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Cynosure, Inc. (NASDAQ:CYNO)

Q4 2008 Earnings Call

February 10, 2009; 9:00 am ET

Executives

Mike Davin - Chairman, President and Chief Executive Officer

Tim Baker - Executive Vice President, Chief Financial Officer and Treasurer

Scott Solomon - Vice President, Sharon Merrill Associates

Analysts

Anthony Vendetti - Maxim Group

Josh Jennings - Jefferies & Company

Dalton Chandler - Needham & Company

Andy Schopick - Nutmeg Securities

Bill Dezellem - Tieton Capital Management

Sasha Kostadinov - Shaker Investments

Andrew Siegelstein - Unidentified Company

Operator

Good day, everyone and welcome to Cynosure’s third-quarter 2008 conference call. Today’s call is being recorded. There will be an opportunity for questions and comments after the prepared remarks. Today’s question-and-answer session will be conducted electronically. After the presentation, if you’d like to ask question (Operator instructions) At this time, for opening remarks and introductions, I like turn the cola were to Mr. Scott Solomon, Vice President of Sharon Merrill Associates. Please go ahead sir.

Scott Solomon

Than you Melissa. Good morning everyone. With me on today’s call are Cynosure’s President and Chief Executive Officer, Michael Davin; and Executive Vice President and Chief Financial Officer, Tim Baker. We’ll begin today’s call with Mike providing and overview of Cynosure’s fourth quarter 2008 results and the business outlook. Tim will take you thorough the financials, after which management will take your questions.

Before we begin, please note that various remarks management makes on this conference call about future expectations planes and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties, and actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2007and subsequent reports filed with the SEC.

These filings can be accessed on the Investor Section of the company’s website at www.cynosure.com. In addition any forward-looking statements represent the company’s use as of today February 10, 2009. These statements should not be relied upon as representing the company’s views as of any subsequent date or Cynosure may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so.

With that, I’ll turn the call over to Mike Davin. Mike?

Mike Davin

Thank you, Scott. Good morning everyone and thank you for joining us for our fourth quarter conference call. As we discussed in our preannouncement in mid-January the affects of the economic slowdown on the aesthetic industry have been significant. After delivering 13 consecutive quarters of year-over-year double-digit percentage top line growth, our revenue declined 30% in the fourth quarter as the credit markets tightened and many physicians elected to postpone capital equipment purchases.

Reflecting the current macroeconomic environment, revenue for the fourth quarter totaled $25.5 million and we recorded a GAAP-net loss of $2.5 million or $0.20 per basic share. A net loss included a $2.7 million bad debt charge discussed in this morning’s press release. While our quarterly results we’re inline with the estimate we provided to you last month, our performance was nevertheless disappointing. Especially given the track record of consistently strong revenue growth and profitability we’ve built over the past three years.

Gross margin also was negatively impacted by the overall climate in the fourth quarter, following about five points from Q4, 07 to 61%. This resulted from a combination of pricing pressure and revenue weakness that was most pronounced in North America which accounted for 61% of laser revenue in Q4, 08 compared to 68% in the fourth quarter of 2007.

We also experienced a decrease in the overhead absorption in the quarter related to the reduction in volume. In light of the economic downturn in the fourth quarter we took a number of steps to reduce expenses as part of an effort to bring cost structure inline with anticipated revenue levels. Especially we reduced worldwide headcount by 17%, curtailed spending in various areas including marketing and clinical development, and imposed other cost cutting initiatives.

These measures are expected to result in an operating expense savings to the company of approximately $8 million to $10 million in 2009. We are committed to maintaining our technology leadership position in the market and we feel it’s important to continue to invest in key areas such as engineering and product development which have enabled us to build an important competitive advantage.

Our goal for 2009 is to maintain our core competency’s or working towards managing the business profitably. We will continue to monitor events closely and adjust expenses appropriately as we move forward.

If you look at our track record over the past three years, it should be clear that the growth we’ve achieved is the by-product of outstanding products, quality global distribution and innovative technology. We have strived to consistently deliver to the market proprietary workstations in product innovations that enhance the aesthetic experience for patients and enable practitioners to efficiently and cost effectively grow the practices.

In 2008 we commercialized three flag ship workstations, dual-wavelength, Smartlipo MPX for laser lipolysis. The Accolade Workstation for Pigmented Lesions and the affirm CO2 a new platform that combines of blade of skin resurfacing and skin rejuvenation in a single laser system.

These systems had been well received by customers and each has opened a new market opportunity for Cynosure. One product innovation I want to highlight from 2008 is our SmartSense intelligent delivery system, which give the aesthetic surgeon performing laser lipolysis on prolog level of precision, safety and control.

For the expansion of our Smartlipo technology and the added capabilities we expect to expand our leadership position in laser lipolysis and further penetrate this emerging market. We believe that clinical data will be instrumental in helping to drive border adoption of our technology.

As a result, over the past year we made substantial investments to enhance the clinical understanding of laser lipolysis. I’m please to say that we expect a benefit from these investments in the months ahead. A number of clinical research papers on Smartlipo have been accepted for presentation at upcoming major industry conferences and we expect more to follow.

Unfortunately in these uncertain times we cannot predict when the cloud that hangs over the economy is going to lift. What we can and will do however is run our business as efficiently as possible and put Cynosure in the best position that we can to emerge from this downturn as an even stronger competitor.

Although, the fourth quarter was certainly challenging, it’s important not to overlook the significance of our achievements in 2008. We delivered double digit top line growth with record annual revenues of approximately $140 million. We strengthened our balance sheet increasing our cash and investments position by more than $9 million.

We launched transformative new workstations such as Accolade, Affirm CO2 and Smartlipo MPX as well as interdicted technology enhancement, such as SmartSense, which we believe is a significant innovation both in terms of improving clinical safety and efficacy of the procedure. Our continuing breath of innovation workstation has allowed us broaden our reach to new market around the world.

The quest to look and feel younger is not a passing fad. Our job is to remain at the forefront of this industry and to provide physicians and patients with the most compelling solutions possible. By every measure our approach has succeeded. As we look ahead to 2009, we are committed to maintaining our industry leadership in every aspect.

Through that end we plan to introduce a new flagship workstation at the American Academy of Dermatology annual meeting in March, open new direct sales offices and select international markets and roll out several new technology innovations designed to benefit both aesthetic practitioners and their patients. With more than $95 million in cash and investments on our balance sheet and no long-term debt, we believe we have sufficient capital to execute our strategy.

Now, let me turn the call over to Tim for his financial review.

Tim Baker

Thanks Mike and thanks everyone for joining us this morning. As Mike noted, our Q4 revenue of $25.5 million, represented a 30% decline from the same period in 2007. For the year, revenue increased 12% to $139.7 million from a $124.3 million in 2007. Turning to the bottom line on a GAAP basis, our net loss was $2.5 million or $0.20 per basic share for the fourth quarter versus GAAP net income of $5.3 million or $0.41 per diluted share for Q4 of 2007.

Results for the fourth quarter of 2008 included a bad debt charge of $2.7 million, this charge which is included in Q4, G&A expenses represent uncollectible accounts for certain customers negatively impacted by the economy and by the imposition of stricter credit standards which cause a number of practitioners to be unable to meet their payment obligations.

On a non-GAAP basis, excluding stock-based compensation expense of $1.6 million and using an effective tax rate of 36%, the net loss for the fourth quarter was $1.9 million, or $0.15 per basic share. This compares with non-GAAP net income of $5.9 million or $0.46 per diluted share in the fourth quarter of 2007, which excluded approximately $1.5 million in stock-based compensation and also used an effective rate of 36%.

We used approximately 12.7 million weighted average shares outstanding in computing basic earnings per share for the fourth quarter of 2008 and used approximately 12.8 million weighted average shares outstanding in computing diluted earnings per share for 2007.

For the full year 2008, GAAP net income was $10.2 million or $080 per diluted share compared with $14.5 million or $1.15 per diluted share for 2007. On a non-GAAP basis, 2000 net income was $14.4 million or $1.13 per diluted share versus $18.3 million or $1.44 per diluted share in 2007.

Reflecting the lower sales volume, laser systems accounted for approximately 83% of our total revenue in the fourth quarter of 2008. This is down from 90% for the same period in 2007. Laser revenue decreased 36% in Q4 of ‘08 to $21.1 million from $32.9 million for the comparable period in 2007. North American laser revenue fell 42%, while international laser revenue was up 23% for the fourth quarter of 2007.

Looking at our laser revenue by a region as Mike mentioned, North America accounted for 61% of total laser revenue in the fourth quarter of 2008, down from 68% in the same period of ‘07. International contribution was 39% of total laser revenue compared to 32% in the same period in 2007.

Gross profit for the fourth quarter of ‘08, was 61% of total laser revenues, compared with 66% for the fourth quarter of 2007. The decrease in gross margin reflected pricing pressure, primarily in North America and the lower North American sales volume as a percentage of total revenue. Despite the cost reduction programs initiated in Q4, the reduced top line in the fourth quarter have the effect of skewing operating expenses higher as a percentage of revenue than in couple quarter in 2007.

Q4 selling and marketing expenses decreased $700,000 to $11.9 million, from $12.6 million in the year earlier period, but increased as a percentage of revenue from 35% to 47%. We’re continuing to invest in sales and marketing at the appropriate levels to build our global brand and further capitalize on the significant international market opportunities we feel are available.

As we have disclosed in Q4, we eliminated 17% of our worldwide headcount. This included 22 Sales Representatives the majority based in North America. Today, we have approximately 285 employees and have instituted a hiring freeze for 2009. Fourth quarter research and development expenses were $1.9 million or approximately 7% of revenue for the quarter, compared with $1.9 million or 5% of revenue for the quarter of 2007.

General and administrative expenses for the fourth quarter $6.7 million or 26% of revenue, compared with $3 million or 8.1% of revenue in Q4 of 2007. The increase in G&A expenses reflected the inclusion of the $2.7 million bad debt charge as well as an increase in legal expenses incurred in the quarter. A loss from operations in the fourth quarter of 2008 was $5.1 million, compared with income from operations of $6.6 million or 18% of revenue for Q4 2007.

Operating results for the fourth quarter of 2008, included $1.6 million of stock compensation expense, compared with $1.5 million in stock compensation expense for Q4 2007. For the full-year, we reported income from operations of $12.6 million in the 2008 versus $19.6 million in income from operations for full-year 2007.

Stock compensation expense totaled $7.4 million in 2008 and $5.8million in 2007. On a non-GAAP basis, excluding the effect of stock-based compensation, the loss from operations was $3.4 million in the fourth quarter of 2008 compared with income from operations $8.1 million in Q4 of ‘07. For the full-year, non-GAAP income from operations was $19.8 million, in 2008 and $25.4 million in 2007.

For more information on the non-GAAP financial measures, please see the table for reconciliation of GAAP results, to non-GAAP measures included at the ends of our earnings release. The table has more details of the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

Turning to the balance sheet, our cash position remained strong and provides us with good financial flexibility going forward. As Mike mentioned our cash, cash equivalents, marketable securities and long-term investments at quarter end totaled $95.5 million, an increase of approximately $9.3 million, from our year-end ‘07 balance of $86.1 million.

Net cash provided by operating activities was $3.1 million for the fourth quarter and $13.9 million for the year-ended December 31, 2008. We continue to have no other long-term debt other than capitalized lease obligations.

Although the contribution from international laser sales increased 35% sequentially to 39% of laser revenue, DSOs for the quarter remained consistent with the prior quarter at 91 days. We continued to work closely with customers to manage our DSOs. With that, we are ready to open the call to your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Anthony Vendetti - Maxim Group.

Anthony Vendetti – Maxim Group

Sales you said that, out of the 17% workforce reduction, 22 were salespeople. How many sales do you currently have and what’s the breakout between the Smartlipo salespeople and the total salespeople?

Tim Baker

This is Tim. We have 54 people in the North American sales organization at the end of the year, of which about 27 are carrying the Smartlipo product line.

Anthony Vendetti - Maxim Group

The ones that are carrying the Smartlipo, is that all they are selling, is that exclusive Smartlipo?

Tim Baker

No there are 18 of those, what we call our hybrid full product line reps and they are carrying Smartlipo as well as the other product lines.

Anthony Vendetti - Maxim Group

Mike, you mentioned that at AD, you going to have a new product platform. Did you say also a couple of Actual upgrades? Can you give us more color on that?

Mike Davin

We were actually going to introduce what I believe, say about three new products. One will be of a flagship nature and the other two will be enhancements to flagship products that we have on the market today and they will be displaced at the AAD during the course of the meeting.

Anthony Vendetti - Maxim Group

Okay and then obviously, we all know the economic conditions. Anything that you’re seeing here in the first quarter that gives you any type of optimism for later in the year or is it still in the sort of hunker down mode and wait for some of these stimulus plans to get in place and hopefully things pickup.

Mike Davin

Yes, I think the latter is probably the case Anthony. Clearly the President’s resignation last night with the kind of crisis situation, we are in the need to the pass the stimulus package. So, we do believe when the stimulus packages are passed that hopefully this will lose some credit in the banks, which has really been the major deterrent for customers to be able to acquire technology as the lack of credit availability. So, we’re hopeful that during the course over the next few months, we’ll start to see the affect of the stimulus packages as it pertains to being positive towards our business.

Anthony Vendetti - Maxim Group

So, there are still physicians out there that have a demand for your products, but some of them were just not able to get the credit to buy it, is that correct?

Mike Davin

It’s probably the number one issue we are confronted with right now. We certainly have ample activity and interest in our technology platforms. The main issue right now is lack of available credit to lease the technology or to acquire the technology.

Anthony Vendetti - Maxim Group

Lastly on the international front, two things on that front; one is, are there pockets of strength in particular country and then, two was the strengthening dollar a factor in dampening sales in some of those regions?

Mike Davin

We had an excellent year in the quarter in China. As you know up until the Q4, we were having an outstanding year I think revenue growth greater than 30% year-over-year. So, it was the Q4 certainly with the pullback, but we have isolated areas where the business is strong, but the majority of our business in the Q4 has been impacted due to the economic environment and Tim could maybe comment on the dollar affect.

Tim Baker

Yes, I’d say it was not a significant impact Anthony, on the revenue for Q4.

Anthony Vendetti - Maxim Group

Okay. Tim, last question for you in terms of you guys was still profitable in a tough period and you taken obviously action to remain, so with the 17% reduction. Do you expect to be profitable obviously probably for ‘09, but maybe comment on whether you think you could be profitable or is your goal to be profitable every quarter in 2009?

Tim Baker

I think it is, we said in the release is to manage the business profitably and I think really give in this environment we’re looking at ‘09.

Operator

Your next question comes from Josh Jennings - Jefferies & Company.

Josh Jennings - Jefferies & Company

Hi good morning this is Josh Jennings for Pete this morning. Thanks for taking my questions. First one, can you speak on this difficult environment, can you speak on this Smartlipo MPX ramp and how that’s rolling out internationally and in the U.S. and whether that’s carrying your sales?

Mike Davin

Josh, we had an excellent year across the board on laser lipolysis platform and as know we continue to innovate with the introduction of the SmartSense, the worlds first ever intelligent delivery system to address the consistency of the treatment of laser lipolysis.

We rolled out the MPX in international markets this summer; we’ve had some nice traction. We rolled it out in selected offices, our directed office as well as a few selected large distributors.

The momentum in terms of the uptake for the procedure has been good in North America. We had an excellent year overall with our laser lipolysis platforms, but certainly in Q4 we saw across the board in all of our businesses a pull back, but we are pleased where we are with the technology and how it is positioned in the different markets that we participate in.

Josh Jennings - Jefferies & Company

Great, thanks and I guess as a follow up on the previous question. Those customers or physicians that having difficulty with credit, I mean what is your strategy in terms of keeping them around with your sales force and constant dialogue with them, how is that rate just falling off or are you keeping sort of some of them still in tight contact with them?

Mike Davin

Certainly we go through a process at our distribution level where we verify credit availability based on that the cost of our technology and physicians have shown a strong interest, but we weren’t able to get credit certainly and we are keeping in constant contact with them for a distribution as well as through our marketing efforts. We do believe once this clears and those physicians can get access to credit, they will acquire our technology.

Josh Jennings - Jefferies & Company

This is my lat one, is just with the bad debt charge of $2.7 million for uncollectible. Was that sort of full scrubbing of your customer base and what was due and do you expect further charges going forward over the next few quarters?

Tim Baker

Josh this is Tim. I mean really we feel that obviously of the 13 quarters, that was the first time we ever had that kind of situation in the marketplace and obviously in our receivables. So, we really feel it was an isolated situation really resulting kind of in the Q3 event and do feel we have done a full scrubbing in that.

Actually if you look at the 1231 AR, North American lasers, we’ve collected 95% of that to date. So, we are not expecting that kind of a situation on that go forward, really it was an isolated situation.

Operator

Your next question comes from Dalton Chandler - Needham & Company.

Dalton Chandler - Needham & Company

Good morning. So you’ve mentioned competitive pressures or pricing pressures a couple of times. Could you elaborate on what you are seeing, is this just to head to head cost cutting with competitors or is it customers saying, hey I need a break in this environment or what’s really happening out there?

Mike Davin

Dalton as you know the space has been fairly explosive over the last few years and therefore a number of small competitors have entered and now with the retraction for demand based on the economic environment some of those competitors are having a hard time surviving sort to speak. So, we’re seeing them be very, very aggressive over the pricing structure just to try and maintain some level of revenue, so that’s one area.

Certainly there are overall just because of the economic environment and the retraction and the demand or availability of credit to be able to get the technology, I think all of us are feeling that pressure and therefore it’s just become a more competitive market. I think from the pricing overall that the company’s are offering at this point in time.

So it’s just a combination of private companies and the young public companies fighting for similar business right now in a market that’s retracted a little bit just due to the credit situation.

Dalton Chandler - Needham & Company

And are you seeing pressure in any particular product line versus another?

Mike Davin

I think it’s pretty much across the board, although with Smartlipo. Since we are the leader with that particular product and believe well ahead of anybody else in the industry. We are able to preserve our position there in terms of pricing levels, but some of our other products may be feeling the pricing pressure a little bit more, but it has been pretty much across the board, once again isolated for Q4.

Dalton Chandler - Needham & Company

Okay, and just internationally. The international market has generally held up somewhat better. Are you seeing similar pressures there?

Mike Davin

We are seeing similar, but not as a significance as Tim mentioned in our numbers that we’ve seen in North America. Keep in mind we made significant investments in the international markets with new offices opening in the Far East as well as even in Europe and so we are seeing the pressure there, but it’s not as impacted certainly as we saw in the fourth quarter in the North American markets.

Dalton Chandler - Needham & Company

Okay. Alright, thanks a lot, guys.

Mike Davin

Thanks Dalton.

Operator

Your next question is from Andy Schopick - Nutmeg Securities.

Andy Schopick - Nutmeg Securities

Thank you. Tim, I got a few for you then I’d like to come back to Mike. Clarification on the bad debt charge, we see the charge of $2.7 million for the fourth quarter, but can you tell us what the total bad debt charges were for the year if there were any in subsequent quarter’s, prior quarters?

Tim Baker

Yes, very minimal and if you look at your bad debt charges it’s been running about 0.42% of revenue if you look at or I’d say 2007 I mean really up through the third quarter, there really was nonmaterial or immaterial in terms of expense. This really was a kind of a normally given the third quarter majority of those deals that ended up being bad debt charges were.

Third quarter deals, where I think doctors had purchased the equipment in the third quarter, obviously the world was crashing end of September and then continued to crash in to October, November and credit facilities of doctors thought they had lined up to pay. A lot of those were pulled from them, a lot of their rates were changed and a lot of them doctors just find out they didn’t have a wherewithal to pay even though obviously at the time they did.

So, like I said, it really was a situation I think given the timing and if we look at where we are at the end of the year, like I said we’ve collected 95% of our outstanding AR as of 12/31. So, we really think it was a situation over 13 quarters that quite we’ve never seen before and don’t expect to see in the future.

Andy Schopick – Nutmeg Securities

Let me ask you this, it’s all reflected in G&A, is that correct?

Mike Davin

That’s correct.

Andy Schopick – Nutmeg Securities

Okay, what was the percent of sales that were direct in 2008 versus 2007?

Tim Baker

For the fourth quarter direct was 82%, it was 83% also last year and for the full-year it was 83% in 2008, it was also 82% in 2007. So that was fairly consistent. What did change in that, if you look at Q4, in that direct number is our direct European subsidiaries, which were 20% of our revenue in Q4 ‘08, that was 15% in Q4 of ‘07.

So, given our overall direct was consistent, that components of that change pretty significantly where the European subsidiaries contributed more, which again reflects a kind of that’s the hardships that we’re seeing in the North America markets and those European subsidiaries typically don’t carry the same margin as our North American sales do.

Andy Schopick – Nutmeg Securities

One more for you, and then I’d like to go to Mike; Long-term investments, update please on the ARS securities, I believe you got over $24 million at the end of March with an unrealized loss of $1.1 million. Those long-term investments were all your ARS securities, are they not?

Tim Baker

That’s correct. So, there is $21 million on the balance sheet that’s showing up as long-term investments, that is our option rate securities. All our option rate securities are with UBS, we did exercise our put rate with UBS. So, we actually have a financial instrument valued at the put rate, which effectively brings those option rate securities back to par.

So right now, we have no unrealized loss, we have 0.2% discount on the put rate and which ran through the P&L about $43,000, but effectively our option rate securities are valued at 99.8% at par coupled with the put rate.

Andy Schopick – Nutmeg Securities

So, that’s great. What’s the maturity on those?

Tim Baker

Well again, the option rate securities go out, the actual underlying securities can go out to 20 to 30 years, student loans but our put rate actually is exercisable in July 2010. So it’s not an 18 month timeframe and we’ll obviously exercise our put rate and we exercise out (Inaudible) put rate and we will hopefully pull that all in at par.

We also had about $1.7 million of option rate securities called in January, which were all called at par. So that number has actually gone down subsequent to year-end.

Andy Schopick – Nutmeg Securities

How many did you say?

Tim Baker

1.7.

Andy Schopick – Nutmeg Securities

Okay. You’re in a pretty good shape them. Mike, I’d like to ask, if you could comment at all about what you see happening among the Candela customer base, given the obvious stresses facing that company, the significant challenges. Is there fertile ground for you or other players to penetrate that existing base of customers?

Mike Davin

Andy, I wouldn’t want to comment on a specific competitor, but I do believe because we’ve seen a fair amount of companies come into the space in the last five years and that there are opportunities for the strong to maybe go after some of the weaker participants in the industry.

Certainly, we feel as though what our breadth of technology and how broad it is that we have the opportunity to address any of the existing customer base out there as well as the new customers.

We are sourcing a significant interest as you know from the non-core market, but we’re certainly seeing some competitors feeling this a little more than others although I think we all felt a significant amount of pain in the fourth quarter, obviously due to the things that are beyond our control certainly the economic environment.

We’re looking everyday and how do we capitalize on the breadth of technology we have, the awesome distribution we have and the strength of our balance sheet and our ability to execute as a company to go after this market which we believe so has very long legs. It would be a healthy market once the economy becomes healthier.

Operator

Your next question comes from Bill Dezellem - Tieton Capital Management.

Bill Dezellem - Tieton Capital Management

Couple of questions, first of all is MPX fully rolled out in the international markets at this point or do you still have additional readings to bring it into?

Mike Davin

It is not fully rolled out throughout the international markets for a couple of reasons. One, we don’t have regulatory approvals in some markets, but we have submitted and are going to the process to get those approvals such as Korea or China.

Also we are now looking at the second tier of our distribution, as I mentioned our first rollout in the international markets to our direct offices, also at that same time we file the regulatory submissions and then to our major distributors. We are now looking at rolling it out through the remainder of our international distribution, which we plan to do probably within the first half of this year.

Bill Dezellem - Tieton Capital Management

And the relative strength that you saw in your international sales, to what degree was that a function of MPX specifically given that in the fourth quarter that was essentially a new product there versus just the international markets being a bit healthier?

Mike Davin

As I mentioned earlier, we are seeing the traction of the rollout. We also expect with the international markets that things will move a little bit slower from a process standpoint than in the North American market, but overall certainly the product has enabled our international distribution to maybe get into the door, where they would not have been able to with the platform and technology carrying prior to the introduction.

Although, the impact was certainly there in the third quarter. The significance was probably diminished due to the overall economic climate. We will be monitoring it very closely and be able to report back to you at the end of this quarter, how the activity was.

Bill Dezellem - Tieton Capital Management

This question maybe redundant, but trying to differentiate a little bit. With the international markets, are you sensing that they are in better shape from an opportunity or position of docks to purchase than the U.S. markets, or is this simply a laid factor, where what we’re experiencing in the U.S. will ultimately roll to those markets?

Mike Davin

We have there are pockets certainly better stronger. The impact of the North American market due to the economic situation certainly was the most significant as we reported in our numbers and felt probably without a dealt felt more by our North American distribution than our other distribution networks. We’ll have to see how the environment continues to evolve. Whether it’s our stimulus packages or packages in other develop to the governments around the world are passing to stimulate their economies, whether it’s China, whether it’s U.K., etc.

So, I think all of us are kind of on the sidelines right now hoping that these programs are going to jump start the business, not only our business, but industries around the globe that have been affected by the economic downturn.

Operator

Your next question comes from Sasha Kostadinov - Shaker Investments.

Sasha Kostadinov - Shaker Investments

That’s for taking my question. My question, I know you’re not giving specific guidance about 2009, but help me kind of walk through this quarter. If I takeout the bad debt charge and say $2 million or $2.5 million in expenses related to your cost restructuring that gets you to about $5 million in saving. You had an operating loss of about $5 million in the quarter.

So, if I assume that we don’t have debt charges, so that’s breakeven level. So, if I assume that we don’t have the same level of bad dead charges going forward would that be kind of a decent base level operating profit to come up with?

Tim Baker

I think again, as we’ve mentioned before our goal is to manage the business profitably, I think your analysis is fairly accurate.

Sasha Kostadinov - Shaker Investments

What is the policy, if you make a sale and you clear the debt to be a bad debt? If you go to the doctor and take the equipment back, how does that work?

Tim Baker

In all the situations where specific bad debts occurred, we are attempting and have in a number of cases succeeded in repossessing our equipment.

Sasha Kostadinov - Shaker Investments

Is that equipment affectively as salable as it was before or--?

Tim Baker

Yes, again depending on the situation, but yes in most part and most parts will recondition the equipment, but there are situations where the equipment is basically new and we can obviously resell.

Sasha Kostadinov - Shaker Investments

Have you considered any assisting any of the physicians who would like to purchase equipment with alternative financing, have you thought about that?

Mike Davin

No. We obviously thought about that, that obviously opens up lot issues relative revenue recognition and also when this environment I don’t think we want to be a banks. What we do is try to facilitate and put them with other third parties they can help provide the financing based on their credit situation.

Sasha Kostadinov - Shaker Investments

Did I hear that all the bad debt expense was put in the G&A line?

Mike Davin

That’s correct.

Sasha Kostadinov - Shaker Investments

In addition to the bad debt, what percentage of the costs that you’re incurring for the restructuring has been realize so far?

Mike Davin

There really wasn’t, for say a restructuring cost or nor to do we participate. A number of the changes we made we are basically just with people who have been here less than a year there was in the severance program.

Sasha Kostadinov - Shaker Investments

Okay, so then the cost savings will begin to accrue immediately then?

Mike Davin

Correct.

Operator

(Operator Instructions) Our next question comes from [Andrew Siegelstein – Unidentified Company].

Andrew Siegelstein – Unidentified Company

That you for taking the question, I was hoping you could give little more clarity on the extended impact of your international direct sales expansion, in terms of how you make that decision of which markets to go in to and to what extent that is a replacement of existing distributors or penetration in to new areas and then how that affects your margins and profitability.

Tim Baker

In terms of the decisions on what markets we go to, we certainly look at the population of the market, certainly the economic environment of the market. As we are direct in Europe, the UK, France, Germany, Spain. We just recently opened a second office in China, two offices in China and then we have two offices in Japan.

As I mentioned we will be announcing other direct offices, but our strategy is the go to countries where we believe there will be a strong demand for cosmetic application, the population certainly supports that and it supports the financial decision to open a direct office.

It’s important to note we still have some 19 distributors that cover close to another 50 countries for us. So, we are really positioning our direct offices in market that we truly believe one worth the expense, certainly the business opportunity long-term.

Operator

Thank you, at this time we have reached the end of the Q-&-A session. I will now turn the conference back over to management for any additional or closing remarks.

Mike Davin

Thank you everyone. We enjoyed speaking to you this morning and look forward to keeping you updated on our progress. Have a nice day.

Operator

That concludes our conference call. Thank you for joining us today.

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