TearLab's (TEAR) CEO Seph Jensen on Q2 2016 Results - Earnings Call Transcript

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TearLab Corporation (NASDAQ:TEAR) Q2 2016 Earnings Conference Call August 3, 2016 4:30 PM ET


David Burke - IR

Seph Jensen - CEO

Wes Brazell - CFO


Chris Lewis - ROTH Capital Partners


Welcome to the TearLab Corporation Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to David Burke, Investor Relations. You may begin.

David Burke

Thank you, operator. Just to remind everyone, certain matters discussed in today’s conference call or answers that may be given to questions asked are forward-looking statements that are subject to risks and uncertainties, relating to future events and/or the future financial performance of the company. Actual results could differ materially from those anticipated in these forward-looking statements.

The risk factors that may affect results are detailed in the company’s most recent public filings with the U.S. Securities and Exchange Commission and the Canadian Provincial Securities Administrators and can be accessed through the EDGAR and SEDAR databases found at www.sec.gov and www.sedar.com respectively.

Please note that the company is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements.

I would like to now turn the call over to Seph Jensen, TearLab’s Chief Executive Officer.

Seph Jensen

Thanks David. And thank you all for joining us on today's call. We've gone through several changes at TearLab with over the past few months that we believe will have a lasting positive impact on our business. We've recently enhanced the company's balance sheet and set it on clear path to achieving sustainability. We've also advanced our next generation platform and significantly improved our financial performance under our new model. So there's several progress updates to cover on today's call but I'd like to begin with an overview of where we stand in the execution of the strategy we implemented late in the first quarter to position TearLab for long term success including the changes to our sales model and steps taken to reduce our operating expenses and our cash burn. As we discussed on our Q1 and as a reminder for those of you that are newer to our story, in March of 2016 we rolled out a new sales model with a more cost efficient sales force structure. This model is focused on balancing productivity and growth by taking our top reforming sales reps and expanding their geographic reach through a combination of one prioritizing their focus on higher volume accounts and prospects while two using internal resources to maintain consistency in our lower volume accounts.

What you see in our Q2 results is consistent with what we said on our Q1 call in that we’re undergoing a transitional period during which we have strengthened our company financially while still driving topline growth and most importantly we validated the benefit of our new sales model by driving all time high utilization levels in our flex business. During the quarter we experienced over 5% growth in the number of active flex devices compared to the first quarter and a 6% increase in the number of active flex accounts. As we have emphasized in the past the flex account model is the most profitable for the company while also meeting the needs of a majority of our customers. Not only are the number of devices and accounts growing for flex but the revenue is increasing as well.

We achieved record utilization levels for both devices and accounts and now are at almost $20,000 of annualized revenue per account. Our sales team has done an excellent job educating our customer base on the benefits of this program and the interest level remains high. Now while we’re working to expand the flex business we are also focused on making our existing accounts as efficient as possible. We used the new model as an opportunity to get a fresh look at our customer's needs and what we've been able to do is have our most talented salespeople engage with accounts that either previously had a less tenured rep or more an under-served market. If you put our overall performance in context against Q4 2015 when we had a much larger sales infrastructure in place, our rep productivity has more than doubled under the new model. Despite significant reductions in both people and spending we experienced sequential growth from Q1 2016 continued our year over year growth while significantly reducing our cash burn and expenses.

The implementation of our new sales model which began late in the first quarter did require some time choices on the part of our sales team and this had an impact on what we could accomplish. While we saw strong growth in our flex business we experienced a reduction in revenue from our master's accounts which had an impact on the overall increase in revenue of 9% for the quarter. However we found that this performance was driven primarily by the shift to our new model and when we segment our existing business into which accounts were impacted by a repertory change and which accounts did not have any impact we see some revealing results. The accounts that were impacted by the restructuring saw a revenue decline of 3% when you compare Q2 to Q1. However if you look at the accounts that were not impacted these accounts grew their revenue 5% quarter over quarter, what encouraged us about this metric is that we know it is taking time and probably more time than we originally thought for the reps to get there full territory and establish the relationships needed to manage these impacted accounts but when our accounts received consistent support they continue to demonstrate growth and discussions with our sales team we believe that much of this work was completed in the second quarter that they worked on building relationships with focus on the 40% of account that do 80% of our business.

With regards to our device placements during the quarter, we had a net total of 58 units which is a low quarter for us. We were pleased with the performance of our flex program where we shipped 61 net new devices in the U.S. and ended the quarter with 1798 eight active devices or approximately 43% of all active devices. Similar to the impact on masters, the time required to acclimate to the new territories negatively impacted our placements for the quarter. In hindsight we underestimated how long this would take simply from a logistics standpoint to get new routing set up, build relationships, understand office dynamics etcetera.

In addition our reps encountered challenges in a few of the inherited accounts at which target utilization rates were not being achieved under our old model and this was driven by various factors but generally it either related to limitations and how we onboarded customers clinically in the past or in some cases questions with reimbursement or office flow. This dynamic required more time for the rep to assess the situation and attempt to reengage the account and create a game plan to increase the customer's utilization levels or failing that convert them into a different contract that makes more sense for both parties.

We directed the sales team to either reengage accounts back to expect utilization levels or convert them to purchase agreements and we were largely successful in either reengaging them or converting them to a purchase model. However we did have some accounts where continued relationship did not make sense and that resulted in higher attrition in Q2 than we have experienced previously. The attrition rate on our U.S. device base in Q2 was about 4% which is higher than historical trend and also higher than what we had expected even when considering the time we knew it would take to transition to the new model.

In our press release we report all of our placements on a net basis, so that higher attrition rate in Q2 is negatively impacting our reported numbers. We actually shipped more than 160 new flex devices in the U.S. on a gross basis and we believe this will provide the footprint growth needed to accelerate our business into the second half of 2016. Most of our attrition in Q2 was from account but for the most part we’re not contributing. So the net placement number we reported is not indicative of how our footprint will contribute to growth going forward.

Now moving on to the sales force, I have visited personally with all of our U.S. sales team at a recent meeting and they are confident in the new strategy and approach going forward. It was refreshing to see how upbeat and excited our team is about the new model. Our reps believe they now have more time to prospect for new customers after having established the relationships at their largest accounts in the New Territories and coverage of lower volume accounts through inside resources. We believe net placements will grow faster during the remainder of the year versus what we saw in Q2 as this unusually high attrition rate should be behind us.

Now turning to our P&L and cash burn let me make a couple of quick comments while Wes will speak to these efforts in more detail later I was very pleased to see our cash burn at $2.6 million for the quarter, a reduction of 4 million from the previous quarter. In addition we saw significant reductions in our expenses when compared to both prior year and prior quarter as the full impact of our restructuring hit in Q2. Our goal through this process has been to be as efficient as possible while still driving growth we focused our sales force to can concentrate on larger accounts and cut back activity on lower potential accounts. This allowed us to more than double the productivity for each sales rep when compared to our previous model and deliver both year-on-year and sequential topline growth despite a significant decrease in our spending. Another corporate milestone reached this quarter with a 17 million raise we completed in early May. The company's long term positioning and drive for profitability will be supported by this equity raise which provides ample capital as we move forward with the implementation of our new business model and endeavor to bring our next generation device to market

Importantly with a strong cash position at the end of the quarter and an understanding of our expenses going forward we do not see the need to raise additional capital with our base model, more recently there was a very exciting announcement in the drive space we’re shy of receiving FDA approval of Xiidra, it's branded lifitegrast ophthalmic solution for the treatment of signs and symptoms of dry eye disease. We’re pleased for Shire and the overall eye care industry as this approval brings new innovation to the space.

This is the first prescription dry eye disease treatment approved by the FDA in the past 13 years, it's very exciting for patients, physicians and industry participants alike and what's important for TearLab is that it further validates the seriousness of dry eye disease and the unmet medical need. As Shire begins to roll out it's product and educate physicians and patients we're excited about the increased participation in this space that a new therapy will drive.

Xiidra's approval represents a great opportunity for TearLab to reinforce our role in properly diagnosing and managing dry eye patients. We believe there will be an increased emphasis on patients receiving the right treatment and day to day management of the disease and our osmolarity system is the only quantitative objective test for dry eye. Now moving on to our next generation device. We continue to work toward CE mark which we expect to receive by end of the year, we spent significant time scenario planning during the second quarter regarding how we might change our product profile if Shire Xiidra were approved and how that could impact our expected development cost and future commercialization.

Based on the Shire approval and cable feedback received we've made the strategic decision that the first test for our next generation system will contain tests for three individual biomarkers including osmolarity and two sets inflammation markers. O Our decision to include two inflammation markers has come from a combination of [indiscernible] input, regulatory and reimbursement analysis and the impact that this enhanced product profile will have on increasing adoption. While adding an additional marker will increase our development costs we have found ways to significantly offset this and we will make only a marginal change in our cash burn guidance that we published last quarter.

We were also able to raise more than $2 million above what we needed to reach our $40 million breakeven level during our May equity financing which gives us flexibility to take advantage of opportunities like this. From a timing standpoint receiving the CE mark by year-end should put us in a good position to file our FDA submission in the first half of 2017 while using the CE Mark approval to enhance our clinical package and gain further KOL experience and support.

Another upcoming catalyst and a major milestone for the company will be the inclusion in the Ocular surface disease guidelines soon to be published by the American Society of Cataract Refractive Surgeons or ASCRS. We expect these guidelines will position osmolarity testing as key first diagnostic test and evaluating ocular surface disease. Patients who are used to and expect to receive a number such as their blood pressure or cholesterol levels, given that we are the only quantitative test that measures osmolarity we’re in a great position to benefit from this type of broad market support. So with that I'll turn the call over to Wes to walk you through our financing, some of the cost structure impacts we've had and the model going forward.

Wes Brazell

Thanks, Jeff and good afternoon to everyone on the call. As we look at our results for the second quarter there's a lot for us to be pleased with. At the macro level we grew our sales sequentially while reducing operating expenses by 2.7 million from Q1 of 2016, when looking at the prior year we had the same trend of growing revenue 9% while reducing operating expenses by 3.5 million. Add to this a continued expansion of gross margin and you can see we're moving closer towards our sustainability level with a much clearer path and more certainty that we can achieve our breakeven model at approximately 40 million in annual revenue. Before we jump into the financials for the quarter let me spend a few minutes on the equity financing that we closed in Q2. As Step referenced we completed a capital raise that closed on May 9th, which strengthen our balance sheet considerably. On a gross basis we raised $17.25 million. After all the associated fees and costs that were part of the deal we cleared net proceeds of 15.5 million so on a balance sheet basis we ended the quarter with approximately 20.1 million in cash. This press release and our 10Q which we expect to file shortly will also provide more detail to help you understand the impact of the financing on our outstanding shares, because some of the deal was completed using a convertible preferred instrument this filing period is the first clear look at our common shares outstanding for the purposes of calculating EPS a go forward basis.

Just one note for clarity on the convertible preferred instrument, it does not have voting rights. It's convertible to common shares at the same price as the deal price and it's converted automatically to common shares in the liquidation. So although it's accounted for as a preferred instrument and for us it's excluded in our basic loss per share calculation. You can think of it then eventually converting into common shares.

Now turning to the financials, we achieved gross margin of 56% for the second quarter of 2016 versus 54% in the first quarter. Again this was made possible by the success of our new business strategy and concentration on the flex program which is achieving utilization per device and per account at record levels. We expect to continue to improve our gross margins in the coming quarters from savings on our new card supply agreement. As we said earlier we expect these savings to begin having a significant impact in 2017 following the move to our current inventory.

We believe the continued productivity in our business along with the parts supply agreement saving we will contribute to gross margin expansion above the 60% level and the base osmolarity only model in 2017. We made significant reductions in our operating expenses during the quarter, our OpEx totaled about 7.3 million this quarter versus just over 10 million in the first quarter of 2016. The savings were based on two initiatives we completed in the first quarter and very early in the second quarter, one was the sale of our OcuHub subsidiary and the other was the restructuring of our sales force and office support staff both of which were not fully realized in the first quarter. And when compared to the second quarter of 2015 we had OpEx savings of 3.5 million which is tracking within the expense reduction we expect to see on an annualized basis. We did have one increase to our expense rate in the quarter and that we had litigation expenses related to a patent case in Canada but we filed suit to defend our patent. This added about a little less than 400,000 to G&A expense in the quarter.

Even more satisfying than the expenses reductions, we reduced our cash burn considerably during the quarter. Our operational cash burn was 2.6 million in the second quarter, $4.1 million reduction from the first quarter of this year and a 4.9 million reduction from Q2 of 2015. The decrease in cash burn was primarily driven by the reduction of expenses which still allows us some other levers to pull to continue to improve our cash burn outside of sales and expenses only. With the improved operating model and the May capital raise, we believe we're well positioned from advancing standpoint for the foreseeable future.

Our R&D spending level in the quarter decreased with these resources are focused primarily on care development and clinical work with the development of the device hardware significantly behind us. R&D was reduced by close to 500,000 from the previous quarter. However as Seph Jensen mentioned earlier we are going to expand the T2 development project to include an additional information marker while remaining on track with our goal to have the CE mark by the end of 2016 while we believe that having the best product possible for T2 is critical but we also believe that keeping the project funding funded within our base model objectives is important.

So while we do expect to spend an incremental 1.5 million on R&D for the balance of the year we believe we can fund this with only a marginal change our original cash guidance through a combination of continued OpEx reductions, more efficient capital expenditures and working capital improvements. Although our P&L model will look slightly different on a temporary basis we can deliver a much higher value next generation product while maintaining close to our original expectations on cash burn.

I'd also like to briefly discuss the guidance change we announced our press release this afternoon. While our year to date revenue growth is at 16% our revenue growth in the quarter was affected by the constraints inherent in transitioning to a more efficient sales model. We have remodeled the year and we do see a potential impact on the full year guidance from last quarter. So we've adjusted our full year top line growth guidance to 13% to 18%. The results from that quarter were a byproduct of our shift in strategy to balance growth and productivity and our sales reps continuing to build new relationships and determine the best course for account that were not providing the appropriate return.

We consider these to be short term in nature and longer term positives for the business and therefore do not see this as a continuing trend in our revenue growth. We believe our efforts during the quarter will benefit the company over the longer term more competent in our guidance for the year. Conversely we're pleased to have only a marginal impact on our cash guidance from last quarter despite the additional investment in our next generation development.

We're now expecting a much more valuable commercial product in both clinical value as well as reimbursement potential that we've been able to offset most of the costs associated to deliver the increased value. Finally I would like to say a word about our stock price and NASDAQ listing. We've been under the $1 minimum listing standard for some time. As it stands today we would receive an additional 180 days from September 12, 2016 upon submitting a plan to NASDAQ to remediate the $1. We believe there are significant room for value creation in this timeframe through sales in P&L pef, Xiidra launch and renewed interest in the space, ASCRS guidelines, the CE mark for T2 and other accelerators or partnerships that we are actively seeking. However our NASDAQ listing is important and we'll consider whatever steps are needed to maintain our listing.

With that I'll turn the call back over to Seph Jensen.

Seph Jensen

Thank, Wes. We believe we’re in a great place right now. With our flex program moving in the right direction the progress on our next generation device towards CE mark, the recent approval of Xiidra, the upcoming inclusion in key industry guidelines and the May funding that secured significant runway. We have a lot to be excited about moving forward. We will no doubt continue to focus on our new sales strategy and keep the company financially strong as we work to create value for our shareholders.

So Operator with that please go ahead and open up the line to questions.

Question-and-Answer Session


[Operator Instructions]. First question is from [indiscernible] of Craig Hallum. Your line is now open.

Unidentified Analyst

I wanted to start with couple of questions on the upcoming catalysts here first and foremost being the Xiidra approval. As you're looking at accelerating the development of the next generation device based on KOL input I'm curious you know sort of first and foremost are you still expecting the approval and the impending launch of Xiidra to really catalyze placements of the current device or if you expect some of the physicians maybe will wait until till that next generation and I guess related to that would be do you have any thoughts around you know how you might handle docs that take the current device. You know with an eye toward perhaps you know transitioning to the next generation device when it's available.

Seph Jensen

I'll take them in order. We absolutely see the launch of Xiidra when it officially launches later this quarter, as an accelerated to osmolarity. When we would get the KOL feedback the bottom line is in a space that’s so large but it's been so stagnant for so long because of the lack of new products. There's just a lot of apathy out there, there is lot of apathy both from physicians and from patients and so when Shire brings their significant resources to market obviously they're not just carving out space for Xiidra in the current market but expanding that space as well. So as more and more people reengage we absolutely see that as an accelerator as the leading diagnostic today for dry eyes. So we do not believe it'll be kind of a wait for the next generation device in any regard.

The other aspect though that we did hear back from the KOLs and I think was a big part of why we chose to add that second information marker is that as you look forward new therapies coming out for dry eye inflammation has been central and it will continue to be central. So having a test that gives more information about how a patient is responding to therapy is going to continue to add more value for adherence, we’re keeping patients on therapy and reinforcing that the therapy is they're working. So we think it add value not just on the diagnostic side but on the therapy and the management side. So we're excited about what to do today but we actually believe as more products come on the market having more inflammation markers is only going to help us therapy get targeted therapy for the patients. As it relates to your question about you know any -- you didn’t use these words but maybe freezing the market or one's words get out there. What's going to happen with our current device I think a couple things are important, first of all our current model today is that doctors do not pay for the device. I mean that's the simplest thing so there really is no risk to them to acquire our current device because they're not having any capital outlay but then they would have to figure out how they manage that they upgrade to a new machine. So that's number one, but number two by the time we get FDA approval and we're actually physically out in the mark in the U.S. we think we'll have a -- we already have you know over 4000 devices over 1700 accounts. So as we continue to move forward numbers are going to grow and we're simply going to prioritize our current customers and they'll be first in line to be in line for an upgrade because we won't have unlimited supply when we launch. So we think both of those factors are going to only have a positive impact to drive osmolarity as we lead into our next generation device.

Unidentified Analyst

So then the Part B to the catalyst upcoming catalyst on the ASCRS you alluded to the pending inclusion, do you have a sense of kind of when that is expected to come out?

Seph Jensen

Not exactly, I can tell you what I know and I can tell you the recent discussions and it's not going to result in me giving you a month or a date but I think as we were leading into the ASCRS meeting in May one of the things we were sensitive to was we didn't want to get out ahead of them and when we spoke with ASCRS leadership you know they actually encouraged us. They said look we're very excited about launching these guidelines and getting them out in the market. We want them out there as soon as possible so we have no problem with you talking about our upcoming guidelines. So for us that was very encouraging and shows the confidence that they have in the inevitability of these guidelines coming out. In terms of where they are in the process, the language that they've used with us and they've actually used in print is that they're hammering out the details. Now whether that means you know next month or a month or two from now you know that speculation but I think we're very close.

Unidentified Analyst

And then just real quickly just take one more here on the R&D spend the extra 1.5 million of R&D spend, you talked about you know sort of being able to offset that with some things and you mentioned a couple of things in the prepared remarks in the release but I'm just curious to maybe delve into that a little deeper considering you just undertook a reasonably sizable restructuring and I'm kind of curious as to where in a little bit more detail on the pockets of spending that you're able offset and then related to that point is the 1.5 million spend that you're accelerating into this year is that spend you really expected to deploy toward the device and it's just a matter of shifting it into your '16 burn or is it you know truly incremental the where you thought you were going to be? Thanks.

Seph Jensen

I'll start with that the end and go answer the first part of question later. So it is incremental and I think there may be a little bit in that we do expect that to work on a stronger clinical package from a launch package. So a little bit of that may come in but the majority of the spending is really for the new marker, so it is obviously additional work on the card, the set up that's related to that, software related to you know reading three markers in the specific markers that we have validation. So that the majority of it. It truly is incremental again maybe there is a small portion that's that advancing and then I think on the way to offset it, so you we mentioned three in particular and I'm not going to get into whether they are third or third or what the exact split out is but I think there is some room still from operating expense standpoint, it's not significant but we certainly have some variable spend that we can look at and flex there's also some things we're working on to make our CapEx much more efficient. So where we're looking at the most our CapEx is devices that we play so in looking at that we're finding some ways to make that much more efficient and then we do have I think a little room in working capital, we carry a significant amount of inventory we had actually a pretty big drag on working capital from the kind of carrying our accounts payable and accrued liabilities over from last year so that you know I think we can pick up a little bit up from that as well. So those are kind of the three methods that we’re looking to offset and again we obviously kind of planned in our mind you know how those will hit but I think through leveraging all three of those through the back half of the year we can offset a significant portion of that 1.5 million.


The next question is from Chris Lewis of ROTH Capital Partners. Your line is open.

Chris Lewis

I wanted to start on the sale strategy obviously walk through kind of a number of kind of factors that have maybe taken a little bit longer than you expected. I guess at this stage do you feel you know you've gotten through that most of that transition process or do you feel that there is going to be a little bit more time required here before the sales team is able to go back and reach into those underutilized accounts and some of the other kind of strategies you discussed in terms of getting there, business is kind of up the par under the new sales approach?

Seph Jensen

Sure it's never an absolute right and what I would say is and I referenced in the opening comments we just had kind of a mid-year meeting where I spent time with the full team in Nashville and I feel very confident and comfortable that we're through a majority of it. So does that mean we're through 70% of it, 80% of it, I can't -- I think it's impossible to tell you exactly I obviously don't have a number but what I can say is you know when we went into the second quarter we were barely one month into the new model. I mean we had just done the restructuring in March. So as we go into the third quarter, now we're four months into it. We've had a full quarter for all of our reps to now cover their bigger territories accounts that were brand new to them.

So yes there's probably a little bit in fairness but I feel extremely comfortable that we're through a majority of it and it'll be you know back to covering territories and markets that are more comfortable them in terms of routing relationships access those things and less discovery if you will that was a large part of Q2 as they went into markets and accounts were they had never been before.

Chris Lewis

And just given the magnitude of the kind of a sales force changes, what type of visibility do you have in the business at this point and I think investors want to know what gives you confidence and this new outlook versus the prior ones?

Seph Jensen

Sure. And if I'm missing your question please feel free to ask a follow up but in terms of visibility or data or metrics or analytics there's no less if anything it's greater. There is nothing about the change that inherently caused us to see less composition of our growth and trends and what's going on at the core level. So we feel very good about finger on the pulse and what went on in the second quarter seeing it clearly. So what gives us confidence again I think is what I said earlier when you when you look at the time required to go out and cover every rep had you know it wasn't exactly double market size obviously but they had a significant portion of their time going into areas where they had never been before even in the middle of all of that we still grew sequentially, we achieved all time record levels in flex and we were through the worst of it in terms of that discovery that transition process. So you know the fact that our team is fully behind the strategy and I can tell you that from personal experience being with them a couple weeks ago and really spending a lot of time with them it wasn’t classic role playing, it wasn’t classic clinical, we really got down with them and let them in on the business analytics and how we think and how we target and how we route and how we got to where we are and I think it was helpful to them to get a real comfort level about the strategy behind the model going forward and buy in so that we can go out and execute the new model. So I don't feel like we have less of visibility I think we're through the majority of the work that was needed to get in and develop the new model and I'm excited about the third quarter.

Wes Brazell

Yes I would add just one comment to that, I think actually our visibility on you know how we execute it versus our expected plans. We have pretty clear visibility to what happened in Q2 and you know I think as Seph said were one month into a new model when we began Q2, we’re four months into it now and when we went through kind of account territory by territory, you know account by account, I think what we see is there is absolutely room for execution improvement and that’s to be expected, it was a major restructuring that we did significant changes in territory sizes etcetera. So there is obviously a learning curve that goes up and I think as we kind of dug into Q2 and to see some of the things that we talked about in my prepared comments, I think we have the confidence level that there are plans in that as our execution improves we’re going to improve some of those things.

Chris Lewis

And then on masters, I thought flex utilization look at but you know Master kind of went through it a little bit but perhaps you can elaborate on I guess two things, how should we think about that kind of that active device number trending from here and then two, kind of what strategies are you taking that to kind of stabilize that annualized revenue per master's account metric.

Seph Jensen

Sure. Even though it was a different metric I think you know with another piece of data that we gave you is kind of a little bit of the answer there. So first let me say in terms of the device is and the accounts, as you model it out, as you think about it. Chris I wouldn't model any major changes. We have said all along that our primary focus is growing flex and converting use, the we continue to plan and expect that that base to continue to decrease as we convert either into purchase or flex. Masters for the most part are healthy customers and they're stable now granted we did see that decline that you see in the numbers that we reported but a lot of that was less about the contract type and more about where the account was and if they were in an impacted territory as we said they decline but the accounts that were non-impacted grew. So I think from a strategy going forward it's just maintaining the right frequency with those biggest accounts, we don't believe there's any inherent you know clinical or reimbursement or flow or any of those problems that are unique to masters. It's just making sure that we have the right activity now with a more stable sales force with more stable coverage, we think that that number will stabilize and I wouldn't model growth. I'm not asking to model in increasing expectations and masters but we feel that was more related to transition versus anything unique to that contract, our focus going forward will continue to be primarily about flex.

Chris Lewis

And then just one more for me, the next gen device the two information markers, can you walk us through if those markers have reimbursement today or still need to kind of build that over time? Thanks.

Seph Jensen

Sure. So there are generic codes that we will latter to, osmolarity has its own code so as we launch we will begin the process for achieving our own code for both of those markers but there are markers that exist today that we will tap into that are not specific to the specific market that we choose that are just related to information in aiding in the diagnosis of dry eye. So we will be able as Wes commented we will be able immediately to offer the doctor they'll have access to the potential for three separate reimbursement opportunities based on those three markers.


[Operator Instructions]. The next question is from [indiscernible]. Your line is open.

Unidentified Analyst

OK Thank

My first question is can we reasonably expect the attrition to be pretty much go away in the third quarter and fourth quarter?

Seph Jensen

So look I want to be very careful and humble, I don't it can go away. I think every business over time loses a little bit, our arbitration rate has typically been in the low single digits. I think it will go back to historic levels so we do think what you saw in the second quarter was that dynamic what I talked about earlier. Our current sales force going into markets and customers that either you know not been seen or they certainly hadn't seen them. So now that we're through that I think the attrition levels will go down to really meaningless levels and there won't be a topic on these calls.

Unidentified Analyst

So we can reasonably expect that the new added system number to be in line with the previously -- the numbers reported in previous quarter?

Seph Jensen

Yes it'll be closer to previous quarters. We do think that total net for this quarter was low based on that, yes.

Unidentified Analyst

Okay. How about the units purchased outside of the U.S.?

Seph Jensen

So ROW business, we haven't broken that out yet. We have called it out in previous meetings and when we did the raise that there's an accelerator opportunity there, we still believe in that. For the quarter we did have a little bit disruption in a major market with a key distributor that slowed a little bit. We expect that that will pick back up in the back half of the year and we'll just have to see how that business develops and we'll have to see what percentage of our total revenue represents but we do see a time in the future where we'll start to break that out and give you more detail.

Wes Brazell

And so we did give the actual unit shipments outside of the U.S. So that was lower than I think we've seen historically at least the last few quarters and again I think what Seph said will do us some disruption but we had a change in distributor in a couple markets so that is the number, I mean we're not guiding to a specific numbers saying we’re going to get back exactly to do what historical was. I think we expect to see that number increase certainly in Q3 and Q4.


There are no further questions in the queue at this time. I would like to turn the call over to Seph for closing remarks.

Seph Jensen

Thank you, Operator. I would like to close by saying thank you to everyone for your time today. We look forward to seeing you in the near future as we report on our continued progress and as the investor conference season begins to pick up pace in the fall. Thanks and have a great evening.


Thank you. Ladies and gentlemen this concludes today's conference. You may now disconnect. Good day.

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