AtriCure's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: AtriCure, Inc. (ATRC)

AtriCure, Inc. (NASDAQ:ATRC)

Q2 2012 Results Earnings Call

August 2, 2012 4:30 PM ET

Executives

David Drachman – President and CEO

Mike Hooven – Co-founder

Dick Johnston – Chairman

Lynn Pieper – IR Consultant

Analysts

Brooks West – Piper Jaffray

Jason Mills – Canaccord Genuity

Danielle Antalffy – Leerink Swann

Matt Dolan – Roth Capital Partners

Charley Jones – Barrington Research

Larry Haimovitch – HMTC

Operator

Good morning and welcome to AtriCure's Second Quarter 2012 Earnings Conference Call. My name is Fab and I will be your coordinator for the call today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today's call. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. David Drachman, President and Chief Executive Officer of AtriCure. Mr. Drachman, please proceed.

David Drachman

Thank you, Fab. Good morning, and welcome to our second quarter earnings conference call. Joining me on the call today, two members of our Board of Directors, our co-founder Mr. Mike Hooven, and our Chairman Mr. Dick Johnston, as well as Lynn Pieper our Investor Relations Consultant.

I would now like to turn the call over to Lynn, for a few introductory comments.

Lynn Pieper

Thank you, Dave. By now you should have received a copy of the earnings press release. If you've not received a copy, please call 513-755-4136, to have one emailed to you.

Before we begin today, let me remind you the Company's remarks may include forward-looking statements. These statements include, but are not limited to those that address activity, events, or developments that AtriCure expects, believes, or anticipates will or may occur in the future such as revenue and earnings estimates, other predictions of financial performance, launches of new products and market acceptance of new products.

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control, including, but not limited to the rate and degree of market acceptance of AtriCure's products, governmental approvals and other risks and uncertainties described from time-to-time in AtriCure's SEC filings.

AtriCure's results may differ materially from those projected on today's call and AtriCure undertakes no obligation to publicly update any forward-looking statement, whether as result of new information, future events or otherwise. Additionally, we may refer to non-GAAP financial metrics. A reconciliation of these non-GAAP measures is included in our press release, which is also available on our website.

I would like to remind everyone on the call today that the Food and Drug Administration, or FDA, has not approved certain AtriCure products for the treatment of atrial fibrillation or AF, or for stroke reduction. The company and others acting on its behalf may not promote these non-approved products to trained doctors for the surgical treatment of AF, or stroke reduction unless the product is so indicated.

These restrictions do not prevent doctors from choosing to use the products for the treatment of stroke reduction, or prevent AtriCure from engaging in sales and marketing efforts, to focus only on the general attributes of the products for the current cleared uses. AtriCure educates and trains doctors in the proper use of its products and related technologies, including for the treatment of AF in accordance with the product-specific indications.

With that, I would like to turn the call back to Dave.

David Drachman

Thank you, Lynn. Good afternoon and welcome to AtriCure Second Quarter 2012 Conference Call. On today's call, we will provide a review of business trends, the strategies for capitalizing on our AF approval, second quarter financial results and our clinical trial progress. We will then open the call for your questions.

Before we begin, I would like to address the announcement that we made this afternoon as I will be resigning as the President and Chief Executive Officer of AtriCure and stepping down as a Director of the Company. As President and Chief Executive Officer for the past 10 years I have had good fortune to develop professional partnerships and friendships with the AtriCure team as well as our physician community, advisors and stakeholders, as we strived together to advent our mission of improving and preserving human life through innovation, clinical science, and secured education.

Based on our collaborative efforts and steadfast resolve, we've treated together more than 120 patients worldwide, become the first company to receive a surgical AF approval and importantly, stud the foundation for revolutionizing the treatment for Atrial fibrillation.

As that I will be staying on as a President and Chief Executive Officer to the end of September to help facilitate with an orderly transition.

I will now turn the call over to Mr. Mike Hooven, who is one of AtriCure's Co-founders and Member of our Board of Directors since the Company's inception in November of 2000. Mike?

Mike Hooven

Thank you, Dave. I would like to take the opportunity to thank Dave for his leadership, commitment, and contribution to AtriCure over the past 10 years. Dave has been instrumental in helping the Company grow and persevering through challenges. It is from his contribution alongside the AtriCure team, that AtriCure is now well positioned for continued growth and success and expanding the treatment options for Atrial fibrillation. We wish Dave well in his future endeavors.

In conjunction with today's announcement the Board of Directors of AtriCure has announced the formation of the Office of the Chairman, which will assume Dave's responsibilities as CEO. The Office of the Chairman will be led by Dick Johnston, Chairman of AtriCure's Board and I will also serve as a Member of this newly created role.

As we conduct the search for a new CEO, Dick and I will work closely with the AtriCure management and employees of AtriCure to carry out the strategic and operational priorities of the Company. We have great people throughout this company, who are all committed to the growth and success of AtriCure. I appreciate the support of our partners and associates doing this transitional time.

I would like to now turn the call over the Dick Johnston, the Chairman of the Board of Directors of – at AtriCure.

Dick Johnston

Thank you, Mike, and hello everybody. Thank you for joining us today. I would like to echo Mike's comments and also speak for the entire Board that we are steadfast in our commitment to AtriCure and to its future growth and to the execution of strategic initiatives. I will be the primary point of contact for questions regarding this transition and I look forward to speaking with each of you.

I would now like to turn back to Dave who will provide review of the business trends of second quarter results, the clinical updates, and also – I also answer any questions at the end of the presentation. My partner of 10 years, Dave Drachman.

David Drachman

Thank you. Turning to business trends. We are pleased to report that in the second quarter US open heart revenue including AtriCure was up 13.8% compared to the same period a year ago. We believe that this is evidence that we are working our plan and our plan is working. Our investments in strategic priorities are building momentum and resulting in sustainable growth opportunities.

In the US procedure trends have remained generally stable throughout the second quarter and we continue to experience small growth trends from our international market which were up 25% versus prior year on a constant currency basis. We are continuing to capitalize on investments in support of our AF approval to education activities designed to increase awareness improve patient outcomes.

We initiated our first training and certification event on January 28 of this year. To date we have trained approximately 377 surgeons, up from 122 surgeons we reported last quarter. We are successfully expanding our surgeon training and certification program, which as we anticipated, is resulting in an increased utilization, competitive share gains, and significant cross selling opportunity.

Now, turning to our financial review. For the second quarter of 2012, consolidated sales increased to a record $18.3 million, reflecting an 8.9% growth on a GAAP basis or 10.5% on a constant currency basis compared to prior year. Revenue from product sales in the U.S. was $13.4 million, an increase of 5.9% on a year-over-year comparative basis. Revenue from product sales in the U.S. was 13.4 million an increase of 5.9%, once again on a year-over-year comparative basis.

Revenue from ablation related product in the U.S. increased by approximately by $300,000. Sales of ablation products using open procedures were up $800,000, which was partially offset by a decrease of approximately $500,000 in sales of products used in minimally invasive procedures.

Importantly, as the company reinstates our minimally invasive clinical trials in the U.S., we anticipate sales of products used in minimally invasive procedures will begin to stabilize.

U.S. sales of the AtriClip system were $1.8 million compared to $1.3 million or a 38% increase compared to the prior year. We contribute this increase in AtriClip sales, primarily to the significant cost selling opportunities created by our investments in training and certification. AtriClip sales contributed to $1.2 million of the increase in sales of products used in open procedures for the quarter.

International revenue grew 17.9% on a GAAP basis and 25% on a constant currency basis, as compared to the second quarter of 2011 to a record $4.9 million. The increase in international revenue was driven primarily by growth in select Asian markets and in Russia, along with moderate constant currency growth in Europe.

Now, turning to gross margin. Gross margin for the second quarter of 2012 was 69.6%, as compared with 73.2% for the second quarter of 2011. The decrease in gross margin was primarily due to increased manufacturing overhead costs required to transition and maintain the manufacturing of PMA approved products and our continued investments in quality systems to support expanding operations. We are building the company for last.

We anticipate pressure on our gross margins to continue over the upcoming quarters to incremental investments in manufacturing overhead and production process improvement. In the near term, we expect gross margins to be relatively consistent with our levels, with potential modest improvements throughout the remainder of 2012.

Next, an update on operating expense. Operating expenses increased 7.5% or approximately $1 million from $13 million for the second quarter of 2011, to $14 million for the second quarter of 2012. Research and development expenses, which include clinical activities were $2.9 million for the second quarter of 2012. We experienced increased costs in support of our clinical trials and regulatory activities, which were offset by lower expenses related to product development activities.

SG&A increased by approximately $1 million with $600,000 in non-reoccurring severance expenses related to a onetime event during the quarter, and the remaining increase was driven by our investments in our training and certification programs, which are paying off. Our operating loss for the quarter was $1.3 million, as compared with approximately $800,000 for the second quarter of 2011.

Adjusted EBITDA was approximately $400,000 compared to $500,000 for the second quarter of 2011. Our net loss per share was $0.08, which includes the onetime impact of the non-reoccurring severance charges, which impacted EPS by $0.04 per share.

Now turning to a few balance sheet items. We ended the quarter with $15 million in cash, cash equivalents, and investment. Additionally, we have approximately $8 million of borrowing capacity, under the revolving portion of our credit facility.

Turning to investments in clinical science and FDA approvals. First, our post approval study. In terms of our post approval study, we expect to initiate enrolment in the post approval study in October of this year with a minimum of 75 patients from ABLATE AF, leaving approximately 275 remaining patients to enroll. This is a seminal clinical trial, that patients will be followed for three years, and this should create additional clinical evidence to facilitate utilization and penetration.

Moving to the DEEP AF feasibility trial, we are pleased to announce that we received total FDA approval to begin the stage DEEP AF feasibility trial. We are working with the sites to obtain IRB approvals, as well as contracts, and anticipate initiating enrolment by the end of the current quarter. As previously communicated, this feasibility study is expected to enroll 30 patients (inaudible).

Our most recent FDA discussions, indicated a 30-day interim analysis with an acceptable rate of prespecified adverse events would enable the company to move directly into a pivotal trial. Our current plan includes the submission of an interim safety analysis and a pivotal trial protocol during the second quarter of 2013.

Importantly, we anticipate initiating enrolment of the pivotal trial in support of state EPA during the second half of 2013, which once again, we believe will stimulate new growth opportunities through the clinical trials in the marketplace.

In addition, we are in initial stages of completing diligence concerning the potential of entering into a newly developed FDA clinical trial. ABLATE AF II is an FDA pivotal trial intended for patients that have failed single or multiple catheter ablation attempts. Moreover, this clinical trial leverages our ABLATE PMA approval, and AF labeled products and accessories. As such, the FDA has indicated that the ABLATE AF II meets the criteria for a PMA supplement. The PMA supplement process is anticipated to significantly reduce the approval time for our minimally invasive sole therapy platform. A very exciting opportunity for the company, which is currently being vetted and should be -- a decision should be made during the next several weeks.

We believe this approach is complementary to DEEP AF, but has an accelerating time to approval and commercialization. Additionally, we believe the ABLATE AF II investigational procedure is more consistent, with traditional cardiac procedures, and therefore will be adopted by a larger number of cardiac surgeons and institutions.

The investigations under consideration of ABLATE AF II uses a right lateral minithoracotomy approach and less invasive peripheral bypass techniques which is (inaudible) as a sole therapy AF alternative for patients with persistent and long standing persistent AF who have failed single or multiple catheter ablation attempts. ABLATE AF II is a single arm clinical trial estimated to enroll 120 patients based on our initial power calculations. The objective performance criteria for efficacy is based upon the ABLATE clinical trial results and in terms of safety, pre-specified adverse event rate are being established from the peer review literature to form our safety hypothesis.

Now, assuming that we move forward with ABLATE AF II, we plan to submit an IB application to FDA by the end of this month with anticipation FDA approval to begin the study during the fourth quarter of this year, and to initiate enrollment during the first half of 2013. Most importantly, our thesis supporting our investment in ABLATE AF II is based on our current estimate that 30% to 40% of AF catheter ablation procedures are a redo ablation.

We believe patients, providers and payors will respond favorably to safe and effective alternative treatments to the large and growing number of symptomatic patients that are resistant to catheter ablation treatment. In addition, we believe that our strategy aligns with healthcare reform trends. The trend discourage redo procedures and are moving to a model where physicians are rapidly becoming hospital employees. We believe these trends further position our sole therapy ablation platforms for broad penetration.

Lastly, our belief is that ABLATE AF II will encourage the community of cardiac surgeons to increase adoption and penetration into the open heart concomitant market, which is significantly underpenetrated and remains a major growth catalyst. ABLATE AF II, as we continue our diligence, remains a significant mid-term growth catalyst for AtriCure.

Turning to our stroke trial. In December 2011, we received FDA approval to conduct a sole therapy feasibility study to investigate the AtriClip, left atrial appendage exclusion system to reduce the incidents of stroke in patients for whom long-term oral anti-coagulation therapy is contraindicated. As previously discussed, we submitted to IRBs and we're waiting for second generation AtriClip prior to enrolling patients.

We recently resubmitted a 510(k) incident report of this second-generation AtriClip system. Moreover, we anticipate making this newer version of the AtriClip available in our staged DEEP AF clinical trial. Notably, our research and development team continues to innovate less invasive concepts of the AtriClip system. We have recently prototyped a new concept technology and performed initial cadaver experiment with the cardiac surgeons, interventional cardiologists and electrophysiology advisors.

Now, if successful in developing these new transformative technologies, we can expand our selling efforts into the cardiology market and strengthen our presence in cardiac surgery. Going directly to interventional cardiologists and EPs will leverage a referral development activity and expand our presence in the cardiology markets in support of our surgical AF products.

Selling into cardiology and interventional EP lab and increasing the end user into the cardiology market could be a major inflection point and value creator for AtriCure. As a result of these ongoing development activities, we are -- we have decided to place the current stroke trial on hold until we have more time to evaluate these new concept technologies and develop our strategic priorities.

Guidance and future outlook. We are moving into the second half of 2012 with solid growth trends, both in U.S. and the international market, a strong balance sheet to support our strategic priorities. Considering the transition, the company is dispending its financial guidance until it hires a new CEO and that person is comfortable with reinstating guidance.

To conclude, I believe in the AtriCure team and have confidence in our people. I've loved AtriCure for the 10 years that I've been here. The company is in good hands with strong management and is committed to continuing its trajectory of success.

We'll now open the call for you questions and comments.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question will come from the line of Brooks West with Piper Jaffray.

Brooks West – Piper Jaffray

Hi, good afternoon and thank you for taking the questions.

David Drachman

Sure, Brooks.

Brooks West – Piper Jaffray

David, I had a question on gross margins, I appreciate your commentary there. Can you comment -- was price an impact there. Are you seeing [prices hold] or is it all the manufacturing changes that you're talking about?

David Drachman

Excellent question. We've actually been very satisfied with our prices over the last several years not just the last several quarters have been generally consistent. So the gross margin pressure is actually coming from our (inaudible) last philosophy. We're investing more resources in manufacturing as well as investing more resources in our quality systems to make sure that we can support our projected growth estimates.

Brooks West – Piper Jaffray

Great. And then just to follow-up maybe for Richard and Mike. I wonder if you'd care to layout any expectations for a timeframe associated with finding a new CEO, and I guess new CFO with the company going forward?

David Drachman

And I think that probably will really depend upon the breadth of the search and the time it takes to properly get candidates and come to a conclusion. And we're at the beginning now and we -- I really just don't we could put a particular time limit on it. But you have the assurance of all of us on the Board that it will be as expeditious as we can make it.

Operator

Your next question will come from the line of Jason Mills with Canaccord Genuity.

Jason Mills – Canaccord Genuity

Hi, guys. Thanks for taking the question. Can you hear me okay?

David Drachman

Hey, Jason, absolutely. How's the (inaudible).

Jason Mills – Canaccord Genuity

It's going okay. I wish I had more time for it. So let' start with the last question and just continue on the discussion of the management. I was wondering if you guys could give us a bit more color on how this decision was made and why was it made now with lack of a CFO and soon no CEO? What sort of processes and procedures are in place to maintain the existing talent within the company, including the sales force?

Michael Hooven

First of all, Jason, there was a fulsome series of meetings, telephone calls, working with outside council, working with Dave and his council to come to a closure on an agreement relative to his desire to resign and to move on. I think that the Board discharged his duties very well and we do have an agreement going forward and we are now going to be turning to the activities surrounding our need to have a new CEO, and also to be working with our finance department relative to the position of CFO. Once again, I don’t know exactly how long all of this will take, but we're certainly all of the mind that we want to move forward rapidly.

Jason Mills – Canaccord Genuity

That's very helpful. Thank you for that. And perhaps someone could sort of help us understand or give us some insight into what discussions have been going on with your sales force? I'm sure this comes as somewhat of a surprise to some people internally, and sort of what have been communicated and so their focus can be on the important stuff, which is continuing to sell the products that are approved?

Michael Hooven

Well, certainly the -- first of all, all employees of AtriCure have been informed simultaneously with the release of the press announcement and the quarterly earnings. There will be a meeting with the employees early tomorrow morning. We also rely upon the senior executives within the sales group to be contacting individual sales win, which as you know is scattered around the country.

We definitely will be reviewing the ability of the company as well as for the salesmen and related specialists in the field. They continue to work on behalf of the patients, the hospitals, the doctors that we all have such fine relationships with. And I can assure you we will -- we definitely will review the compensation in connection with that need.

Jason Mills – Canaccord Genuity

That's very helpful. And I can certainly appreciate the affluent nature of this and how difficult it is. So I appreciate your candidness. Let me just ask one more on the management side and then I'll get to the business which seemed to perform very well versus expectations in the quarter, and that is Dick I'm wondering if you could just comment as to whether or not this was generally a surprise to the Board of Directors or has it been contemplated or discussed longer than maybe the last couple of months?

Richard M. Johnston

I really don't want to go into any details other than what has been stated in the press release and relative to the comments that Dave has made at the beginning of this meeting, this has not been a long dated situation.

Jason Mills – Canaccord Genuity

Okay, that’s helpful. I appreciate that. As for the business, the international business, Dave, continued to be strong and the number in the U.S., The number of surgeons that have been trained very surprising to us in a positive way. I guess talk about your ability or the company's ability to continue to train more docs over the course of the second half of the year. And while you're suspending your guidance, Dick, I can understand. Would the trend lines in training correspond to work perhaps when they naturally expect in terms of the growth in the U.S. business?

David Drachman

Jason, if I'm hearing you correctly, is there any liner correlation between training and U.S. opening growth?

Jason Mills – Canaccord Genuity

Certainly a better way to say it than I did Dave, yes

David Drachman

There is a relationship how liner it is and we're trying to get our arms around the analytics. It's defiantly a stimulated cardiac surgical community over the AF approval and there is some clear relationship and in each account, the window of time between training certification and increased penetration and usage can vary. So for example, if it's a new user, we typically have to go through a more elongated process and existing user if they are incompetent to use at a lower level. The impact of utilization can take longer. So there's a clear correlation but there is several derivatives in terms of prototype physicians that would actually drive the window of time between the absolute certification and only begins to the impact established.

Jason Mills – Canaccord Genuity

Okay, that’s helpful. One last one and I'll get back in queue. I think you mentioned 300 plus -- I can't remember the number right now on the top of my head -- surgeons that have now been trained since the FDA approval. Could you comment how many of those are new AtriCure accounts versus those surgeons that you've done business with in the past?

David Drachman

There's about a 20% of the 377 are new users. One of our emphasis that we believe is an important part of the strategy is where we have business is softening quicker to increase utilization. And then we look to target a higher line competitive account which is that, within that 20% for the conversion. So, I think it's the combination of about 20% new users and 80% existing users. Did I answer your question, Jason?

Operator

Your next question will come from the line of Danielle Antalffy with Leerink Swann.

Danielle Antalffy – Leerink Swann

Hi, good afternoon. Thanks so much for taking the question. Dave, we're sorry to see you go. Just a question on the strategy given the CEO transition. I was hoping maybe you could comment on how this could change the strategy sort of longer term, and potentially give us some insight into what you're looking for in a new CEO as far as strategy goes? Has the Board's strategy basically unchanged? If you could give any color there, that would be great.

Michael Hooven

The Board of Directors received a strategy report from Dave that had been put together by Dave and his team back in June. And that strategy is -- it says forth a lot of what was just mentioned on this call. And certainly the Board views positively the work that was done and the conclusions that came out of that strategy. And I think it builds importantly upon what the company has been able to accomplish over the last 10 years.

So, I think we want to see and the continuation of this update and strategy. And obviously when someone comes in, there may be emphasis that would change on that but it’s very basic as to what we are trying to do to provide better outcomes that are safe and to do so in cost effective manners that are responsive to hospitals, to the physician community, to the payors beside of course the patient.

Danielle Antalffy - Leerink Swann

Okay, great. And then if I could dig into the business a little bit. Dave, you guys had a great quarter. Just wondering what you're seeing on the sort of halo effect with sales, the cross-selling that you talked about and driving sales into AtriClip. Are you seeing more success there this quarter maybe than you saw last quarter, any color on that would be great?

David Drachman

Sure, that's a great question, Danielle. We have the best sales force in cardiac surgery and we have some of the best people leading it, people like Doug Seith is too strong, I could name many people. But their philosophy which we developed over time is we have accessing to the operating room, we put more products on the shelf and we drive increased utilization in those products because they had clinical value, optimized care and improved outcomes.

And the certification program just bodes on that. It allows us to put physicians and find physicians, they can basically tell that story of why our plans on our trial program are [pen in our cleft] of all these products combined with our [pen in our] overall labs for example, why the combination of these products is stronger and why they provide patients with secure outcomes.

So our sales organization has a command of technologies. Sales leadership is extremely effective at this specific area because they are the command of the technology and the procedure development process and doing an extremely good job, and again that's just been (inaudible) through the training and certification program by our physician (inaudible).

Danielle Antalffy - Leerink Swann

Have you ever quantified how many -- on average how many products per procedure are used with your devices?

David Drachman

It's difficult for us to get all that information because we're not [end of the] procedure, because I'd like to say, the sales management group who appointed is exceptionally strong in terms of selling the clinical benefits of our products to improve the outcome. They have their own internal nomenclature about how they talk about doing that and to incentivize the sales organization for increasing the meaningful products for procedure and have a strategy.

For example, if I am doing a double valve and CABG and I'm doing it through a (inaudible) an efficient ACE versus an atrial fibrillation, what lesion sets, what ablation treatments and what technology support the best possible treatment. And we tried to emphasize those technologies and those treatments for those physicians and have yielded a very nice steady incline into number of products used for procedure, which is also evident by the fact that atrial clip had a running start of about $1.5 million, and for example last year $1.3 million, and this year, in this quarter $1.8 million which is about 38% increase and we contribute that specifically to our training and certification programs.

Danielle Antalffy - Leerink Swann

Great, thanks so much.

David Drachman

Thank you.

Operator

Your next question will come from the line of Matt Dolan with Roth Capital Partners.

Matt Dolan - Roth Capital Partners

Hi, good afternoon. I had maybe two more targeted questions on the transition. First, company has been through a lot from the DOJ investigation to the highs of this, the AF approval. Can you help us maybe make sense of the timing of the management transition announcement relative to what from the outside appears to be a strengthening business even globally speaking following this approval?

Dick Johnston

Yes. I don't think Matt that we could really comment upon the timing of it. It developed not over a long period of time. There was a desire to work out a satisfactory and agreeable arrangement for Dave to resign. The Board took into account a number of factors and that agreement then has been put in place.

Matt Dolan - Roth Capital Partners

Okay, fair enough. And then following that considering how involved and well regarded Dave has been with the organization and the number of things on the play today. Even though the company has suspended guidance at this point based on business trends that you are aware of, there's no reason to anticipate any disruption from the trajectory that company was on obviously. Is that a fair statement?

Dick Johnston

Well, your first point is really of a comment, definitely it's a disruption and we hope it does not change the trajectory. And we're committed as a Board to work diligently with the management and with other management team and with others keep it on that trajectory, but in the absence of the CEO, we don't believe it's a good thing to be offering guidance. And as quickly as we can get a new CEO and there is comfort there, I would think we would certainly be considering it going forward.

Matt Dolan - Roth Capital Partners

Okay, I appreciate that. Then Dave on the business itself, you've talked a lot about cross-selling and some of the certification program. What can you tell us about the ability to gain market share in last quarter?

David Drachman

Good question, Matt. So in terms of market share gains, we've had some significant targeted large in terms of account gains. Our Director of Marketing was up at one of the accounts with our Ohio Area Director recently, a very large account not only converting to ablation devices but their philosophy which is a good clinical plus that we believe is while the chest is open [the bandage] can it in the most safety and corrective way which is the H-clip.

So we've had some fairly significant competitive conversions now and we will say that those conversions take time to build up in terms of sales based on value analysis committees and a little bit more of a rigorous process for purification for new users. The users have to go through a few additional steps for this certify so we can actually sell them products. So the ramp in the new user account is a little bit longer, but the conversions are real and happening.

Matt Dolan - Roth Capital Partners

Okay. And then last one is just on the kind of the budget or your expenditures as they stand today, should we expect any increases for some of the R&D or marketing initiatives that are on the table, I know some of those might be influx, but just help us understand from the operating expense we saw in Q2?

David Drachman

We are very happy with our operating expenditure as you know really if you take about the non-recurring one-time severance payment which is $600,000 payment or $600,000 charge to the second quarter and in fact the EPS by $0.04, the overall increase from a dollar perspective was $400,000 on a year-over-year comparative basis. So there is definitely a disciplined approach to making sure that we invest resources in areas that are driving growth.

And on a year-over-year comparative basis from a full year perspective, we are sticking I think – well let me take my best estimates based on we forecasting the business with what we communicated on the first earnings call was that R&D would increase by $3 million and $3.5 million on a full year basis and SG&A would increase by $2 million, $2.25 million to $2.75 million on a full year basis. Again, the company will have to reevaluate that my answers based on our most recent forecast, I think those were reasonable estimate go forward with.

Matt Dolan - Roth Capital Partners

Okay. Thanks for taking the questions and take care.

David Drachman

Thank you.

Operator

Your next question will come from the line of Charley Jones with Barrington Research.

Charley Jones – Barrington Research

(inaudible) like to start, Dave, by letting know that I truly believed you, you know, the world has much gratitude owed to you and as a member I'd like to thank you for everything you've done for AF.

David Drachman

Well, thank you Charley, that means a lot. Thank you very much.

Charley Jones – Barrington Research

A couple of regulatory questions here, I guess I'm curious how long it will take to analyze this new clip system. I was hoping you could go through a little bit more clearly on what – 510k, how long it will take to get to the longer delivery tool 510k. If you could describe the approval process and the time it will take to get the PMA supplement trial going for these redo procedures? Thanks.

David Drachman

Great, great. Well the – first of all, once again, thanks for kind and generous comments. In terms of the 510k for the longer, (inaudible) tool and the current clip, that's actually we have discussions some of my colleagues and (inaudible) and I had a discussion with FDA about this product and it was slated into the special 510k submitted as a special 510k which gives us the 30 days to respond so we anticipate during the (inaudible) 30 days assuming, that there's no questions which – I think this is a pretty safe 510k because the clip hasn't changed, only just an (inaudible), it's probably a 50% of their chance they will get the clearance on their first round.

In terms of the new concept technologies as you know, innovation and new concept – it is often two steps forward and three steps back. So it's a little bit early for us to talk about timelines but what's very exciting is the ability to put the – clip into a percutaneous subxiphoid intra-pericardial approach, which is something that I've been working on with different technologies for years, and people in company as well. And this approach, we know, is achievable, it's a matter of [solving] for the technical aspects of developing the right platform.

So we want to continue down this path, we've made some breakthroughs, primarily because we have assigned some of our most talented engineers to it, as well as some of the most talented physician advisors are consulting with us and we've recently again made a few meaningful breakthroughs with how – made us think about taking a pause back because anything that we do with a totally thoracoscopic implant will not be transferable you know for a subxiphoid approach, so we need to just take a step back and take a look at that.

The ABLATE AF II, this is a trial that company has been asked to make a decision on whether or not they want to go forward, it's 90% i.e. we could actually submit the IDE now. We'll have a few additional discussions with some key physicians over the next couple of weeks, but this could be very powerful, more invasive, it is a (inaudible) approach, probably more adoptable than (inaudible). And more focused on (inaudible) patient where the payors maybe more focused on concepts of de novo persistent and long-standing persistent patients.

Charley Jones – Barrington Research

If everything went well, how long do you think you would take to get a product on label for that indication? Best guess.

David Drachman

Our best power estimates given interaction with FDA is 120 patients. So we should be able to enroll that in a year, but it could be followed for a year. And then a PMA supplement, three months after that and we put this on with (inaudible) submit to FDA and so it's probably a better two and a half year process from start to finish and if the company decides that this is the best step forward then we would submit this month actually and begin to rolling business by the end of the year.

Charley Jones – Barrington Research

Do you think you can achieve your regulatory goals by end of September and does that have something to do with – the timing that you felt like a lot of these regulatory issues were nearing a point where you felt comfortable with – you've obviously been extremely involved in that process. And I'm – two questions for the Board, how are you going to approach a regulatory position that Dave's been doing it simultaneously as a CEO? And Dave – if the Board would let you, I'd love your comments on – your term as CEO, you think is most appropriate you've had several roles there, if you obviously have the support of the team and I'm curious if it's a professional CEO, someone internal sales oriented person or a what not that you think would best fill your shoes?

Dick Johnston – Chairman

So on the regulatory side I'll pass for that and answer your second question, I think the Company would – very well, to have somebody in the back office position, that's dealing with the strategies there's a lot of moving parts strategically and a lot of opportunities for the company to capitalize on. Whether it's sales and marketing growth, marketing programs, clinical and regulatory programs.

I think strategically there needs to be a focus in Chief Executive Officer moving the business forward and execution is one role, and then strategy and somebody developing that strategy on an ongoing basis and working with the CEO to implement it, I think is the best combination with certain advantages.

Charley Jones – Barrington Research

And any plans to add a new regulatory person here? And I guess it appears that you've really had a lot of successes on the regulatory aspect, would you not agree with that?

David Drachman

I would agree with that only because in that time [not a lot many] some of my skill sets in this area dated back to the early '90s with AF clinical trials. So I've been fortunate to really work with some of the best clinicians. And for example we filed -- since we did the first initial IDE for atrial fibrillation, so I've been a student of this for a long time and that I benefitted from that. EPA has very good people. They are a little bit more regulatory sometimes, I'm a little bit more clinical. I'm sure the company can find a suitable replacement and continue to move these programs forward.

Charley Jones – Barrington Research

Again, many thanks, Dave and sorry to see you go.

David Drachman

Thank you, Charley.

Operator

Your next question will come from the line of Larry Haimovitch with [HMTC] sic HTMC.

Larry Haimovitch – HMTC

Good afternoon, everyone. Well, Dave, I'm not quite sure what I want to say expect I'm very, very sorry about your resignation. I think you've made an extraordinary contribution, as Charlie just said, to the company, to the field of atrial fibrillation and all of us have all been in awe of your incredible determination and your incredible dedication and wherever you go, we know you'll be a great success. And personally I'm very sorry about you leaving.

David Drachman

Well, thank you, Larry. I'm that sorry as well. I appreciate your comments and your generous kind words and you've been a great friend and colleague and actually a great mentor in every respect, so I look forward to continuing on our friendship.

Larry Haimovitch – HMTC

As they say, let's keep it going. Dave, I want to get a -- on the business side, I wanted to understand a little more about the ABLATE II trial that Charlie and you just talked about. I'm a little unclear. Is this going to be on a stopped heart or on a beating heart? And I guess is it standalone or is it in conjunction with a concomitant, I wasn't quite clear on that?

David Drachman

Thank you. This is the sole therapy approach.

Larry Haimovitch – HMTC

Okay.

David Drachman

It is peripheral bypass, so it (inaudible) and the aorta is clamped, the heart's arrested. It is open heart and -- but it is minimally invasive. What we've seen is the patient is said to go home in three to four days, and it's adversely in the cardio which has a big advantage with redo catheter ablation because of the adhesion that can form after a catheter ablation procedure. It can make it harder to do a thoroscopic approach. But the other very important thing about this is the fact that it's a PMA supplement, which typically speaking cuts the time in half and also cuts the costs in almost half because you don't have to grow now typically speaking. So again, we think this approach would be very well suited for (inaudible) catheter ablation, probably it's more adoptable in many more stenters than a thoracoscopic approach -- a pure thoracoscopic approach, and you can -- as soon as the company decides that this is the best step forward, we could have this trial, the (inaudible) actually prepared and we resubmitted. We just wanted to get through this calling part. We wanted more physicians to be always (inaudible).

Larry Haimovitch – HMTC

So the open procedure has a sternotomy -- full open sternotomy?

David Drachman

Well, this is on many right lateral thoracotomy, so it's…

Larry Haimovitch – HMTC

Okay.

David Drachman

Like a keyhole and the patient is

Larry Haimovitch – HMTC

So it's one-sided as oppose to what we're used to today and the minimally invasive, which is a two-sided procedure?

David Drachman

Correct.

Larry Haimovitch – HMTC

Okay. And the difference is, is now you're doing the peripheral bypass?

David Drachman

Peripheral bypass, arrested heart, the heart is being opened and you were using the same technologies and accessory tools that were used in the ABLATE clinical trial, which -- that's why it qualifies for a (inaudible).

Larry Haimovitch – HMTC

Dave, is this going to be easier for doctors to learn and perform? I know that for some physicians, there has been concern about the double-sided thoracotomy at the time with the patient (inaudible) procedure, the fact that the patient's got to be turned from one side to the other, the fact that the lung has to be inflated, et cetera. Do you see this is kind of streamlining and making the minimally invasive procedure easier and better?

David Drachman

I think there are many -- the DEEP AF trial and the thoracoscopic approach is for some surgeons. I think you're right, Larry. This is more widely -- will be more widely adopted mostly likely and the other very attractive thing about this approach is when people do a mini-mitral valve, this is the same surgical approach. They use peripheral bypass, they arrest the heart, it's the same surgical approach. And when they do mini-mitral valve, these are many isolated mitral valve in that the patient's only having a mitral valve no other corrective surgery and they do this mini right lateral thoracotomy of one side, peripheral bypass, arrested heart, they often do a (inaudible). So, it really leverages existing skills in many of the key centers. And so we think that this could not only stimulate a very large market of catheter ablation patients that have no other options or very limited options, but also it helps us while we're getting it up and running, it will leverage more (inaudible) we think in the open heart business.

Larry Haimovitch – HMTC

Great. Thanks Dave.

David Drachman

Thank you, sir.

Operator

There are no further questions in the queue. I would now like to turn the call back over to Mr. David Drachman for closing remarks.

David Drachman

Thank you all for your kind words and this has been a very productive call. We look forward to your continued support and thank you very much.

Operator

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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