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Novadaq Technologies Inc. (NASDAQ:NVDQ)

Q2 2013 Earnings Call

August 01, 2013 08:30 am ET

Executives

David Martin - Vice President for Business Development and Investor Relations

Arun Menawat - President and Chief Executive Officer

Steve Purcell - Chief Financial Officer

Analysts

Jason Mills - Canaccord Genuity

Matt Miksic - Piper Jaffray

Doug Miehm - RBC Capital Markets

Brian Gagnon - Gagnon Securities

Steve Crowley - Craig-Hallum

Spencer Nam - Janney Capital

Operator

Greetings and welcome to the Novadaq's Second Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host David Martin, Vice President for Business Development and Investor Relations for Novadaq. Thank you, Mr. Martin. You may begin.

David Martin

Thank you, Kevin. Good morning everyone. Thank you for joining us today to review Novadaq Technologies Financial Results for the second quarter 2013. On the call today representing Novadaq are Arun Menawat, President and Chief Executive Officer; Steve Purcell, Chief Financial Officer; and myself, David Martin, Vice President, Investor Relations.

Before we start, I want to remind you that certain statements made in this conference call may be considered forward-looking. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements, and therefore these statements should not be read as guarantees of future performance or results.

All forward-looking statements are based on Novadaq's current beliefs as well as assumptions made by and information currently available to Novadaq and relate to, among other things, results of future clinical tests, the SPY, FIREFLY, PINPOINT, LUNA, and Trapper Imaging Systems, anticipated financial performance, business prospects, strategies, regulatory developments, market acceptance and future commitments.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Due to risks and uncertainties, including the risks and uncertainties identified by Novadaq in its public securities filings; actual events may differ materially from current expectations. Novadaq disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that said, I’ll now turn the call over to Dr. Arun Menawat.

Arun Menawat

Thank you, Dave. Good morning everyone. We are in stereo this morning because David in Toronto and Steve and I are in Vancouver, but the agenda today is as usual. Steve will highlight our second quarter financial results. After that, I will discuss Novadaq's Q2 achievements as well as the recent acquisition news we've announced this morning and then Dave will provide you overview of the latest clinical publications.

So with that, Steve, please?

Steve Purcell

Thank you, Arun, and good morning. Q2 revenues of $8.1 million exceeded Q2 '12 revenues by $2.7 million, a 50% increase. SPY product sales increased by $2.8 million due to a 108% increase in SPY capital and a 40% increase in recurrence SPY pack sales as compared to Q2 '12.

TMR product sales decreased to $191,000, mainly due to capital Laser sales. Royalty revenue increased by a $122,000 in comparison to same period last year and service sales also exceeded Q2 '12 by $20,000 due to increased service contract sales.

In comparison to Q1 '13, revenue increased by $820,000 due to an increase in SPY products and royalty sales offset by slight decrease in TMR product sales. Gross profit of $5.1 million in Q2 '13 increased from $3.3 million for the same period last year due to increased sales from our alliances with LifeCell and Intuitive offset by reduction in TMR kit margin.

Increase in SPY product sales continue to produce higher margins. In comparison to Q1 '13, gross profit is higher by $509,000 mainly due to increased SPY product margins and increased royalties.

Operating expenses of $7.3 million exceeded previous year Q2 expenses by $3.1 million. Selling and expenses increased by $2.3 million due to the direct sales personnel being hired to support our PINPOINT and LUNA sales program along with increased promotional expenditures.

Research and development expenses increased by $668,000 to support expanded operations, higher non-cash depreciation expense and equipments utilized in clinical trials, higher patent expenses for new and existing patents and higher PINPOINT product development cost.

In comparison to Q1 '13, operating expenses are higher by $2.1 million due to the increase in selling expenses by $1.2 million for direct sales personnel being hired along with increased promotional expenses, higher research and development expenses by $559,000 for PINPOINT product design and related expenses and non-cash equipment amortization.

Administrative expenses increased over last quarter by $381,000 due to non-cash stock option expense, professional fees and insurance. Q2 '13 non-cash warrant revaluation expense of $7.5 million was higher than Q2 in '12 warrant revaluation expense of $311,000 due to our quarterly increase in the company's share price.

For Q2 '13, the share price increase was $3.60 as compared to $0.20 for the same period last year. In comparison to Q1 '13, warrant revaluation expense increased by $5.4 million as the share price increase of $3.60 for Q2 '13 was greater than share price increase of $1 for Q1 '13.

Net loss of $9.7 million in Q2 '13 was $8.3 million higher than the net loss of $1.4 million in Q2 '12, due mainly to higher non-cash warrant revaluation expense of $7.2 million and higher operating expense by $3.1 million.

Offsetting these higher expenses, higher gross profit by $1.8 million and lower interest and imputed interest cost by a $170,000. In comparison to Q1 '13, net loss increased by $6.8 million due to an increase in warrant revaluation expense by $5.4 million and increased to operating expense by $2.1 million.

Offsetting the increased expenses were higher gross profit of $509,000 and lower combined interest expense by $156,000. Cash use in operating activities was $3.5 million which included working capital usage of $2.9 million and cash burden of $600,000.

Cash and cash equivalents were $88.5 million at June 30th, reflecting an increase of $51.3 million, compared to cash position of March 31, 2013.

On May 7th, Novadaq announced the closing of its public offering of 4,485,000 common shares, on a bought deal basis at a price to the public of $12.90 per common share. Gross proceeds in the offering were approximately $57.9 million resulting in cash proceeds of $54.7 million, net of transaction costs.

Now, I'll hand the call over to Arun.

Arun Menawat

Thank you, Steve, and welcome everyone again. As I have previously stated, our three key goals for 2013 remain building a secular growth company targeting yearly increases of 40%, introducing PINPOINT and LUNA to their markets and continuing to strengthen the value proposition of our company through clinical studies.

At the end of Q2, we believe that we are on track towards achieving these goals. In addition, we are also strengthening our value proposition by providing clinically relevant imaging to surgeons by adding scintigraphy.

Let's start with the performance of the quarter. During Q2, we shipped a combined 175 SPY technology systems manufactured by Novadaq. And of those, approximately 128 systems were deployed into hospitals. The installed base of SPY technology in hospitals is now approximately 1,000 systems.

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The majority of the installations at this stage of our direct launch were as a result of our partner’s effort, but our direct team also had some early success in installing a few systems. We estimate that more than 5,300 patients were treated with our technologies during the three months prior to and that existing the second quarter the U.S. penetration in breast reconstruction increased to 15% as compared to 14% in Q1.

The progress made in the direct launch of PINPOINT and LUNA is meeting our expectations. Installation of both products into U.S. hospitals has now reached double-digit, although not every system installed is a sold system at this stage.

Today, our direct sales team is comprised of approximately 22 sales professionals and from here. We plan to slowly increase that number during the second half of the year. Bottom line, so far we are on track and meeting our expectations for this year.

Regarding our business goals overall, as I said, we are satisfied so far at the midpoint of 2013. However, we are obviously aware of the recent dynamics in the robotic surgery space and our FIREFLY attachment rate in the U.S. now quite high, we will be more exposed to fluctuation in quarterly robot sales numbers than we have been in the past.

In fact, our business overall will be more exposed to capital sales trend as PINPOINT becomes immaterial driver, thus these external dynamics may dampen our rates of growth during the second half of the year to some extent, although we remain comfortable on a year-over-year basis.

Now, let me provide you with some color on our other news. In the second press release this morning, we announced that Novadaq has acquired the assets of Digirad’s surgical imaging product line, including a patented scintigraphy system which has been in development over the last few years and which incorporates specific technologies and features that make it optimal for use by surgeons in the operating room to visualize radionuclide in real-time.

We have also acquired a disposable handheld probe that can be used either with the imaging system or independently. We are excited about these new additions to our product pipeline as they will help us advance our mission to provide clinically relevant imaging to surgeons.

As you know, SPY technology visualizer perfusion and blood flow in vessels during surgery, the new technology, which is used in conjunction with low dose radionuclide tracer molecule is capable of imaging lymph nodes and tumor in deeper tissue before during and after surgery.

Early experience with alpha versions of the technology shows that its use enables sentinel lymph node biopsies and tumor resections which are more accurate and efficient and thereby overall effective.

At the Ohio State University Wexner Medical Center; for example, in patients with parathyroid cancer investigators revised their clinical strategies in seven of 20 patients and removed additional tissue based on detection of residual radiolabelled tumor tissue revealed to be intraoperative by the intraoperative imaging. The investigators also estimated that operating times were reduced between 19 to 39 minutes by the ability to confirm complete resection in the operating room.

The same group also used the technology to visualize sentinel lymph nodes in more than 50 melanoma and breast cancer patients. In this application, in approximately one-third of cases, clinical patient management was changed as a result of having real-time intraoperative imaging information available to surgeons during the surgical procedures and the completeness of the sentinel lymph node biopsy procedure was improved.

In some patients, lymph node that contained cancer cells were identified only by imaging that may have remained in patients had the technology not been used. We've identified a number of opinion leaders who are eager to work with us to develop this surgical imaging technology for both, lymph node localization and tumor margins visualization and we look forward to updating you on our plans to complete both, products and clinical development at our Second Annual Analyst Investor Day, which will be held on November 18th in New York City.

Overall, the acquired technology will further enhance Novadaq's value proposition to surgeons by providing surgical scintigraphy and SPY imaging technology. Our goal is to enable surgeons to not only visualize perfusion and blood flow in vessels, but also visualize lymph nodes and tumor margins all at the same time in the same patient, in real-time, in the surgery suit.

At this point, I will turn the call over to Dave to discuss key clinical publications from the second quarter.

David Martin

Thank you, Arun. We've commented in past quarters on the growing number of publications that support the clinical and economic value of SPY imaging in numerous different surgeries and in wound care. This quarter, the clinical highlight was on head and neck surgery. Two papers were published in the area. In the first, green and associates from the Walter Reed medical center reported in the journal of maxillofacial surgery that among 61 flap reconstruction surgeries conducted, 55 using SPY and 55 without SPY, one patients in each group developed partial flap necrosis.

The 1.8% necrosis rate in the SPY group compares favorably to the rate for the without SPY group and also favorably to the 8.6% rate realized in a series of 23 patients treated without SPY and Walter Reed before the study started. The authors concluded that SPY aids in pedicle location and anastomotic flow visualization and flap perfusion assessment and can assist the reconstructive surgeon in avoiding perfusion related complications.

The second head and neck publication was a case report from [Shaw and AAO] at the Yale School of Medicine. In this case SPY was used to confirm perfusion and viability of the forehead flap prior to division and inset thereby eliminating the question of flap survival based on clinical judgment alone. In this case report, SPY Elite was used during the second stage of the forehead flap reconstruction procedure on a 67-year-old man and no complication was reported in the patient's operative and postoperative course.

Also in the second quarter, a SPY cost analysis in our lead open surgical application breast reconstruction was published in the Journal of Plastic and Reconstructive Surgery. This analysis was conducted by groups of the Dartmouth-Hitchcock Medical Center and the Tuck School of Business in New Hampshire.

Unlike cost analyses that are done by most hospitals before they buy SPY, this analysis took the perspective of the third-party payer. The authors conducted a comprehensive literature review to identify rates of the most common complications when SPY is used and when it isn’t used in free autologous breast reconstruction surgeries.

The rates were then combined with reimbursement costs that were linked to Medicare current procedural terminology provider codes to derive per patient cost. The authors reported that without SPY, the complication rate was 26.5%, whereas the complication rate with SPY dropped to 5%.

From the payer’s perspective driven by the reduced rate of complications for which the payers would be responsible and the calculated value of the gain in quality-of-life, a benefit of approximately $3,500 per patient was determined. The authors concluded that SPY angiography is a cost-effective technology under the most stringent acceptable thresholds when used in mediate free autologous breast reconstruction.

On our Q1 call, the topics of our clinical review were predominantly focused on breast reconstruction ,in the 200 patient MD Anderson study presented at PSRC conference in Santa Monica as well as colorectal surgery in the presentation by Dr. [Steve] are the PILLAR interim results during stages. This quarter was encouraging to see clinical benefit reported for one of the lower volume, but nonetheless important other applications of SPY imaging and also encouraging to see further third-party support for the economic value of our technology this time from the perspective of the different stakeholder, the payer.

With this publication update, I'll turn the call back to Arun. Arun?

Arun Menawat

Dave, thank you so much. I would now like to ask the operator to open the phone lines for questions.

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting the question-and-answer session. (Operator Instructions) Our first question is coming from Jason Mills from Canaccord Genuity. Please proceed with your question.

Jason Mills - Canaccord Genuity

Hi, thanks for taking the question and congrats on another good quarter. Can you hear me okay?

Arun Menawat

Yes. I can. Thank you, Jason.

Jason Mills - Canaccord Genuity

Great. Good morning. First, this is several quarters in row that you had strong placement numbers and I'd love your comments on how you think generally speaking placements are leading indicator procedures over the longer term.

The second part of that question is if you could give us a sense for the breakout and how those placements went with your different various partners and I know you mentioned that you sold a few directly. I wonder if you could be more specific there and then I had a follow-up question.

Arun Menawat

Sure. So, Jason, the majority of the systems we are placing right now or selling are still through our partners, but if you look at the ones that we have placed in the second quarter, we are certainly in double digits already.

I think if you look at each of the products that we have placed of our own, we are pretty happy with what we did this year. I think if you look at capital overall, we are somewhere in the range of about 15 in the second quarter, some of those were placed by our partners or sold by our partners but more were sold by our own team. So, I think that that's kind of where we are.

Once we get to double-digits individually, I will definitely provide the exact numbers. With respect to giving you little bit more granularity I think right now about 80% of the da Vinci Robotic Systems are sold with FIREFLY, which is a higher number than it has ever been in the past and that also relates to my other comment that in the past we’ve been in the 50% to 65% range, but given that now we are no majority of the systems are now being sold with the upgrade, we probably will have some [dilation] with respect to robotics sales as well and I don't know how those will go.

Obviously, that’s not where we are, so I think overall the mix of placements is pretty consistent with what I was expecting in the second quarter. With respect to future sales, how this will drive utilization, I would say this year as I have said before expect linear growth, but I think that we’re certainly getting into more procedures GI procedures, in PINPOINT we are getting into multiple procedures, also including GI and some GYN procedures. So I do think that next year and following years, utilization per device will start to pick up also.

Jason Mills - Canaccord Genuity

That's helpful. With respect to that comment, just segueing into my next question, you mentioned the robotic surgery will fluctuate a bit but in terms of FIREFLY it’s a relatively smaller portion of your revenue.

SPY Elite, and then emergence of PINPOINT and LUNA, at least seems to us would drive the model and I think drives most of our models in terms of revenue growth on a go forward basis, so in the second half of the year, as it has been typical you have more revenue, is this business is ramping in the second half of the year than the first half of the year and to get to the midpoint of your range that will occur again. Could you just sort of walk us through how you are thinking about that if we are thinking about that correctly?

Arun Menawat

Yes. Absolutely, Jason. I think number one, our revenue from robotic sales are fairly stable. They have been stable for a while and we do think that they will remain stable. I think on the percentage of total revenue basis, because we do expect that our own sales will continue to pick up, that the percentage of robotic sales will continue to decline as compared to total revenue.

I think having said that, the only thing I would say is that capital sales and most people are saying in the second half are little bit, the length of time to close these are little bit extended and so it might be a little bit of a slower growth or something over the short-term, but over the long-term we are very confident about the direction of where we are going. And I think you're absolutely right over the long-term, our own products will continue to drive the growth rate.

Jason Mills - Canaccord Genuity

So just with respect to your guidance, you mentioned the midpoint which I believe is around $34 million or little over $34 million or something in that range. How should we think about that relative to sort of what you’ve done so far in the first half of the year which is I think beat expectation in first two quarters?

Arun Menawat

Sure. So I think what I’m saying is, the overall mid-point number I think I’m comfortable with, whether or not we can beat those numbers don't know, but turning to the overall I am comfortable with.

Jason Mills - Canaccord Genuity

Okay. And last question for me is on the clinical trial side. One of the things you've talked about is the need for level one evidence to reach standard of care across multiple modalities. Certainly we’ve seen data from PILLAR and we’ve seen or heard some really conversations about PINNACLE, you’ve talked about a clinical trial starting perhaps in endometriosis which is into procedure that you are garnering in your revenue from now. Could you give us an update with respect to randomized trials in some of the areas that ultimately could drive the growth longer term? Thanks guys.

Arun Menawat

Surely. Absolutely, Jason. I think we are on track with all of the clinical trials or studies I guess that we’ve talked about in the past. We do plan to do something that is equivalent to a Phase II in endometriosis in the second half you’ll see that beginning. In the second half,, we have done some Phase I, Phase II type work on even that [work] and we will continue that and we will provide you with more details on that at the Q3 call.

The PILLAR trial is now in terms of recruitment is complete and the final script is in process, so it should get published by the end of this year. We do we are in conversations with the investigators who ran the first trial to begin a Phase III type or longer-term trial. As soon as all that gets finalized and we can start to put a number date to the recruitment, we will put that out there. But overall, the discussions we’ve had in the past with respect to focusing on significant multi-center trials that will have where outcomes became our key endpoints is definitely intact and remains our strategy.

Jason Mills - Canaccord Genuity

Thanks, Arun.

Operator

Thank you. Our next question is coming from Matt Miksic from Piper Jaffray. Please proceed with your question.

Matt Miksic - Piper Jaffray

Hi. Good morning. Thanks for taking the questions.

Arun Menawat

Good morning, Matt.

Matt Miksic - Piper Jaffray

I just wanted to make sure I understand what you are saying about the sales in the quarter. It sounds like you are talking about you said you’re into the double digits in terms of system sales. Is that right?

Arun Menawat

That’s right.

Matt Miksic - Piper Jaffray

So, these would be PINPOINT units?

Arun Menawat

PINPOINT and LUNA.

Matt Miksic - Piper Jaffray

Okay.

Arun Menawat

So our own capital sales…

Matt Miksic - Piper Jaffray

You ahead, I’m sorry.

Arun Menawat

Right. PINPOINT and LUNA would be direct sales. LifeCell is our partner on the SPY side and they also have some capital sales also in the quarter.

Matt Miksic - Piper Jaffray

Okay. So, I'm struggling a couple of calls. I apologize, but the LUNA would be, are those actual sales or are they operating lease model kind of or you’ve started putting them in the same bucket.

Arun Menawat

Yes. So, majority of the installs of LUNA in the field right now, which is in double digits also, are either evaluation or placements, but we do have some capital sales also for LUNA. As I have mentioned, it’s in early stage, what I was looking for in the second quarter was validation of the business model and having enough of an install base that we can generate the key opinion leaders, which will help us drive the growth of those products and I feel pretty comfortable with achieving those goals.

Matt Miksic - Piper Jaffray

Yes. I know. I think it’s very encouraging. I just want to make sure I don’t take away too much sort of enthusiasm around these numbers to early, but when you say also in double digits, are both PINPOINTs I mean independently PINPOINT and LUNA both kind of open that or you are looking at it on a combined basis?

Arun Menawat

Right. I think that you are absolutely right. We are happy with where we are, but I don't want to get too excited too early, so combined both, PINPOINT if I look at PINPOINT and LUNA combined, our capital are in double digits.

Matt Miksic - Piper Jaffray

But not independent?

Arun Menawat

But not independently.

Matt Miksic - Piper Jaffray

Great. Okay. That’s very helpful. Then just another on the capital environment, I think we are seeing this kind of volatility in the end markets for capital. Is that comment that you made pertaining to some of the system sales that you are making to partners and what you’ve already seen on that front or is that comment that you are making just given the environment it’s just sort of why is to be mindful of potential volatility that maybe you have not yet seen? I just want to get a sense of where that comment is coming from.

Arun Menawat

Yes. Most certain. When we see early sales, I think sometimes it does not, I think we want to be cautious about whether or not it’s an early predictor of fast run rate or not, because sometimes you have early adopters who have the ability to get devices and so on, so I think that’s really where my comment is coming from.

What we see in capital sales is that there certainly is a power shift in the hospitals and that there are two aspects to the power shift. The first aspect is that it is almost impossible or certainly very difficult for one surgeon specialty to justify the acquisition of a new device and so we are addressing multiple applications with multiple departments to make sure that there is enough momentum from the surgeons to be able to go to the administration.

The second power shift that we see is that the administration has become more powerful in terms of making the final decision and what it turns into for us, because the reality is the clinical data is pretty much there, the economic data, there is a lot of economic data there also, and because it’s imaging, administration even can look at the movies and the patient and images and in evaluations they get it.

So, what it turns into more often is it’s not that no we don't want this technology, it's really how long will it take for us to get and make it happen. In some cases, they would say, well, put it in next year's budget. In some cases, they will say I’ll lease it for a while before I can get it, so I think that’s the dynamic that we see and the reason I do want to be careful about not being too exuberant is because at this stage it is little bit harder to predict exactly when they will close, so when our sales people go to the hospitals they don’t, nobody is questioning the value of our product anymore it’s more of timing issue.

Matt Miksic - Piper Jaffray

Hi, Arun.

Arun Menawat

Yes.

Matt Miksic - Piper Jaffray

Sorry. So, one that’s very, very helpful. I just had one follow-up on the forward sort of looking programs.

Arun Menawat

Sure.

Matt Miksic - Piper Jaffray

And you’ve got a few of them now I guess. So, near-term, can you give us maybe color as to where the protocol and your thinking is on wound care intermediate-term? Are you willing to say anything about endometriosis at this point? Then finally, the Digirad technology give us, if you could give us some sense as to how far out you think that become sort of a product you'll be talking about introducing into the market?

Arun Menawat

Surely. For endometriosis, we have approval to begin the Phase II trial. We think that you will begin to see recruitment within 60 days, so third quarter you will begin to see recruitment for a Phase II-type endometriosis trial. There are at least, I would say, probably about 10 hospitals that have done the initial exploratory work and we feel pretty comfortable that it’s very real, so I think that we will provide the protocols and so on within the next 60 days on that and I think it would again take about a year and so on to get all of this done, but it should begin to drive the multi-surgical approach that I talked about that multiple specialties can begin to use the technology.

On the second one, on Digirad, I think that we can certainly answer details for you but the way you might think about this is more of a 2015 program. This technology that we are acquiring is about 75% complete. We need to do more engineering to finish the work and introduce it into clinical work, but I would say from the point of view of introduction into the market, this is a 2015 project.

Matt Miksic - Piper Jaffray

Thanks very much, Arun.

Arun Menawat

Thank you.

Operator

Thank you. Our next question is coming from Doug Miehm from RBC Capital Markets. Please proceed with your question.

Doug Miehm - RBC Capital Markets

Thanks very much. Arun, we are starting to see a quarterly pick up now in the breast reconstruction 13%, 14%, 15%. Can you tell us what you see happening in the market in terms of are we gathering momentum and do you think that or do you used to think at 20% this has the chance to become a standard of care? Maybe you could just give us a few details on that?

Arun Menawat

I think that most certainly we are continuing to see that it is gaining momentum. We certainly are seeing that pretty much all the opinion leaders that are now using this as a standard and I think that you are right that around that 20% mark, we should begin to see that this should have a drive towards standard care. I’ve talked about the fact that at some point societies should begin to recommend this. I think that as it turns out the plastic surgery society typically does not have a protocol to do those things, but I do think that breast reconstruction continues to head in that direction.

Doug Miehm - RBC Capital Markets

Would you hope to see that 20% eclipse sometime in 2014, or is it just too difficult to tell right now?

Arun Menawat

I think, 20% in 2014 is sometime in 2014 is a reasonable expectation.

Doug Miehm - RBC Capital Markets

Okay. Great. Then just to follow up then on PINPOINT, can you give us any more granularity? Are you more excited about the launch of PINPOINT relative to LUNA or they are both going better than you thought? And, maybe you could point to a couple comments that you are hearing from clients or prospective buyers as you have gone into the marketplace. What are they particularly excited about here?

Arun Menawat

Sure. Let’s talk about PINPOINT first. I think that there is a lot of learning for everyone as we moved into the commercialization earlier this year. On the plus side, the most interesting comment that I’ve heard is that the fact that there is an overlay image where they see full visible light and they see the fluorescent imaging show flow in perfusion and even though it is not FDA approved in many cases lymph node that that overlay image is something that they have really been excited about.

That’s the most that’s on the positive side and I think that as I mentioned we don't get a comment let say, oh, I don't see the value of the technology. We do get a comment that I need to get more hands on experience. I need to get more surgeons involved and that it might take a little longer given the environment in the hospitals to get the deal close, but, we certainly get to the clinical value of the product is pretty clear.

I think that because it is more of an interactive tool, there are couple of learnings, the dosing, what time to inject the imagine agent, how much imaging agent to inject and those depend upon which procedures they are doing and the characteristics of the patient, so there is a little bit of learning that they are going through and I think sometime next year you will probably start to see those protocols becoming more and more standard and thereby they will drive sales more appropriately, so I think that’s on the PINPOINT side.

On the LUNA side, the one thing that I mean I’m really, really excited about is that the clinical value, I mean the surgeons or the physicians very, very quickly see the clinical value for this. And, because there are number of management organizations, we think that we can begin to work with the management organizations to drive adoption rate at a relatively faster pace, so again I think that 2013 as I expected would be a relatively linear year, but I think certainly 2014 we should start to see fair pick up in these products. I think both of the products are doing well.

Doug Miehm - RBC Capital Markets

Okay. Then just to wrap up and sorry if I missed this, I joined the call a little late. Just kit sales during the quarter and maybe you could speak briefly to the utilization, average utilization per machine that would be great. Thank you.

Arun Menawat

Sure. So, kits are about 8%, 9% higher, compared to last quarter. Very typical of this quarter, so there is nothing special. In terms of utilization per device, it is a little bit higher. It is ticking up a little bit as we do get to more types of procedures, but I'm not sure if that kicked up is statistically significant yet, but somewhere between 55 to 60 per devices where we are on the side.

Doug Miehm - RBC Capital Markets

What was the number of kits?

Arun Menawat

It's about 8% above last quarter, I think. Dave, correct me if I’m wrong.

David Martin

A little more than 5,300.

Doug Miehm - RBC Capital Markets

Okay. Great. Thanks very much.

Operator

Thanks. Your next question is coming from Rick Wise from Stifel. Please proceed with your question.

Rick Wise - Stifel

Hi, good morning, Arun.

Arun Menawat

Good morning, Rick.

Rick Wise - Stifel

Let me start with the number of direct reps. you said 22 now and they’ll increase slowly. Can you give us any sense of where you think you will be by year end and are you going to be above 30 do you think? And maybe talk a little bit about the folks you're hiring, their background and how long it’s taking to pull them into the organization?

Arun Menawat

Sure.

Rick Wise - Stifel

And get them productive you know?

Arun Menawat

Yes. Sure. Absolutely, so we have 22 direct sales reps right now. We are looking to add somewhere between 5 and 10 per quarter, so I think certainly we think that by year end will be more than 30, maybe somewhere between 35 and 40 by year end is what I think we want to end up with.

We are transitioning a little bit from hiring people who are stronger on the big picture in capital sales and the sales process to also looking to hire some people who will drive utilization in both of our PINPOINT and LUNA product lines so that we'll probably look for another set of sales team who will have a little bit of more clinical background we can drive utilization at the install base as we are building install base.

With respect to how long does it take to train and so on, I think it's fair to assume it takes about four to six months to get the sales person become productive. It takes about three months for them to really understand the implications, because it’s not really about understanding the product. It's really about how to use in surgery so they have to attend a number of surgical procedures and we do have a number of our key opinion leaders function as educators and factor a number of sessions to educate them, so I would say four to six months is reasonable.

Rick Wise - Stifel

Okay. That's very helpful. I always appreciate that you are conservative and careful in looking ahead and talking about trend and I hear you about the capital equipment sort of question mark that we are left with, but have you seen anything concrete any pushback, are your selling cycles taking longer than you might have thought? Is there any concrete indication that you are experiencing that should make us more cautious?

Arun Menawat

No. I think that's where it's coming from. Rick, I mean there are many hospitals that have that we want to buy this system. But, going from we want to buy it to closing the deal certainly it is a much longer and circuitous process than it has been in the past. It does go through the value analysis committee and goes through the finance department. In many, many cases, there is a change in the behavior at the hospitals, so it has nothing to do with our technology or any technology. It's just that hospitals are going through a change in the way they approve new money and that change is I think where my caution is coming from.

Rick Wise - Stifel

Are you as committed to the capital sales model for PINPOINT as you’ve been rather than offering lease or rent? I mean, given this environment, are you rethinking that aspect of the approach?

Arun Menawat

Yeah. We are most certainly opening the dialogue to broaden the business model that we use and if leasing makes sense, we are certainly open to that. Now the issue with that is that the installed base will certainly grow, but the revenue recognition tends to be different in those situations.

Rick Wise - Stifel

Right. Just two last quick ones, Arun. Just following on the theme, how do we think about the second half for capital placements? You've been plus minus roughly 130 per quarter in each of the last three quarters. Should we think that the second half can match the first half or given all the new indication the sales force expansion, could we see second half modestly or more strongly exceed the first half rate? Maybe talk about puts and takes?

Arun Menawat

Sure. I think that in terms of total number as you know Intuitive represents a large portion of the total device placements. I think that in the past, we have been about 50% of the robotic systems sold, and in the last quarter it has grown above 75%, closer to 80% and so I think that given that we are now majority of the sales, we are probably more vulnerable to the fluctuation if there are going to be any which I don't know if they will or not, but I’m just saying we are going to be, in that particular arena, more tied to the robotic sales than we have been in the past. Because, if you look at this quarter; for example, even though the number of robots sold in the U.S. were slightly lower than in the past quarters, but the percentage of robots sold with FIREFLY was higher which meant that it did not influence our business. But now that the percentage is up there, it has more opportunity to influence our business. Again, over the long-term the total revenue coming from robotic sales is going to continue to be a smaller percentage of our total sales. But over the short-term, it has that potential, so I don’t know if I have answered your question properly, but please ask me again if I haven't.

Rick Wise - Stifel

No. Well, I’ll push you later. Maybe just last quickly. Any update color on your expanding internationally. Thanks, Arun.

Arun Menawat

Yes. I think that we started the international efforts late last year. I think that in the second half of this year, probably you will see a little bit of sales from international and we are certainly preparing for international sales for 2014, so the reception in international market again very, very early has been reasonably positive.

I think that in the world of socialized medicine and being able to provide more in the surgical suite seems to be resonating. In fact I am going to be on a tour of international right after this call, so we are definitely exploring those opportunities. I wouldn’t expect material sales this year, but certainly you will see some revenues coming in.

Operator

Thank you. Our next question is coming from Brian Gagnon, Gagnon Securities. Please proceed with your question.

Brian Gagnon - Gagnon Securities

Good morning, gentleman. A couple of questions, can you give us any users of the PINPOINT system and where the devices are going and what they are using it for and maybe the same question on LUNA?

Arun Menawat

Good morning, Brian. I guess if you are looking for references, I would say all our PINPOINT sites are probably are best references. I think in general most of the opinion leading hospitals are beginning to get either in evaluation mode or in the process of figuring out how to get the system, so I'm not sure if I have the list of the actual hospitals but certainly if you look at the investigators who were part of the PILLAR II, trial they are [of GI] hospitals. Certainly those are great reference sites. I think on the LUNA side, I can get the list for you. I think certainly the hospitals that have installed the system tend to be the bigger opinion leading sites overall, Brian.

Brian Gagnon - Gagnon Securities

What's the thought process on how you are going to sell into the wound care clinics at this point?

Arun Menawat

You know right now what we are doing is we are working with the management companies, we are figuring out which hospitals tend to be or wound care clinics, tend to be the flagship clinics for them so that we can focus on those that they would consider to be important site for them and we are getting our devices placed in those hospitals. I guess other than that I think right now probably it's too early to give you specific name.

Operator

Thank you. Our next question is coming from the line of Steve Crowley from Craig-Hallum. Please proceed with your question.

Arun Menawat

Good morning Steve.

Unidentified Analyst

Hi gentleman. It’s [Matt] for Steve Crowley.

Arun Menawat

Good morning, Matt.

Unidentified Analyst

Good morning, Arun. Just a follow up maybe on LUNA and the types of size you are selling into or actually kind of tangent. On LUNA, I think one of the drivers that we've talked about potentially been that LUNA has been some pushback from reimbursement on the use of wound care treatments and then specifically the hyperbolic oxygen therapies. Any update there? Has that been a driver for you guys?

Arun Menawat

Matt, we are in early stages, but we are certainly looking at how our technology could become a way to quantify the benefits of hyperbaric chambers. You probably will see some form of a clinical study that we will do probably beginning second half of this year in the wound care space.

The early data, Phase I-type data, certainly seems to show that we can show the difference in vascular behavior before and after hyperbaric therapy. And if that can be shown in a statistical significant manner it could actually have couple of benefits. It could show that if the therapy is working, that the frequency of therapy could be modified. If it is not working it, it allows them to move to the next type of therapy very, very quickly.

Unidentified Analyst

Right. Perfect. Thanks. Just one quick follow-up, I know that you guys have ACS this year, but what other big conferences do you expect to be presenting data at? And, what you are excited for announcing in the back half of the year, on the clinical side?

Arun Menawat

Sure. In terms the conferences that we will be, we will be in the American Society of Surgery Conference. Probably our biggest one will be in the most wound care conferences this year. Also, I think in general I guess I’m definitely excited overall about our business. I think that the launch of the two products are certainly coming along at a pace that I anticipated. I'm certainly satisfied and happy with the caliber of the sales team and the leadership in sales and marketing that is helping build the sales team, so I think those are the general things I’m very excited about this new technology that we have just acquired.

I think it really strengthens the value proposition of our company and brings our vision to reality in the sense that not only that we can show perfusion blood flow that is near the surface, but this would allow us to show deeper nodes and cancer margins, so I think over the long-term, I’m very excited about that.

Unidentified Analyst

Thanks Arun.

Operator

Thank you. Our next question is coming from Spencer Nam from Janney Capital. Please proceed with your question.

Spencer Nam - Janney Capital

Thanks for taking my question. Just a couple of quick questions here on the guidance as well as the recurring revenue line. So, Arun, it seems like the recurring revenue line for the quarter was somewhat flattish relative to first quarter number and I was wondering given that you place a significant number of new systems during the quarter what was the sort of driver of that the flattish quarter-over-quarter kind of the performance on the recurring revenue line and whether that revenue line includes any the payments from Intuitive. I'm assuming it does not, but I just want to get little bit of a clarification.

Arun Menawat

Sure. Spencer, I wouldn't put too much into those numbers, because what happens is that there is a little bit of about two to three weeks of inventory in our partner site and we tend to not want to have a large inventory, because we tend to want to manage it as close to real time as possible. So from one quarter to other you will see couple of weeks of worth of product sometimes it will be more and sometimes it will be less and this quarter it tends to be, it was a little bit less, so I wouldn't put too much into that at all actually. Because the fact that the numbers are overall so small, they tend to fluctuate and they show up like that but the number is that's why we put out the number on. We know how many kits were shipped by our partner or by ourselves now directly also and so that number is more important.

Spencer Nam - Janney Capital

That's very helpful. And in terms of just that your comments about the second-half outlook and the potential uncertainty associated with the capital sales, particularly with respect to Intuitive, I’m curious if you are thinking you know how much of a visibility do you have from the Intuitive folks and then also in terms of also you've been cautious about second half numbers. I’m curious where you are thinking in terms of the recurring revenues or the procedure volume growing over the course of next six months? Thanks.

Arun Menawat

Sure. So, Spencer, let me answer this last question first. Recurring revenue I continue to think will continue to grow. Because, once you have the install base and the surgeons are using it, I don’t see any reason why that would not continue to grow. I think with respect to robotic sales, again, please don't be too much into this. We have a very high opinion of the robotic systems. We have a very high opinion of Intuitive Surgical. We don't speak for them at all. Obviously, they run their business. We run our business and my only point there is that if we are 80% of the sales of the robot, then if the robotic sales are going up and down then we would be influenced by it over the short-term.

As time goes on, it will become less and less material to us, but I wouldn't read too much into that at all actually either. Overall, I'm very positive. I think that the only thing that I'm saying is that because of this power shift that is going on and the change in which, the change in the way hospitals are acquiring capital dollars, capital that change is causing a natural delay and that's the only thing that I’m cautious about. I am totally not concerned about the value of our product, totally not concerned about the fact that how we have priced our product. I think we are going to get there. I think these are external factors that we have very little influence over. That’s the only thing I’m concerned about.

Spencer Nam - Janney Capital

Great. Thank you.

Arun Menawat

Thank you.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further closing comments.

Arun Menawat

Excellent. Thank you so much. So, we certainly look forward to the call in the next quarter and I just wanted to mention again that we will do the second Analyst Day in New York on November 18th and Dave can provide more details and we will certainly put a press release out at some point on that. Thank you so much.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonder day. We thank you for your participation today.

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