Stereotaxis Inc (STXS) 2009 Q2 法說會逐字稿

Welcome to the Stereotaxis Q2 2009 earnings conference call on the 6th of August 2009. Throughout today's recorded presentation, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions)

I will now hand the conference over to Doug Sherk. Please go ahead, sir.

Thank you, operator, and good morning everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review financial results for the second quarter of 2009.

Before we get started, we'd like to remind you that during the course of this conference call the Company may make projections and other forward-looking statements regarding future events, or the future financial performance of the Company, including without limitation, statements regarding future operating results, growth opportunities, and other statements that refer to Stereotaxis' plans, prospects, expectations, strategies, intentions, and beliefs.

These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. For a detailed discussion of the risk and uncertainties that affect the company's business and qualify the forward-looking statements made in this call, we refer you to the Company's recent public filings filed with the SEC, specifically the form 10-K for the fiscal year ended December 31, 2008.

The Company's projections and forward-looking statements are based on factors that are subject to change, and therefore, these statements speak only as of the date they are given. The Company assumes no obligation to update any projections or forward-looking statements.

In addition, regarding orders and backlog, there can be no assurance that the Company will recognize revenue related to its purchase orders and other commitments in any particular period, or at all, because of some of these purchase orders and other commitments are subject to contingencies that are outside of our control. In addition, these orders and commitments may be revised, modified, or canceled either by their express terms as a result of negotiations, or by project changes or delays.

Now I'd like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis. .

Thank you Doug, and good morning everybody. On the call with me this morning is Jim Stolze, our CFO. Despite the challenges of our current economy, Stereotaxis continued to generate strong financial results, as EP labs and hospitals recognize the substantial value and benefits that Niobe and Odyssey Systems bring to their institutions, physicians, and patients.

Revenue for the quarter was 19% above last year, which highlights the strength of our backlog. Margin continues to be strong, reflecting our belief that the customer perception of our value is strengthening. Operating costs for the quarter again demonstrate our commitment to investing in growing the business with a mindful eye on expenses.

Revenue for the first six months of 2009 grew 34% compared to the prior year, driven by the backlog conversion and strong recurring revenue. Recurring revenue, including disposable services and accessories, reached a record $4.5 million during the second quarter, 62% above the second quarter of 2008.

Importantly, recurring revenue generated from the sale of disposables increased more than 100% above the second quarter of 2008, and approximately 10% above the first quarter of this year, reflecting the continuation of the rollout of the magnetic irrigated catheter in Europe and the U.S.

Our gross margins for the first half of 2009 was 66%, compared to 63% in 2008. Operating expenses fell by 19% during the first half of the year, and operating costs for each of the last three quarters have consistently been below $15 million, despite our investment in building our sales and clinical support functions, and launching eight new products in 2009.

The $60 million annualized run rate compares favorably with the total operating expenses of $67 million in 2008.

Instrumental in lowering our cost structure have been our efforts to institute best practice processes, thereby increasing organizational efficiencies.The result was a 46% reduction in our operating loss to $13.8 million in the first six months of 2009, compared with $25.4 million in the same period last year.

While we believe our income statement demonstrates significant progress for both the quarter and the past six months, I'd like to turn to those items which are not reflected in the financials. Specifically, the clinical acceptance and utilization of our platform and the hospital capital markets and our expectations for new orders.

First, regarding clinical acceptance -- as I previously stated, recurring revenue related to disposable devices and royalty increased more than 100% over the second quarter of 2008.

The magnetic irrigated catheter has created a new level of energy within our installed base and highlights the value of our magnetic platform in EP. We've rolled out the irrigated catheter to 86 of our approximately 120 installed sites worldwide. Overall, worldwide utilization for all EP sites where the irrigated catheter has been introduced, is greater than 1.5 cases per week.

In Europe, all sites within the European Union have been rolled out, and are still progressing towards independent use. There are a number of -- small number of accounts managed by our European organization outside of the EU, which have not been launched. For example, Russia, Saudi Arabia, and Turkey locations.

However, for those sites utilizing the irrigated catheter, the average is over two cases per week. Utilization in the top centers averaged approximately 4 cases for the first full six months of the year. While we're confident that utilization trends will continue to increase in Europe, we expect a temporary decline in overall usage in the third quarter, reflecting the seasonality associated with the summer holiday period.

With the introduction and the growing adoption of the magnetic irrigated catheter, there has been a significant increase in the ablation procedures performed in the left side of the heart in Europe. Specifically, atrial fibrillation and ventricular tachycardia are a growing trend.

In the second quarter of 2009, these left-sided procedures increased 100% over the same period in 2008. Right-sided procedures, in comparison, have remained relatively stable, increasing just under 10% year over year.

In North America, we have launched the magnetic irrigated catheter in 51 of the 70 installed EP sites. As a reminder, we have a very carefully thought out introduction plan we are implementing that provides on-site support and follow-up guidance with individual physicians, as appropriate when they perform complex procedures.

Many sites have multiple physicians who learn and adopt at different rates. We are on target to complete the rollout in the US in the fourth quarter of this year and expect to see utilization increase over time as physicians gain experience in use. Utilization in North America sites where the Thermocool catheter has been rolled out is over 2.5 cases per week and the average for all North American sites where the Thermocool has been introduced is more than one case per week. As a reminder, AF is not approved in the US and it is approved in the European locations.

What has fundamentally changed with the utilization pattern, is one year ago we had a handful of accounts performing the majority of the cases and today we have over 50% of our irrigated sites averaging, as a group, over two cases per week. This speaks well to the value of our platform and provides a foundation for a sustainable success in growth.

What is even more impressive than the utilization numbers, is the clinical success we've experienced in our platform in the market. More than 23,000 magnetic cases have been performed, from which we have generated a very impressive clinical results for safety and efficacy in a broad number of applications

. This past quarter was exceptional in the terms of adding to the scientific publications of the clinical outcomes obtained with our products, both in peer-reviewed literature and from the podium of major meetings.

As we mentioned in the last call, The Heart Rhythm Society meeting in May featured several presentations and posters detailing outstanding results across the broad range of applications.

Specifically there were abstracts from three separate centers in Europe, Copenhagen, Hamburg, and Milan, detailing excellent long-term results obtained when treating AF with the magnetic irrigated catheter .

The most rigorous of these studies was from Dr. [Chen] in Copenhagen, who placed a two-week monitor on 37 patients one year after their magnetic ablation procedure was performed, and found that 65% had no signs whatsoever of AF.

This is very favorable if you consider that the recently presented FDA trial for the magnetic irrigated catheter reported a 59% freedom from AF after nine months using a similar protocol. Dr.Chen's average case time for his patience was 140 minutes, with fluoro time of seven minutes. Again, this compares favorably with manual times in the above study, which averaged 211 minutes and fluoro times of 48 minutes.

Last month's Europace meeting in Berlin also featured multiple abstracts on the use of our technology in a wide variety of EP applications, including AF, VT, SVT, and congenital applications.

Of particular interest, was a presentation from Professor Adragao's group in Lisbon, showing that electro-anatomical maps of the left atrium created with a magnetic catheter were more accurate relative to CT scans than maps created with a conventional catheter in patients undergoing AF ablation.

Also of interest, was a small series of VT patients from Professor Karl Heinz-Kuck in Hamburg showing that the soft magnetic catheters can reduce PVC's during mapping, thus creating a better map to guide proper treatment of this very complex arrhythmia. Professor Kuck's groups reported 100% acute success in these patients series.

The second quarter of this year also saw an addition of several interesting and supportive papers in medical literature, not only in EP, but also in related to our vascular applications for interventional cardiology.

One paper of particular interest was published by Dr. Mark Patterson, from OLVG in Amsterdam, in the Journal of Euro Intervention. In a series of 47 consecutive patients with complex distal lesions who underwent magnetic assisted percutaneous coronary intervention, Dr. Patterson demonstrated statistically significant reductions in total procedure time, fluoroscopy time, contrast volume, and procedure-related costs when compared to a similar number of patients in a manual control group. These reductions were even more pronounced in a more difficult Type C lesion set.

Lastly and very importantly, we will launch several new products which should favorably impact utilization.

First, we are pleased to announce that the 0.1 TESSLA or high field strength feature has been released in Europe, and is expected to be released in the US later this year or early next year. This innovation allows physicians the ability to modify or increase field strength to generate 25% more magnetic moment or force for certain applications requiring manipulation of the catheter into very difficult to reach areas such as the right inferior pulmonary vein or under the mitral valve. Early physician feedback has been very positive in Europe.

Second, we are scheduled to commercialize a partnered nonlocalized version of the irrigated catheter in Europe this year, which will be targeted towards the high volume flutter application.

Third, the next generation magnetically compatible localization system should provide a significant improvement in our efficiency and effectiveness of the combined platform. This new product is designed to greatly improve remote mapping time and visualization of all devices used throughout the ablation procedure; and in 2009 there's much more to come, reflecting our commitment to continue to invest in those products and programs which strengthen our position and expand our value.

Now, turning to the hospital capital markets. We've had numerous discussions with industry analysts, our customer base, and other capital companies regarding the state of the economy in the US, hospital spending, and particularly capital spending for products.

We've reviewed in detail, our past orders and our current pipeline in an effort to better understand and identify those factors which could be leading indicators for a change in new order patterns. I will review our findings in a moment, but first I'd like to go over the results for the most recent quarter.

The majority of our revenues throughout the first six months of the year was driven from our backlog, which helps insulate the Company from the short-term downcycle and provide the security to maintain pricing and to protect our value proposition in the market.

The portion of our current backlog which we expect to be recognized to revenue within the next 18 months is approximately $42 million, which breaks down to slightly less than 50% for 2009, and slightly more than 50% for 2010.

We generated $5 million in new purchase orders during the quarter, with an average selling price for the new Niobe orders year-to-date in 2009, remaining above $1.1 million. Half of the current orders were from the US and we are pleased to announce that we received our first government order from the Veterans Administration in the second quarter, which bodes well for future contracts.

60% of our incoming orders for the year were outside of the US and continue to be very favorable to plan. Capital revenue in Europe and rest of world are up 75% year over year and all leading indicators and activities support a continuation of this success.

In Europe, where we have over 40 installations, the launch of the irrigated catheter has facilitated the establishment of strong reference sites, allowing potential customers the opportunity to see the value that they can expect to receive. In the Asia-Pacific region, we now have systems in Australia, Singapore, China, Taiwan and Japan, and continue to build market awareness and presence.

Although we have cut our operational expenses as a company, we've continued to shift our investments to the infrastructure necessary to increase revenue and adoption.

In China we've opened a Chinese representative office and hired our first employee to expand our clinical presence and support our growing number of installations. In Japan we're in process of a human clinical trial to gain regulatory approval for the Niobe system.

As many of you know, the Japanese market is one of the largest EP markets, but difficult to penetrate since it requires a full clinical study as part of the regulatory approval process. We're approximately halfway through enrollment and anticipate submitting final paperwork in 2010 and receiving approval in 2011. We remain committed to expanding our global footprint, which allows us to negate geographic market conditions, as reflected this past year in the US.

Now, turning to the US. We've completed an in-depth review of our sales funnel and those metrics we believe to be leading indicators. We've concluded that there's several positive indications that the market is turning around.

New Niobe quotes in North America and initial site drawings bottomed in the JanuaryFebruary time frame. Since then, both of these leading customer metrics have rebounded, with initial customer proposals almost doubling from the first quarter to the second quarter.

The interest in financing alternatives, such as operating leases, is beginning to gain momentum, all reflecting growing customer interest. We're optimistic that these leading indicators will generate an improvement in new orders, but we feel it's premature to prognosticate the exact timing.

The Odyssey product line has not been immune from the macro challenges in the market, but has an independent growth path which we believe can provide a third revenue leg to our Niobeand recurring revenue base. With 50% of our incoming Niobe orders, including an Odyssey system, and the introduction of a non-Niobe product, we expect orders to accelerate in the upcoming quarters.

As we look ahead into 2009, we remain very optimistic about the outlook for achieving our key objectives. What is reassuring is that, due to our strong backlog, even if we would not receive another order this year for shipment in 2009, we are comfortable that we can grow revenue in 2009, which would be driven from our backlog conversion and recurring revenue growth.

These financial trends are a testament to the progress we've made in our key objectives-- worldwide commercialization of the magnetic irrigated catheter to build utilization and build reference sites for system sales, Odyssey sales growth and the continued reduction in operating expenses with the goal of driving the Company to profitability.

Now, before I turn the call over to Jim, I'd like to touch on one other important announcement we made today. Jim has decided to retire at the end of this year, for the second time in his career, and although I know he will be staying for several more months, I did want to express our appreciation to him for all the hard work and the many hours he's put in to make this company successful.

He'll be leaving big shoes to fill. However, we feel we are fortunate to have found an excellent replacement for Jim. We've named Dan Johnson our new CFO. Dan, who's already based in St. Louis, will be starting in September and will officially become CFO on November 15.

We're excited about the background Dan brings to Stereotaxis. He has over 15 years experience as a senior financial management position in rapidly growing companies, including three firms that were generating over $1 billion in revenue.

He is a hands-on operational manager with strong financial and organizational skills, and we believe he will be very helpful in taking the Company to the next level of performance. And with that, thank you, Jim and let me turn over the call to you to discuss the second quarter financial results in more detail.

Thank you, Mike. Revenue for the second quarter totaled $12.6 million, 19% above the prior year. Systems revenue accounted for $8.2 million of the total and included revenue recognized on eight Niobe systems and two Odyssey systems.

Of the eight Niobe systems, four were placed in the US and four were placed outside the US. As Mike mentioned, we received purchase orders in the second quarter for $5 million. These new orders include approximately $0.5 million of orders for our Odyssey systems.

We currently expect that approximately $42 million of our backlog is likely to be converted to revenue within the next 18 months. We continue to review our overall backlog to determine the risk, deliveries scheduled outside this 18-month horizon.

To that end, we have removed three systems from this longer lead time backlog as a result of a lack of activity at these sites, including, in one case, the rejection by the state of an application for a certificate of need, and in another case, the change of ownership of the hospital.

As a result, our total backlog as of June 30, approximates $59 million, including the $17 million longer-term backlog orders, which are more susceptible to the risk of change, deferral, or cancellation.

Gross margin for the second quarter was $8 million, or 63% of revenue. While improved from $6.5 million, or 61% of revenue in the second quarter of 2008, the recent second-quarter gross margin reflect an approximate $400,000 in one-time service charges related to one of our very early systems. Excluding this nonrecurring charge, gross margin would've been 66% of total revenue.

Average selling prices recognized for the Niobe systems were slightly below the first quarter, due to a few larger revenue deferrals pending completion of installation as well as the mix of distributor versus direct shipments.

Odyssey pricing improved somewhat in the quarter. Systems revenue margin was 61% for the second quarter, a significant improvement from the 51% realized in the second quarter of 2008. The margin from disposable, services, and accessories was 68% for the second quarter, but was impacted by 10 percentage points as a result of the service costs related to the system I discussed above.

Recurring revenue margins were also impacted by costs incurred this quarter to upgrade many of our systems to our newly released Navigant software package. Operating expenses continue to decline to $14.6 million in the recent second quarter, compared with $14.8 million in the first quarter, and $18.7 million in the second quarter of 2008.

Included in the recent second quarter results was a $535,000 impairment charge related to the write-down of certain equipment, which was no longer deemed usable. The decline from the prior year's second quarter was driven by a 37% decrease in G&A expense, a 24% decline in R&D expense, and an 11% reduction in sales and marketing.

As Mike mentioned, this is our third quarter of sub $15 million in operating expenses and we therefore expect that are run rate for a normalized quarter has settled into the $15 million range. We reported a net loss of $7.4 million, or $0.18 per share for the recent second quarter, much improved from the $12.8 million net loss, or $0.35 per share in the second quarter a year ago.

Average shares outstanding for the recent second quarter were 41.7 million, compared with 36.5 million in the same quarter last year, reflecting the 4.4 million shares issued as part of the simultaneous offerings that we completed at the end of December 2008. Cash and investments totaled $12.8 million at June 30, a decline of $6 million from the end of March.

We used $5.6 million in cash from operations during the quarter, compared to an EBITDA for that period of a negative $4.7 million, with working capital uses of approximately $700,000 accounting for the difference.

In conjunction with our focus on operating expenses, we've also put in place processes to improve our working capital performance as we strive for cash flow breakeven. Good examples of these efforts are our current quarter accomplishments of 84 days of sales outstanding, and inventory turn up to 2.5 times, both measures that we are highly focused on and which we intend to improve upon.

As we anticipated in our last conference call, the cash used this quarter was significantly below the first quarter cash burn, which was unusually high due to the timing of system related payments received in the fourth and first quarters.

Total bank and other debt was $28 million at June 30, with $13.2 million drawn against the $25 million working capital line with Silicon Valley Bank. Included in the debt is approximately $14.5 million owed to Biosense Webster, related to the $18 million facility that was finalized in July of last year.

Repayment of this facility will be from royalties otherwise payable from Biosense to Stereotaxis with no minimum cash outlay requirements until May 2010. At the end of the second quarter our cash was roughly $13 million and approximately $12 million remaining under our working capital line with the bank.

We continue to believe that our cash outlay through the remainder of 2009 will closely match the related quarters' EBITDA. Therefore, we believe that our cash consumption for the full year 2009 will be less than the $30 million we used during 2008.

Given the continued uncertainty in the economy and the trajectory of the planned growth in our business, we believe it is prudent to ensure that we have additional flexibility to assess the capital markets on an as-needed basis.

Thus, we filed a $75 million universal shelf registration statement this morning to put in place the requisite documentation in the event that the market and Company circumstances would make approaching the equity or debt markets an attractive alternative.

It is important to note that approaching the equity or debt markets is not a foregone conclusion for our company. We are actively investigating all strategies to meet our future needs. With that, I'd like to turn the call back to Mike to provide an update on our outlook for 2009.

Thank you, Jim. Before we take your questions, I like to make just a few final comments regarding our outlook on 2009. As I mentioned earlier, we expect revenue this year to grow above 2008, driven by Niobe backlog conversions, Odyssey revenue growth, and a 50% increase in recurring revenue.

We expect gross margins in 2009 to be above 65%. We expect operating expenses to be below the 2008 level of $67.2 million, with sales and marketing expenses at or above $28 million, R&D expenses below $17.4 million, and G&A below $21.1 million. With that I'd like to open it up to any questions.

Thank you. (Operator instructions)

Thank you. The first question comes from Charley Jones from Barrington Research. Please go ahead.

Morning Charley.

Thank you, Charley Jones. Your line is open. Okay. We'll go with the next question. Spencer Nam from Summer Street Research. Please go ahead.

Thanks very much for taking my questions. Just a couple of questions. Number one, this backlog, you know we were looking at somewhere in the $63 million backlog last quarter, so is that in terms of apples to apples-- is the $59 million apples to apples comparison versus last quarter orhow should we think about that?

Yes it is.

Okay. I see. And then, related to this, the orders that are coming in say, you know between now and the end of the year, those are most likely to be recognized sometime in 2010. Is that fair to estimate that way?

Yes. So Spencer what -- we have 1 to 4 customers that have requested shipment this year, of Niobes, and then of course Odyssey will be different because the order to cash cycle on Odyssey is much more compact than Niobe. But I would expect your general statement that Niobe orders between now and the first quarter of 2010 will largely be shipping in 2010.

Got it. And then, on the pricing sidebased on numbers that I have, it looks like that maybe the average selling price of a Niobe was a little below the ASP, historical ASP. Now you mentioned in the call that it was -- the pricing was steady and I couldn't quiteget the numbers right.

Yes.

How did the pricing work out?

There's-- on the call I was talking about incoming orders. The pricing on the incoming orders is-- continues to be steady.

Got it. (multiple speakers).

There are two or three issues that impact what I call apparent pricing, Spencer.

Okay.

One is-- depends on the individual contract. Some contracts will have 5% withheld pending installation, some will have 10% or 15%, so it's a mix of how much-- and we don't recognize that until installation is completed. So, in one case I might hold back 15% of the ASP when I ship and recognize revenue, and in the other case I might hold back 5%. So you can see a 10% swing in ASP, depending on which type of contract you have in that given quarter. In addition, as I mentioned, we had several distributor orders this quarter, and we do pass through some concession to distributors, although all those systems were actually shipped directly to hospitals and I think every distributor order shipped this quarter is actually in the process of installation at the relevant hospital.

Great. And then, this is probably a question that I think is somewhat of a standard question at this point but, your competitor did not do as well on their quarterly numbers, placement numbers. I was wondering if there has been any impact from that that you guys are seeing? The customers, new customer interest from that effect?

From the competitive situation? No, we're continuing to grow, Spencer, in customer interest. I mean, our sales pipeline can just be pretty robust, and I don't think their challenges equate to our success. Let me put it that way. I think we look very strongly at what we can do to improve our sales success, and so we've seen a nice pickup. I think our biggest, as we mentioned in several calls, our biggest short-term efforts are to get reference sites up and running, get utilization up and then build from that a sales funnel through those reference sites.

I see.

And we've made some progress, I think significant progress in the last six months.

I see. Final question. The Odyssey placements seemed a little light, would any thoughts on kind of how the quarter played out with Odyssey?

Yes, the Odyssey-- I think you'll see a stronger pickup in the last half, and the result is-- as a result of getting into non-Niobe labs in a bigger, bigger fashion in the last six months of the year. We just-- as you know, we launched that in the first half. We're beginning to see a lot of interest. I would expect in the next several months you'll start to see some of those translate into orders, and then we will, we'll be able to move it from an order to revenue pretty quickly, because it's not connected to a big construction cycle. So we'll see that pickup. I think it was a little bit of a lull, mainly because all the Odyssey's that came in in Q2 were tied to Niobe's, and we'll start to see it disconnect in the last half of this year.

I see. Thank you very much.

Thank you. The next question. The next question comes from Keay Nakae from Collins Stewart. Please go ahead.

Yes, good morning. Mike, in terms of your guidance, we think about your system sales in the back half of the year, relative to your 18 month pipeline, you talked about less than 15% coming in the back half of this year I guess. Are we looking at sequentially flat numbers there? You did$15 million in the first half. Is that what we should expect in the back half or could it be a little better than that?

Yes. Let me restate and make sure that -- I said there's $42 million in the next 18 months in backlog. Less than 50% would go to revenue this year, slightly less, slightly less than $20 million and the balance into revenue next year. We expect to pick up a couple orders that would go to revenue between now and the end of the year. So that will be complemented with a few more orders, and then largely we think the orders between now and even almost into Q2 of 2010 will help build the backlog and the revenue necessary for 2010. So all the new orders coming in largely Q3-4-1 and part of Q2 will help build 2010 to a strong revenue base. So we feel pretty comfortable. So if you look at that, and then add to that recurring revenue.

Right. No, I understand that. I'm just looking for a little more detail on the systems since you're already-- your guidance is for '09 revenue to be better than '08. Through six months you're already $6 million above that. Your recurring revenue in the back half is going to clearly be much stronger than '08 so just-- are we looking at flat system sales or possibly down or do you expect to see second half improvement?

You're talking about systems to revenue, not sales?

That's correct.

Yeswhat-- if you just take that backlog at $20 million, that I mentioned, plus recurring, that would be the baseline I would look at.

Okay. Let's move on to the recurring revenue. We're seeing that nice sequential improvement. What percent of that now is disposable?

Jim?

If you look at disposables and royalty, it is in the half range of that total number.

Okay. Very good, and then Mike, you talk about some of your product launches, but was there more new products coming in 2010?

Yes.

Beyondthe US launch of the enhanced TESSLA, what else is coming in 2010?

We should see, hopefully, the rollout of the nonlocalized irrigated catheter in the US, which would be a nice addition in the US. We should see the partnered new mapping system in the US. We also are working on some product improvements that help us in EP to expand our footprint beyond just control on the magnetic catheter. So we'll continue to look at kind of how we provide a platform to take care of complex arrhythmias and expand their footprint in that. So it we'll have, I think, several new nice additions to the EP platform, and again, although we've downplayed it, we're continuing to, on a small scale, invest in our vascular growth. So we're looking at launching a couple of products in vascular as well next year.

Okay, and then just one last question on the [OpEx, continue to do a very good job there, and just wondering specifically to the G&A number? Is that level that we saw in Q2, is that going to remain fairly steady or how do we think about that specific line?

Yes. I think that the whole trajectory has kind of settled in now, okay, to a reasonably consistent pattern that will allow us to kind of hold at those levels. I think it was $4 million in Q1, $3.7 million-- $3.3 million in Q2, so it'll fluctuate somewhere between those two. We include in that number and it's a bit misleading when I call it G&A, not misleading, but we choose to put our regulatory, clinical, and our --some of our training activities in there. So, the fluctuations in G&A will include fluctuations in our -- as Mike mentioned, we're doing some regulatory work in Japan, so all the costs for that Japanese effort are in G&A. They're not in R&D. So the fluctuations in G&A are going to be driven largely by regulatory and training activities.

Okay. Thanks for that clarity.

You bet.

Thank you. The next question comes from Imron Zafar from Deutsche Bank. Please go ahead.

Hey. Good morning. Thanks for taking my question. I wanted to begin, Jim, by congratulating you and wishing you the best.

Thank you, sir. I appreciate it. It's been fun working with everybody on the calls.

Likewise. So, on the new orders in the quarter, they were sequentially down. Can you just maybe, be a little more explicit in explaining why that was the case, is it purely just the CAPEX headwind?

I think largely it's a US CAPEX headwind. I think if-- you know, we're pretty pleased with our effort outside of the US. Most of the discussions are focused on US. And when I mentioned leading indicators, those were all US leading indicators. Obviously, outside of the US we continue to see nice activity. So, I think it just culminated in Q2. The sales force is pretty bullish on the balance of the year. I'm a little more conservative in my view and we'll see how these leading indicators translate to actual orders in what time frame.

Okay. And then, as you go after the non-Niobe EP labs with Odyssey, how do you plan to-- do you plan to do that alone or is there a potential for partnership there? Just give --.

Definitely a potential for partnership. We're going to initially do it alone, because we don't want to get in a position of giving away too much of the value as we look back. So we're going to go at it alone for the near term. But we're definitely considering partnerships.

Okay. And then what's--is there a way to quantify a backlog specifically for Odyssey?

I think it's about 10% of the capital backlog, roughly.

Okay. And then the conversion--?

The conversion, if it's not tied to a Niobe-- so if it's tied to a Niobe , then obviously it converts at the same time.

Right.

If it's not tied, we've done-- we've gone from order to cash in 90 days on an Odyssey. So it's very quick.

Okay. And then, can you just give us -- and I'm sorry if I missed this, but can you just give us an update on the Cardiodrive II, you know, how much(multiple speakers) --.

Yes. I think that-- we call a QuikCAS. I believe it's rolled out to 80% of our installed base. We should be fully rolled out at the end of Q3.

Okay. And then, as far as the reference sites, how many do you have up and running and where do you plan to be, say, six months from now.

In Europe, I think we'd qualify 3 to 4 and then one for interventional and 3 to 4 for EP. In the US, I think they're still developing. I think they feel good about 2 or 3. And then in Asia, it's still emerging. It's pretty premature in Asia. I think by the end of the year we should have 1 in Asia that we feel comfortable as a reference site. Now what's nice about that, Imron, is we're in St. Louis through the Odyssey network. We're also connecting them via the network, so that any customer that visits St. Louis can also see any site thatis hooked up on the network that's a reference site. So it doesn't -- you don't have to physically go to that site. They can come here and be online with any site.

Great. Thank you very much.

Thank You.

Thank you. The next question comes from Sameer Harish, from Needham Company. Please go ahead.

Hi guys and Jim, I just wanted to extend my congratulations as well.

Thank you, Sameer.

Real quick, I'm not sure if you covered this already, but did you give a total procedure number for second quarter?

No, we did not (inaudible-multiple speakers)-- we talked about the averages per sites, but not total.

Can you give a number or total procedures to date?

I think we were going to stay away from total numbers thus far. We're getting into more transparency just talking about utilization rates and then obviously you see the numbers, you see the financial numbers.

Okay. And I think you mentioned, in the press release, 50 sites have been converted to irrigated in the US, or trained on irrigated. Are those fully proctored sites or are they still going through the proctoring process?

Yes, still going through. (inaudible-multiple speakers) Yes. They're somewhere between early phase to-- we're working them towards that independent phase.

Okay. And how many are fully up and running independently on irrigated?

I don't know the exact account. I think in Europe it's maybe 20 to 30%. In the US, it's less than that, maybe 10 to 15%.

Perfect. Thank you very much.

Thank you. The next question from Mimi Pham from Soleil Securities. Please go ahead.

Hi. Good morning

Good morning, Mimi.

And I also want to say thank you to Jim and best of luck in your, I would just call it semi-retirement.

Thank you, ma'am.

Just first, can you clarify your comments on CAPEX spending, like, in the US, are potential US Niobe customers telling you that once they visit the reference sites they could potentially put in a Niobe order, or is it more of a longer-term, not even an option near term, it's more of a mid-to-late 2010 at a best case?

We're hearing more optimism towards spending freeing up late '09, 2010 in the market. Now that's a general market macro (inaudible) environment. You know people, typically, if you look at doing site drawings, you know, you don't do a site drawing unless somebody's interested in you showing up and actually talking to their construction guys and getting into details. It's just not worth it. It's not something that you see as part of a customer that's not interested in buying in a reasonably short period of time, and those have gone up considerably since January and February. So we think that the leading indicators are starting to turn in the right direction.

Then, in terms of utilizations in the US for the irrigated, some of your sites have, I guess, average a once a week average. For the ones that are less than one per week, is this a matter of time or is there something with the irrigated catheter thatthey've said to you, you need to change this or change that before I use it more?

I haven't heard any performance problems with the irrigated. I think it's a matter of getting the right physicians trained and in the lab. There is a fairly complex formula of getting-- if there's a large number of physicians and a large number of labs, getting everybody through the right labs and trained.

Or I guess, have you heard of any of your sites so far in the US saying that they don't like the irrigated, they're not going to use it?

No, I haven't. Have you?

No I have not.

No.

And then just clarification, the non-navigation irrigated that you'll be launching, is that made by J&J?

Yes.

And then last question. I thought you did give us the 23,000 total cases (inaudible-technical difficulties) to date, but can you give us a number entering 2009, so that we can just get a general annual run rate? . I think that was the prior question.

I think we wanted to stay away from those numbers right now. We might get into total numbers by year-end. But we've got to look at that metric.

Okay. Thank you very much.

(Operator instructions)

Okay. Thank you sir. We have no questions at this time. Please continue.

Well, thank you, everybody, for the call and we look forward to talking again in the next quarter, and as a company we remain committed to driving success and continuing to drive what we believe are the most important things that result in both securing next year to be a nice growth year as well as continuing the success we've had this year with the irrigated roll out and continuation of financial improvement. So, thank you again and I look forward to talking to you soon.

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