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Synergetics USA Inc. (NASDAQ:SURG)

F2Q 2014 Earnings Conference Call

March 6, 2014 05:00 PM ET

Executives

Dave Hable - President and CEO

Pam Boone - EVP and CFO

Analysts

Chris Cooley - Stephens, Inc.

Joe Munda - Sidoti & Company

Charles Haff - Craig-Hallum

Operator

Welcome ladies and gentlemen to the Fiscal 2014 Second Quarter Earnings Call. At this time all participants are in listen only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded.

Synergetics would like to remind listeners that certain comments made during this conference call may be forward-looking statements for the purpose of the Private Securities Litigation Reform Act of 1995. In some cases forward-looking statements can be identified by words such as believe, expect, anticipate, plan, potential, continue or similar expressions. Such forward-looking statements include risks and uncertainties and there are important facts that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These facts, risks and uncertainties are discussed in Synergetics' Annual Report on Form 10-K for the year ended July 31, 2013, filed October 1, 2013 as updated from time to time in our filings with the Securities and Exchange Commission.

I would now like to turn the call over to Dave Hable, the Company's Chief Executive Officer.

Dave Hable

Thank you, operator. Thank you and good evening everyone. Apologies in advance for my voice. I'm on the backend of cold and sound a lot worse than I feel. With me on the line today is Pam Boone, our CFO. A press release was issued today after the market closed outlining our earnings for the second quarter of fiscal 2014 ended January 31st.

Here's our agenda for today's call. I will provide a high level overview of our second quarter performance and a brief review of our sales growth in our two primary businesses before turning over to Pam for some additional detailed financial color. I will then return to provide an update on the commercialization of VersaVIT. We will then conduct a question and answer session.

Turning to our financial results in the second quarter, we reported revenues of $15.1 million, reflecting growth of 7.4% driven by strong OEM sales of 18% growth and nearly 1% growth in ophthalmic business compared to prior year. Profitability in the second quarter improved on both a GAAP and a non-GAAP basis.

On the ophthalmology side of the business sales increased 0.6% year-over-year in the second quarter. We reported 2.4% growth domestically, offset slightly by a 1.4% decline outside the U.S. Revenue growth in ophthalmology continues to be driven by contributions from our new products, including our VersaVIT system and related accessories, as well as from the acquisition of our UK distributor M.I.S.S. Ophthalmics which occurred last year. However our base ophthalmic business continues to face headwinds due predominantly to competitor activity in our three largest disposable product lines. The competitive pressure largely consists aggressive pricing including product giveaways. We’re squarely focused on regaining market share and we are pleased that despite the mid-single digit declines we experienced in our base business, we were able to post positive revenue growth in our total ophthalmic business this quarter.

Turning to our OEM business, sales to our marketing partners increased 18% year-over-year driven by strong demand for our disposable products and to a lesser extent contributions from our relationship with Mobius. On the capital equipment side, sales of Stryker pain control generators performed nicely, while sales of Codman electrosurgery generators were well below plan in the second quarter.

As we have shared in recent quarters, we have improved top line visibility into the order trends from our marketing partners. With this we proactively refocused production capacity in the second quarter towards our OEM backlog when order trends softened at the end of the calendar year. We continue to feel good about the order trends on the disposable side of the business. However on the capital equipment side based on our current visibility, we are pretty confident that revenues will be down on a year-to-year basis over the second half of fiscal ’14. Stryker and Codman remain valuable customers over the long term and while we may see periods of modest volatility in order trends quarter-to-quarter, our OEM business remains healthy.

Longer term we continue to expect our relationships with our two largest marketing partners to drive sustainable revenue growth on an annual basis, although in light of the weaker capital equipment trends we expect for the second half of fiscal 2014, we expect OEM revenue growth for the full fiscal year period to be in the low single digits.

With that I’ll turn the call over to Pam for a detailed review of our financial results. Pam?

Pam Boone

Thanks, Dave. Total sales increased 7.4% to $15.1 million, compared to $14.1 million in the prior year period. U.S. sales increased 10.8% to $11.1 million while international sales declined 0.8% to $4 million. International sales represented approximately 27% of total Company sales this quarter with the balance of 73% coming from domestic sales. Our international sales mix last year was approximately 29%. Total Company sales by product category, disposables and capital equipment reflect a 15% increase in sales of disposables year-over-year and a 29.7% decline in sales of capital equipment. Disposable sales accounted for approximately 87% of total sales this year, compared to 81% of sales last year.

Now for a look at total company sales performance by our ophthalmic and OEM business lines. Total ophthalmic sales increased 0.6% to $8.7 million this quarter, compared to sales of $8.7 million last year. We saw U.S. sales increased 2.4%, offsetting a 1.4% decline internationally. U.S. ophthalmic sales benefited from strong VersaVIT and related accessory sales which offset weakness in our base ophthalmic business in the period.

Internationally sales performance was driven by contributions from our acquisition of M.I.S.S. Ophthalmics last year and by sales of VersaVIT systems and accessories. As Dave mentioned, these positive contributors to sales performance offset the mid-single digit declines in our base ophthalmic sales we experienced in the second quarter.

Total OEM sales increased 18.3% to $6.1 million, compared with $5.2 million last year. OEM sales performance was driven primarily by a marked increase in volumes of disposable product sales to our OEM partners Codman and Stryker. The improvement in total OEM sales performance was moderated by a decrease in sales of electrosurgery generators to Codman.

Now for a brief review of the rest of the P&L for the second quarter of 2014. Gross profit for the second quarter increased 62.4% to $8.4 million or 55.6% of sales, compared with $5.2 million or 36.8% of sales in the year ago period. As mentioned in our press release, the change in reported gross margin includes the impact of a $2.1 million inventory write-off that occurred in the second quarter of fiscal year 2013. Excluding this write-off, margins improved nearly 400 basis points due largely to higher absorption of labor and overhead cost compared to the prior year period.

Total commercial expenses increased 19.8% to $8.8 million or 58.1% of sales compared to $7.3 million or 52.1% of sales last year. The total increase in commercial expenses was primarily attributable to higher research and development expenses, which approximated 10% of sales this year compared to 5.9% of sales last year. Our increased spending in R&D reflects a commitment to adapt to competitive pressures and to drive future revenue growth through targeted investments designed to expedite our highest priority development project. Despite the uptick in R&D expenditures over the first half of fiscal 2014, we expect our full year expenses to approximate 8% of sales in 2014.

Our sales and marketing expenses increased to $3.6 million or 24% of sales this year compared, with $3.6 million or 25.5% of net sales for the same period last year. General and administrative expenses increased to $3 million or 19.9% of net sales for the second quarter of fiscal 2014 compared with $2.9 million or 20.4% of net sales for the same period last year. The year-over-year increases in both our sales and marketing and our G&A expenses were primarily related to our acquisition of M.I.S.S. Ophthalmics last year.

I would like to highlight two additional items that impacted our second quarter operating expenses this year but did not occur in last year’s results. First, total operating expenses this year included a full quarter impact from the medical device excise tax, compared to the prior year period, which included only a partial quarter impact. This added an incremental $70,000 to second quarter OpEx.

Second, reported operating expenses this year included approximately $514,000 related to the Company’s exit activities at its King of Prussia facility. As noted in the non-GAAP reconciliation table at the end of the press release, this impacted our EPS performance by over a penny. We expect to incur an estimated $650,000 of expenses related to the closure of this facility over the next 11 months.

On a GAAP basis, second quarter operating loss was $377,000, compared with operating loss of $2.2 million in the second quarter of fiscal 2013. Excluding the incremental expenses related to our King of Prussia facility, non-GAAP adjusted operating income was $137,000 this year, compared to an adjusted operating loss of $61,000 last year which excludes the inventory write-down in the period. Both of these non-GAAP adjustments are detailed in the non-GAAP reconciliation table in our earnings release. Reported GAAP net loss declined 83.7% $225,000 or a net loss of $0.01 per diluted share from $1.4 million or a net loss of $0.05 per diluted share for the same period in fiscal 2013. We reported non-GAAP net income of $132,000 or $0.01 per diluted share, compared to a GAAP net loss of $1.4 million or $0.05 per diluted share and a non-GAAP net loss of $49,000 or $0.00 per diluted share in the second quarter of fiscal 2013.

Earnings before interest, taxes, depreciation and amortization or EBITDA totaled $117,000 and $631,000 on a GAAP and a non-GAAP basis respectively in the second quarter of fiscal 2014. For the six months ending January 31st, total sales increased 6.8% to $30.6 million, compared with $28.7 million last year. GAAP net income of 709,000 or $0.03 per diluted share compared to a net loss of $30,000 or $0.0 per diluted share last year.

Turning to the balance sheet, at quarter-end we had $11.2 million in cash and no debt. Our DSO ratio is 75 days, up slightly from 73 days at the end of the prior quarter. Our inventory position was $16.7 million, up 10% year over year. The inventory balance represents 213 days of inventory on-hand versus 190 days last year. The increase in inventory in the second quarter is related to new products and the safety stock bills related to our east facility closing activities. Cash used in operations over the first six months of 2014 was $302,000 compared to cash used of $671,000 over the first six months of 2013. The changing cash flow from operations was due primarily to improvements in net income and deferred taxes, offset partially by changes in working capital.

Now, I'll turn the call back to Dave to provide an update on our progress in the commercialization of VersaVIT.

Dave Hable

Thanks, Pam. Simply stated, we remain encouraged with both our progress on commercialization to-date and the long-term growth opportunity from our innovative portable vitrectomy machine VersaVIT. We continue to receive positive feedback as the VersaVIT system addresses unmet clinical needs and does so with a compelling value proposition. Early adopters have demonstrated the ability to leverage the VersaVIT's simplicity of setup and to ease the use to facilitate procedure turnover, thereby improving the profitability of their practices.

Let me share some of the progress we made this quarter in the key areas of focus for our commercialization effort. We continue to increase the number of evaluations in progress around the country. More retina surgeons are testing the VersaVIT machine in their practices and we believe this represents further validation that we have identified an unmet clinical need in our market, one that VersaVIT is well-positioned to serve.

We have completed more than 6600 retina procedures, including evaluations with the VersaVIT, which is up 21% sequentially and more than four-fold year over year. This remains the strongest evidence of the powerful market acceptance of our innovative technology.

Finally in the second quarter, 43 of our VersaVIT customers placed orders for our VersaVIT disposables. These accounts represent a group of customers that have converted to VersaVIT, burned through their competitive and demo inventory and found themselves in a position to order disposables for their daily usage. Let me be clear, we are squarely focused on driving disposable volumes in the future and expect these sales to represent an increasing percentage for our total ophthalmology results going forward.

Having said that, I want to remind everybody that this remains a very market to penetrate, given the highly entrenched global players we are trying to replace. We continue to see an intense competitive response largely in the form of aggressive pricing but we believe we have the right strategy to provide continued success in the commercialization of VersaVIT.

Our primary challenge thus far in our commercialization effort continues to be closing evaluations as quickly and efficiently as possible. Our average evaluation time over the first half of 2014 stands at roughly 15 weeks, in line with the similar trends we saw at the end of fiscal 2013.

As I mentioned earlier, VersaVIT was a key contributor to the growth in our ophthalmic business again this quarter, which is of critical importance to us given the challenges we face in our base ophthalmic business. We believe the commercialization of VersaVIT is progressing well but as we have shared in recent quarters, the pace of adoption continues to be sorer than originally anticipated due largely to the length of evaluation period.

Based on our experiences in field and the feedback from the many evaluations conducted to-date, we have taken proactive steps to improve some of the tactical attributes and our sales and marketing strategy in an effort to take all the objections off the table and to increase our chances of closing evaluations more efficiently and at a faster pace.

For example on the R&D side, we have focused investments on improving the performance and speed and we expect this will help to overcome obstacles and improve our clinical evaluation times. We expect to see evidence of these investments in this fiscal year. On the sales and marketing front, we have added three additional clinical field applications specialists over the past six months and we expect to add incrementally more going forward. The specialists work with our sales team to streamline the evaluation process, ensure physicians are seeing the requisite number and type of procedures to demonstrate the full utility of this system and to expedite evaluation times overall.

But we are encouraged by the early impact of these investments. We expect more meaningful contribution later this calendar year. Despite the measured growth, we continue to expect in VersaVIT the next few quarters, we remain confident in the long-term growth opportunity this innovative system presents. We are competing in a highly volatile ophthalmology market, one that has not seen a compelling technological alternative in many years. We have listened to our physician partners during this early commercialization period and have acted with notable responsiveness in an effort to provide a truly disruptive system we believe the VersaVIT represents. Our ability to step on the peddle to invest in targeted areas, to drive the adoption's dramatic advantage and we expect to be -- have increasingly positive momentum as a result of these investments later this year.

Before we open the call to your questions, let me offer a few closing statements. We were pleased with our second quarter performance overall. Our compelling new products and our recent acquisition of M.I.S.S. Ophthalmics helped offset the challenges we are seeing in the base business and we posted growth in total all ophthalmics in the quarter.

We were pleased with a solid growth out of our OEM businesses, driven by the strong growth and sales of disposables which offset declines in capital equipment. The long-term growth opportunity remains compelling for Synergetics as evidenced by the early success we had in our commercialization of VersaVIT and while we expect the current trends in the capital equipment orders and our OEM businesses to continue in the second half of the year, this business is still expected to post positive revenue growth for the year. We will continue to execute our strategy to drive and improving operating and financial performance going forward.

With that I’ll turn it back to the operator and open the call for your questions. Operator?

Question-And-Answer Session

Operator

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] First question from Chris Cooley with Stephens. Please go ahead.

Chris Cooley - Stephens, Inc.

Just a couple from me and then I’ll get in queue. On VersaVIT, it’s encouraging what you mentioned there about the increase in the number of evaluations and the procedure volume. Just curious if you could maybe give us some color around that increase in the procedure volume, and then give us a little bit of, between your split, kind of what’s being done here in the states versus what’s being done abroad? And I'm also kind of curious if you're seeing any changes from a consumable standpoint in terms of the time that it takes to work through some of that inventory out there and then just one other quick question and then I'll go back in queue, on something OEM side of business. Historically you've kind of guided -- I don’t know you don’t give formal revenue guidance but you've kind of guided that business as a 10-ish percent grower longer term. Just kind of curious what you’re seeing from your partner and in particular Codman there, that's going to make this go to a single digit grower for the full-year. And what gives you confidence based upon that? Did it revert back to that 10% plus growth longer term?

Dave Hable

Chris, I think I got all of those. So first of all on VersaVIT, the procedure volume, what I call utilization in the States versus abroad, the dynamic we see is that people who have used the system are using it more on a regular basis, both because of our efforts of helping them iron out any issues they have in the actual course of the procedure, as well as their own confidence based on their experience. That trend is definitely accelerating in the U.S. faster than it does overseas simply because we have to go through distributors in I think 60% for international volume, and so there's a lag in terms of their ability to drive that type of utilization effect.

On the OEM question, you also asked about how quickly people our burning through their competitive inventory and presumably how that’s resulting in a higher number that we're seeing in terms of people that are reordering our disposables, 43 this quarter versus I think 30, last quarter.

So I think it’s premature to say that people are burning through their inventory at a quick level. That continues to be all over the place Chris. People have varying levels of inventory depending on the nature of how they've operated. So I'd would be hesitant to call any definitive trend there.

On the OEM, the difference in our -- how we're thinking about OEM business going forward is definitely related to generators of hardware piece of the business, which has become proportionally less of the business as time has gone on. And this is not a question of inventory management, timing corporate edicts that we saw last quarter. What we are seeing reflected in their ordering trends which as I reported before I see on a regular basis, on a weekly basis, almost on a daily basis, it’s changing.

So I’m hesitant to still air anything totally definite over here. But we're seeing a downward trend in the capital side of their ordering and consequent inventory levels are asking us to respond to. So they describe that as, they're having a challenging time with the capital equipment across the border. It’s not just a Codman Synergetics CMC 5 dynamic. It’s more of an overall dynamic.

But keep in mind, that proportion has become a less significant part of our OEM business overall. Historically it’s a bounced between 18% and 30% around the quarter. So the big growth engine in OEM have been disposable for us, number one. And then the tips and tubing that we sell to Stryker. And our strategy to offset weakness we see on the capital equipment side is based around new product introductions and muscling up against that disposable opportunity. We have multiple products in the pipeline that we’re going to be introducing pretty shortly. So we’re actually very excited about those products. So no doubt there is a downturn in the capital equipment which is changing how we talked about that going forward but we have a plan to manage it.

Operator

Next question is from Joe Munda with Sidoti & Company.

Joe Munda - Sidoti & Company

I guess following up on the comment you just made, the new products in the pipeline, I'm a little confused, is that on the OEM side?

Dave Hable

Yes, the OEM. So my strategy that I talked about before is to iterate off the two product platforms that we have electrosurgery and related disposables for Codman and tips and tubing for ultrasonic aspiration for Stryker. So there is no products that I refer to relate to disposables OEM in that arena.

Joe Munda - Sidoti & Company

Now these new products, are these new products that Codman came to you guys or Stryker came to you and said can you do this for us or is this something that you've developed and are looking to basically pass through the current distribution channels.

Dave Hable

No you had it right first time. It’s basically -- they are the ones that have the distribution channel and they feedback to us what their customers are telling us and then we work on collaboratively. So these are our market based -- market driven unmet need their [indiscernible] products.

Joe Munda - Sidoti & Company

And as far as -- do you think I am just spitballing here, but the decline in the ordering pattern and inventory, is that any -- you think any relation to the new products that you may have in the pipeline?

Dave Hable

No, two different things. So we see significant increases in the disposable forceps in this case. That’s going up and the boxes are the things that are going down. So no, they're not related.

Joe Munda - Sidoti & Company

Okay. And as far as VersaVIT, I appreciate the procedure number you gave us. I was just wondering how many trials were conducted in the quarter for VersaVIT?

Dave Hable

We don’t advertise those exact -- that exact number on a quarterly basis. But it is increasing fairly significantly each quarter, both U.S. and International.

Joe Munda - Sidoti & Company

My other question for Pam. In your prepared remarks you talked about the exit cost from King of Prussia $514,000. I know you guys had very limited sense of when those expenses were going to hit. But the $650,000 is that $650,000 left or in total that’s going to be expended over the next 11 months?

Pam Boone

So the $514,000, that was for second quarter, and the $650,000 is what’s left to be spent from that from February through December.

Joe Munda - Sidoti & Company

Okay. And any sense of how that’s going to occur or…

Pam Boone

It will be more evenly spread. This first chunk primarily came from the retirement obligations from Dr. Malis as he retired at the end of the calendar year and that led to that larger obligation coming through in second quarter. The rest of it is more -- day before, it’s more lumpy and will come as people are released from their obligations to stay through the closing period. So there shouldn’t be as big a lump in the out periods here.

Joe Munda - Sidoti & Company

And then Pam the other thing, the inventory write-off, can you give us some color as to what inventory was written off and for what reason?

Pam Boone

And that was in the second quarter of last year, Joe.

Dave Hable

Our history.

Joe Munda - Sidoti & Company

I am sorry, I am looking at…

Dave Hable

Don’t crack that up.

Joe Munda - Sidoti & Company

I am sorry about that. I'm looking…

Pam Boone

So that was due in 2013 and then the non-GAAP tables we took out that inventory charge from the prior year and we took out the cost for you.

Joe Munda - Sidoti & Company

Okay. And I guess my final question and then I’ll hop back in the queue. Dave, it seems like every quarter you’re fighting this battle with larger players who are discounting aggressively. I'm just wondering how you think this is all going to play out in your mind? What do you think happens? Is there a tipping point sometime in the near term? Anything would be helpful.

Dave Hable

Yes, on the price side, we have not seen it get worse in the quarter we saw, but in last six months a big come down across the board from our competitors. But incrementally that has not gotten worse on the quarter-by-quarter basis. So, the question there is how low can they go and we haven’t seen them go lower than, progressively lower as time has gone on after that big jump down.

Relative to the tipping point, what I'm focused on is utilization. It is very clear to me, having spent last week just observing VersaVIT procedures that we have a unique product offering in that it’s uniquely designed for the ASCs and you know my story about procedures, greater amount of procedures being done in the ASCs versus the hospital operating room.

I've seen competition. I've seen how complicated it is to use it effectively. I've seen our system. We have -- for all those procedures, a significant amount of that 6,000 procedures is we have learned from all those and we have taken that learning and instituted it in a physical manifestation in the new products and we've done it with lightning speed.

So, I'm feeling great, to tell you the truth about getting close to the point where we really start seeing the breakthrough sort of volume we think this product represents, has potential for. With that said, guilty, we're a small company taking on big people that have been around for a long time, that are well entrenched that the force of habit for using these alternatives is not insignificant. And so guilty, we're up against that for sure but we're lean and mean and responsive to what we see in the marketplace and I feel great about the opportunity.

Operator

Next question is from Charles Haff with Craig-Hallum.

Charles Haff - Craig-Hallum

So, I wondered on the OUS side from VersaVIT, I know you have CE Mark there but can you give us an update on how many registrations that you have in the works or maybe approved for VersaVIT and maybe which countries those are? That would be great.

Dave Hable

Yes, absolutely. So, I think of the registered -- we have CE Mark which gets us into Western and Europe gets you into Europe. But the emerging market countries that -- we get to the realized registration and can't see the benefits would include Russia, China, Japan, not emerging market obviously, South Korea, are all markets, Brazil, emerging market that we have not achieved registration in. a lot of the benefits of VersaVIT accrue to those markets. It makes sense for them to pick up unit and take it with them to their clinic in the countryside. So we are really looking forward to getting those markets. There's lot of issues associated with each of those registrations. They are all in process and some might come due very soon and some may take as long as year to actually realize depending on the various bureaucracies of work in the individual territories.

Charles Haff - Craig-Hallum

When do you expect or which countries do you expect to maybe happen first?

Dave Hable

Russia should be first and then probably South Korea and Japan, would be thought [ph] about.

Charles Haff - Craig-Hallum

Okay, great. And then you mentioned the R&D expenses ticked up this quarter Pam and those were accelerating priorities. I was little bit confused, you mentioned also there were three clinical field specialists that were added. Do the clinical field specialists -- are those put into the R&D line or is that put into another line on the income statement?

Pam Boone

No, they're in sales and marketing.

Charles Haff - Craig-Hallum

Okay. So, the R&D stuff is more of the new products and OEM that you were speaking of earlier?

Pam Boone

No.

Dave Hable

New products yes, OEM no. So basically the incremental spend that was 10% on R&D was type II projects that we wanted to put the pedal to the metal on. And so one it’s going to have impact in this fiscal year and one in the calendar year. One is encumbered by any additional regulatory mile and one has a regulatory requirement Class II product, the 510-K 90 days by statue. So, it’s ophthalmology.

Charles Haff - Craig-Hallum

Okay, that’s great. And then regarding gross margins Pam, those have bounced around a little bit but I know that you've had some competitive pricing pressure on the ophthalmology side. How should we be thinking about gross margins? Pricing is so important there. How should we see that kind of netting out? Would you say gross margins would be up materially in the back half of this year or just about the same as where you’ve been in the first half of the year. Any kind of color there would be helpful?

Pam Boone

So the margins were impacted in the quarter by, you’re exactly right, from some competitive pricing going through. They’re also impacted by a larger negative foreign currency that hurt us on the international side. And some other little things like the [indiscernible] hurt us, the carbon generators are typically fairly high margin for us and those being down in a fairly fixed cost environment in the east [ph] that hurt us. What we were surprised by that really helped was some of our, the lean stuff that we’ve been working on and the product cost improvements that we’ve been working on. So as some of that stuff reverses itself, especially the foreign currency, we should be able to see some upward lift in our profit margins towards the end of the year and as sales -- typically we have a larger back half of the year as sales grow, that will help with both the labor and overhead absorption here as well.

Charles Haff - Craig-Hallum

Okay, so you’re taking a little of it on kind of lowering your expectations for Codman on the gross margin line but you have all steady and great guys that net-net should be able to give you a little lift in the second half relative to the first half of the fiscal year. Is that right?

Pam Boone

Exactly.

Charles Haff - Craig-Hallum

Okay. Sounds good and then, appreciate that you don’t want to give away kind of what you’re doing on the evaluations side days but any kind of characterization. My channel checks -- evaluations are pretty -- typically take 14 to 15 weeks and so I’m just trying to understand if you’re not able to lower that number and it kind of remains in this industry average level, what are your expectations for number of evaluations as we progress through each quarter for VersaVIT.

Dave Hable

Yes, so, on evaluations per se we’ve try to differentiate between the clinical evaluation time and the administrative time. And while we’re making progress reducing the clinical time, the administrative time is increasing on us, particularly in ASCs are sweet spot target accounts, who are developing bureaucratic mechanisms to evaluate new products like VersaVIT. So the net of that is, we’ve been frustrated by not being able to move that 15 weeks in a meaningful way. With that we fully -- I don’t want to advertise that we can reduce the time. We’re definitely aiming to increase the number of evaluations through these product enhancements that are market based and through an increasingly focused sales effort identifying those accounts that our product offering resonates most with. And nothing mysterious, sales, management focus and driving the result within and that has already given us a sequential lift in the number of evaluations which we’re aiming to accelerate.

Charles Haff - Craig-Hallum

Okay, and just my last question and I’ll hop off here. In terms of the evaluations and the incentives for your sales people, do you give an extra split to the sales people for doing a VersaVIT evaluation or starting one or any bogey that you kind of target for each salesperson on the number of evaluations they need to have.

Dave Hable

First of all they definitely have a bogey and an objective that’s closely managed by the sales manager. From a conversation structure standpoint the way it works is we have base compensation structure in a new product category that has an accelerated commission rate. VersaVIT is in that -- and related accessories and products related to VersaVIT. So they do earn a higher commission on the VersaVIT family of products.

Operator

At this time I’ll turn it back to Pam and Dave for closing remarks.

Dave Hable

That's it. We appreciate your time. Again, I’m sorry to be croaking at you here with my voice but we appreciate your time and we’ll talk to you later. Bye, bye.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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