Palomar Medical Technologies, Inc. Q4 2008 Earnings Call Transcript

Feb.17.09 | About: Palomar Medical (PMTI)

Palomar Medical Technologies, Inc. (NASDAQ:PMTI)

Q4 2008 Earnings Call Transcript

February 5, 2009 at 11:30 am ET

Executives

Dan Valente - Chairman

Joe Caruso - President and Chief Executive Officer

Paul Weiner - Chief Financial Officer and Treasurer

Kayla Castle - Investor Relations Manager

Analysts

Dalton Chandler - Needham & Company

Anthony Vendetti - Maxim Group

Andrew Schopick - Nutmeg Securities Limited

Unidentified Analyst [Alex Schuzikli]

Unidentified Analyst [Hisham Zaman]

Unidentified Analyst [David Ratlas]

Richard Deutsch - Ladenburg Thalmann

Unidentified Analyst [Robert Eising - Klingenstein, Fields & Co., LLC.]

Julie Hoggatt - Noble Financial Group

Richard Rinkoff - Craig-Hallum Capital

Operator

Welcome to the Palomar Medical Technologies fourth quarter and yearend 2008 financial results conference call. Please be aware that each of your line is in a listen-only mode. At the conclusion of the Palomar's presentation, we will open the floor for questions. (Operator instructions) I would now like to turn the conference over to Ms. 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’ fourth quarter and yearend 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 52026952 or webcast replay at Palomar's web site, www.palomarmedical.com through Thursday, February 19th.

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 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. 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

Thank you, Kayla, and thank you all for tuning into the conference call. Before I turn the conference call over to Joe Caruso, let me make a few comments about the situation. Needless to say, this economic recession is deeper than most people have seen in their lifetime. It is certainly is deeper than any I have seen in my 50 year career. Many companies may not survive this recession. However, we believe Palomar is in a strong position to weather this strong and we will be well positioned when the economy has turned around. We also believe that there will opportunities during this slowdown and Palomar will be poised to take advantage of them. America is known to have the most resilient economy in the world so let us see what happens. Okay, Joe.

Joe Caruso

Thank you, Dan. For more than a decade, we have developed 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. This strategy continues to serve as well during these difficult economic times. More than 40% of our revenue last quarter came from sources other than the end sale of our high priced capital equipment. This business model has enabled us to invest more research and development than our competitors and we will continue to do so. Our unique financial model works well regardless of the strength of the economy. Economic turmoil has made this last quarter another 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 additional tightening of available credit for our customers and their patients.

In past years, the fourth quarter has been our best quarter domestically as doctors scramble to use available tax write offs by purchasing capital equipment by yearend. However, due to the weakened economy, Section 179 tax incentive purchases were not a factor this year. Our goal is to remain cash flow neutral during this recession. This will not be easy as it is difficult to predict how long and deep this recession will be. We have taken steps to decrease our operating expenses in all areas of the Company including reductions in headcount and salary freezes. We will continue to monitor and adjust as we move forward. Our intent is to balance our short term operating goal of cash preservation with our long-term opportunities as we invest in research. We have built a core competency in light-based cosmetic device and we intend on maintaining it as we navigate through this tough economic periods. These challenging times could be with us for a while. We do believe however that the long-term outlook of light-based cosmetic devices remained a great opportunity and one that we are prepared to capitalize on. The strong companies will survive and we plan on being even stronger when the recession ends.

This is the opportunity that is presented to us. We will continue to build assets based on the strong foundation put in place over the past few years so that when the recession end and the economy begin to strengthen, we are ready. Although today, we are discouraged with the overall economy, this is also an exciting time for us. We are aggressively increasing our product offerings and we will focus our sales efforts on those decisions 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 liposuction, specifically minimally invasive laser assisted lipolysis. 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 are shipping Aspire systems to key opinion leaders throughout the industry. The ramp up in revenue is slow than we had anticipated due to the economy but we are gaining momentum and the feedback from those using the system is even better than expected.

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 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. Our distribution relationship with Q-Med has been terminated and we know have full control over our international distribution. There is a great deal of opportunity for us outside North America. We have also 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 very well and is on schedule. We are pleased with that collaboration and believe that the products we are working on today will provide us with opportunities to address very large markets.

Over the past few years, we have worked with Gillette and P&G and made substantial progress in moving light-based hair removal to the mass market, including receiving FDA-OTC clearance for our device. P&G continue to pays us $1.25 million per quarter prior to commercial launch of a product. We also continue to work independently on the consumer hair removal devices. WE continue to execute our intellectual property enforcement strategy. We have a portfolio of very broad patent in a number of areas. We have eight executed licensees in our hair removal patents and we are in negotiations with many other companies. To date, we have received almost $80 million in royalty payments from this valuable asset.

Hair removal case against Candela is stayed for the time being as the patent office reexamines the Anderson hair removal patents. Reexaminations are common and this was not unexpected. While we are not happy with the delay, the reexamination process gives us an opportunity to add new claims to the patent and show that the existing claims are valid overall prior act Candela and others had raised. Consequently, when we go to trial, the strength of the claims will be further fortified. In October, we went to trial in Texas over Candela's wrinkle patents. The jury found that we did not infringe the asserted claims and that those claims were invalid over prior act. This means the jury found that Candela did not invent the technology it sued us on and even if it did, our products did not use that technology.

Intellectual property enforcement was expensive for us in 2008. Given the stay of the hair removal case against Candela and the completion of the case in Texas, the activity level has decreased and with it, the cost of enforcement will as well. We are steadfast in our strategy and will pursue infringes of our technology. 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 needed for continued growth over the long term including cash and marketable securities. We are expanding our product portfolio with the Aspire body sculpting platform to address in ever changing market and we remain focused on investing in the long term for research and development and will continue to strengthen our valuable intellectual property position.

The recession will one day be behind us and when that day comes, we will be ready to exploit the tremendous opportunity for light-based aesthetic devices to enhance the everyday lives of millions around the globe. Now, Paul will brief us on the financial performance.

Paul Weiner

Thank you, Joe. Revenues for the quarter were $17.2 million as compared to $28.2 million for the same quarter last year. Product revenues for the quarter were $13.3 million as compared to $24.5 million for the same quarter last year. The 68% of product revenues were in North America and 32% were outside North America. As Joe had previously commented, product revenues are being affected by the weakened economy.

Ongoing royalty revenues are consistent with past quarters. However, with licensees reporting lower revenues due to the weakened economy, we would expect royalty revenue to decrease in the upcoming quarters. Funded product development revenues consist of funding from Johnson & Johnson of $485,000 for this quarter. 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 58% this quarter as compared to 73% for the same quarter last year. Fourth quarter 2007 product gross margin was positively affected by a $1.5 million royalty adjustment. Excluding this royalty adjustment, product gross margin for the fourth quarter of 2007 was 66%.

During the fourth quarter of 2008, we were able to balance sales price, volume and operating expenses which resulted in a close to breakeven bottom line and positive cash flows from operations. Research and development expense for the quarter was $3.5 million as compared to $4.4 million for the same quarter last year. Research and development as a percentage of total revenue was 21% this quarter as compared to 16% for the same quarter last year. Selling and marketing expense for the quarter was $5 million as compared to $6.3 million for the same quarter last year. Selling and marketing as a percentage of total revenue was 29% this quarter as compared to 22% in the same quarter last year. General and administrative expense for the quarter was $3.2 million as compared to $5.8 million for the same quarter last year. General and administrative expense as a percentage of total revenue was 19% this quarter as compared to 21% for the same quarter last year. General and administrative expense this quarter decreased from last year due to only $600,000 in legal costs associated with our losses with Candela as compared to $2.4 million for the same quarter last year. Now that the trial in Texas is over and the case in Massachusetts is stayed awaiting the reexamination of the Anderson light-based hair removal patent, we estimate quarterly litigation cost of less than $500,000 throughout 2009.

Loss before tax this quarter is $600,000 as compared to income before taxes of $5.6 million for the same quarter last year. Net loss this quarter was $400,000 or $0.02 per diluted share as compared to net income of $3.5 million or $0.18 per diluted share for the same quarter last year. We are pleased that we are close to breakeven in this weakened economy and that we had $2.7 million and positive cash flows from operations. The balance sheet is solid with ample cash and cash equivalents of $123 million. We have been successful in maintaining extremely low accounts receivable days sales outstanding of 43 with very limited write off even when many of our customers or potential customers have limited access to financing. This again is an area that we have been able to keep in check by balancing sales volume and positive cash flows from operations.

We are now ready to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Dalton Chandler - Needham & Company.

Dalton Chandler - Needham & Company

Could you give us the split between the US and international revenues?

Paul Weiner

Yes that was about 70/30, 70 domestic, 30 international.

Joe Caruso

It is 68/32.

Paul Weiner

Right.

Dalton Chandler - Needham & Company

Okay, and that is just the product piece, right, the product revenue piece?

Paul Weiner

That is correct.

Dalton Chandler - Needham & Company

And now that you have wined down the Q-Med deal, what do you expect internationally going forward? Are you looking to build a direct distribution network or are you going to try to continue to rely on distributors?

Joe Caruso

As you know, the Q-Med distribution agreement, we did it in such a way that we had test countries. So during that period, during this last 12 month period that we were trying this Q-Med distribution model out, we had only really one test country that we were going through. So we really did not disrupt our distribution model that we had previous to that. We still have the majority of our distributions in countries outside North America that are with full scale distribution separately owned or privately owned groups. We will continue to do that in the majority of the countries that we plan. We do however have some presence overseas. We opened up an office in Australia. We are trying that out as a test operation that is going along well. We have our operation in Netherlands that is also working out very well.

So on a country-by-country basis, we will take a look and analyze what might be best for particular venue with the majority of the efforts going towards independent distribution.

Dalton Chandler - Needham & Company

Okay. You mentioned you shipped the few Aspires. Were those for revenue or were those more demo units?

Joe Caruso

We actually shipped more than a few but we are shipping them initially to some of the key opinion leaders or trainers that we intend to use and we are still going through that. We are also shipping them to some of the more advance sites that are and have already been doing liposuction for awhile. The feedback has been excellent. A lot of the foreign pictures, a lot of the feedback we get not only from the physician but from the patients as well is actually beyond our expectation when we pressed out of this program.

So we are very happy with the rollout. Obviously we would like to roll more systems out but the economy, where it is, we are not where we would like to be with that product from a sales standpoint but from a clinical standpoint, we are in better shape than we thought that we would be.

Dalton Chandler - Needham & Company

Okay. So you did have Aspires in revenue for the quarter?

Joe Caruso

Right.

Dalton Chandler - Needham & Company

And in the sites where you have Aspires, what sort of usage levels are you seeing?

Joe Caruso

We see usage of a few treatments per week on average. We see some physicians that were the early purchasers of Aspire that are actually doing that most of the time now. So we are really happy with the fact that physicians that were doing for instance all traditional liposuctions are now doing almost all laser liposuction with our system. That is a very, very good indication.

Dalton Chandler - Needham & Company

Okay and then just to make sure I understand on the royalty revenue, $2.2 million you reported for the fourth quarter, that is always a quarter on arrears, right? So that was actually what your licensees sold for the third quarter?

Paul Weiner

That is quarter. So what we get in the first quarter will be for the fourth quarter. That is correct.

Dalton Chandler - Needham & Company

Okay. And then just on the operating expense, I think it was about $11.2 million for the quarter. Is that a good level to use going forward or do you expect some further cost savings?

Paul Weiner

Yes, it is a fairly good level to use going forward. We have made adjustments as we go and in the fourth quarter we did that based on what we saw in revenues and so hopefully that will continue to be flexible in the future but that is a pretty good number as far as operating expenses to use moving forward.

Operator

Your next question comes from the line of Anthony Vendetti - Maxim Group.

Anthony Vendetti - Maxim Group

I just have a couple of follow ups on the J&J. Joe, you had mentioned that is on schedule and going well. Is this more on, I know it is up to J&J I guess but are you anticipating some type of products by the end of the year or is this more like a 2010 situation and it is a 510(k) approval process, correct?

Joe Caruso

Right, 510(k) approval process but we cannot give our target dates.

Anthony Vendetti - Maxim Group

Okay. So, no kind of timeframe at this point and it is a combination of a, J&J and then the FDA so that is why it is tough to come down to dates, correct?

Joe Caruso

Our plan is pretty solid but we are not allowed to publicly talk about our target dates.

Anthony Vendetti - Maxim Group

Okay and in terms of the headcount reduction, some companies are giving the total percent of their total headcount. Was there a percent that you reduced total headcount or a number of actual employees?

Joe Caruso

Yes but we have decided not to talk about that publicly for now.

Anthony Vendetti - Maxim Group

Okay and sales, you had traditionally about 38 to I guess 40 territories. Has that come down a little bit or is it still around 38 to 40?

Joe Caruso

Yes, we have reduced the number of territories in relation to the level of product revenues. So those have somewhat come down.

Anthony Vendetti - Maxim Group

Okay and just a follow up on this lipo, I know it has been mostly the opinion leaders, I thought you mentioned you have sold some, do you want to give a number on that and if not, what was the ASP on that?

Joe Caruso

ASP is where we targeted and where we like to be and even though we are placing those and focused, turning our attention on the key opinion leaders, they are purchasing those so we are not giving those systems away. It is a piece of our revenue. We do not breakout which components of our product line is at different levels but it is a level that is a good level. Obviously we would like to have more Aspires, more StarLux sales too. It is just the tough economy and sales are down. It is less than we anticipated in total but we are still where we wanted to be from a total rollout clinical place.

Anthony Vendetti - Maxim Group

And in terms of, you mentioned this is your first foray into disposables. What is the disposable component, the laser fiber and if so, how is that being packaged or sold?

Joe Caruso

Alright, the disposable piece is a fiber and tip. The tip is a one-time use disposable and the fiber is a multiple use disposable. It is a good system. The tips and the fibers, to their extent, are captive disposables so you can only use our tips with the system. People are really happy with the tip. It is a sterile that comes in a sterile pack, very easy to use. It comes with three different sizes with three different body locations. So that is working extremely well.

Anthony Vendetti - Maxim Group

Okay and in terms of litigation, I know you formed the FTOPP which is the joint patent pool with I guess, with now Star Medical and MGH. Can you talk about the strategy around that and around that patent portfolio and the fractional technology?

Joe Caruso

Yes, the strategy is very similar to the strategy that we employed in the hair removal cases. We have formed the strategic alliance between Mass General and Reliant. We have incorporated within that alliance a number of very key patents all around this fractional area. We feel that the strength of the portfolio is such that anyone that has products that use basic or base fractional technology will fall within this area and we are contacting companies that have fractional products that are in the field and offering them licensees. That is the first step.

Second step is to actively pursue enforcement strategies once we shake out who wants to take a license on a voluntary basis or not. It takes a while because as you might expect, companies have to analyze not only the patents that are in the portfolio and there are number of those in the portfolio but also have to analyze their products in relation to that and whatever else is out there in the intellectual property world. So that takes a little while on the hair removal case but I think that over the course of time, we will see this patent portfolio, the similar strength as a hair removal portfolio.

Anthony Vendetti - Maxim Group

Okay and lastly, I think you mentioned in the beginning about committing to trying to stay cash flow positive in this difficult environment and you were able to do that this quarter. You have by my calculations a $117 million in net cash, obviously plenty of room even if you were to be slightly negative but your goal and correct me if I am wrong is to try to keep expenses inline with the anticipated revenue and try to stay as close to positive cash flow as possible as we await the turnaround in the economy, is that correct?

Joe Caruso

That is right. Really two goals for this year and maybe throughout this whole recession which is the cash preservation from operations and also to keep the core competencies that we built and the light-based aesthetic devices throughout the Company which is research and development, clinical trial, support, sales and marketing. Keep those core competencies that we feel so that we are in very good position when the economy does turn around. And that is basically the two things that we are really looking at certainly in 2009 depending on what happens to the economy probably in 2010 as well.

Anthony Vendetti - Maxim Group

Okay, so question on that follow up on the core competency, we have AAD and Aslan around the corner and you also mentioned in the press release about keeping, you want to make sure you continue to spend on R&D. Is there anything in 2009 in terms of new products that we should be expecting either at one of these competencies or at the later date?

Joe Caruso

Yes, we have got some new things on the pipeline. It is a little bit early to talk about that right now but we have some enhancements to our product portfolio that we think will serve us well this year.

Operator

Your next question comes from the line of Andrew Schopick - Nutmeg Securities Limited.

Andrew Schopick - Nutmeg Securities Limited

I need a couple of clarifications. First, 100% of the SlimLipo shipped recognized as revenue or is there some percentage that it is recognized and another percentage that is still in inventory?

Joe Caruso

Whatever was shipped, we will get the order then and people who have been properly trained, we shipped the Aspire and it is recognized as revenue.

Andrew Schopick - Nutmeg Securities Limited

Okay. So there are no products that have been shipped in the field that are waiting some revenue recognition requirement. Once they have been shipped, they are being recognized as revenue.

Joe Caruso

That is correct.

Andrew Schopick - Nutmeg Securities Limited

Okay. Now, Paul, could you help me reconcile the 42% of our revenue generated from sources not related to our capital equipment sales. I was trying to do a few quick calculations from the press release and I am not sure what that means because I do not know for example if you have a revenue of $1.25 million in the quarter and the $5.2 for the year, I am not sure what the composition of that was but if I just take the three lines below the product revenue that has to be about $3.7 million or 22% and I know there are some service component in here and I would really like to understand how you are defining this. What this 42% represents?

Paul Weiner

That is exactly it, Andy. The remainder would be related to service within our product revenues line item. That would make us that exact number, yes.

Andrew Schopick - Nutmeg Securities Limited

So that implies if I do this calculations correctly that you had about $3.9 million or $4 million of service related revenue.

Paul Weiner

In those numbers, I mean the calculation around that 40%, the difference is related to service.

Andrew Schopick - Nutmeg Securities Limited

Yes, okay. That is what I have done. Now, just clarify for me, the other revenue of $1.25 million for the quarter and $5.25 for the year was comprised of what?

Paul Weiner

That is the Procter & Gamble that we will receive on a quarterly basis related to them, not exclusively licensing our home hair removal light-based patent.

Andrew Schopick - Nutmeg Securities Limited

So, it is all P&G.

Paul Weiner

That is correct.

Andrew Schopick - Nutmeg Securities Limited

Okay, thanks very much. That clarifies that. I do not know what else to say. This is one tough spell for this industry. That is for sure.

Dan Valente

For many industries, I would say.

Operator

Your next question comes from the line of [Alex Schuzikli].

Unidentified Analyst

Today, you talked a bit about the cash level that you have. I mean given that you believe in the long term prospects to your industry, you have a lot more cash that you need. Have you thought, in terms of share buyback and also in terms of other kinds of industries you are trading kind of well below in their cash value, does that give you any idea as to what the future might be in terms of what you want to do with share buyback probably?

Paul Weiner

Yes, as far as the share buyback is concerned, we do have a buyback program in place. During the quarter, we used about $1.4 million to buyback about 135,000 shares at average price of around $10 per share. So to date, we purchased about 640,000 of the million that we have authorized for a total about $9 million that at average price about $14 a share over this period of time. And we plan on continuing at this point in time, continuing the buyback program moving forward. And as far as opportunities that present themselves as far as with the industry and lower valuation, we are always looking at those types of opportunities.

Unidentified Analyst

Does the fact that your stock is so cheap make you want to be more aggressive on the buyback in terms of the expanding and reauthorization that maybe going a bit faster?

Joe Caruso

There is a bit of a balance between cash being king, looking at opportunities with lower valuations out there and consolidation and buybacks. So, we are trying to balance all of that.

Operator

Your next question comes from the line of [Hisham Zaman].

Unidentified Analyst

I just had a question on the international front. From what I am seeing right now based on the breakout, the 68/32, it seems that product revenues might have been around $4.2 million international, is that correct?

Paul Weiner

That is correct, yes.

Unidentified Analyst

And the third quarter 2008 was around $9 million?

Paul Weiner

Third quarter of 2008 was around $7 million.

Unidentified Analyst

Around $7 million, okay. So, I guess the question I want to ask is, is this just a macroeconomic downturn that is driving that down? Does this tie in to the Q-Med agreement or cancellation? What would be explaining that sequential down tick?

Paul Weiner

It is really two things. It does not at all relate to the Q-Med and two that they do relate are somewhat interrelated. One is the macroeconomic environment and certainly, it is depressed throughout the world, Europe and elsewhere. The other big effect I think faster is the foreign exchange weight where the cost from outside the US cause more for them to buy products from the US in today's rate environment than it has in the past. So, between the economic environment and the weakness of that as well as the strength of the dollar compared to international currency, at this point in time, both of those are major factors internationally where domestically the foreign exchange is not an issue but under the economy and credit crisis, it is.

Unidentified Analyst

I see. Just a few questions on your financials. So, 58% of product margin during the quarter, I am wondering, is that mostly lack of overhead absorption? Is there some ASP pressure, any clarification?

Paul Weiner

Yes, for the most part, it is related to volume. Certainly in these times, depending on who can get financing and tougher times, there is, you have to take pricing into, as a factor of when you are selling the product. But the majority of this change in margin is related to pure volume.

Unidentified Analyst

I see. So, I guess the concern is you kind of guided toward around $11 million operating expenses on a quarterly basis. I am just wondering if, I mean as far as profit always concern heading into 2009, how much leverage is left in the model where you can maintain the profitability heading into the year? I mean are you planning in bringing down any other expenses? Is R&D coming down, sales and marketing? Just any clarification would be appreciated.

Paul Weiner

Yes, a lot of it really depends on the top line. Obviously a lot of it is driven based on where we have a top line and our strength is certainly within research & development and we are in business and we are in business not just in short term but in long term. Our main goal is to be as strong of a company as possible coming on the other side of this economic weakness. And the only way you could do that is by continuing, as we have in the past, spend a lot of money fortunately to research and development as we have in the past and as compared to competitors we have. So we planned on continuing to do that but we will balance that again just where the top line is and we do watch all of our other expenses, whether it be in marketing area or within G&A. We are monitoring those much closer than we ever have in the past and then we will try to balance that with whether our revenues coming from product sale.

Unidentified Analyst

I see and just couple final questions. As far as the $500,000 per quarter in legal expenses for 2009, what are you baking into that? Is there anything planned from, is this simply Candela or there are other things that or Candela or actually, just any color you can offer would be appreciated.

Joe Caruso

That is what we have. We have the fractional patent sales there. We have the hair removal patent which is stayed but it is still in reexamination and other expenses related to it and as far as the guidance on that and as it has been to the past, we were not defending ourselves against the Candela lawsuit that is down in Texas, we gave guidance that the litigation expense should be no more than $500,000 a quarter. So, we are back at that level of no more than $500,000 a quarter. That is what we believe on a high end but it depends on what comes out. So, it could be below that number as well. It is just very hard to know exactly where legal litigation bills are going to be on a ongoing basis but we are trying to give some guidance on the outer side of $500,000 or the upper side of $500,000.

Unidentified Analyst

Okay and I guess final question off of that is, has anyone been notified of a potential patent infringement on the FTOPP?

Joe Caruso

Oh, yes. Just like in the hair removal patent where we notified many competitor. We have done the same thing with the fractional patent, yes.

Unidentified Analyst

Okay, I am not sure if you will be willing to disclose how many, not specifically to but how many competitors have you notified?

Joe Caruso

No, but there are a lot of competitors out there doing fractional tight treatments.

Unidentified Analyst

Okay, I thought I would give it a shot.

Operator

Your next question comes from the line of [David Ratlas].

Unidentified Analyst

The last caller, you clarified some of the delta in the gross margin year-over-year and you said that last year was there was an adjustment to that number. My question is the inventory is continuing to build, is that still directly attributable to the Aspire or is that implying more pricing pressure where this lower margins or lowers, is what we would expect going forward?

Joe Caruso

No, I think that the inventory level actually is pretty consistent with where it has been over the last few quarters. If you are looking at, so and it does relate mostly to the Aspire and build up in Aspire that is where the majority of that does come from.

Unidentified Analyst

Okay. So, the 58% gross margins, is that a good number to basically use going forward?

Joe Caruso

It is hard to say. It really depends on volume. I do not see ASPs necessarily changing, affecting that number. So I guess that is a reasonable number to use in this environment and just to give you a background on the inventory question, the increase in inventory that you might be referring to is related to potentially from the press release comparing December of 2007 to December of 2008. But the build up in the Aspire over the last two quarters, we have been operating it around the same $16 million this year and inventories there has not include.

Unidentified Analyst

Okay. That is $15.9 last quarter. The only other question is a simple just balance sheet question. I see your marketable securities; your non-current marketable securities dropped slightly. But is that because you were able to redeem some or is that you have taken a mark against those?

Joe Caruso

A little bit of both actually. We tried the conservative approach and we did take a little bit of a discount on those, the ones that remain but also some were redeemed in the fourth quarter and obviously we are hoping that they would continue to be redeemed as we move forward.

Unidentified Analyst

Okay. Well, congratulations on the October litigation settlement and good luck going forward.

Operator

Your next question comes from the line of Richard Deutsch - Ladenburg Thalmann.

Richard Deutsch - Ladenburg Thalmann

I would like to have you speak to your credit availability and line credit that you have outstanding. I seemed to remember I have read that you just got at the line of credit somewhere. So, can you just go over that, Paul, quickly with me?

Paul Weiner

Sure. We had a $30 million line or revolving note that we can borrow and pay off of as we wish at very favorable rate that it gives us access to additional capital as needed.

Richard Deutsch - Ladenburg Thalmann

So there was not a specific item that you are looking for to spend money on that you would to beef up your credit?

Joe Caruso

I mean not specifically. It is to support the expansion of these facilities that is why we put it in place but is not earmarked. It could be use for any capital requirement that we might have going forward.

Richard Deutsch - Ladenburg Thalmann

Alright. So, you are actually looking to expand your physical plant. Is that the answer to basically what I am looking for here?

Joe Caruso

That is correct. Yes, we are looking at new facility that at least comes up in our current facility moving to another facility, yes.

Richard Deutsch - Ladenburg Thalmann

Is that your administrative or your manufacturing? What kind of facility are you looking to?

Joe Caruso

It will be the whole company. We only have one facility here in Burlington, Mass just outside the Boston and that whole facility from research, development, clinical, manufacturing, shipping, service, administration, all of that is all at one facility and it will be at the new location as well.

Richard Deutsch - Ladenburg Thalmann

So you are actually going to own this facility or how does that going to work?

Joe Caruso

That is correct. Under our current situation, we are currently leasing and in near situation, we will own the facility.

Richard Deutsch - Ladenburg Thalmann

Okay, we that answers my question.

Operator

You have a follow up question from the line of Dalton Chandler - Needham & Company.

Dalton Chandler - Needham & Company

I think this maybe a related question but I see your property and equipment had a big jump in the quarter. Is that related to the new facility?

Joe Caruso

That is, yes.

Dalton Chandler - Needham & Company

And I also wanted to just reconcile the fact that you said the cash from operations is positive, about $2.7 million but your actual cash balance declined by around $5 million. Was that also facility related?

Joe Caruso

Exactly Dalton, yes.

Dalton Chandler - Needham & Company

Okay and then just one other question here on the Aspire, you mentioned that the feedback you are getting has been better than expected. Could you just talk about what that mean in terms of speed or efficacy or what are people saying about it?

Joe Caruso

Well, people really like that fact that it is an easy procedure to do. The fatigue that physicians usually feel when they do general liposuction is not present in this SlimLipo procedure because we have such good selectivity in the wavelength we use, the probe which is this stiff fiber really goes smoothly through not only the fat tissue but the fibrous fat tissue as well and that basically melts the fat down to a liquefied form and then it is very easily removed with smaller cannulas than what is normally used in liposuction. So, less bruising, faster, less fatigue on the physician and the overall result is pretty amazing because the skin actually tightens up after this procedure.

So normally when you have a large liposuction procedure, you have skin that is kind of loosen and really not the effect that people are really looking for but in this procedure, really within a week or two, you have just an unbelievable result where you have bulk tissue removed but also much tighter, smoother skin and that is the clinical effect that is not really you cannot get with any other type of procedures. So the doctors are really excited about that, not only on large body parts like the abdomen but also under the arm or in the saddle bag area, love handle area, neck area; these areas are areas that physicians are really getting very good results and the patients are thrilled because normally not on a general anesthesia so they are up and about the next day, no bruising, no sutures, so it is a very good procedure.

Dan Valente

If you want to look on our website actually, there are some good clinical pictures in our website and everyday we have additional clinical pictures that continue impressed I will say really anybody that looks at it. They speak for themselves.

Dalton Chandler - Needham & Company

Okay, are you primarily placing this with plastic surgeons or is that dermatologist or some combination?

Joe Caruso

Lot of plastic surgeons, some dermatologists that is doing liposuction was also buying the procedure equipment but yes, quite a few plastic surgeons.

Dalton Chandler - Needham & Company

Okay and they are doing really all areas of the body. They are not limiting it to some of the smaller areas?

Joe Caruso

Well, the system is so fast because we have this high level of absorption that they are using it on a lot of large areas.

Operator

Your next question comes from the line of [Robert Eising - Klingenstein, Fields & Co., LLC.]

Unidentified Analyst

Well, I am interested in the economics of the traditional treatments. Has there been any change from the standpoint of the physician in that?

Joe Caruso

Well, as you know I mean a lot of the plastic surgeon's business is down in this economy because those procedures are very expensive, the surgical procedures that they usually do and even the liposuction procedures that they usually do because many times, those or actually all times, they have done under general anesthesia which is more expensive type of procedure. These new laser lipolysis procedures are done under local anesthesia so it takes that cost out and they are being done at price points that are less than for the most product sort of the larger body areas than with traditional liposuction. So it is a good time for this procedure when you think about the economic backdrop.

Unidentified Analyst

The economics from the physician standpoint when using the traditional models has decayed quite a bit because of the frequency, is that the idea?

Joe Caruso

Frequency and the fact that there are just not as many people doing those large procedures as it used to be because of the economy.

Unidentified Analyst

So is that the reason that the banks are not lending?

Paul Weiner

Well, the reason I think that the banks are not lending is specific to the number of treatments being done but more to the whole financial tightening or credit crisis that we are in and across the Board, they have increased the credit requirement and credit scores that people are required to have before they will even look at financing anybody. Also there is some degree they are feeling that they are not looking to fund any new businesses or anything that is right out of their niche so when you are talking about certain procedures, they are more than happy to lend to plastic surgeons and dermatologists that have been doing this particular procedures or specialize in aesthetic area but only even then if they have very higher credit scores outside of that area when they are talking about general practitioners or the physician or especially med spas that is even much tougher to get credit even if they do have higher scores which is a much higher threshold overall with capital equipment because this is relatively expensive equipment. Financing capital equipment in this environment is just relatively tough.

But I could tell you that with good credit scores and especially amongst plastic surgeons, the lenders that we do work with are very aggressive as far as rates are concerned. They do want to do lending when they can and they are being very aggressive. They are just being a lot tighter on credit requirement.

Unidentified Analyst

So the basic model that we had a couple of years ago major market expansion through additional channels was essentially put on-hold because of the current credit conditions and the traditional markets frequently have machines in place already. Is that a fair summation of what is going on?

Joe Caruso

I would not say necessarily because they have the machines already but yes, as far as your first part of the statement, yes. It is tougher to expand as we had into the other non traditional market because of the credit situation for the time being but because of the reaction we have gone with our products as far as with liposuction type products, those are better suited towards the higher end of market anyway but I think as time go on, we should be able to expand that into the other market as economics improve.

Unidentified Analyst

Have you looked at using your cash on the balance sheet to improve the financing equation for customers?

Joe Caruso

We looked at it. We have not aggressively drawn up to that but we do continuously look at it and we will do that going forward as well.

Unidentified Analyst

And what do you think that your market share is by channel? Has that changed?

Joe Caruso

No, I do not think the market share by channel is changed. Our percent sale to the different market has changed. Historically over the last, since 2004 anyway, our mix has been about 40% to derms and plastics and 60% to other. This past quarter it was 50/50 so you could see the trend moving more towards the derms and plastics than they were in the past because of the leases that we had previously talked about.

Operator

Your next question comes from the line of Julie Hoggatt - Noble Financial Group.

Julie Hoggatt - Noble Financial Group

I was wondering if you can give us any insight as to whether or not you have meeting scheduled with Gillette and are they regularly scheduled meeting or if you had any recently?

Joe Caruso

They are working on their own and we are working on our own. We do have contact with them though so we do not have regularly scheduled meetings but we do have periodic contact.

Julie Hoggatt - Noble Financial Group

Okay. No further insight in that I suppose. Can you give us as a percent of system sales like what was SlimLipo?

Joe Caruso

No, we do not break it out by products or application really.

Julie Hoggatt - Noble Financial Group

Okay and then the headcount reduction, can you give us the percent of the sales and marketing and the percent of it in G&A?

Joe Caruso

No, we are not going to breakout the percentage but we will say that we did reorganize within our sales group to be more efficient in this market and whether it be G&A, R&D, manufacturing, we looked across the board as far as what we could do in these times and we made appropriate adjustments.

Julie Hoggatt - Noble Financial Group

So number of territories went from what to what, can you give that?

Joe Caruso

Yes, we had about 40 territories as far as direct selling territories. It is now in the neighborhood of about 30, 33 territories.

Operator

Your final question comes from the line of Richard Rinkoff - Craig-Hallum Capital.

Richard Rinkoff - Craig-Hallum Capital

I just wanted to clarify a few numerical things. You said that US was 70% of revenue and North America was 68%, did I get that right implying Canada was 2%?

Joe Caruso

North America was 68.

Richard Rinkoff - Craig-Hallum Capital

Right but is US 70? Excuse me, those numbers do not chive, do they? So I am trying to isolate US.

Joe Caruso

US is 62%.

Richard Rinkoff - Craig-Hallum Capital

Sixty two percent, okay. J&J traditionally had been paying you $400,000 a quarter and they paid you more. Should we infer anything from that or is it likely to be around $400,000 going forward?

Joe Caruso

No, it should be around $400,000 going forward but as in the past and into future, as we work on the additional things that are not earmarked specifically within our budget, some additional payments from time to time on a quarterly basis but it is said to be or estimated to be around $400,000 a quarter. That is correct.

Richard Rinkoff - Craig-Hallum Capital

Did I get you right that you have received roughly $80 million in royalties from hair removal?

Joe Caruso

Yes.

Richard Rinkoff - Craig-Hallum Capital

Okay. On your income statement line, you have got other expense $255,000. What is that and where do you want to put interest expense?

Joe Caruso

Foreign currency, Paul?

Paul Weiner

Yes, that would relate to foreign currency. That is correct.

Richard Rinkoff - Craig-Hallum Capital

So is that a balance sheet item that you need to reflect on the income statement?

Joe Caruso

Yes, it just relates to because it most relates to our facility in Australia because of the inventory we have out there and other things. We have to market to mark those assets based on the foreign exchange at that point in time and as of December 31. That is with the other expense line item relates to.

Richard Rinkoff - Craig-Hallum Capital

Right. So that number, assuming currencies did not change, that would be zero going forward, and if that could be swing to the positive sometime in the future?

Joe Caruso

Right. That is correct, depending on where our rates go between here and Australia really.

Richard Rinkoff - Craig-Hallum Capital

Okay and interest expense, I imagine there was not much in Q4. You are going to net that out of interest income?

Paul Weiner

That is correct and we do not anticipate a lot of interest expense going forward either.

Richard Rinkoff - Craig-Hallum Capital

Okay because they are almost giving it to you, right? Couple of years ago, you suggested that profits earned in consumer market could dwarfed that earned in the profession market, did I get that correctly and do you still stand by that?

Joe Caruso

Yes, I think over the long haul that is true. I mean I think that the use of these types of technologies, light-based technologies to home is a big business and big business opportunity. It is still very early and I think that obviously the current economic conditions do not help much but I think over the long haul because there are many applications and many versions of the technology that could be millions and millions of homes around the world with good, consumable revenue streams. So yes I think that that is correct still. There has not been a change to that.

Operator

And there are no further questions at this time. I will now like to turn the call over to Mr. Dan Valente for closing comments.

Dan Valente

Thank you, operator. Well, I hope we have answered your questions as directly and clearly as possible and thanks for tuning in and we look forward to talking to you on the next call and let us hope the economy start to show some sense of recovery by then. Have a good day.

Operator

This concludes the presentation for today. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!