Executives
Kayla Castle – IR Manager
Dan Valente – Chairman
Joe Caruso – President and CEO
Paul Weiner – CFO and Treasurer
Patty Davis – SVP, General Counsel and Secretary
Analysts
Andy Schopick – Nutmeg Securities
Dalton Chandler – Needham & Company
Anthony Vendetti – Maxim Group
Issac Ro – Leerink Swann & Company
Rick Rinkoff – Craig-Hallum Capital Group
Julie Hoggatt – Noble Financial
Richard Deutsch – Ladenburg Thalmann
Ross Nelson – Vermillion
Steve Howard [ph] – Concentric Investments
Palomar Medical Technologies, Inc. (PMTI) Q3 2008 Earnings Call Transcript October 30, 2008 11:30 AM ET
Operator
Welcome to the Palomar Medical Technologies third quarter 2008 financial results conference call. Please be aware that each of your line is in a listen-only mode. At the conclusion of Palomar's presentation, we will open the floor for questions. (Operator instructions) I would now like to turn the conference over to Kayla Castle, Investor Relations Manager of Palomar. Ms. Castle, you may begin.
Kayla Castle
Thank you. Good morning and welcome to the Palomar Medical Technologies third quarter 2008 conference call. Before we start this morning's call, there are a couple of items we would like to cover. This conference call is on a recorded line and you may access the telephone replay of the call at 888-286-8010, pass code 48448084 or webcast replay at Palomar's web site, www.palomarmedical.com through Thursday, November 13th.
Various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the Form 10-K for the year ended December 31st, 2007 and the company's quarterly reports on Form 10-Q which are on file with the SEC and available through Palomar's Web site.
To supplements Palomar's consolidated financial statements presented in accordance with GAAP, management uses the following measures to find the non-GAAP financial measures by the SEC. Non-GAAP income before taxes, non-GAAP provision for income taxes, non-GAAP net income, and non-GAAP diluted earnings per share. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. In addition, the non-GAAP financial measures included in this call may be different from, and therefore not comparable to similar measures used by other companies. For more information on these non-GAAP financial measures, please see the non-GAAP data included in the press release. This data has more details of the GAAP financial measures that are most directly comparable to the non-GAAP financial measures and the related reconciliations between these financial measures. Palomar's management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business operating results. Palomar believes that both management and investors benefit from referring to these non-GAAP financial measures and accepting Palomar's performance and when planning, forecasting, and analyzing future periods. These Non-GAAP financial measures also facilitate management's internal comparisons to Palomar's historical performance and our competitors operating result. Now, Palomar believes that these non-GAAP measures are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making.
The information in this conference call related to projections or forward-looking statements may be relied upon subject to the previous Safe-Harbor statements as of the date of this call. The information in this conference call is a property of Palomar and should not be reproduced, recorded, or otherwise published without the express prior written consent of the company. Joining us this morning are Dan Valente, Chairman; Joe Caruso, President and Chief Executive Officer; and Paul Weiner, Chief Financial Officer.
I would now like to turn the call over to Dan.
Dan Valente
Thanks, Kayla, and thank you all for tuning into the conference call. Palomar's financial results for the third quarter suggest a steady performance over the last three quarters in a very volatile, financial and economic market. We have not deviated from our longer range goals during these uncertain times. As I mentioned in our last conference call, we accelerated our R&D and launched our Aspire platform which remains the hottest new area of the aesthetic market. We continue to fortify our sales force and try to battle our way through these tough times. These actions have served us well in the past and we find ourselves with a solid financial and business position to weather the storm.
Let’s hear it from Joe.
Joe Caruso
Thank you, Dan. We continue to execute our diversified strategy by addressing the professional light-based aesthetic market today, working towards driving our technology to the mass consumer market and capitalizing on the value of our extensive patent portfolio. Economic turmoil has made this last quarter a challenging one for many companies and we are no exception. We are feeling the effects of an overall economic slowdown, a decrease in consumer confidence and a tightening of available credit.
September which is traditionally our best month during the third quarter was an especially difficult month as they were many events in the financial markets that contributed to an overall downturn in the economy. We believe this weak economy is contributing to lower product revenues as potential customers are postponing major buying decisions are unable to finance their capital equipment purchases. This trend could be with us for a while. We believe we will see a decrease in demand for aesthetic products during the short term however we feel that the long term outlook for light-based cosmetic devices remains a great opportunity. Although we are discouraged with the overall economy this is a very exciting time for us. We are aggressively looking to increase our product offerings and will focus our sales efforts on those positions that are willing and able to invest in their practice.
We recently introduced our newest product the Aspire platform. This new system is a diode laser platform that is focused on body sculpting. The first application we are addressing is the minimally invasive laser assisted lipolysis market. The Aspire has unique selectivity which uses a particular wavelength that is highly absorbed in the lipids present in fat cells. This selectivity allows the Aspire to treat and target fat cells more effectively and much faster than devices offered by competitors and is the focus of our product positioning. We are marketing the procedure as SLIMLIPO. The Aspire system uses a proprietary one-time use delivery system. This is the first time we have incorporated a per treatment disposable revenue stream into our products. We are pleased to report that we shipped the first Aspire systems in the third quarter to some of our training sites and are on schedule with ramping up our manufacturing to full scale levels over the next couple of quarters.
Along with body sculpting, we are also well positioned with fractional technology. We have a full suite of ablative and non-ablative product offerings that complement our other light-based and laser-based hand pieces. Fractional technology provides a higher level of safety and efficacy for certain applications than non-fractional treatments and we are a leader in this technology.
We are focused on expanding our market opportunities for our products outside North America as well. We are looking and working with Q-Med in the first test country. We are also working to enhance our distribution through our existing and new distributors and will make future transition decisions based on the success of our first test country with Q-Med. We have made a great deal of progress over the past few years with our plans to take our technology to the mass market. The Johnson & Johnson program is moving along well. We are pleased with that collaboration and believe that the products we are addressing and working on today will provide us with opportunities to address very large markets.
Over the past few years, we have worked with Gillette P&G and made substantial progress in moving light-based hair removal to the mass market, including receiving FDA-OTC approval for our device. Under our agreement, P&G pays us $1.25 million per quarter prior to commercial launch of a product and a percentage of worldwide sales thereafter. We are also executing on our intellectual property enforcement strategy. We have a portfolio of very broad patents in a number of key areas. Over the past few years, we have increased the numbers of licensees of our hair removal patents to nine and we are in negotiations with many other companies. To date, we have received over $75 million in royalty payments from this valuable asset.
In August, 2006 after years of trying to get Kendala to take a license to our hair removal patents we sued them for patent infringement. They retaliated with a patent infringement suit of their own in Texas. The Texas case included many of our products and multiple Kendala patents. It was a desperate move by Kendala and they left us no choice but to defend ourselves. Days before the trial started, Kendala dropped the majority of the patents and products from the suit and went to trial accusing only a few products of infringing only four claims from one particular patent. At the conclusion of the trial the jury found as we expected that our products did not infringe. In addition we also proved that the four claims Kendala sued us on were invalid. The Texas case was expensive and time consuming but we held steadfast in our intellectual property enforcement strategy and did not waver. We are pleased to have that case and the majority of the costs associated with it behind us. We are now awaiting the trial date for our hair removal case against Kendala in Massachusetts. In the short term our business like many others is being affected by a downturn in the overall economy. Over the past five years we have successfully built our business and accumulated the assets including a cash and marketable securities balance in excess of $130 million needed for continued growth over the long haul.
We are expanding our product portfolio with the Aspire body sculpting platform to address an ever-changing market. We remain focused on investing in the long term through research and development and will continue to strengthen our valuable intellectual property position. Our products enhance the quality of life for people around the globe and make them look and feel better. The market for our products is not going away and in fact should grow substantially with time.
Now Paul will brief us on the financial performance for the quarter.
Paul Weiner
Thank you, Joe. Revenues for the quarter were $24.2 million as compared to $31.4 million for the same quarter last year. Product revenues for the quarter were $19.2 million as compared to 23.1 million for the same quarter last year. 63% of product revenues were in North America and 37% were outside North America. As Joe had already commented, product revenues are being affected by the weakened economy.
Ongoing r royalty revenues are consistent with past quarters. Although last year royalty revenues included $3.1 million and other revenue included, both of which were related to the recognition of a portion of the back owed royalties and trade (inaudible) infringement associated with a settlement agreement with Alma. Funded product development revenues consist of funding from Johnson& Johnson including an additional one-time funding payment of $550,000. We should continue to receive $400,000 in future quarters. Other revenues include the $1.25 million quarterly payment from P&G related to the non-exclusive license granted to P&G for home use light-based hair removal for women. Product gross margin was 65% this quarter as compared to 66% for the same quarter last year. Gross margins are consistent with the same quarter last year.
Research and development expense for the quarter remained consistent at $4.2 million as compared to the same quarter last year. Research and development as a percentage of total revenue was 17% this quarter as compared to 13% for the same quarter last year. Selling and marketing expense for the quarter was $5.9 million as compared to $6 million for the same quarter last year. Selling and marketing as a percentage of total revenue was 25% this quarter as compared to 19% in the same quarter last year. General and Administrative expense for the quarter was $6 million as compared to $4.4 million for the same quarter last year. General and administrative expense as a percentage of total revenue was 25% this quarter as compared to 14% for the same quarter last year. G&A expense this quarter increased over last year due to $3.5 million in legal costs associated with our losses with Kendala as compared to $1.8 million for the same quarter last year. Now that the trial in Texas is over, we estimate the litigation expense for the fourth quarter will decrease to about $2.5 million and we would estimate quarterly litigation costs of about $1 million throughout 2009 with an increase in the quarter that our hair removal case against Kendala goes to trial. The trial date has not yet been set but we do expect a trial date in 2009.
Income before tax this quarter was $900,000 as compared to $8.6 million for the same quarter last year. Net income this quarter was $600,000 or $0.03 per diluted share as compared to the net income of $5.3 million or $0.28 per diluted share for the same quarter last year. We had $5 million in positive cash flow from operations this quarter.
Due to the strength of the dollar towards the end of the third quarter, we incurred a $69,000 foreign exchange loss related to intercompany transactions. We cannot predict where the exchange rate is heading but we do know that due to the continued strengthening of the dollar in October we do expect to incur an additional foreign exchange loss in the fourth quarter related to intercompany transactions.
Our effective tax rate for the year has decreased to 35% and is expected to remain at a relatively low level in the fourth quarter due to the R&D tax credit enacted into law in this fourth quarter. The balance sheet is solid with ample cash and investments $133 million. As of today, we have approximately $5.3 million in auction rate securities down from $7.2 million last quarter which have been reclassified as long-term marketable securities due to the illiquidity in the auction rate securities market.
We are now ready to take your questions.
Question-and-Answer Session
Operator
At this time, we will open the floor for questions. (Operator instructions) Your first question comes from the line of Andy Schopick with Nutmeg Securities. Please proceed.
Andy Schopick – Nutmeg Securities
Thank you and good morning. One or two questions if I may, one of your competitors yesterday mentioned some issues with DSOs becoming a little bit more extended in particular in the international markets and your receivables look to me like they are in fairly good shape, I just wonder right now if you could comment on if you are beginning to see any kind of collection issues or ageing of receivables that may be of concern to you in the quarters immediately ahead?
Paul Weiner
This is Paul, that’s a good question Andy. About a year ago, actually a year ago this quarter, we changed our policies as far as shipping and revenues due to the tightening in the credit market. In the third quarter of last year our DSOs went from where they were previously at around 60 days it jumped up to about 85 days in the third quarter of 2007 due to again the beginning of the tightening of the financing. So in the fourth quarter last year, we tightened our credit policy and have kept with that and that resulted in our DSOs lower than it was even in the past to around 50 days or 51 days in this particular quarter. So we have got pretty good control over our receivables and probably tighter and even better now than they have ever been.
Andy Schopick – Nutmeg Securities
I wonder if you can just comment whether there has been any revenue recognition on the Aspire shipments that have occurred to date or when you would anticipate beginning to recognize revenue if you have not done so already.
Paul Weiner
We recognize revenue on Aspire systems this quarter. Even though we shipped these first systems to some of the training sites that we anticipate needing throughout the United States and internationally, we still ship those for revenue.
Andy Schopick – Nutmeg Securities
So you do basically recognize revenue upon shipment.
Paul Weiner
Yes, that’s always been our policy, yes.
Andy Schopick – Nutmeg Securities
Okay. One other thing on Kendala and I don’t know if you are going to want to comment any further on it but have you ever given any indication as to what the back-owed royalties from Kendala might be within the range should you be successful and if they wish to go to trial and pursue this matter any further than they have already have, have you ever been any more specific about what the recovery could be in terms of royalties?
Paul Weiner
We have certainly done our internal calculations and we know it in the tens of millions of dollars but we have not disclosed it to the public but we do know the range of where it is and again it is a substantial amount of money.
Andy Schopick – Nutmeg Securities
Thank you very much. Let me pass it along.
Operator
Our next question comes from the line of Dalton Chandler, Needham & Company. Please proceed.
Paul Weiner
Good morning Dalton.
Dalton Chandler – Needham & Company
You had commented that you are staging the Aspire rollout, what quarter do you think you will be at full production capacity on the product?
Joe Caruso
We should be in full capacity somewhere between the fourth quarter this year and first quarter next year.
Dalton Chandler – Needham & Company
Okay. You are positioning it as a platform, can you comment on what other applications we might see and the timing of the introduction of those applications?
Joe Caruso
We haven’t publicly stated what the other applications might be but they will be related to the same body contouring and body sculpting tightening type procedures that you might expect as part of a platform associated with body sculpting versus the StarLux platform which is still especially the StarLux 500 great product platform for us that can address things like hair removal and pigmented lesions and superficial veins and so on.
Dalton Chandler – Needham & Company
Okay. Any comments on the timing of new application introductions?
Joe Caruso
We haven’t disclosed that yet.
Dalton Chandler – Needham & Company
Okay and then can you comment on the progress that you have made with Q-MED?
Joe Caruso
The Q-MED, yes we signed the agreement a while ago. It took us a while to put in place the right people and procedures and working relationship and we have currently one test country that we are working with them on. Based on the results of the test country, we will make some decisions going forward. In addition to that we are also working with and adding additional distributors in other parts of the world. So we have sort of a two-pronged approach, we have our distributors that we have been working with for a while, we are strengthening that as best we can and we are also doing this test with Q-MED. If Q-MED works well, we will expand with that, if it looks like we want to focus more attention on distributors we might do that, we might do a combination of both still the jury is out on that.
Dalton Chandler – Needham & Company
Okay are you adding distributors in regions where Q-MED doesn’t have a presence?
Paul Weiner
Yes we do continue to add distributors. Again, as Joe said, Q-MED is in one country today as a test, all other countries throughout the world are open and we are adding distributors as we find strong distributors.
Dalton Chandler – Needham & Company
Okay. Then a last question, you mentioned September was unusually weak, are you seeing a continuation of that through the month of October?
Joe Caruso
Well the first kind of a quarter, any of the quarters is always a slow part of the quarter. I don’t see anything that is unusual that I would not expect at this early part of the quarter. Most of the sales with this type of capital equipment come towards the end of the quarter and if you remember the end of the third quarter was especially unstable in the financial markets which did not help matters as far as capital equipment sales.
Dalton Chandler – Needham & Company
Okay, thanks a lot.
Operator
Your next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed.
Anthony Vendetti – Maxim Group
Thanks. Just a couple of questions, the breakout for domestic, international was 63, 37, do you have a breakout of core, non-core?
Paul Weiner
No, it’s pretty consistent with where it has been in the past, about 40% derms/plastics and 60% other.
Anthony Vendetti – Maxim Group
Okay and on the Aspire, you just started selling that, is the list price still $130,000, has that changed at all or is that where it is at?
Paul Weiner
The list price is actually $145,000.
Anthony Vendetti – Maxim Group
And there is a disposable component with that, correct?
Paul Weiner
There is, that’s correct, a one-time use disposable.
Anthony Vendetti – Maxim Group
What is the list on that?
Joe Caruso
$150.
Anthony Vendetti – Maxim Group
Okay. In terms of the funded product development, you said there was a one-time payment from J&J of $550,000 this quarter?
Paul Weiner
Correct.
Anthony Vendetti – Maxim Group
Was that just a catch up or is that just an acceleration of that program?
Paul Weiner
There are a couple of different components and one is spread pretty evenly and then there is some other components that we get paid separately depending on when we work on particular projects and that just happened to be outside of the standard $400,000.
Anthony Vendetti – Maxim Group
Was that offset this quarter by R&D expense?
Paul Weiner
Yes, we are continuously spending money plus or minus. We are receiving a flat amount of $400,000 basically $400,000 a quarter and that does not necessarily tie to our spending, it could be plus or minus that in any particular quarter. So, it is not necessarily tied to revenue to spending. Sometimes the spending is higher sometimes it is lower.
Anthony Vendetti – Maxim Group
Okay, did you want to comment –
Paul Weiner
But it is Anthony for reimbursement of our spending overall in the program, yes.
Anthony Vendetti – Maxim Group
Right. Did you want to update us on how that program is going?
Paul Weiner
The program is going well. We can’t give you any more details than that other than we are quite pleased with the progress we are making with J&J.
Joe Caruso
One other comment is the working relationship between the J&J team and the power monitoring team is excellent. I don’t think I have ever seen companies, two different companies work so closely together as one company in that program.
Anthony Vendetti – Maxim Group
Can you Joe maybe refresh us on what the end goal there is, what these products would be for?
Joe Caruso
We have three fields in skin rejuvenation, acne and cellulite. We haven’t disclosed which or how many of those fields we are working on at any particular point in time and I don’t think we will be able to do that either until we change (inaudible) decisions to make things public.
Anthony Vendetti – Maxim Group
Actually that is a good segue into the skin rejuvenation, there has been a lot of talk about fractional technology and the popularity of that, a number of companies have come up with different types of fractional hand pieces and products, can you talk a little bit about your patent position in that particular arena?
Joe Caruso
Sure, we have very strong patent position. We have an exclusive position in what is probably one of the fundamental if not the fundamental patent in the area, we have a program that we began to look at enforcement licensing of that in particular patent family. We believe that is one of the families of patents that will be very important to us going forward just as the hair removal patents have been very, very important to us in the past and as you said it is the use of fractional technology is probably one of the biggest enhancements in positive changes in using light to treat skin that has come along in a long, long time. So to have the position we do and to have the intellectual property position we have, I think is a great benefit.
Anthony Vendetti – Maxim Group
Okay and on the royalty, the royalty revenue was a little higher than I expected as well, did you say Paul that there were some back-owed royalty from Alma in that?
Paul Weiner
In the prior year there was.
Anthony Vendetti – Maxim Group
Okay. In this quarter though it was all normalized the $2.8 million was all normalized.
Paul Weiner
That’s correct. Generally it has been ranging somewhere between $2.2 million and $2.8 million a quarter, this one happens to be on the high end and it relates to hair removal sales from obviously many of our competitors from the previous quarter which would have been their second quarter.
Joe Caruso
Our hair removal remains the single biggest application in the marketplace. So I am not surprised to see that type of royalty shrink.
Anthony Vendetti – Maxim Group
Okay. The stock-based compensation this quarter was a little bit higher than we were expecting, can you explain how that rolls out? Is that from a prior grand, according to the Black-Scholes model gets recognized this quarter?
Joe Caruso
Yes it is related to the Black-Scholes model and catch-up adjustments that we had in this particular quarter. To give you some guidance going forward, we would anticipate that the FAS 123R compensation charge should be about $800,000 a quarter going forward.
Anthony Vendetti – Maxim Group
Was that the only difference between the GAAP and non-GAAP number?
Paul Weiner
Yes other than – we break out a number of things in there including the cash first, non-cash tax rate because we are paying tax at a relatively low rate in the single digits yet our effective tax rate for the quarter is at 37%, 35% for the year. So we do break that out for you to look at that, but yes that is the only pro forma item.
Anthony Vendetti – Maxim Group
Right, to get to the non-GAAP number we would add back the stock-based compensation plus the difference in the tax?
Paul Weiner
Yes, that’s all detailed in the press release.
Joe Caruso
Both of those items as you know are both non cash.
Paul Weiner
And that’s all helped us whereas I said earlier cash flow from operations this quarter was at $5 million because of items like this.
Anthony Vendetti – Maxim Group
Lastly on the financing, can you refresh my memory in terms of what percentage of your sales are financed?
Paul Weiner
It has actually gone down this year probably we anticipate because of the typing and the financing so that now under 50% of our customers are actually financing their equipment. Again it is probably related to the tightening of the financing market. So, it is around that level.
Anthony Vendetti – Maxim Group
Okay, that’s good. Thanks very much.
Operator
Your next question comes from the line of Issac Ro with Leerink Swann & Company. Please proceed.
Issac Ro – Leerink Swann & Company
Hi guys, thanks for taking the question. Just first off, we are not getting into specific numbers, could you maybe share a little bit qualitatively around your market share goals for Aspire and maybe what geographies you think you will be marketing the product in most aggressively?
Joe Caruso
The US market is a good market for that type of procedure, consumers, patients very interested in these types of methods for reshaping, sculpting of bodies, I think the US market obviously is probably the biggest single market. But there are different countries in Europe and in the Far East and in South America that I think will do well with this product and those are the ones that we are focused on right now. It takes a little bit longer to set up to pre-set the sites and training sites in some of these international venues and to get some traction behind that. You might see some stage event where we, more in the United States and not as much in the outside of the United States, areas until we get up to speed on that but I think overall it is going to add a lot to total revenues and overall market share.
Issac Ro – Leerink Swann & Company
Okay and then a little bit more specifically on Aspire versus competitors, would you guys consider publishing or putting together head-to-head data versus some SlimLipo or some of the other players in this market?
Joe Caruso
Usually what happens is doctors do their own side by side their own clinical trials and comparisons and those are usually presented at some of these medical conferences we attend. So I would be very surprised if we don’t see some of that in the future.
Issac Ro – Leerink Swann & Company
Okay just to finish the thought there beyond third party out from doctors that are using all these products, how do you guys look to gain mind share for Aspire versus the potential leaders as you try to go to market with the product today?
Joe Caruso
It’s a combination of using the precept of training sites to educate some of the doctors who are potential buyers of the system as well as some of the white papers and other clinical experiences being written up and used in marketing and other traditional marketing efforts, webinars, seminars and things like that we have used in the past. It is really no different than any of the other products or applications that we have put on the market in the past.
Issac Ro – Leerink Swann & Company
Okay and then just broadly speaking on the marketplace we are hearing that a lot of these equipment vendors are doing record level of business this year and I am wondering did you guys see any creep into your business from doctors that might be moving to some of these lower cost options and how do you guys combat that?
Joe Caruso
We haven’t seen a big push into that, I have heard the same thing. I think it depends on the technology that people are looking for, a price point that people are looking for. People, physicians, if they are going to get into this business or they want to expand their practice, for the most part they invest in the right technology to make sure that they have very good clinical effect, good economics around the technologies that they chose and they are not using technologies that might be outdated or they might not give their patients the best clinical outcomes. So you might see some of that activity certainly more than we have seen in the past but I think the majority of the central customers still buy equipment from equipment manufacturers, and also as we have talked about earlier.
Paul Weiner
Financing is certainly top for us specially in the lower markets, maybe in the MedSpa [ph]. So those customers that might be interested in buying systems that just can’t get the financing out for a new equipment could also potentially be turning towards used equipment that is always a possibility.
Joe Caruso
It is always a little dangerous too when someone buys used equipments because they don’t know the wear and tear and warranty history of that equipment and it may be out of warranty for instance, maybe more expensive for them to carry that equipment and operate that equipment over time but I think the majority of the business will still be with the original equipment manufacturers.
Issac Ro – Leerink Swann & Company
Okay and then just lastly the sort of the question I guess ask every quarter but I will just ask again, on valuations for others companies in your space for the public and private they certainly come down, are you guys versus 90 days ago, are you feeling more aggressive about potential acquisitions to help your growth rate in a tough environment given your cash position?
Joe Caruso
Certainly they have to be considered based on where valuations are. It is something that we look at on a periodic basis. We assess different aspects of potential acquisitions and we discuss it. It is not something that we have done aggressively in the past and it is not something that you want to take lightly because the integration process of any acquisition is what you have to live with after the acquisition is done. So, it is one of the things that we certainly will look at on a go-forward basis and valuations certainly help that but valuations are down with all companies. So it’s not like there is a tremendous amount of leverage in any one particular situation in general.
Issac Ro – Leerink Swann & Company
Okay, thanks very much.
Operator
Your next question comes from the line of Richard Rinkoff with Craig-Holeman. Please proceed.
Rick Rinkoff – Craig-Hallum Capital Group
That would be Craig-Hallum. Sales force has been an issue over the last year, where are you in terms of numbers, open territory, sales force moral and productivity of that sales force?
Joe Caruso
All of our territories are full, we have the same number of sales people that we have had, territories that we have had over the past few quarters. Turnover is a lot better than it was a year ago. We had some issues a year, 18 months ago. We have worked through most of those issues. We have put in a few quarters ago a very aggressive training and retention program. Sales force obviously is very, very excited about the new Aspire platform. Productivity is at an okay level. Obviously I would always like to see more productivity out of the sales force but it is not at a bad level. So, I think all in all we are in pretty good shape with it.
Rick Rinkoff – Craig-Hallum Capital Group
What about the buybacks, did you buy shares in the quarter and what is your thought here at $11?
Joe Caruso
Yes, that is a good question as well. During this past third quarter was a quarter that we did not buy back shares due to the volatility in the market but we do plan to be opportunistic when buying shares in the future including being more aggressive when buying back shares in this fourth quarter. So today we have purchased about 505,000 of the 1 million shares that have been authorized for a total of about $7.6 million, an average price of $15.13 and again the way it looks right now, we plan on being more aggressive in our buyback in this fourth quarter.
Rick Rinkoff – Craig-Hallum Capital Group
Okay, any comments on gross margins going forward?
Joe Caruso
The pricing has been stable over the last few quarters, margins have been – mid 60s are the gross margins that we predicted a year ago and 18 months ago and those margins have been at that level even at lower volumes. So we are pretty happy with pricing. It is not pricing that is causing us to be concerned about the revenue levels, it is really buying decisions, really physicians that are postponing buying decisions for whatever reason, maybe they want to wait until the election or maybe they want to wait until next year or maybe they want to see what happens in the credit tightening. Now credit tightening should loosen with a lot of the work that is being done as part of this whole bailout. As far as consumer confidence and physician confidence, I think it will come back. I think it might come back slowly but it will come back. So, we are in a pretty good position because we have good base technology. People like the platform approach, the cost and effectivity and payback of the systems is excellent. Just launched what we think is going to be a very important piece of our product portfolio.
Rick Rinkoff – Craig-Hallum Capital Group
Okay. Back to the question on fractional, have you notified any companies that you believe they are infringing on your patents?
Joe Caruso
Yes we have.
Rick Rinkoff – Craig-Hallum Capital Group
Any response, any suits in the near term?
Joe Caruso
As was our history in the past with hair removal, we don’t comment on particular developments and that, we will let the Street know when there are developments but we don’t comment on where things are at.
Rick Rinkoff – Craig-Hallum Capital Group
Okay, thank you.
Operator
Your next question comes from the line of Julie Hoggatt with Noble Financial. Please proceed.
Julie Hoggatt – Noble Financial
Hi guys, thanks for taking my question, I was wondering if you could give us a little more color on the upside we saw in some these developments, was that actually a milestone payment or was just reimbursement for expenses?
Paul Weiner
No again it was just a reimbursement for expenses not a milestone payment. This is all related to just funding of our research and development but that was again, the funding of that was outside of $400,000 a quarter.
Julie Hoggatt – Noble Financial
Okay could you quantify maybe some of the cost savings we might see due to the ending of the Kendala suit where you were the defender or is the litigation going to continue with the $3 million or $3.5 million or?
Paul Weiner
As I said earlier, we did about $3.5 million, we spent about $3.5 million in litigation cost related to Kendala in the third quarter. We are estimating that will probably come down in the fourth quarter to about $2.5 million and then on an ongoing basis starting in the first quarter of next year to continue our enforcement against Kendala we anticipate it being probably around $1 million a quarter in legal until in and around the quarter that we go to trial and then it will probably go up a bit from there. So there should certainly be some good cost savings moving forward related to litigation.
Julie Hoggatt – Noble Financial
Okay, thank you.
Joe Caruso
Thank you Julie.
Operator
Your next question comes from the line of Richard Deutsch with Ladenburg Thalmann.
Richard Deutsch – Ladenburg Thalmann
Thank you. I have two questions, one is related to the financing. What are the main avenues that your customer use for financing and did they do any leasing versus that and second part of that is would you potentially use your balance sheet to assist in this tight credit situation to get some customer funding? The second question is on your option rate notes that you sold, how did you dispose of them and what was the discount?
Paul Weiner
As far as financing and our customers’ financing of our equipment, those that do do financing are working with third-party leasing companies of which we have relationships with a number of them that we can refer our customers over to. Many of our customers prefer to use their own or a local bank. So, these are all third-party financing arrangements not associated with Palomar. As far as assisting customers with our balance sheet and financing, we are not looking at doing any of that now or in the future as far as we can say. The auction rate and securities are the ones that were – we continue to bring our auction rate security balanced down and turning that into cash and those that do to get redemptions from the municipalities or the companies that issued the preferred securities and those redemptions are down 100% of the time.
Richard Deutsch – Ladenburg Thalmann
Great, thank you.
Paul Weiner
Thank you.
Operator
Your next question comes from the line of Ross Nelson with Vermillion. Please proceed.
Ross Nelson – Vermillion
Hi guys, most of my questions have been answered. So I just want a clarification, you said you have $5 million of cash flow in the current quarter and there is about $500,000 left on the buyback?
Paul Weiner
That’s correct, yes, $5 million in positive cash flow from operations and close to $500,000 left in the buyback, yes.
Ross Nelson – Vermillion
What was your cash flow for investments if any?
Paul Weiner
Cash flow from investments is about $3.5 million in the third quarter.
Ross Nelson – Vermillion
Negative, I mean you spent – CapEx, what was CapEx?
Paul Weiner
CapEx you are talking?
Ross Nelson – Vermillion
Yes that part of it.
Paul Weiner
Yes, that was about $400,000.
Ross Nelson – Vermillion
Okay.
Paul Weiner
We have hardly any capital expenditures.
Ross Nelson – Vermillion
Okay, so just hypothetically if this stock were to trade super liquidly and there were no kind of buying back 20% of the shares outstanding or other average daily volume wasn’t an issue, you could theoretically complete the whole buyback in the next quarter with cash flow from operations, if you so chose?
Paul Weiner
That would be the case.
Ross Nelson – Vermillion
Okay thanks.
Operator
Your next question comes from the line of Steve Howard [ph] with Concentric Investments. Please proceed.
Steve Howard – Concentric Investments
Hi guys, most of them have been answered as well but when you commented the product revenue were slowing with the economy since September I guess, can you quantify the slowdown what pace you saw and then are there any regions where the slowdown is more pronounced?
Joe Caruso
It is really difficult to put some numbers on it because it is really feedback from the sales force of people, positions, postponing buying decisions, it doesn’t mean that those customers are going away. Some people that postpone buying decisions earlier this year bought at third quarter, you have some that were introduced to the technology in the third quarter that might buy in fourth quarter, they might buy in the first quarter, it is really tough to put numbers on it. As far as where that is happening, it is really happening all around the United States and our distributors are also indicating outside the United States they are seeing a little bit of slowdown there but not anything close to what we are seeing in the United States. It is really prominently US driven and where you might see a tendency to have a bigger slowdown in the United States in the areas would correlate to the areas where you will see the biggest housing crisis. So those areas that have been hit hardest by the decrease in pricing and housing, those are the areas that correlate to probably the slower areas of the countries. That is where the majority of the sales come from in the first place. So it all ties in.
Steve Howard – Concentric Investments
Okay fair enough. Then just sort of follow-on, looking at the role of financing it needs to develop 50% or so, what impact if any has the recent credit turmoil had on credit availability I guess since mid September, are you seeing increased difficulty for folks to get credit through the third party vendors?
Joe Caruso
To increase or decrease, I am sorry?
Steve Howard – Concentric Investments
Is it more difficult for customers to get credit I suppose since mid September, have you seen a change since the credit dislocation, we’ll call it?
Paul Weiner
A little bit. Certainly the credit ratings need to be a little bit higher starting towards the middle of September and again as Joe had mentioned, since many of our sales in the quarter end up towards the end of the quarter the last two weeks were difficult because the tightening had already taken place and that is where a big part of our sales already occur. So, we would not anticipate from a financing situation anything different from the third quarter into the fourth quarter because our major selling period over the last couple of weeks of the quarter that was already an issue and in fact depending on certainly if the credit becomes a little bit looser and as it becomes looser then that should free up and potentially increase our customers’ ability to get financing from here.
Steve Howard – Concentric Investments
Okay, so you would say that roughly it is about the same currently credit wise as it was call it at the end of Q3?
Paul Weiner
Yes we would and in fact there has obviously been a lot more government intervention and potentially loosening going on within the financial credit markets which could potentially again help us in the future, obviously we don’t know exactly when but we don’t anticipate it getting worse than it was at the end of the third quarter.
Steve Howard – Concentric Investments
Okay, fair enough. That is it from me, thanks guys.
Operator
You have a follow-up question from the line of Anthony Vendetti with Maxim Group. Please proceed.
Anthony Vendetti – Maxim Group
Actually most of them have been answered but just one quick one, we know and we have heard from other companies especially in the patent situations that some companies that are being sued for patent infringement whether they are public or private have requested from the patent office that the patents be re-examined and looked at again, have you had any company come, whether it is public or private, to try to look at any of your patents that you have and has the patent office been willing to re-examine those or look at those?
Joe Caruso
We have Patty Davis here with us, so we will have her answer that question for us.
Patty Davis
I just need to make sure I understand your question, could you just one more time – are you asking me whether the patent office is re-examining some of our patents?
Anthony Vendetti – Maxim Group
Yes we heard that they are re-examining patents of other companies and I was wondering if they are re-examining any of your patents.
Patty Davis
Yes, recently a third party anonymous filed to re-examine the hair removal patent but interestingly enough it was already sited and the patent examiner even noted that in his response, the patent office always allowed a re-exam and you can see the link that they are making. So we will address it appropriately. Again it is an unanimous third party, to try all against Kendala is far enough along that it should not have an impact.
Anthony Vendetti – Maxim Group
Okay so it was an unanimous third party because I have heard this not just in this industry but just in other industries there has been a lot of re-examined filings, so that is just standard practice to look at some of these?
Patty Davis
Yes, it is pretty common and I don’t believe that this unanimous third party would be Kendala because not all the claims have been examined.
Anthony Vendetti – Maxim Group
Okay, great, thanks.
Operator
You have a follow-up question from the line of Andy Schopick. Please proceed.
Andy Schopick – Nutmeg Securities
Joe, I would just like to ask you or perhaps Paul if he cares to comment this question, investor sentiment towards this entire sector has been horrible as reflected in the incredibly depressed valuations we are seeing among all the publicly owned companies in this sector and of course (inaudible) consumer confidence in spending trends that are clearly evident now, but is there anything you are seeing in the business that you fear or that you think would justify what we as investors are seeing in the valuations of these companies now?
Joe Caruso
I think it all has to do with time horizons. If you look out a quarter or two quarters and you compare that time period with consumer sentiment or consumer spending or what is happening in the general economy or what is happening in gas prices or credit then you could be fearful but if you look out past those things and if you look at the potential of the technology and the potential size of the market opportunity the way we look at it then you feel pretty good about it because no one is doing that now obviously, so you ask me if I see things that I am afraid of or fearful or bother me, they really don’t because we continue to develop new technology, the technology works extremely well. If you look at where the state of the art is in technology as far as predictable, safe, effective results today versus a decade ago, it is really amazing how far the business in this sector in this market has gone. When things turn around and they always do, there will be a pent up demand for these types of procedures and we will be better at it. We will be able to creep faster, more effectively at a lower cost with consumers that will be more educated when those things turn around. Now, there are few companies in this space that are very well positioned for that and Palomar I think is maybe best positioned at that. We have plenty of cash, we have plenty of technology, we have an excellent IP portfolio and we have a group of employees that have stuck with us for the most part more than a decade. So, does it bother me, sure in the short term you hate to see people worried about it but in the long term it doesn’t worry me at all.
Andy Schopick – Nutmeg Securities
Joe my point here is that the enterprise’s value of these companies, if I strip up the cash from several of these companies, the enterprise’s value of the companies as reflected in the market cap is absurd. I just am astounded to see what I am seeing in terms of how investors are pricing these stocks and for me I have to wonder whether that is reflecting some type of extreme scenario in the upcoming year beyond just a bad recession.
Joe Caruso
I don’t see it. If you look at the financial profile and leverage in the business, even at what we see today as far as revenue volumes go just last quarter, we still generated $5 million as part of cash flow for the quarter. So, we have a lot of cash to weather the storm. I don’t think that the storm will be that long that it will become an issue for us.
Andy Schopick – Nutmeg Securities
Okay, thank you.
Operator
You have no more questions at this time, I will now like to turn the call over to Dan Valente for closing comments.
Dan Valente
Thank you, operator. I hope we have answered your questions as directly and clearly as we could and we appreciate you tuning in and we look forward to the next call we have with you.
Joe Caruso
Thank you, operator.
Operator
This concludes Palomar’s third quarter 2008 financial results conference call. Thank you for attending. You may now disconnect.
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