Artivion, Inc. (AORT) Q2 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the CryoLife Second Quarter 2012 Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Anderson, President and CEO for CryoLife. Thank you. You may begin.

Good morning everyone and welcome to welcome you to CryoLife’s second quarter conference call. This is Steve Anderson, CryoLife’s CEO, and with me today is Ashley Lee, the company’s Executive Vice President, COO and CFO. During the second quarter we continued to execute on our growth strategy and delivered solid top and bottom line financial results. We achieved quarterly revenues of $33.2 million, an increase of 13% over the same quarter last year and up 3% quarter-to-quarter. Our revenue growth was driven by continuing excellent sales of BioGlue in Japan, a strong quarter for Allographenes and valves, a full-quarter of Cardiogenesis sales compared to the previous year's partial quarter and the addition of $635,000 of HeRO Graft sales due to our recent acquisition of Hemosphere. On the bottom line, we delivered net income of $0.12 per share compared to $0.06 per share in 2011. In addition to the solid quarter, we further enhanced our long-term market opportunity and growth potential with the acquisition of the HeRO Graft for end-stage in dialysis patients which will allow us to further leverage our sales force and core competencies. During the quarter we also eliminated the ongoing legal exposure in costs related to some very material lawsuits. We will provide updates on each of these items on today’s call. The agenda is as follows. Ashley will discuss today’s earnings press release in detail. He will discuss our performance by tissue and product line and he will discuss the recent settlement of the Medafor and CardioFocus lawsuits and the positive effect these settlements will have on our earnings going forward. At the end of the call he will return and provide updated financial guidance for the remainder of the year. I will discuss the recent acquisition of Hemosphere and then HeRO Graft for end-stage renal disease vascular access. I will also discuss the timetable for the beginning of the PerClot human clinical trial here in the United States.

Thanks Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I would like to make the following statement. Comments made in this call that look forward in time involve risk and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include the statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future including the guidance for 2012 that I’ll provide in a moment. Additional information concerning risks and uncertainties that may impact these forward-looking statements is contained from time to time in the company’s SEC filings including the Risk Factors section of our previously filed Form 10-K for the year ended December 31, 2011, and our subsequently filed Form 10-Qs for the quarters ended March 31, 2012 and June 30, 2012, which we expect to file shortly and in the press release that went out this morning. This morning we reported our results for the second quarter and first 6 months of 2012. We achieved strong financial results for the second quarter and further positioned the company for long-term revenue and earnings growth. Here are some of the highlights. We achieved an all-time quarterly revenue record of $33.2 million driven by year-over-year increases in all lines of business and by the recent acquisition of Hemosphere. We settled 3 outstanding lawsuits with Medafor, CardioFocus and Tenaxis which eliminated our ongoing legal exposure and expenses related to these lawsuits. And we completed the acquisition of Hemosphere, a company that has the only currently approved fully subcutaneous product to bypass central venous stenosis in end-stage renal disease patients undergoing hemodialysis. As I previously mentioned, we set an all-time quarterly revenue record of $33.2 million, up 13% year-over-year. The following factors influenced our revenue performance. Total international revenues were up 16% in the second quarter compared to the prior year. Total product revenues grew 15% to $16.7 million. Total tissue processing revenues grew 11% to $16.3 million. Worldwide BioGlue revenues were up 5% for the second quarter. This was driven by volume increases in international markets, primarily Japan. PerClot Sales for the second quarter were $691,000, which represents our best quarter since we launched the product in the fourth quarter of 2010. We have recently made some personnel changes in certain areas in the EU as well as concentrated our EU sales efforts in our direct sales markets. We believe that these efforts are beginning to pay off with our best sales quarter for PerClot and we expect better results in future quarters. We are also broadening our EU sales focus beyond cardiac and vascular surgery. Steve will provide details on the U.S. PerClot timeline in his remarks. Revenues from the Cardiogenes product line were $1.9 million for the second quarter. Beginning in the third quarter we implemented some new sales programs and increased the focus of our TMR sales team on driving utilization and we are beginning to see some early positive results. We’re also in the process of formulating strategies focused on autologous stem cells that could potentially have a favorable effect on sales on the future. We will communicate those plans to you when they are solidified. Revenues from the sale of the HeRO Graft were $635,000. This covers sales from the date we acquired Hemosphere, May 17, 2012, through the end of the second quarter. HeRO Graft sales were roughly in line with our expectations. We believe that the HeRO Graft, BioGlue in Japan, Cardiogenesis and PerClot represent attractive top line growth and margin expansion opportunities for the company this year in 2013 and beyond. Cardiac tissue revenues for the second quarter of 2012 increased 10% compared to the corresponding period in 2011. As compared to the prior year, shipments of cardiac tissues were up 2% for the quarter. We saw a particular strength in our aortic valve business. The remaining increase was attributable to a shift mix in our pulmonary valve business to more SynerGraft processed tissues. In the second quarter approximately 74% of our pulmonary valve shipments were processed using the SynerGraft technology. Vascular tissue revenues increased 12% compared to the prior year’s quarter, on an 11% increase in units for the quarter. We saw a particular strength in our shipments of saphenous veins used for peripheral vascular reconstruction and aneurysmal abdominal aortas. Total gross margins were 64% for the second quarter of 2012 compared to 65% in the prior year’s quarter. In any given quarter margins can be affected by tissue and product mix as it was the case in the second quarter of 2012 when our tissue processing revenues were particularly strong. Gross margins for the 6 month period were favorably affected by an increase in preservation services gross margins which was the result of increased manufacturing throughput. Also contributing was a favorable product mix of our highest margin products including surgical sealants and hemostats, the HeRO Graft in the Cardiogenesis product line. Gross margins also benefited from the low - the loss of lower margin hemostats revenues. The higher margin products combined became a larger portion of our business. General administrative and marketing expenses for the second quarter of 2012 were $13.9 million, which increased 2% from the second quarter of 2011. G&A increased due to litigation expenses and the settlement of the litigation with CardioFocus, business development and integration expenses primarily related to the acquisition of Hemosphere and increase in marketing expenses including cost of our expanded sales staff and increases in spending on advertising. These costs are partially offset by the benefit of the settlement of the Medafor litigation and a reimbursement of litigation expenses from insurance carriers. R&D expenses were $1.7 million for the second quarter of 2012. R&D spending in 2012 primarily focused on PerClot, BioFoam and SynerGraft tissues and products. Net income for the second quarter of 2012 was $3.3 million or $0.12 per basic and fully diluted common share. Net income for the second quarter of 2012 included a pretax gain of $4.7 million related to the settlement of the litigation with Medafor. Pretax charges of $3.6 million related to the settlement of the litigation with CardioFocus, $1 million in business development and the integration charges primarily related to the acquisition of Hemosphere and $2.1 million in litigation expenses, offset by $3.1 million in reimbursement of certain litigation expenses from insurance carriers. Excluding these charges and benefits, on a profroma non-GAAP basis, earnings per share would have been $0.10 in the second quarter of 2012. Proforma non-GAAP earnings per share in the second quarter of 2011 would have been $0.12. As of June 30, 2012 we had $9.3 million in cash, cash equivalents and restricted cash and securities. This includes $878,000 received from the DOD for the development of BioFoam and $5 million in restricted cash and securities. Our balance sheet remains very strong. We continue to carry almost no debt and continue to generate cash. Refer to our SEC filings for detailed discussions and factors affecting our results of operations including our Form 10-Q that we plan to file shortly. Now I’ll turn it back over to Steve.

In May we completed the acquisition of Hemosphere and our HeRO Graft which provides a long-term hemodialysis access solution for access challenged and catheter dependent patients. Hemosphere is located in the Twin Cities and was doing about $5 million a year in revenues. This will prove to be a complementary business to our Allograft vascular graft business which should be an approximately $34 million annual business for us in 2012. Hemosphere had 7 sales representatives that were focused on developing their business, predominantly east of the Mississippi. We are in the process of integrating their business into ours and their sales force into our distribution network. In the third quarter, we plan to begin selling the HeRO Graft throughout the U.S. with our combined 35% vascular sales force. We estimate this device will address about a $250 million and growing global market opportunity due to the aging population and the increasing number of people undergoing hemodialysis. The HeRO Graft has margins in the mid-60 range which could possibly move into the low 70% range in future years. Sales since we acquired Hemosphere and had the HeRO Graft for sale were $635,000. We have a team of people working with the Hemosphere staff for the purpose of relocating in our manufacturing from Eden Prairie, Minnesota to our corporate headquarters in Georgia. We expect this project to be completed during the first quarter of 2013. We expect the HeRO Graft to be a significant growth area for the company going forward. We are currently focused on executing on the acquisitions that we’ve closed over the last several months and we are not aggressively pursuing other targets at this time. However, we continue to be made aware of interesting opportunities on the business development front and we’ll continue to evaluate them as appropriate. Second quarter PerClot sales in our direct areas in Europe which includes the UK, Ireland, Austria and Germany were up 35% from the same period in 2011 from $228,000 to $308,000. PerClot sales in these same areas for the first half of 2012 were up 43% from $398,000 to $571,000. There have been 2 studies on PerClot’s clinical use that have recently been published and these data will be used to support our application to the Assistance Publique, the government authority in France. In the U.S., our response to the FDA’s latest questions about our IDE application for PerClot will be sent forward to the agency late in the third quarter. We expect to initiate enrollment in our U.S. clinical study in the first quarter of 2013. This study will involve 300 patients, 150 in the control group and 150 in the PerClot group. We expect to obtain an approval for multiple specialties and indications. We expect to prove all the IDE/PMA in Q4 of 2014. Approval could be sooner depending on the speed of patient enrollment and the required follow-up time that we negotiate with FDA. Excellent progress is being made toward the completion of our PerClot manufacturing space here at corporate headquarters. For those of you familiar with our facility, PerClot will be manufactured in the suite of clean rooms located in building-2 of our headquarters. Initially this manufacturing capability will be used to supply the U.S. clinical trials. Next year we planned to apply to the regulatory bodies of both Canada and Brazil and then if approved, we will expand our capacity in order to serve these 2 markets along with our existing business in Europe. According to market research information available to us, PerClot will address a potential market of $1.3 billion growing to as much as $1.9 billion in 2015. Now I will turn the call back to Ashley so that he can update you on our revenue and earnings guidance for the remainder of 2012.

We are updating our guidance for the full year of 2012 to reflect the actual results from the first half of 2012, the acquisition of Hemosphere and the settlement of all the company’s outstanding litigation during the quarter. We expect total revenues for the full year of 2012 to be between $129 million and $133 million, which includes revenues of approximately $500,000 related to the use of funds received from the U.S. DOD in connection with the development of BioFoam. This represents annual total revenue growth between 8% to 11% up from our previous guidance of 5% to 8% revenue growth. We expect tissue processing revenues to increase from low to mid-single digits on a percentage basis for the full year of 2012 compared to 2011, up from our previous guidance of flat revenues. Revenues from our higher margin product segment are expected to grow between 12% and 15% for the full year of 2012. The updated product revenue guidance includes expectations for BioGlue and BioFoam revenues to increase in the mid-single digits on a percentage basis in 2012 compared to 2011 and PerClot revenues to be between $2.5 million and $3 million. We expect revenues from revascularization technologies to be between $9 million and $10 million in 2012. We expect HeRO Graft revenues to be between $2.5 million and $3.5 million in 2012. Turning to expenses, we expect general administrative and marketing expenses for the full year of 2012 to be between $64 million and $66 million, which includes approximately $2.7 million of integration cost resulting from the acquisition of Hemosphere in May 2012. Research and development expenses are expected to be between $9 million and $10 million in 2012 as a result of our investments in our U.S. clinical trials for PerClot and BioFoam. We expect earnings per share of between $0.20 and $0.23 in 2012 which includes a non-recurring benefit of $424,000 related to litigation settlements and expenses, net of insurance reimbursements and estimated non-recurring transaction and integration charges of approximately $2.7 million, of which approximately $1.6 million is expected to occur in the second half of 2012. This compares with prior-year 2012 GAAP earnings per share guidance of $0.14 to $0.18. Our earnings per share guidance, excludes expenses related to additional business development and potential share repurchases which cannot currently be estimated. We expect the effective income tax rate for the second half of 2012 to be in the mid to upper 30% range. I would like to take a moment to discuss the ramifications of the medical device excise tax on our business. Based on our current understanding, domestic sales of medical devices will be subject to the device tax beginning in 2013. Domestic revenues derived from our processed human tissues that are regulated by the FDA as being human tissues and not as medical devices would not be subject to the tax. So our current interpretation is that SynerGraft process tissues that are distributed domestically plus domestic sales of BioGlue and HeRO Graft would be subject to the device tax. We do not believe that we would be responsible for billing and collecting the medical device tax for our TMR products as we outsource the manufacturing of both the consoles and the handsets and the primary manufacturer of medical devices is responsible for assessing and collecting the tax. None of our international revenues would be subject to the tax. Based on this understanding, the device tax for the second quarter and the first 6 months of 2012 would have been $275,000 and $519,000 respectively. Of course, since the regulations implementing the medical device excise tax are not final, all of this information is subject to the final regulations and further interpretation. We believe we’re successfully executing on our strategy of positioning the company for accelerated revenue and earnings growth by expanding our adjustable market opportunities through internal R&D, expanding sales and marketing and executing on business development opportunities. Internal investments include maintaining and expanding the sales force with the key personnel, establishing and expanding positions training programs for new products such as the HeRO Graft and TMR and repositioning the company as we expand our product portfolio to establish CryoLife as a more valuable and innovative part of the surgeons armamentarium. We believe these internal investments in the sales and marketing infrastructure and pipeline will generate accelerated top line growth over the next several years. Looking forward, we have several opportunities to expand the company’s market opportunity with higher growth, higher margin products. These include, one, the launch of the HeRO Graft through our 36 person direct cardiovascular and dialysis therapy sales force during the third quarter of 2012; two, initiating enrollment in our PerClot IDE clinical trial during the first quarter of next year positioning us to potentially enter the U.S. market with the next generation hemostat by possibly late 2014; three, gaining additional regulatory approval for PerClot in the international markets and commence commercialization; four, expanding our European sales and marketing coverage for PerClot to include surgical specialties in addition to cardiac and vascular surgery; and five, expanding our TMR physician training and education programs and drive growth in system placements and procedure volume. That concludes my comments and I’ll turn it back over to Steve.

At this time, we will open up the conference call for questions.

[Operator Instructions] Our first question is from Brooks West with Piper Jaffray.

Hey, very thorough commentary, thank you for that. Just a couple of small things. Steve, you mentioned on the HeRO Graft, that product was only being sold east of the Mississippi?

Yes.

And you’re going to fully expand distribution to the west in Q3. What do you think like, what do you think that product looks like with kind of a mature U.S. distribution behind it?

I think that that product would move pretty quickly into the $20 million range. To wit, when we acquire the company they had a 150 lead forms that had been filled out at conventions from - or by physicians west to the Mississippi, so they had never been called on. And those leads have been distributed to our sales force and beginning in September as we expand the sales efforts across the United States those 150 physicians will be called on immediately. So I think this is a big growth engine for the company.

That’s great. Then on the PerClot, what did you - what was the anticipated trial size again that you were describing?

300, 150 in the control group and 150 PerClot patients.

And then what’s the follow-up?

We don’t know that yet. We’re still in the process of negotiating that with the FDA when we send our response in, towards the end of this quarter that will be one of the items that we will have to negotiate with them.

Okay. And then last for me, Ashley on the SG&A. I missed your commentary there, that was significantly less than we were looking for in our model. Is that the go forward number or how should we think about SG&A from here?

Yes I mean I think if you look at our - well first of all, Brooks the second quarter benefited from a couple of things, one was the reimbursements from the insurance companies for legal expenses and the settlement with Metaphor. So there was a lot noise in the G&A number in the second quarter. Going forward, if you look at our guidance for the second half of the year, we’re guiding towards I think roughly $16 million per quarter, maybe a little bit more than that. And so actually maybe $16 million to $17 million which includes some integration expenses from Hemosphere. So I think going forward, you’re probably looking between $16 million and $17 million on a go forward basis.

Our next question comes from the line of Matt Dolan with Roth Capital Partners. Please proceed with your question.

First question is on the EPS. Let me start with the revenue guidance. If we look at the second half of the year and kind of back into it and obviously considering you now have HeRO for the full 6 months. It seems that the core business would be sequentially down in the second half versus the first half. Is that the nature of the business seasonally speaking, or conservatism? Or maybe you can help us understand that a little better.

As it relates to the third quarter that’s always been a little bit weaker for us, we have a pretty significant international business in all of Europe goes on vacation for the month of August. So that’s one factor that has gone into it and then we’ve got the holiday season coming up towards the end of the year. So if the - we see seasonable weakness and we could end up towards the lower end of our range but if we see some improvement in our PerClot and TMR businesses which were already exceeding in the third quarter of this year and we do a little bit better than we expect to then we could be towards the upper end of the range.

Okay. And then on the EPS side of things, you have a number of moving parts and adjustments. Is there any way you could provide some type of apples-to-apples comparison you gave us the pro forma $0.10 for the second quarter. Can you do that on an annual basis both with your prior guidance and current so that we can kind of understand where the underlying EPS guidance is going?

I think the best thing that you can refer to, Matt, is there is a schedule included in our press release. It’s on the very last page of our press release that pro forma is a reconciliation of our reported GAAP numbers and our non-GAAP numbers. There is a lot of information in there that backs out all the noise that we’ve had related to business development and litigation. And that I think that gives you a pretty clear indication of where we should be heading in the second half of the year and going forward.

Sure, but what’s your guidance doing then? If we strip all that out, I mean are you seeing the underlying guidance go up purely because the legal spend is out of the equation or is the underlying business, I know your R&D spend is down for example. So maybe just some type of clarity on the direction, it’s clearly a big increase in guidance we’re just trying to make sure we’re comparing the right numbers to each other.

Yes, well, obviously we’re stripping out the litigation expenses related to the second half of the year. We hope that we’re going to end up towards the upper end of the range of revenue guidance which would obviously be beneficial for the bottom line. The second half of the year, we’re expecting increases in R&D spending as compared to the first 2 quarters of this year. So we certainly expect that to be a driver of our performance in the second half. And then the other thing is, we’ve got integration related cost related to the ongoing integration of Hemosphere and I believe that we said that that number, we expect it to be $1.6 million, $1.7 million for the balance of this year. So I think if you look at that again point to that reconciliation of earnings as being par for the second quarter I think those are the factors that I’ve just mentioned that could expect to impact the second half of the year as compared to the second quarter.

Okay. So it seems that R&D relative to prior expectations, R&D is down so that’s helping and the legal is coming out and those are the 2 main underlying factors, fair?

Yes, and then you got obviously again the integration related cost related to Hemosphere and if we continue to execute on the top line we think that that could hopefully we’re going to end up towards the upper end of the range that’s our hope. And that would also be beneficial too.

Okay. And the last topic is on your sales force that you eluted to expanding it on little bit on today’s call as well as the prior call. So anything you can quantify there and what we’re trying to understand is the cross selling capability as HeRO comes in. Maybe talk about how you’ve been able to cross sell with the prior acquisition like cardio genesis and how that plays into the sales force plans going forward? Thank you guys.

I think the sales force expansion that we mentioned a little bit earlier was primarily related to the additional people that we brought on with cardio genesis and the additional people that we brought on with the Hemosphere acquisition. There currently are no plans going forward to add significantly to our headcount as relates to sales staff. As it relates to cross selling opportunities for the Hemosphere acquisition our existing sales force is currently being trained on the product and we expect to launch fully later this quarter, sometime in September and we’re already starting to see just anecdotally because some doctors are calling us and wanting to do procedures. So we haven’t launched fully but we’ve done somewhat of soft launch. And the feedback that we’ve gotten is very positive, as it relates to potential cross selling particularly. So there could be some beneficial effect and we expect there to be some beneficial effect on the cross selling opportunities especially in our vascular allograft business.

I’d like to expand on that a little bit. Our sales force that handles the vascular grafts of course was calling on dialysis type physicians and those grafts were being used for infected prosthetic grafts and also for early stage, renal dialysis patients. So we’re now covering the full spectrum early to mid-stage hemodialysis patients and with the addition of HeRO, the late stage and chronic hemodialysis patients. Our sales force has been able to see physicians, vascular surgeons with the HeRO Graft that they never were able to see before. And they have been quite successful in talking into those physicians about our complete line of vascular grafts at this time. So we’re very positive about the cross-selling opportunities in that part of our business and in the early stages of it, it’s having a really great impact.

Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

Could you review and discuss a little bit about BioGlue and I guess the rate of international markets growing or not growing and particularly what countries that are being sold into as well as Japan?

The - we’ll talk specifically about Japan first. Right now, we’re currently on about a $4.5 million to $5 million run rate for Japan and it’s a very narrow indication which is aortic dissection. When we launched the product there, we indicated that the potential market opportunity for aortic dissection in Japan could approach $10 million or so. Going forward, we do expect to see some continued growth in the Japanese market as we move forward. We think if there is a larger opportunity there if we’re able to expand the indications for use in Japan, which we’re currently working with our partner on doing right now. Some of the other areas where we’re seeing particular growth that relates to BioGlue is in the Middle East. We’re also seeing a lot of strength through the Asia-Pacific rim, those markets are all doing very well for us and there are some of the South American markets that are doing very well too. The European business for BioGlue has been relatively flat. Of course we’ve been selling in that particular market for 10 or 12 years now. So again, so we’ve been in that market for a while, but all of the other international markets are growing very well for us and particular in Japan.

Okay. What’s the specific on label expansion that you’re hoping to get?

We’re hoping to get a label in Japan that mirrors the U.S. label which is for all practical purposes, cardiac and vascular surgery. Now we’ve started that process. We think there is a possibility that we could get that expanded label indication sometime late next year.

Got it. And on PerClot revenue, you were talking about UK, Ireland, Australia and Germany being was it 308,000?

Now let me look.

For the quarter, and could you provide any general commentary as well in PerClot per country OUS?

I don’t have the statistics in front of me, Jeff. By country for PerClot, we’re predominantly selling in the EU right now. There might be 1 or 2 countries outside of the EU that we’re selling into that we’re predominantly selling PerClot in the EU. We have recently refocused our efforts in our direct markets. Those are markets that we’re doing particularly well in and we’re refocusing our efforts there. Going forward and based on some of these new sales programs that we put in place and so forth and because of that strategy we’ve seen an improvement in the business there. July has started out very well as it relates to PerClot, so we expect some of the changes that we’ve made to really have a positive effect on the PerClot business going forward. If you look beyond that, next year, we think that’s - there are some opportunities to bring some additional international markets on board. In particular, there is a possibility that we could be in Brazil next year and maybe Canada and then beyond that hopefully in about late 2014 we could get the U.S. approval. So we think that there’re going to be continued opportunities to grow that business going forward.

Sales of PerClot in the first 6 months of 2012 were up 43% from $398,000 to $571,000. I do want to say this about some of the things in Europe, which at the risk of stating the obvious, there are some headwinds for us in Greece and there have been some headwinds also in Turkey and Italy due to the financial situations that those countries have confronted or are confronting. And we are watching those things carefully. We are evaluating whether we should change representation in those countries. But as a result of the headwinds in the countries around the Mediterranean there, we have been focusing on the northern part of Europe and trying to expand our shares in both France and Germany and the UK. But we definitely are concerned about it and I’m sure that CryoLife isn’t the lone ranger. I’m sure that other medical companies are confronted with that same situation.

Got it, okay. Two more quick ones, do you expect any onetime charges related to the movement of the HeRO facility from the Twin Cities to Atlanta?

We think that the cost at the time of the move, are probably not going to be material. We have indicated in our guidance, in our press release that they are going to be ongoing integration related charges over the balance of this year and I think that we indicated that over the balance of this year there is going to be like $1.6 million to $1.7 million in ongoing integration cost. The cost to formally set down the facility, are going to occur probably in early 2013, but we don’t expect that it will be material.

Okay and lastly one more for you. You are talking about device tax and you were saying that that would include domestic BioGlue, HeRO, would that include or not include the SynerGraft technology?

It would include the SynerGraft technology and those numbers that we gave you for - what the device tax would have been it did include the SynerGraft related tissues.

Okay, which you said would be about $519,000, would have been for the first half?

For the most of the year, that is correct.

So net-net about 0.8% of 1%?

Roughly.

Okay. Thank you very much.

Our next question comes from the line of Raymond Myers with Benchmark.

Yes Steve and Ashley, I was hoping you could discuss the PerClot clinical to the FDA clinical trial in a little bit more detail. Specifically what are the milestones to initiating that trial and discuss--has the guidance for the total cost of that trial from your previous guidance?

We have been back and forth with the FDA a couple of time answering their questions and that is a subject that is ongoing negotiations regarding the parameters of that trial and I think that we expressed what we feel comfortable expressing earlier in the call. But our response will go back to them sometime in the late third quarter. And then I’m assuming that there will be a couple of meetings after they’ve had a chance to review our responses to their questions.

You know Ray, as it relates to the cost associated with the trial, that really hasn’t changed since our initial guidance. We think that from here on out to completion of the trial we’re going to be somewhere between $4 million and $5 million.

And that cost would be starting now in Q1 next year?

Well, I mean there's going to be some ongoing cost that we’re going to be incurring over the balance of this year, but the significant costs are going to start when we begin the enrollment which is going to be hopefully no later than the first quarter of next year, it might even be a little bit earlier than that, but let’s assume it’s going to be the first quarter. And then, so the majority of the cost will incur probably during 2013 with some into 2014 as we wrap up the trial and hopefully get approval.

There are no further questions at this time. I’d now like to hand the floor back over to Mr. Anderson for closing comments.

Thank you for joining us and we look forward to speaking with you again in the third quarter.

Ladies and gentleman this does concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.