Net loss

$ (4,157)

$ (3,054)

 

Basic and diluted net loss per common share

$ (0.26)

$ (2.48)

 

Basic and diluted weighted average common shares outstanding

15,971,951 

1,233,943 

 

(1) Includes stock-based compensation of:

Cost of sales

$ 23 

$ 8 

Research and development

22 

23 

General and administrative

465 

285 

Sales and marketing

94 

29 

$ 604 

$ 345 

RESTORE MEDICAL, INC.

Condensed Balance Sheets

(Unaudited, in thousands, except per share amounts)

 

March 31,

December 31,

Assets

2007 

2006 

Current assets:

Cash and cash equivalents

$ 5,103 

$ 11,377 

Short-term investments

14,181 

12,463 

Accounts receivable, net of allowance for doubtful accounts of $24 and $86, respectively

879 

1,262 

Related-party receivables

54 

33 

Inventories

670 

598 

Prepaid expenses

201 

237 

Other current assets

34 

10 

Total current assets

21,122 

25,980 

Machinery and equipment, net

556 

539 

Deferred debt issuance costs, net of accumulated amortization of $138 and $108, respectively

216 

246 

Total assets

$ 21,894 

$ 26,765 

 

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$ 130 

$ 670 

Accrued expenses

498 

939 

Accrued payroll and related expense

559 

519 

Current portion of long-term debt, net of debt discount of $37 and $37, respectively

2,263 

2,192 

Total current liabilities

3,450 

4,320 

Long-term debt, net of debt discount of $29 and $37, respectively

2,268 

2,863 

Other long-term liabilities

14 

14 

Total liabilities

5,732 

7,197 

 

Stockholders’ equity:

Common stock $0.01 par value: 50,000,000 shares authorized; issued and outstanding 15,672,819 and 15,534,244 shares, respectively

157 

155 

Additional paid-in capital

93,259 

92,772 

Deferred stock-based compensation

(1,133)

(1,395)

Accumulated deficit

(76,121)

(71,964)

Total stockholders’ equity

16,162 

19,568 

Total liabilities and stockholders’ equity

$ 21,894 

$ 26,765