Stereotaxis Inc (STXS) 2006 Q2 法說會逐字稿

Good morning. My name is Eduardo, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stereotaxis second-quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to Brian Ritchie of Noonan Russo. Sir, you may begin your conference.

Good afternoon and thank you for joining us today for the Stereotaxis second-quarter 2006 investor conference call. By now you should have received a press release. If for some reason you have not received a press release or are unable to log onto the webcast, please call me, Brian Ritchie of Noonan Russo at 212-845-4269, and I will be happy to assist you.

Speaking today we have the Company's Chief Executive Officer Bevil Hogg and the Chief Financial Officer Jim Stolze. Before we get started, we would like to remind you that this conference may contain forward-looking statements regarding future events or the future financial performance of the Company, including without limitation statements regarding operating results in calendar 2006 and 2007, growth opportunities and other statements that refer to Stereotaxis' plans, prospects, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to the Company today, and the Company assumes no obligation to update these statements as circumstances change. For additional information, please see the cautionary statements included in the Stereotaxis most recent public filings filed with the Securities and Exchange Commission.

At this time, I will turn the conference call over to Stereotaxis' CEO Bevil Hogg. Please go ahead, Bevil.

Thank you, Brian, and good afternoon, and thank you to everyone for dialing in. On this call I would like to update you on the sales momentum that we have generated during our second quarter, including updating you on our backlog and pipeline France and the US and in international markets, on our usage rates in France, on the trading programs that are a key part of driving this utilization and on the strong sales effort that we are engaged in to leverage these factors into new order activity.

I will also be providing you with an overview of our progress in evolving and expanding new applications for our technology. I will then briefly ask our CFO Jim Stolze, to provide you with additional detail.

We are pleased to report a particularly strong performance in our second quarter. We secured a record order volume of $13.6 million with 11 new orders, and our net backlog has increased to $40 million. Acceleration of order activity in the US was proceeded as we had anticipated, and the US orders for the second quarter outpaced those in Europe for the first time in recent quarters. This trend toward acceleration of our US ramp is even more pronounced as we look at our late stage pipeline. We continue to see highly favorable sales momentum in the international markets, reflecting the earlier commercial availability of key ablation catheters. The positive trend toward the shorter conversion cycle from order to revenue recognition has continued, and second-quarter orders represent an anticipated conversion cycle of roughly eight months.

As to the specifics of our ending order backlog of $40 million, this figure is, of course, net of shipments made and taken to revenue during the second quarter, in which total revenues of $3.8 million were in line with expectations. Further we elected to remove from backlog one prior order where a key physician moved to another hospital from which we expect to receive an order in a reasonable time period and a second prior order because of a highly extended construction schedule.

Our order volume for the quarter necessarily includes an element of pent-up demand in our late stage US pipeline because of prior FDA delays. That said, we note a robust late stage pipeline or sales funnel and, therefore, are confident about order momentum for the second half of the year, which will essentially relate to shipments that will take place in 2007 or beyond, although third-quarter orders will not necessarily match or exceed those of the second quarter.

Importantly, I note that we currently have sufficient orders in hand with scheduled 2006 delivery dates to allow us to meet our revenue guidance range for the year, and we remain confident about this guidance. As we have noted in prior earnings calls, our expectation was that the FDA catheter approvals that we received in late 2005 and early 2006 would, following a lag of roughly six months, begin to drive a point of inflection in US sales in the second half of the year. I believe that our second-quarter orders validate this expectation.

Oral revenue guidance regarding the next two quarters is that we anticipate approximately one-third of additional revenue to be recognized in Q3 and two-thirds of additional revenue to be recognized in Q4. However, I must as always emphasize that lumpiness based on hospitals' cath labs installation schedules is an inherent part of our business. Although shipments and revenue recognition remain heavily weighted to the fourth quarter, we are well-prepared for the resulting delivery and installation challenges.

We're pleased to report that we are experiencing favorable trends regarding pricing for our system for which ASPs in recent quarters has risen substantially and will translate into revenues over time. Although our gross margin for the quarter was 43%, this result was impacted by an unusual warranty charge, continued under-absorption of overheads in our field service and manufacturing departments and by some material obsolescence charges as we move further toward outsourcing. These charges represented more than a 15% impact on our reported margin for the quarter. Although some of the overhead issues may continue past this quarter, as production and installation levels increase, the impact of these charges should diminish significantly.

Our strategy of focusing extensively on clinician training and field support continues to generate excellent results in terms of physician participation and site qualification. You may recall that a useful categorization of a qualified site is a site that is beginning to use our system in the ordinary course and is an installation at which at least one clinician has been fully trained and done sufficient procedures to be able to operate independently. We are on track with our training and qualification program that was detailed in previous calls, which was to qualify at least 10 sites by the end of the first quarter, 20 sites by midyear and the rest of the qualified sites on a rolling basis following installation. During the second quarter, we trained an additional 17 clinicians at 11 hospital sites.

Our utilization continues at a healthy rate in both Europe and the US, consistent with our expectations of achieving about one procedure per available EP lab day for qualified accounts by year-end in the US. We regard our utilization rates as a healthy sign, given that the initial high levels of utilization that we typically experience immediately after a new system is installed are now translating into steady growth and usage of our computerized remote-controlled procedures. Our worldwide blended average utilization rate per available EP day for all qualified sites in the second quarter was roughly .71 per day.

Of particular note, those US sites trained in the first quarter showed almost 25% growth in their second-quarter usage rates.

Going forward, we will increasingly rely on our recurring revenue trend rather than on utilization data as a key metric for systems usage. This is because as installations and procedure volumes increase accurate direct data as utilization becomes increasingly difficult to obtain. Many hospitals have strong policies across all departments against providing utilization data and factoring in cath lab downtime, clinician absences, precise training completion dates and so on in order to calculate relevant EP utilization rates across a broadening installed base of cath labs at which we no longer necessarily have company personnel present is becoming increasingly problematic and unsustainable over time. We believe that our recurring revenue run-rate by the end of this year will approximate 20% of the year's revenue.

Also, significant during the second quarter and to date is strong initial interest from the hospital market in the Siemens retrofit program previously announced, which essentially provides that Siemens will trade in used fluoroscopy systems from any manufacturer in exchange for favorable terms on a new digital flat plate Siemens x-ray system installed in combination with NIOBE II. This program has already generated a substantial volume of sales leads, and we expect it will begin to contribute to our order rate by the end of the year.

Importantly, this program not only provides a financial incentive to upgrade but gives clinicians and hospitals access to state-of-the-art flat-panel x-ray technology sooner than they would otherwise be able to achieve.

We're pleased to report that consistent with our expectations clinicians of CE Mark has been received in Europe for an 8mm ablation catheter that incorporates both magnetic navigability and Biosense Webster's 3-D catheter location sensing technology.

As noted in our last call, the PMA supplement for this catheter was filed with the FDA earlier in the first quarter for US approval, and we expect to begin commercializing in the US no later than the first quarter of '07 in the US.

Also, as noted prior, we anticipate that Biosense will be filing for approval of an irrigated ablation catheter that also incorporates Biosense's unique 3-D catheter locations sensing technology in both the US and in Europe in the second half of this year with an estimated US commercialization timeframe of the second half of '07 and again earlier in Europe. We continue to anticipate that these additional catheters will encourage more widespread adoption of our computerized procedures for the treatment of complex arrhythmias and contribute significantly to both our clinical usage rates and overall value proposition.

It is worth noting that we continue our unbroken record of not experiencing any perforations attributable to the use of our catheters in roughly 3800 EP procedures, which underlines the soft touch and essentially atraumatic nature of these devices.

I'm also pleased to announce that we're now shipping the latest NAVIGANT software platform, our version 2.10, now fully integrated with Biosense's [Carter VA system]. This new software advance brings greater levels of automation and integration to the EP individual lab, including automated mapping, which is now completely automated in the new version and can be completed with one touch of a button, potentially eliminating a technician from the control room. [Carter Emerge], including advance CT image integration, the ability to navigate on either the Carter or the NAVIGANT screen and many other attributes.

Stereotaxis' vision is to bring the soft touch automation to the cath lab, and we have taken one more important step in that direction. We believe that these are essential ingredients to be able to bring about improvements in safety, as well as efficacy and efficiency to complex EP procedures.

I spoke extensively about Stereotaxis' activities in CRT during the last earnings call. So I will confine my comments to the fact that we are making progress towards demonstrating that magnetic navigation can enable a clinically feasible hemodynamic evaluation of the coronary vascular chip that will improve patient's response to CRT.

Our HEAL HF 50 patient study to be conducted in partnership with Medtronic will begin patient enrollment in the fourth quarter. Recent studies have begun to demonstrate that acute optimization of lead position results in long-term improvement in response rates.

In the interventional cardiology arena, we're particularly gratified to note that our approach to treating complex occlusions such as CTOs is beginning to show real progress in vitro. It is focused on magnetic navigation of a triple magnetic 14,000 RF guide wire, using a registered CT preop roadmap. We expect to present our solution at this year's TCT conference in October and will over the coming year move into clinical studies and regulatory approval. We're optimistic about our ability to bring real value to this major therapeutic challenge with potential for other applications such as peripheral CTOs and even (indiscernible) functions.

On the topic of reimbursement, many of you may have been aware of the proposed changes this past April by the Centers for Medicare and Medicaid Services or CMS suggesting significant cuts in payment to hospitals through the DRG (indiscernible) for numerous cardiology procedures. On August 1, after widespread concern from patient groups, professional groups, industry trade organizations and Congress, CMS revised their proposal and issued the final rule for fiscal year 2007. The final rule indicates that average payments for procedures such as ablation would actually increase by approximately 2%.

In addition, there would be favorable reimbursement for patients with more severe illness, just the sort of patients that would benefit with the safety and efficiencies of Stereotaxis technology.

Additionally this week the newly revised ACC/AHA/EFC 2006 guidelines for management of patients with atrial fibrillation has moved catheter ablation up to a mainstay therapy for patients with symptomatic AF. Previously the recommendation had been to use ablation as a last line therapy after proof that multiple drug therapy was ineffective. The combination of favorable reimbursement for catheter ablation and greater consideration of ablation to treat AF enhances the value of Stereotaxis and our technology that we are providing to hospitals and patients and all goes well for our future growth.

I would now like to ask our CFO, Jim Stolze, to provide a detailed discussion of the quarter's results. Jim?

Thank you, Bevil. Stereotaxis rerecorded total revenue of $3.8 million, including systems revenue of $2.9 million in the current quarter, compared to total revenue of $6.1 million, including $5.5 million of systems revenue in the comparable year ago quarter. We recognized three systems this quarter compared to six systems in the prior year quarter. Our disposable service and accessories revenue increased to $954,000 this quarter compared to $681,000 in the prior year quarter, driven by the increased installed base, as well as the impact on disposable revenue of the FDA approvals for two mapping and ablation catheters for use with our NIOBE system in the US.

For the six months ended June 30, 2006, our revenues amounted to $5.5 million, including $3.8 million of system revenue compared to total revenue of $11.2 million, including $10 million of system revenue in the comparable year ago period. The Company recognized revenue from the sale of four systems in the current year period versus 11 systems in the prior year period. Average selling prices of the systems recognized increased approximately 12% and 5% for the quarter and year-to-date period respectively compared to prior year periods. During the six months ended June 30, 2006, disposable service and accessories revenue increased to $1.7 million compared to $1.1 million recorded in the prior year period, driven by increased disposable revenue and service fees related to systems in place more than one year.

Our gross margin for this quarter amounted to approximately $1.6 million or 43% compared to $2.9 million or 48% in the prior year quarter. Gross profit dollars were negatively affected in the current quarter by a warranty charge related to the replacement of an early version of our system. Gross margin percentage was adversely impacted 6% by this claim, as well as by unabsorbed overhead costs in our manufacturing and installation departments.

For the six months ended June 30, 2006, gross margin amounted to $2.1 million or 38% compared to $5.6 million or 50% in the prior year period. Margin percentage for the current year period was impacted by the reduced number of systems sold and produced during the current year period, as well as by the warranty charged previously discussed.

As Bevil has mentioned, our field service, installation and manufacturing cost pool has burdened our gross margin in these periods of relatively low production and installation. These costs will have a significantly smaller impact as production and installation activities increase to higher levels.

First-quarter operating expenses of $15.5 million were approximately $3.9 million higher than the year ago quarter, excluding the onetime royalty settlement recorded in the prior year quarter. The increased year-over-year cost relates primarily to added research and development costs, incremental training cost and added headcount, most notably in the sales and marketing functions, and to the impact of the additional stock compensation expense required under the newly implemented accounting standard. R&D activities, while we expended approximately $1.7 million more than the prior year quarter, our costs were approximately $600,000 less than the first quarter this year. We continue to focus our resources on software and user interface improvements, disposable device development, including integration with the new cardio software to continue our overall platform development and to further the PMA filing for our HELIOS catheter.

Compensation expense recorded under FASB statement 123R amounted to $1.2 million in the current quarter to recognize the cost of stock-based compensation issued to employees and directors compared to less than $100,000 in the prior year quarter. Operating expenses for the six months ended June 30, 2006 amounted to $30.6 million, an increase of approximately $8.8 million compared to the $21.8 million expenses, excluding the royalties settlement recorded in the six months ended June 30, 2005. Net loss for the 2006 second quarter was $13.6 million or $0.41 per share based on $33.2 million weighted average common shares outstanding versus a net loss of $11.3 million or $0.42 per share based on $27.3 million weighted average common shares outstanding for the 2005 quarter. Net loss for the six months ended June 30, 2006 was $28.2 million or $0.88 per share compared to the loss of $18.7 million or $0.69 per share for the prior year period. Weighted average shares for the two periods were approximately $32.2 million and $27.2 million respectively. The change in weighted average shares for both the quarter and six-month periods primarily relates to the issuance of 5.5 million shares in the Company's follow-on offering completed in February 2006.

The Company used approximately $12.7 million of cash and operations in the second quarter of 2006. We ended the quarter with $44.7 million in cash and investments as compared to approximately 10.7 at year-end 2005. Total debt at June 30, 2006 amounted to approximately $2.5 million. We have a $10 million line of credit available through April 2007, which we have $1 million drawing against at this time.

Looking forward, the Company has a backlog of purchase orders and other commitments for its systems of approximately $40 million. We received orders for 13.6 million during the quarter, and after adjustment for two systems and a reduction of the backlog, our systems recognized in revenue this quarter ended the quarter with a backlog of $40 million.

Please note the Company does not include orders for disposables, service or accessories in its backlog data. International orders are maintained on backlog at current exchange rates to the extent they are non-dollar-denominated. As indicated in our release, we remain comfortable with the previously communicated annual revenue guidance of $26 to $30 million. To reiterate, Stereotaxis sales cycle similar to other companies selling capital equipment to hospitals is relatively long and can be subject to lumpiness from quarter to quarter as hospital budget decisions and equipment installation schedules are often subject to last-minute delays. Prudence dictates that we should anticipate the occasional impact on our quarterly results of such unexpected delays.

We also announced today our intention to file two registration statements with the SEC. The first relates to registration of common stock underlying warrants that have been previously issued in private placement transactions, most notably the convertible preferred pre-IPO financings.

The second is the universal shelf registration statement that we consider a matter of financial hygiene to position the Company to take advantage of capital market conditions. As the release states, we have no current plans for a specific offering and would only proceed after review and approval by our Board of Directors. We continue to expect that we have sufficient liquidity to fund our operating and capital requirements through cash flow breakeven.

I would now like to open up the call for questions. In as much as it is possible, we would like to ask that you limit yourself to two questions. Please go ahead, operator.

(OPERATOR INSTRUCTIONS). Tao Levy, Deutsche Bank.

Congratulations on a fantastic new quarter. So just a couple of questions here. Obviously the back half of the year, you are still confident in your full-year guidance, and that obviously implies a big ramp-up. Bevil, what can you tell us to get us comfortable that you are seeing this huge sequential growth in the back half that everything is intact there?

Here we are pretty much halfway through the third quarter. Again, just any metrics or what you are seeing in installations or sales process that can give us increased confidence that, in fact, the guidance is intact?

Well, first of all, by now we have laid out our delivery schedule for the balance of the year. We understand the construction cycles and schedules of the hospitals. We have in place all necessary and prudent provisions to ensure that we can meet those construction cycles or construction schedules to meet our own delivery schedules and to achieve the revenue recognition.

I should also point out that to cope with lumpiness, because we are all aware of the fact that at the end of any given quarter, there can be a delay in installations in the system and recognition of the system, we have the potential to generate additional orders that are shippable in the second half. These are typically orders that would be shipped to distributors and recognized immediately. So we are quite confident that we can make the numbers.

Perfect. And maybe you can give us a sense just given the large number of new orders, how did that play out in the quarter? Was there a big orders post the Heart Rhythm Society, or was it just evenly paced throughout the quarter?

I wish I could say that orders and shipments of revenue recognition were evenly paced, but they are not. The imaging companies have taught the hospitals to back-end load everything, and most of the business that has transacted has transacted in the last two of three weeks of the quarter both in terms of order generation and revenue recognition.

But that being said, I would say that HRS was probably the turning point with Stereotaxis when taken in combination with the catheter approvals that we had received earlier in the year. It was certainly a tremendous validation of our technology in the eyes of hundreds if not thousands of EP practitioners, and it became a catalyst for order generation and acceleration.

If I could just said one more, for modeling purposes, how should we think about the third quarter from a new order perspective? Somewhere between the first quarter and the second quarter or you know less than the first quarter?

We are looking at a very robust pipeline, and we think the second quarter will be -- excuse me, the third quarter will be a great quarter, and the fourth quarter will be a greater quarter. However, recognizing that the second quarter was in excess of our expectations, I think it would be prudent to do as you say and look at somewhere between the two quarters.

Mimi Pham, HSBC.

On the new orders, can you give us -- can you tell us when you may be started initiating conversations with the labs that put in the new orders this past quarter?

Well, many of them go back a long time. We do have a 12-month sales cycle. I would refer to HRA as an accelerant and a catalyst rather than an initiation. There may be one or two or even three or four orders that were generated during the quarter and the closing stages of the prior quarter, but most of our orders take 10 to 12 months to come to fruition.

Okay. I know you're saying that it is getting difficult to estimate usage, but can you breakout maybe the disposal revenue within the group and the disposable service and accessories?

I think I am not sure that we have done that in prior periods, and I don't think we want to begin to separate disposables with software and service because these are all important components of recurring revenues. So we prefer to stick with putting them together.

Okay. Well, maybe you can give the split if you have that kind of visibility into the CELSIUS versus NAVISTAR disposables? Are you getting any use on one or the other?

I don't have specific data in front of me. But I do know that they are both being used, and they are both being used broadly in both the US and in Europe. And unfortunately I don't have a specific breakdown for NAVISTAR and CELSIUS Q1 versus Q2. But they are both pretty broadly usage.

Rick Wise, Bear Stearns.

Let me turn to the catheter usage, which I understand why you are pointing us to it, especially as the installed base is set to grow. Maybe you could help us frame the outlook for disposables. There have been -- obviously you will have increasing installed base of these sentiments as you proceed through the year. Usage patterns are going to be increasing. You are going to be offering new catheter products. Can you help us think through what the implications of that are for revenues? Do we take the second-quarter rate, and does that base grow 25% given the mix and price and usage? How do we think about it?

Well, first of all, I think it is important to separate in our minds order rate from installed rate, so that even though we had a pretty dramatic uptick in orders in the second quarter. The actual number of systems installed was only three. So the increase in our installed base is not materially significant between the first quarter and the second quarter.

That being said, what we said was that although it is becoming increasingly difficult to sort of capture realistic numbers for usage rates across an ever broadening number of diverse hospital situations, we still do see that the number of procedures are increasing as performed by clinicians from quarter to quarter, and we believe that we are on track to achieve our goal of roughly one procedure per EP day in the US and hopefully sustain that in Europe.

So if we can assume that that is the case, then what becomes sort of a driver for revenue generation is the number of dollars that we can attribute to each case. And given the very high compliance that we have had with service contracts, which have exceeded our expectations, and these are pretty expensive service agreements, and we include those in referring revenues, given the fact that we now have new software products to sell and given the fact that our usage rates for disposables are increasing, we believe that the percentage of recurring revenues will approach -- will approximate 20% on a run-rate basis by the fourth quarter, which is what I stated in my earlier comments.

But just to reemphasize that point, so run-rate is about 20%. We think that by the end of next year, we can be looking at a run-rate of about 30%.

All right. And coming back to the backlog, obviously it is great that you have a $40 million backlog at this point. Where would you expect to exit the year? You know, I assume at a higher level is what you would hope for, is that not realistic?

It is what I am looking for, but I'm not sure that is what I'm going to get. Because the third quarter might see an increase in backlog, as well as significant shipments. By the time we get to the fourth quarter, we will have to generate very very significant revenues in the fourth quarter, and we expect to. But I'm not sure that we will be able to exceed those revenues in terms of new order generation.

So just on the back of an envelope, and this is not what I would call sophisticated guidance, I would say that our backlog will continue to grow through the third quarter, but that in the fourth quarter, it might actually come down a little bit. And if we end up somewhere around $40 million or just north of $40 million, we would be quite satisfied.

And perhaps, just if you would, give us a little color on some of the drivers of the backlog? Is it -- I don't mean to put words in your mouth -- but is this mostly coming through the Siemens retrofit program? Is J&J driving this? You know, maybe help us understand the sources of that backlog buildup this quarter?

The backlog will be -- well, the interest in our pipeline, let's say the expression of interest that we can see in our pipeline in our funnel late stage, which is really driving the backlog is broadly based, deeply based, and embedded in it is broad permission desire to obtain a Stereotaxis system or systems in order to eventually threat complex arrhythmias.

We have not factored into this any Siemens retrofit impact. It is not coming from any specific program. It is broad, and it is deep, and we are very pleased to see it.

Larry Keusch, Goldman Sachs.

This is Charlie for Larry. Just a few questions here. First of all, just looking at gross margins, obviously we saw some noise related to the warranty and warranty issues. I'm kind of thinking how should I think about the remainder of the year in terms of gross margin?

Obviously the warranty claim at 6 points was an unusual nonrecurring type of a charge. So you get near 50 with that, and to the extent we can and will increase production levels as well as shipment levels, the installation and other folks will get utilized over a much broader base to which to allocate their costs. So, as Bevil said in his commentary, the combination of some obsolescence in that adds to almost 15 points. So you could certainly get north of the mid-50s.

North of the mid-50s?

Yes.

Great. Thank you very much. And just as the number among the systems that were placed during the quarter, could you speak to were there any upgrades from NIOBE I to NIOBE II? Also, could you give us a feel for -- you indicated that there were more -- in terms of the backlog build, there was more interest from the US side. I guess, could you give us a breakdown of US, o-US placements for the quarter?

First of all, to my knowledge there were no upgrades of systems in the backlog. The split between o-US and US was roughly -- I think not roughly, exactly -- six systems in the US and five systems in Europe. That is why in my comments I said that international demand and European demand continues to be very strong.

Okay. In terms of second --

I'm talking about backlog here not revenues. Were you talking about revenues?

Well, actually I was, but that granularity was much appreciated. How about from a revenue standpoint for the quarter, can you tell me were all of the systems here in the states or outside of the states?

I think two-thirds of them were outside and one-third of them were inside.

Okay. Two outside and one in.

Approximately.

I'm glad you guys have control of that aspect. I wanted to ask you just another backlog question. I want to come at this from another angle because in general it was really encouraging to see the spike in the backlog, but by this point, and especially after the increased profile at HRS, it seems like there is substantial awareness for the NIOBE. So why are we not seeing the growth coming higher? What is keeping some hospitals on the sidelines at this point?

Well, I'm not sure that there was anything restrained in our order generation in the second quarter. If you think about it, you take a run-rate, an order run-rate of $13.5 million and multiply it by 4, that is really an annualized run-rate of what, $52 million? And this is a company that last year generated roughly $15 million in system revenues. So the order run-rate was 3.5 times our last year's revenue run-rate, and we only received regulatory approval just over six months ago. We attended HRS just over two or three months ago. I would say that is pretty rapid acceleration.

Right. So going forward, going into '07 and obviously the estimates on the street now project that there needs to be some substantial build on the backlog, how should we think about -- obviously give us some guidance as to what the fourth-quarter backlog number probably should be, but is that a number that -- should that number continue to grow going into '07? Should we think about you being able to work down the backlog in '07 to make certain that you are able to hit some of the revenue expectations?

Well, first of all, I'm not sure that we have set any expectations or provided any guidance for 2007. But looking at a broad range of Wall Street expectations for 2007, I would say that an ending backlog of $40 million would position us very nicely. Clearly that would show significant acceleration given the fact that most of these orders were accumulated in the last two-thirds of this year. So I would be very satisfied, as I think I said to Rick earlier, with a $40 million ending backlog, and believe that we could satisfy everybody's expectations next year on that basis.

Great. I understand I have gone beyond my two question limit, but one last question. And that is, why put up a $75 million shelf at this time when you have so much cash? And especially because -- and especially in the context of you not needing to use it anytime soon?

We did that precisely because we don't need the money, and we're not planning on using the shelf. So we think that it is unwise to signal the market that when you put up a shelf the day before you run out of money, that is a very vulnerable point to be putting up a shelf. We don't intend to run out of money, but we are interested in exercising what Jim refers to as financial hygiene or prudence. We just think that nowadays it is almost standard operating practice for companies of the type of Stereotaxis to have in place a shelf. But we emphasize that it is not in our immediate expectations or plans to do anything with that shelf.

(OPERATOR INSTRUCTIONS). [John O'Bodley], DC Capital.

Just two quick questions. One, the Siemens relationship. Could you just give a little bit more color on the strategy involved and what you believed to be the addressable market and how hospitals are being targeted? Is it a joint -- (multiple speakers)? Go ahead.

You are talking about the retrofit program?

Exactly.

Yes, I think it is a great program because it does two things. It gives hospitals access to Stereotaxis NIOBE systems, and at the same time, it gives them an excuse to get a flat-panel x-ray system before they would otherwise be eligible to get one given the normal replacement cycle.

There are a pretty large number of hospitals out there with sort of intermediate aged x-ray systems that are not digital, or rather they are not flat panel digital. They are image intensifier systems, and almost to a person, clinicians are eager to get rid of them.

So this is not just a program that is driven by Stereotaxis and the desire to obtain NIOBE systems, but also there is a strong incentive for clinicians to give state-of-the-art imaging. And the fact that Siemens is willing to essentially buyback whatever system they have currently, whether it is a GE or Philips or Toshiba or Siemens, for essentially what they paid for it, is a very attractive proposition. I don't think that this is going to become the dominant source of our new order generation. But I think it will be very nice icing on the cake.

That is helpful. And secondly, on the salesforce front, I noticed I think the last call you had made reference to sort of a key hire on the West Coast. Has that been made, and if so could you talk about it? If not, could you talk about what you're doing to make progress in that area?

I'm not sure that we referenced a key hire on the West Coast. However, we are continuing to build our salesforce, and we either have or are in the process of making a number of key hires that would clearly include the West Coast because most of our regional management was concentrated in the Midwest, South and Northeast. So we will continue to expand our salesforce and will particularly do so now to drive home the order rate momentum that we see accumulating in the pipeline.

Steve Ogilvie, ThinkEquity.

I had a question on the software. You said you released the 2.10 version. Was that sold, or was that being shipped in the new unit?

It is being shipped in the new units.

Were there any software sales in the quarter?

I'm not sure if we generated any software sales in this last quarter. But I will get back to you on that.

Okay. And then the other question I had, just on the ASP for the system, with the two in the US and one outside the US, and the ASPs just under 1 million, going forward, is that kind of a safe assumption for the systems you intend to install throughout the back half of the year, or are there more domestic installations so that ASP might be a little higher?

Well, I think if you look at the order generation in the second quarter, and we stated that we had 11 orders generating $13.6 million of incremental revenues, that would point to a much much higher ASP for our systems. However, not all of those systems will be shipped in the second half of this year. Obviously a number of them will fall into next year.

But the trend is in the direction of higher ASPs, and we think it is a sustainable trend. I personally believe that the ASPs that we generated in the second quarter are rather higher for no particular reason other than sort of random luck, are rather higher than we should expect going forward, but we will see, I believe, strong ASP growth. That will translate into revenues over the balance of this year and, of course, throughout next year.

One last thing. I'm sorry if I missed it. Could you mention what the penetration of service contracts was for units that have been in the field for over a year?

I have not mentioned that. I believe that in my last earnings call I may have referred to a goal of 17%, and I would say that our success is very consistent with that goal.

And then are you comfortable saying what the ASP is for your service contract?

I'm not sure that that is published, and it would not be wise to publish it or make it public because there are many variables. For example, some service contracts include software license fees and some don't, and some are platinum programs and gold-plated programs, and we even have platinum-plated programs. So that would be disclosing competitive information that probably would not please some hospitals and would please others.

Okay. I understand. Great. That is all for me. Thanks.

[Ray Tang], eTech Advisers.

I had a question on the CTO that you mentioned. How many universities or research sites are looking at that now for you?

Currently we are working with one site in particular that is actually doing work, and that is the Forex center in Rotterdam, Holland. However, there are an additional two or three sites that have expressed to interest, and we expect to generate six sites in total that would become the focus of this program. So let's say one that has been with us for the past two years working on this program, migrating to two or three, and growing to six within the next 12 months or so.

What do you see as the main advantage? I read about the 3-D Russell Reconstruction as being an advantage. How about mechanically, what do you see as the advantage there over existing methods?

You're talking about CTO?

Yes.

The big challenge for commissions who are treating CTO manually is that they are using a manual wire a bent tip. And, first of all, it is very, very difficult to penetrate the hardening cap of the CTO with the manual force alone and sort of the sharp tip of a wire. And when navigated manually, the wire tends to glance off the cap and head off in the wrong direction. Once it has created a pathway in the wrong direction, it is virtually impossible to bring it back.

So the features of our system are number one, an energy source to break through the cap. That is critical. Number two, tip control because it is no good pointing a bent wire at a fully occluded vessel and expect to be able to navigate it. We can navigate the tip, and we can point to tip in the right direction so that we can break through the cap using RF energy and then control the tip of the wire in what is oftentimes a somewhat tortuous mission.

The third point is we can create a roadmap using preoperative CT because CTOs tend not to show up in real-time fluoroscopy.

And then finally, we can do it remotely, and ultimately we will bring automation to it. I think that from a regulatory standpoint and from a practical standpoint we will probably begin with complex occlusions or CTO in the peripheral vessels probably in the legs. But we expect that this will migrate northwards because there is tremendous demand, and nobody else we believe -- and I underline that -- no one has ever come up with the means of controlling the working end of a wire in an occluded vessel.

And what do you expect would be the minimum size vessel you could address?

Well, we've got a 14,000 -- our RF wire is a 14,000 wire, which is a standard interventional cardiology wire. So I mean I am not an expert here, but I would imagine that there is really no limitation on vessel size because all of the vessels are greater than 14,000.

Nice sales. Thank you.

I will now turn the floor back to management.

Well, I would like to thank you all for your time, and I look forward to talking to you at the next earnings call. Thanks and good-bye.

Thank you. This concludes today's Stereotaxis second-quarter 2006 earnings conference call. You may now disconnect your lines, and have a wonderful day.