Cardiovascular Systems Inc (CSII) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2013 Cardiovascular Systems Incorporated earnings conference call. My name is Regina and I'll be your conference operator for today. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Larry Betterley, Chief Financial Officer. Please go ahead, Larry.

Thank you, Regina. Good afternoon, and welcome to our fiscal 2013 second quarter conference call.

During the course of this call, we'll make forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding CSI's future financial and operating results or other statements that are not historical facts. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. CSI disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments, or otherwise.

We will also refer to non-GAAP measures, because we believe they provide useful information for our investors. Today's news release contains a reconciliation table to GAAP results. I'll now turn the call over to Dave Martin, CSI's President and CEO, for comments. Dave.

Thank you, Larry, and hello to everyone. CSI delivered another strong quarter. Rapid adoption of our easy-to-use Stealth 360 continued with physicians who treat peripheral arterial disease, or PAD, in both hospital and office-based lab settings. Our technology is scientifically proven as a safe and effective treatment for PAD, especially in diseases complicated by calcium. Our technology is the primary therapy to treat PAD.

We're also working to secure an indication to treat coronary calcium. This is a vastly underestimated problem in medicine today, with the market opportunity estimated to exceed $1.5 billion annually in the U.S. alone. We are making substantial progress on a coronary indication. Completing ORBIT II enrollment was a major milestone for the team in the second quarter.

At TCT this year, Dr. Philippe Genereux presented new data, proving with statistical significance that coronary patients with moderate-to-severe calcium were more likely to die and have major adverse coronary events than patients with mild or no calcium. There is a pressing need for a new solution to effectively fight coronary calcium.

Moderate-to-severe calcium is present in nearly 40 percent of those treated for coronary artery disease, or CAD. Moreover, it is present in about 65 percent of the 2.5 million people diagnosed annually with PAD. Calcium can lead to poor outcomes and higher treatment costs in both coronary and peripheral intervention when traditional therapies are used. This is the CSI opportunity.

As a company, we have three goals. Expand the use of our Stealth system as the primary option for treating calcified arteries in the PAD market; build on our base of scientific data that supports safety, effectiveness and economic benefit of our products; and obtain approval for coronary application, which will allow us to address a large unmet need in treating calcified coronary arteries. We advanced these goals during the fiscal second quarter.

Specifically, revenues grew 28 percent year-over-year and 9 percent sequentially. Stealth 360 revenues grew to 93 percent of total device revenues. Most of our customers are now converted to the new system. Office-based lab revenues continued to grow at a double-digit consecutive quarter rate. We are achieving success in both hospital and office-based lab settings.

We continue to expand on our wealth of clinical data with presentations at the medical conferences supporting the safety and efficacy of our technology, and the dangers and complications of calcium in peripheral and coronary arteries. And as I mentioned, we completed enrollment in our highly anticipated ORBIT II coronary trial.

Now, Larry will provide more details on our financial results and then I'll come back for additional comments before we take your questions.

Thank you, Dave. For the second quarter of fiscal 2013 compared to a year ago, revenues grew 28 percent to $25.3 million. Device revenues were 88 percent of total revenues. More than 7,000 devices were sold in the quarter, bringing the life-to-date total sold to more than 100,000. Reorder revenues remained high at 97 percent of total revenues compared to 95 percent last year. We added 48 new accounts, compared to 41 last year. All of the accounts added this quarter were Stealth accounts. Our Stealth 360 customer base grew 13 percent from the first quarter this year to nearly 900 accounts. Stealth now comprises 93 percent of our total device revenues. Device usage in Stealth accounts is nearly 30 percent greater than our overall average usage per account. Other product revenues grew at a higher rate than total revenue to $3.1 million from $2.2 million, primarily due to strong Asahi wire sales.

Gross profit margin was 76 percent, similar to both last year and the first quarter of this year. The positive effect of higher production volumes was offset by the Stealth higher unit cost and additional costs for the ramp-up of our facility in Texas for additional future capacity. We expect engineering enhancements to Stealth and increasing production volumes to reduce unit cost in the future. However, costs incurred to prepare for our coronary launch may offset these gains in the near term.

As planned, operating expenses rose 30 percent to $24.5 million. Approximately $4.7 million was for the ORBIT II trial and preparation for our coronary launch. We also made investments for competitive enhancements to the sales and marketing, and expansion of medical education programs to drive PAD adoption. All of these investments are geared towards generating higher future revenues.

The 2.3 percent medical device tax became effective on January 1 and will be included in SG&A expense in future quarters. Net other expense increased $169,000 to $645,000, due to valuation changes of our debt conversion option and higher interest from higher debt levels. The resulting net loss of $5.8 million or $0.28 per share was better than expected and compares to a loss of $4.1 million or $0.23 last year.

The number of weighted average shares outstanding rose to 20.7 million from 17.8 million last year, due to the issuance of 1.8 million shares in our equity offering in the fourth quarter of fiscal 2012, the issuance of stock from employee stock plans and warrant exercises. Adjusted EBITDA, calculated as loss from operations, less depreciation and amortization of stock-based compensation expense, was a loss of $3.2 million compared to $2.2 million last year. The increase was driven by a higher operating loss, partially offset by higher stock compensation expense. Excluding investments for the coronary application, adjusted EBITDA was positive for the quarter.

The first half of 2013 mirrors the second quarter performance. For the six months ended December 31, 2012, compared to the prior year, revenues rose 27 percent to $48.6 million. Reorder revenues were 97 percent of total revenue compared to 95 percent last year. The gross margin was comparable to the prior period at 77 percent for reasons similar to the quarter.

Operating expenses increased 32 percent to $47.7 million, again for reasons similar to the quarter and included $8.5 million for the ORBIT II trial in coronary launch preparation. Interest and other expense was $649,000 versus $1.2 million last year, primarily as a result of conversion and valuation changes related to our convertible debt. The year-to-date net loss totaled $11 million or $0.53 per share compared to a loss of $8 million or $0.45 per share last year. The average shares outstanding grew by 2.9 million shares to 20.5 million due to the same factors noted for the quarter. Adjusted EBITDA loss was $6.4 million versus $3.6 million last year, and again, was positive excluding coronary investments.

We finished the quarter with more than $29 million of cash. Repayment of our long-term debt began in July 2012 at $400,000 per month. No draws have been made on our $15 million receivable line of credit.

I'll now turn it back to Dave for further comments. Dave.

Thanks, Larry. I'd like to detail the ongoing clinical progress we're making and highlight key conference presentations, both by CSI and other leaders in the field. As noted, we completed enrollment in our ORBIT II clinical trial in the second quarter. In total, 443 patients were enrolled. ORBIT II was evaluating the safety and effectiveness of CSI's orbital atherectomy technology in treating severely calcified coronary arteries. ORBIT II is the first trial design to study these difficult-to-treat patients.

We received approval from the FDA for the ORBIT II study in April of 2010, and 49 U.S. medical centers enrolled patients. The primary endpoints of ORBIT II are based on a 30-day patient follow-up post procedure. CSI and the FDA agreed to a modular PMA submission. To date, module one (preclinical) and module two (manufacturing and quality systems) have been submitted to the agency and are currently under review. Our PMA will be final on submission of module 3 which includes ORBIT II clinical data and proposed labeling. We are targeting to submit the third module around March 31, 2013.

Based on the exceptional results in treating calcified lesions in small arteries and severely calcified coronary arteries in our ORBIT I study, our orbital technology may be well suited for removing calcified plaque in coronary lesions. We'd like to revisit some critical clinical data surrounding the latest findings in conquering coronary arterial calcium. This was presented at TCT in October. An analysis of approximately 19,000 patients presented by Dr. Philippe Genereux demonstrated that moderate-to-severe calcium is associated with worse outcomes after drug-eluting stent use, including a significantly higher occurrence of death and major adverse coronary events. Despite advanced stent technology, moderate-to-severe calcium remains a real treatment challenge and there is a pressing need for a new therapeutic approach.

Dr. Jeff Chambers presented preliminary results from our 50-patient ORBIT I coronary feasibility trial. His analysis showed that using CSI's orbital atherectomy technology to treat calcified coronary arteries before stenting achieved procedural success and compelling long-term clinical outcomes. On the PAD front, late-breaking data from our CONFIRM study series and 12-month results from our CALCIUM 360 study were presented last week at the 25th Annual International Symposium on Endovascular Therapy, or ISET Conference.

The CONFIRM study series evaluated the safety and procedural effectiveness of the CSI Orbital Atherectomy System to treat PAD and is the largest atherectomy dataset ever for that disease. It addresses lesions throughout the leg in a real-world population of patients with no exclusions. 81 percent of the lesions had severe or moderate calcification. Study shows that CSI's Orbital Atherectomy System safely removes plaque with 99 percent freedom from perforation and 98 percent freedom from distal embolization. Results also demonstrate improved lesion compliance, with a low mean inflation for adjunctive balloon therapy. Safe and effective results are achieved in office-based lab settings or the hospital.

12-month results from the CALCIUM 360 study, treating calcified lesions in patients with critical limb ischemia, show that our Orbital Atherectomy System followed by PTA provides a significantly higher rate of freedom from major serious adverse events at a rate of 93 percent compared to 58 percent for PTA alone. Now I'll detail our outlook for the fiscal third quarter ending March 31, 2013. We anticipate revenue to be in the range of $25.5 million to $26.5 million, representing year-over-year growth of 20 to 25 percent. CSI's gross profit as a percentage of revenue should be similar to the second quarter of fiscal 2013. Improvements in the Stealth 360 component costs and increased utilization of our manufacturing facilities will be offset by the cost to prepare for a coronary launch.

Operating expenses are expected to grow 8 to 9 percent over the second quarter of fiscal 2013. We're investing about $4.5 million in the ORBIT II trial and preparation for the coronary launch, and also in physician and sales education. The increase also includes approximately $0.5 million related to the new medical device tax. We anticipate interest and other expense to be about $350,000 excluding the effect of debt conversions, evaluation changes of the related debt conversion option asset. The resulting net loss is expected to be in the range of $6.6 million to $7.2 million or a loss per common share ranging from $0.31 to $0.34. This assumes $21.2 million average shares outstanding. Again, this excludes the potential effect of conversions, valuation changes related to our convertible debt.

To conclude, we continue to make great progress toward our goals of establishing CSI's orbital technology as the primary treatment option for treating calcified arteries in the PAD market; building on our wealth of scientific data supporting the safety, effectiveness and economic benefit of our products; and obtaining approval for coronary application. Investing in these opportunities will help us realize the full potential of our technology, support ongoing attractive revenue growth and lead us to profitability over the long term.

Thank you for participating in today's call. Operator, we would now like to take questions from the participants.

(Operator Instructions) Deepak Chavlagai, Dougherty & Company.

Good afternoon, guys. Thank you for taking my questions. Quickly on the PAD business, which has been obviously strong, particularly the device usage, it has remained stable or even slightly grown sequentially. Because of the new Stealth, should we expect you should stay on that level and perhaps grow, or how should we think about it going forward?

Yes, it has been growing. We see a pretty significant increase in usage per account in the second quarter and in our Stealth accounts particularly. It's about 30 percent higher than our overall average, and you should see that growing going forward not only due to the enhanced ease of use of the Stealth, but also our focus on driving adoption in accounts. We will limit the number of accounts we have, probably to around 40 per quarter and the rest of our growth is going to really be increase in that usage per account.

That makes sense. And in terms of your office-based lab business, that has grown nicely in the last few quarters. David, you, I know, had focused on that with some of the sales and marketing leadership restructuring. You are comfortable with that now, the way it's been growing strongly the last few quarters, or should we expect that trend to continue?

No, we're comfortable. It's so patient-centric in the office, and if you step into one of these, they are just a great place for someone to go in need, and the safety of our device really unlocks the ability of the physician to do cases in their office. Safety is critical for a good clinical and economic outcome, and it's also when you're away from the hospital just a great place to use our technology and proliferate.

So for the patient, there are more access points than ever. Some of the busiest and more dedicated physicians are moving into the office space, and we've got a great support system for them. Medical education continues to improve in both the frequency of events and the quality of events, and the office-based lab physician has been taking advantage of that CSI education. The commercial team is executing every activity with more frequency and more quality, and we are serving that part of our customer base, the office-based physicians, very well now. I do see this trend continuing; it's really healthy for the healthcare systems. It could be a real improvement for outcomes for the PAD patient.

Sure. And then, you quoted in your trial, you said in your prepared remarks, you expect to file the clinical trials data sometime by the end of March 31. Could you walk us through the potential timeline, and when you could hear back from the FDA and potentially you could launch -- commercially launch in the U.S.?

Yes, we -- the team has really swarmed to the detail and they've done a great job closing out the sites and working with the FDA, and we've put in two quality submissions-modules one and two, with the three on the build here, which is just great. The beginning of the window for that good news for the clearance and for the ability of us to start treating patients in need in the coronary space might be fall to late fall late in this calendar year-that would be the early part of the window. It is the FDA and plenty of companies have been disappointed with timing, so that's the beginning of the window. We think, because the ORBIT I results should be worked closely with the FDA and we've got some great results in that ORBIT I, that we would qualify for the early part of the window. But it certainly could be longer. The average post submission could be well over 200 days, and that clock would start once we submit module three.

Sure. And since you have continued to invest in educating your sales and marketing, and since there is a big overlap in the customer base, is there anything else you need to do or from now until whenever -- if and when the FDA approves. It's just training your sales force and doing those kinds of things rather than anticipating and expanding your sales force.

Well, there are great synergies for the company in almost every department-marketing, development, manufacturing. But what's happening right now is actually happening from the podium at some of the meetings. The 19,000 patient database-the CRF database-really has been quite a find in helping create awareness in the market for the prevalence of the disease. Over 40 percent of the patients treated right now have moderate-to-severe calcium and that's a much larger market than people maybe had thought previously without knowing that there was a tool that could treat this prolifically and safely.

So people are starting to think about that market in a new way and imagining what if I had this device that produced a great result in ORBIT I and how might that improve outcomes. So from the podium, most recently at the TCT with Philippe Genereux talking about the prevalence. I think you're going to hear a lot more about that. It's captivating both a private practice physician and academic physician alone, and 19,000 patients is an incredible size with which to mine for data and these findings, I think, are new and eye-opening.

Thank you. Congratulations on a very good quarter.

Thank you.

Thanks, Deepak.

Ben Andrew, William Blair.

Good afternoon, Dave and Larry.

Hey, Ben.

So if you're open to file on the 31st, or by the 31st, when might we see the data and what are you hoping for in the results as a starting point?

Yes, the data will be presented at ACC, we've been accepted to show it there. So that will be our first exposure in March, which we're really excited about. We just got that news a couple of days ago. So that would be the first time we'll be able to let people look at it and see how it compares to ORBIT I.

Okay, great. And is there any reason to think you might end up having to go to panel, Dave, and I'm not sure you talked about that, just curious?

May be. We don't know -- we've looked at it every which way and it's hard to define. But we'll be ready for both. We really feel like we've crossed the Ts and dotted the Is on our end, everything that is in our control. We've controlled and we've got no reason to believe that this study wouldn't produce the same great result as ORBIT I. So the enthusiasm here, both in the physician community and in the company, is really high, but with the regulatory piece, we just don't know.

Okay, fair enough. And Larry, I was doing a little math in the quarter. It looks like device pricing went down maybe $55, $60 a unit this quarter. Was there anything there? Was it mix, was there some new pressure, am I doing the math wrong?

No, you're right, we did have a slight decline, probably about 1.5 percent from the first quarter, fairly flat, maybe about 1 percent from last year. It could be that we were getting a higher mix on the office-based labs, [with the pricing there a little more favorable to prior pricing.

Okay. So we should remodel it maybe assuming that penetration keeps going up, either hold pricing steady or gradually erode it from here?

Yes, maybe a slight decline, but it's been fairly stable, this is really a modest decline.

Okay, fair enough. And then, David, maybe a couple of things on the field organization. Can you remind us, ballpark, what percent of your cases today you think are being done by, what you might classify as a cardiologist versus a peripheralist and even -- I know it's hard to draw that line and what that might imply for needs in the field organization as you look to 2014?

Yes, the mix of customer, we've got three, the intervention cardiologist, vascular surgeon and intervention radiologist. It's still primarily cardiology. We've had some strength though in vascular surgery with recent investments. We've, for the first time, gone to some of the vascular surgery meetings like VEITH. Our Cadaver Lab, which is part of CSIQ, our medical education training program, is really well suited for the vascular surgeon-they've really been loving it. And some of the vascular surgeons are running the top office-based labs out there in the field. But the mix hasn't changed too much. I think the quality of the mix has changed. I think the usage rates and the increase in productivity per representative speak to the fact that we're working with more of the top cardiologists and top vascular surgeons and I think will continue down that path on the peripheral and they will also look to target those cardiologists who also do coronary in advance of clearance and at some point in time commercializing the coronary opportunity.

Okay. And then, you still have a few guys not using the new version of the product, the electric version. Is there any particular reason given for that or is that just kind of habit and eventually you'll shut down that piece of the business to simplify things?

Yes, it's a small piece of the business now, it's either accounts where the physician has moved or that are so small, we just haven't targeted them to make the conversion and there are a couple of accounts that have that old device. They've gotten great results from it because the in-the-body portion never changed and they like their pricing on it. So they are sticking with it. In addition, there is some high usage on a site-by-site basis for AV grafts and they like that device and the price point for treating AV fistulas.

Okay, great. Thank you.

Danielle Antalffy, Leerink Swann.

Hey guys, thanks so much for taking the question and congrats on a great quarter.

Thanks, Danielle.

Thanks, Danielle.

Just a question on ORBIT or I should say on the coronary launch, I'm jumping the gun here a little bit, but was wondering if you could give any clarity around how a potential launch would look, who you're targeting exactly. Are you going to target sort of current users and key thought leaders in the space? Any color around that would be great.

Yes, we certainly have some current users' institutions who do a tremendous amount of coronary intervention and that'd be a natural target. Some of the sites we used for the ORBIT II study are anxious to get that product and then in a great and opportunistic way, there are a few sites that do a tremendous volume of coronary where we are not penetrated and we're equally excited to get into those new accounts. So it'll be a mix. We will take a targeted approach-we're going to feature quality usage and installation at some of the highest volumes centers in the U.S. to start and I think you can anticipate a stair-step approach that focuses on quality in a targeted way.

Okay, that's helpful. And then, it seems like you guys are really picking up momentum here. I wondered if you could talk about the sustainability of sort of sales growth acceleration in the PAD business and what you're seeing that makes you confident you're guiding to an acceleration again in the third quarter? So any color there?

Is the question as to why we're growing so rapidly?

Yes, well, and how you feel about the sustainability of that and continuing to drive sales growth acceleration quarter-to-quarter?

Yes, it starts with the technology and the people introducing it. The technology is just great, we studied it and it's safe. There's more calcium in more arteries than we'll ever get to. I think we're really opening some eyes in terms of outflow. There are three vessels below the knee that need to be cleaned out and revascularized in order to get a great long-term durable outcome and people see that. Now, for the first time with this technology, you could treat that. So that's going to be an area of growth that is supporting our growth right now but for years to come, we will be dedicated to outflow and calcium with our wonderful tool, but the people make the difference.

The installation of some key management and some of the systems and programs and process that we've installed over the last six quarters continues to gain steam. The enthusiasm is high and the competence has never been as high, on the clinical and economic outcomes that we can provide, the way we're targeting physicians and using our valuable limited resource of time. So it has grown every quarter; the team does more and more with quality every quarter; and that's true, I think, about the company. This was the best-managed quarter we've ever had and that is sustainable. I think that's a great indicator that as we scale, we could handle the responsibility and continue the great results.

All right. Thanks so much, guys.

Jose Haresco, JMP Securities.

Hi, guys, good afternoon.

Hi, Jose.

Hi, Jose.

First of all, I would echo everybody's sentiment here. Congratulations on a really very good quarter. I want to understand, first of all, on the other revenue rate-you said that was primarily due to sales of more wires-is that a sustainable growth trajectory or is it just you've established kind of another stair-step up to $3 million and it will hover around there for some time, or should we be looking at that as a growth category now? That's it.

Yes, it typically grows -- it's typically in that 10 to 12 percent of revenue range and it does tend to grow with the growth in devices. The last few quarters, it's grown at a higher rate because we've added some new Asahi wire lines and have put some emphasis on selling the Asahi wires-very good wire; if you can wire it, you can treat it with our device. So that's been a good product emphasis for us, and that has accelerated growth in other revenue, but I would say it's about 12 percent of revenue, and that's a reasonable level going forward.

Okay, thank you. I noticed that the reorder rate did kick up in the quarter, that's hovering around in your comment over 96 percent, is there a difference between accounts that have the Stealth versus the ones that don't or is everybody ordering at that rate?

There was a dramatic difference between Stealth and the old products, it's night and day.

Yes, there are a couple of ways to look at the reorder rate really. When you look at new account revenue, we're going to stay around that 40 per quarter and it's going to fluctuate. This quarter is 48; a quarter ago, it was a little lower. So what's fairly constant and with revenue growth the reorder rate will go higher. Regarding usage per account though, we've seen a nice increase. As customers convert to Stealth, they tend to have a higher usage rate, and as I said, is 30 percent greater than the overall, and the remaining Diamondback accounts are fairly low usage.

What percentage -- I'm sorry if I missed this, but what percentage of your accounts right now are still on the older device?

885 of about 1,200 accounts life-to-date are now Stealth.

Okay. And I guess is your goal [users] can't show any inclination in moving to the new device, or in the absence of you pushing it or are they pretty stubborn?

Well, eventually, we'll move them all. There are a few high-volume accounts that always love that device who don't feel the need to change because the in-the-body portion produces the same great result as our new product, but over time, they'll convert. There are some using the old AV fistulas in some high-volume practices that specialize in that, but the majority of them are maybe non-targeted accounts, low-volume physicians who have moved and our targeted approach has been very successful at focusing our limited resources in the right direction. I think we will phase out the old product over time, but there won't be any push to go to all 400 of those remaining accounts. We'll go to a targeted subset of that.

Thank you. And then, I guess lastly, what are you seeing on the competitive front? Last year, we were dealing with a lot of price pressure from some competitors out there, how are they behaving these days?

Aggressive. The peripheral market continues to be super aggressive. Both big company and small want to get in there and get the business, and they want to take our business. But the substance is that our device goes where other devices don't go. We're the only way to safely treat calcium. Calcium is everywhere, particularly in those three arteries below the knee that are so critical to outflow and a great clinical and economic outcome. The technology and the substance of our clinical data and the real hustle and competence of our sales and marketing team have been successful in beating them back. So I don't think that will go away. I think it will be highly competitive going forward. We just have to continue to execute.

Right. Now, and you said you've gotten notice that you were accepted to ACC, is this a podium presentation or is this a poster or is it a what you'll be looking for?

It's a podium presentation.

Okay, great. All right. Thank you very much.

Ben Haynor, Feltl and Company.

Good afternoon, gentlemen.

Hey, Ben.

Hi Ben.

Could you talk a bit about the competitive enhancements to sales and marketing? Are these replacements of existing personnel or is this additional sales assets that you're putting out on the ground?

Yes, we've got the same-sized commercial team, relatively. We haven't put a lot more feet on the ground; in fact, they've haven't put anymore feet on the ground. They're enhancements really-we installed new management starting with Kevin Kenny about a year-and-a-half ago. And then, he's put in systems and process for management training and field sales training and every specific aspect of what we need to do in the adoption curve. Medical education has been a big hit, that was new. We didn't have it and then we had it and Angelo Giovanis came over from Johnson & Johnson and helped start it-fantastic programs. So those two things are converging execution, competence, capability, and new programs, to produce a more predictable result.

Okay, great. And then, on the medical education programs, is there anything new and exciting that you find is really effective?

Yes, one of the things that's really creating great enthusiasm and excitement for what the physician can do in the office at a hospital is our low profile, wire-like device with the crown on the end of it. You can enter the body and get to the disease from the pedal arteries, from the tibial arteries and so uniquely, we can get there from above; and if above is difficult, which it is sometimes with these patients with advanced disease, you can get there from below. And that's exciting; you can get there safely and quickly.

The biggest buzz I would argue in the last six months directly related to medical education is our Cadaver Lab that under ultrasound-so without radiation-physicians are accessing small arteries, pedal arteries, tibial arteries, in less than ten minutes, and advancing our device to the lesion. And that's really exciting and that's something that can happen in the hospital or in the office-based lab, and it's really patient-centric because the entry site is low; it's patient-centric because it gives the physician another chance to succeed against difficult disease; it's physician-centric because you don't need radiation and ultrasound, it's pretty easy to use and access these vessels. So there are a ton of benefits to this and I see this as one of the areas that we'll be able to proliferate with our unique technology and sustain the growth going forward.

Sounds like some exciting stuff.

You bet.

Excellent. That's all I had. Thank you very much, guys.

(Operator Instructions). James Terwilliger, Benchmark Company.

Hi, David; hi, Larry, can you hear me?

I can.

Very well, James.

Great job on the revenue-now 28 percent growth-for the current quarter and the revenue guidance going forward. Most of my questions have been answered, but I've got two quick questions. The first one, Larry, might be more centered towards you. When I look at the gross margins, can you quantify at a high level the drag or the impact on the gross margins from the facility in Texas because you've got some unused capacity down there? And does this facility support all of your needs for the coronary launch? And then, lastly, at what point would you need to expand your current manufacturing capacity after the coronary launch?

Yes, I don't have exact numbers for Texas, but you go back year-over-year, our indirect cost has probably gone up I'd say about $0.5 million, so that has some impact, a good chunk of that is going to be from the Texas facility. As far as a facility standpoint, we have enough capacity for the foreseeable revenues. It's a very large plant down there. Now, you have to add a certain level of equipment and of course, continue to add direct labor to increase your capacity, but I'd say all in, we're in that 15 percent utilization range from a facility capacity standpoint. When you consider multiple shift potential and square feet. So we're well set in Texas. We'll get that certified for the upcoming coronary launch and we will have ample capacity going forward.

Okay, thank you. And secondly, this question is probably for David and Larry. If I look at the R&D expenses, how should we think about R&D going forward? It seems logical that this number should kind of trend down in terms of actual dollars. So is that the case and what are you currently working on and what else are you going to be working on in that R&D department?

Well, we've got two pipelines now, one for coronary and one for peripheral. So we couldn't be more excited about that and with the advent of new access points, there is a chance to do some really neat things for physicians and for the calcified patient over time. So that's great and even better is the fact that, that wonderful crown. We don't have to reinvent the wheel, so to speak, because we've got the mechanism of action that really works against plaque but is nice to the anatomy. So I'll let Larry speak to the expenses over time, but the production out of R&D is exciting over the next six to 12 quarters.

Yes, James. I don't think the R&D in total will come down. We'll have some reduction -- obviously, when the ORBIT II ends. We've talked about Liberty 360 before, that we've put on hold because we want to focus on ORBIT II, but that will be starting to launch when we get the bandwidth to do it and we will continue to enhance the Stealth and coronary products as well. So I don't see it really coming down going forward. The mix might change, but it's probably going to continue to be a significant investment.

All right, guys, thanks for taking my questions, and again, great job on the revenue that you post for this quarter and the revenue guidance you gave for next quarter. Thanks, guys.

Thanks, James.

Ladies and gentlemen, this does conclude the question-and-answer portion of today's event. I'd like to turn the call back over to management for any closing remarks they'd like to make.

We look forward to executing on the large opportunities in front of us and realizing the full potential of our technology. Thank you again for joining us today. We look forward to updating you on our progress next quarter.

Ladies and gentlemen, thank you so much for your participation in today's teleconference. This does conclude the presentation and you may now disconnect. Have a great day.