Executives
Kayla Castle - IR Manager
Dan Valente - Chairman
Joe Caruso - President and CEO
Paul Weiner - CFO
Analysts
Dalton Chandler - Needham & Company
Anthony Vendetti - Maxim Group
Anthony Petrone - Maxim Group
Jose Haresco - Merriman
John Sparks - Private Investor
Isaac Ro - Leerink Swann
Amelia Balonek - Ladenburg Thalmann
Julie Hoggatt - Noble Financial
Richard Rinkoff - Craig-Hallum
Andy Schopick - Nutmeg Securities
Ross Nelson - Vermillion Asset Management
David Ratliff - Doucet Asset Management
Ashvin Dhingra - Glacier Bay Capital
Palomar Medical Technologies Inc. (PMTI) Q4 2007 Earnings Call February 7, 2008 11:30 AM ET
Operator
Welcome to Palomar Medical Technologies' fourth quarter and year-end 2007 financial results conference call. (Operator Instructions).
I would like to turn this conference over to Kayla Castle, Investor Relations Manager of Palomar. Ms. Castle, you may begin.
Kayla Castle
Thank you. Good morning and welcome to the Palomar Medical Technologies fourth quarter and year-end 2007 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, passcode 18710466 or a webcast replay at Palomar's website, www.palomarmedical.com through Thursday, February 21st.
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 provision 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, 2006 and the company's quarterly reports on Form 10-Q which are on file with the SEC and available through Palomar's website.
To supplement Palomar's consolidated financial statement presented in accordance with GAAP, management uses the following measures defined as 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 performance 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 in assessing Palomar's performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management's internal comparison to Palomar's historical performance and our competitor's operating results. 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 rather forward-looking statements maybe relied upon subject to the previous Safe Harbor statement as of the date of this call. The information in this conference call is the property of Palomar and should not be reproduced, recorded or otherwise published without the expressed 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 the Dan.
Dan Valente
Thank you, Kayla. Thank you all for participating in this conference call. You know, the Palomar people here are motivated to work hard and make Palomar a better company every day and serve our investors as best we can. Our strategies are to exploit market opportunities to maintain our leadership position through innovative technologies. Our business sector, namely, the professional market, intellectual property, maintenance and enforcement in consumer market opportunities are progressing well. Our goal is to continue to lead the way in our industry by bringing meaningful solutions to the world of aesthetics.
Now, let's hear from Joe.
Joe Caruso
Thank you, Dan. We remain focused on executing our diversified strategy by addressing the professional light-based aesthetics market today, working to driving our technology to the mass consumer market and capitalizing on the value of our extensive patent portfolio.
As stated in previous calls, we had a 50% turnover in our domestic sales reps in 2007. That turnover in our domestic sales force affected our sales throughout the year. We have since filled all open territories with new sales reps. Based on history, it generally take about nine months for new sales reps to get up to speed with our technology and competitive products. We have seen positive signs of improvement from our North American sales group.
When comparing the fourth quarter to the third quarter, product sales in North America are up 17%. Accounts receivable days sales outstanding has improved from 85 days to 59 days and gross margins before any one-time adjustments are slightly higher. These are the types of trends that we have been working toward and like to see, but we still have some work to do. We continue to have an aggressive training and mentoring program and we have instituted measures geared toward employee retention.
Turning to the rest of the world. We announced a few weeks ago a bold move to expand our presence outside North America. On January 9th, we announced a strategic collaboration with the European based company Q-Med. A leading biotech medical device company and the producer of Restylane, one of the most popular and widely distributed dermal fillers in the world, with over 9 million treatments provided so far.
Q-Med sells Restylane globally through a network of fully-owned sales companies, partners and distributors. For over a year, we have analyzed certain drivers in the aesthetic market, and we have determined that dermal fillers and toxins are the first step for a new physician getting into aesthetic treatments. Q-Med has a very large sales force outside North America that calls on tens of thousands of accounts. A large portion of these accounts, either have only some of the light-based technologies we offer or none at all. This collaboration should provide an excellent opportunity to address that untapped market.
Another trend present in the aesthetic professional market is that physicians that do not have fillers and toxins and light-based devices, many times use all three on the same patient. With this collaboration, we can market the use of all these technologies together. In addition, Q-Med has the best brand recognition of any filler, Restylane, worldwide. Palomar is known for advanced technologies and the best energy-based solution on the market. Together, we can now offer a full suite of products to the professional market. Q-Med is present in over 70 countries, and we believe this collaboration will catapult us beyond the growth outside North America that we could expect on our own.
Over the next two years, we would work together to determine which countries outside North America would best be served through Q-Med and the transition in these countries to their control. This is a long and difficult process. Each country has its own unique circumstances and will have to be handled separately. We have already started the process of planning for transition. We anticipate in the short term, we could see a negative impact on our international sales as we transition countries from our distributors to Q-Med's control and we believe that the full transition will take more than two years. But if successful, we believe that we could have the best distribution system in the industry.
Our European office will support Q-Med and we anticipate additional support locations around the world as we expand our collaboration. We have been working with Q-Med management for over the past few months and we are now ready and very happy with this open collaboration. We are looking forward to a long and very profitable relationship with them.
We have developed a new fractional applicator handpiece for Lux2940, for more aggressive skin resurfacing with limited downtime that attaches to our StarLux platform. We have shipped the first few handpieces and we have outfitted most of our sales staff. The early feedback is very good. Earlier this month, we introduced this exciting technology at the IMCAS meeting in Paris, with a live demonstration for 100s of physicians. This technology complements our non-ablative fractional technology and should be a positive addition to our product portfolio.
We are also getting positive feedback from our Lux deep IR fractional handpiece for skin tightening. This technology is the latest generation of a deeply penetrating broadband energy delivery system. All of our fractional technology introductions have been well received by physicians. We believe fractional technology has a bright future in the aesthetic light-based treatment market. This technology is an important addition to our core strength and a large portion of the systems we sell include this novel treatment approach.
Our fractional technology was highlighted at the American Academy of Dermatology meeting last week in Texas. At that meeting, which is the largest dermatology meeting of the year, we also introduced our latest handpiece for Lux1440 for even faster non-ablative fractional skin resurfacing. This again complements our fractional series and provides physicians with all the tools they need. We will begin shipping the Lux1440 at the end of this quarter.
We have made tremendous progress over the past few years with our plans to take our technology directly to the consumer market. The Johnson & Johnson program is moving along nicely in some key areas of interest. 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 been working with Gillette, P&G and have made substantial progress in moving light-based hair removal for the mass market, including receiving over-the-counter OTC clearance from the FDA for our device. We have a proven intellectual property position and have defended it successfully against infringes. We believe that light-based hair removal in the home is a near-term reality and this is one of our most valuable assets. We intend to exploit it to the maximum benefit for our shareholders.
In mid-December 2007, P&G indicated to us their desire to change certain terms in the agreement, including potentially retaining only a non-exclusive collaboration with us. On December 21st, we issued a press release announcing that we extended the launch decision with P&G until February 29th of 2008 in order to allow us to consider P&G's proposal.
At this time, we are in discussions with P&G at their request to change our agreement moving forward. We are evaluating their proposal and we will decide whether we can come to an acceptable agreement with P&G as compared to the alternative of potentially working with other parties. We believe there is tremendous value in the exploitation of our technology in the consumer hair removal market, whether we work with P&G or others. We will obviously keep you informed of our decision.
We are also executing on our intellectual property enforcement strategy. We have a portfolio of very broad patents in a number of areas. Over the past few years, we have been able to increase the number of licenses of our hair removal patents to nine and in the past two years, we generated over $25 million in profits from this valuable asset.
We will continue to protect our technology through patent enforcement and we will seek damages from those who infringe including those that might choose to enter the consumer market. Our patent enforcement strategy is expensive, but we are steadfast in our position and we continue to enforce our intellectual property position at a vigorous pace.
Overall, we are bullish on the growth prospects of the overall light-based cosmetic market and we continue to focus on building the asset we need to exploit this lucrative business opportunity. Our industry is in its infancy and we are excited to be part of it. Now, Paul will brief us on the financial performance.
Paul Weiner
Thank you, Joe. As Kayla stated in her opening statement, the following financial analysis does include certain non-GAAP financial measures. We believe that these non-GAAP measures are useful to investors in allowing for great transparency with respect to supplemental information used by management and its financial and operational decision making. For more information on these non-GAAP financial measures, please see the GAAP to non-GAAP reconciliation included in the press release that you should have received earlier today.
Revenues for the quarter were $28.2 million as compared to $28.9 million for the same quarter last year, excluding back-owed royalties. Royalty revenue in the fourth quarter of 2006, include $10.6 million related to back-owed royalties. Excluding these back-owned royalties, royalty revenue for the fourth quarter of 2007 increased to $2.4 million from $1.5 million for the same quarter last year. Product revenues for the quarter were $24.5 million, as compared to $26.5 million for the same quarter last year. Product revenues for the quarter increased by $1.4 million over the $23.1 million in the third quarter of 2007.
As we talked about throughout 2007, as a result of sales reps turnover during 2007, we do not have the seasoned sales force that we've had in the past. All the sales territories have been filled but we expect that it will take some additional time for us to get the sale grew back to the level of productivity we have come to expect from the seasoned sales team.
We have instituted measures geared toward employee retention and we continue to aggressively train our new sale reps.
Funded product development revenues increased from the same quarter last year due to amortization of the Gillette $2.5 million go decision payment following FDA OTC clearance in December 2006 that we recognized throughout 2007. Amortization of the Gillette $1.2 million amendment in February 2007, which is recognized throughout the remainder of 2007, offset by a reduction of funding from the U.S. Department of the Army as that project has come to completion.
Funded product development revenues are expected to be approximately $400,000 per quarter in 2008. Product gross margin increased to 73% this quarter, as compared to 69% for the same quarter last year. Product gross margin was positively affected by a $1.5 million royalty adjustment related to royalties we had accrued for MGH, Massachusetts General Hospital on certain of our product sales sold prior to the fourth quarter of 2007. Excluding this royalty adjustments, product gross margins were 67%.
As a percentage of worldwide product revenues, expansion efforts outside North America resulted in product revenues increasing to 27% this quarter versus only 23% for the same quarter last year. Such international sales are at lower distributor transfer prices as compared to end customer prices in North America.
Research and development expense for the quarter was $4.4 million, as compared to $3.6 million for the same quarter last year. Research and development, as a percentage of total revenue, increased to 16% this quarter, as compared to 12% for the same quarter last year, excluding the back-owed royalties in the fourth quarter of 2006.
Selling and marketing expense for the quarter was $6.3 million, as compared to $5.9 million for the same quarter last year. Selling and marketing as a percentage of total revenue increased to 22% this quarter, as compared to 20% for the same quarter last year, excluding the back-owed royalties in the fourth quarter of 2006.
General and administrative for the quarter was $5.8 million, as compared to $3.6 million for the same quarter last year. General and administrative expense, as a percentage of total revenue, increased to 21% this quarter, as compared to 13% for the same quarter last year, excluding the back-owed royalties in the fourth quarter of 2006. G&A expense this quarter increased over last year's fourth quarter due to $2.4 million in legal costs associated with our lawsuits with Candela, as compared to $400,000 for the same quarter last year.
G&A expense for the first quarter of 2008 will included an additional $1 million expense for investment banking fees related to the completion of our international distribution agreement with Q-Med. Income before taxes this quarter was $5.6 million as compared to $8.2 million for the same quarter last year, again excluding the back-owed royalties in the fourth quarter of 2006. Net income this quarter was $3.5 million or $0.18 per diluted share as compared to $21 million or $1.3 per diluted share for the same quarter last year.
Excluding the back-owed royalties and a non-cash benefit from income taxes of $6.8 million in the fourth quarter of 2006, net income for the fourth quarter of last year would have been $8 million or $0.39 per diluted share. Net income this quarter is reported at a full effective book tax rate of 38% as compared to a tax benefit of 44% from the same quarter last year.
The balance sheet is solid with ample cash and investments of a $132 million, a $12 million increase over the $120 million reported as of September 30th. We are now ready to take your questions. Operator?
Question-and-Answer Session
At this time, we will open the floor for questions. (Operator Instructions). Your first question comes from the line of Dalton Chandler with Needham & Company. Please proceed.
Dalton Chandler - Needham & Company
Good morning.
Joe Caruso
Good morning, Doug.
Dalton Chandler - Needham & Company
So, with the sales force I think last year, most of your turnover occurred very early in the year. Could comment on what you have seen so far this year in terms of retention?
Joe Caruso
You mean in '08 so far?
Dalton Chandler - Needham & Company
Right.
Joe Caruso
Yeah, in '08 so far, we haven’t seen the turnover like we did in '07. We made some changes in early '07 to our commission program and also some we've instituted some other employee retention programs and those seem to be working well. We are still going through the normal replacement of any sales personnel that might be under performing, we will still go through that. I mean we are still in the process of training the sales folks that we brought onboard throughout 2007. But we are pretty happy with some of the trends that I talked about just a few minutes ago.
We are up 17% in North America from last quarter. That’s a very good sign as well as the increase in day sales outstanding. That’s also a very good sign. That means that the quality of the sale is also much better. So, we like those trends. We would like to see those trends to continue. We are still not where we would like to be. We still think that it will take a little time to find tune the group, but we are pretty happy with the progress so far.
Dalton Chandler - Needham & Company
So, you would say what you've seen year-to-date as more a normal pattern versus what you saw last year?
Joe Caruso
Right, correct.
Dalton Chandler - Needham & Company
Okay. And then, you mentioned the North American sales, could you give us the breakout between U.S. and international for the quarter?
Paul Weiner
Yeah. U.S. was 73%, or I should say North America. North America was 73% of the sale versus 27% outside North America.
Dalton Chandler - Needham & Company
Okay. Can you break out the US from that, because that's the way you do it in the queue?
Paul Weiner
Sure. US sales were total of 16 I could give you the numbers, $16,250,000. First is North America of $16,250,000, right; North America in total with $17,935,000 which just includes the Canada and outside North America with $6,533,000.
Dalton Chandler - Needham & Company
Okay, thanks for that. And then, just on the P&G deal. Can you talk about if you do decide to go at different way with this, how you would anticipate the intellectual property being divided up? How that process would work?
Joe Caruso
I'm not sure I understand the question.
Dalton Chandler - Needham & Company
Well, you've contributed IP to this project and Gillette has contributed IP to the project, and the result has been a product. So, if you were to decide to go with the different partner, what would you take away from this relationship?
Joe Caruso
Yeah, that's all outlined in the agreement that we filed originally, the original Gillette agreement. And it'll take a while to go through all that with you, but if you want to do that offline, we can do that, or you can look at yourself throughout that agreements, pretty well defined.
Dalton Chandler - Needham & Company
Okay.
Joe Caruso
Extremely well defined actually.
Dalton Chandler - Needham & Company
Okay. And then, I just wanted to understand the $1.5 million in cost of goods, I understand, was that you had over accrued for MGH royalties, and that was a true-up. Is that what happened there?
Joe Caruso
Yeah. That's correct. We have, as you know we have a number of different positions with Mass General and along the way we determined what royalties are on certain products. So, as we roll out new products, and we negotiate those terms and we had happened to estimate high on that previously, and that was as true-up. And then going forward, obviously we have the new rates.
Dalton Chandler - Needham & Company
It's okay. All right. Thanks very much.
Operator
Your next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed.
Anthony Vendetti - Maxim Group
Thanks.
Joe Caruso
Good morning, Anthony.
Anthony Vendetti - Maxim Group
Good morning. Just on the gross margin line, it looks like that it bounced back a little bit here this quarter. Would you say that how would you categorize pricing right now in the industry and particularly for your product? Is it holding steady?
Paul Weiner
Yes, pricing is holding steady. It went from, I think around 66% to quarter-over-quarter -- the third quarter of '07 and the fourth quarter of '07 from 66% to 67%. That has more to do with the mix of international versus North America than anything else. The average selling prices have remained constant and if anything else they continue to increase as we add new applicator hand pieces.
Anthony Vendetti - Maxim Group
Okay. And it looks like I think you mentioned what legal expense were for this quarter, may be, if you could just repeat that? And then, what do you think is a run rate to use for G&A or for legal expense as part of G&A going forward?
Paul Weiner
Yeah, this quarter we had about $2.4 million related to our lawsuits and that compares to about $400,000 to prior year and that's probably -- its going fluctuate but at least through the July trial date it should remain relatively high.
Anthony Vendetti - Maxim Group
Okay. The funded product development revenues, you also said that that should be approximately what per quarter in 2008?
Paul Weiner
Approximately, 400,000 per quarter.
Anthony Vendetti - Maxim Group
400K per quarter. Okay. And if you could just, could you give us approximately what up and functioning sales rep, what their quota would be once they finish their nine months of training? Approximately…?
Joe Caruso
It is really tough to say, because it depends on where they are in North America. And that's a function of how dense population is versus how easy it is for them to travel within that territory. So, it fluctuates all around the country. There is no typical number.
Anthony Vendetti - Maxim Group
Okay. But US sales sequentially were up 17% from third quarter, correct?
Joe Caruso
That's right. Those are the type of trends we would like to see.
Anthony Vendetti - Maxim Group
Right. Correct.
Joe Caruso
And so, we instituted some, we had some difficulty in retention at the beginning of last year in '07. We took steps to correct that. We took additional steps as far as retention and training goes. And so, that takes a while to flush out, as we said a couple conference calls ago, and we are happy with where we are in the process. Doesn't mean we are finished with the process. But we are happy with where we are in the process.
Anthony Vendetti - Maxim Group
Okay. And the Lux2940 handpiece, it sounds like it has ablative and fractional, it does a couple of things, is that correct?
Joe Caruso
Well, ablative fractional is one thing.
Anthony Vendetti - Maxim Group
One thing. Okay.
Joe Caruso
Fractional is creating damage, spots or columns, surrounded by healthy tissue. And that can be ablative, non-ablative, there is many different ways to use factional as a broad concept and we have very good position in that technology. Ablative is one way to do it, where you vaporize certain spots on the skin and that gives a different result than a non-ablative, it's little more aggressive.
Anthony Vendetti - Maxim Group
Down time is about 4 or 5 days with this particular one?
Joe Caruso
That's right. Yeah, just a few days. There is really no downtime with non-ablative. So, it's just one more tool that the physician can use in designing a treatment protocol for their patients. And they look at what the target is, how much downtime somebody can accept? How many treatments somebody is willing to accept? These are all of the types of things.
That's why there are so many different choices, and that's really the value of our platform system because some one can really tailor that technology depending on what they think their patient load is looking for, and then as their patients change or as they change their ways that they treat their patients they just add different technology, different handpieces that really a fraction of the cost of standalone systems.
Anthony Vendetti - Maxim Group
Okay. So, the 2940 is a combination of fractional ablative technology. Anything else that particular handpiece does, or is that what it is?
Joe Caruso
Well, that's the purpose of that handpiece.
Anthony Vendetti - Maxim Group
That particular handpiece, okay. And the list price on that, approximately?
Joe Caruso
70,000.
Anthony Vendetti - Maxim Group
70K, okay. And then lastly, you said you are pleased with the J&J progress, where is that sort of in the timeframe of coming to some type of decision, I don't if it's a launch decision, but some type of decision of what this product will eventually be or how it will be sold all that? Where are we in that process?
Joe Caruso
We can't talk too openly about where we are in that process. So, all we can say is that we have been working with them for a while; we are very pleased with that collaboration, we've made a lot of progress. We like the type of products that we are working on with them. We think that they have pretty large market opportunities. But we are not allowed to talk about specifics of timing.
Anthony Vendetti - Maxim Group
Okay. And just to circle back really quickly last question on the gross margin. So, they've stabilized here it looks like they've ticked up a little bit. Is this in this current market condition, with the current economic cycle the way it is. Are you seeing, and do you think the gross margin should stabilize here for a while, and are you seeing any tightening in credit terms or lease terms for the physicians that are trying to lease these products right now?
Paul Weiner
Yeah, we've said that gross margins we feel comfortable in the mid 60s depending on our international versus domestic mix, we don't see that changing. At this point in time and again haven't seen any changes in our pricing. So, even with these market conditions we don't see that changing at this point in time. As far as the credit situation, we have really not run into a lot of forms we have as you could see in our day sales outstanding, going down quite a bit to 59 days.
Now, accounts receivable day sales outstanding from 85 days prior quarter. As we mentioned at the end of last quarter, with the day sales outstanding go up to 85, we're going into two. A bit tighter credit terms and that seem to work out well for us, in the fourth quarter bringing down our days sales outstanding. At the same time, we haven't seen too many problems as far as customers are getting credit from leasing companies now.
Anthony Vendetti - Maxim Group
Okay. And with the cash on hand are you, are you considering a buyback or is management thinking of personally buying any shares at these levels or --?
Paul Weiner
Yeah, as far as the buyback is concerned, as you're probably well aware, we do have a buyback program in place of about a million shares. As of the end of the third quarter, we had purchased about 100,000 of those shares. In the fourth quarter, or even as through today, we have not purchased any additional shares or brought back any additional shares due to the fact that we are not allowed to buyback shares during this whole quarter because we're in a black out period, during the final stages of a negotiates with QMed, and now because of our renegotiation with P&G, we are not allowed to buyback company stock at this time or at any time during the fourth quarter really.
Anthony Vendetti - Maxim Group
Okay.
Paul Weiner
So, our buyback is pretty much as standstill right now with a 100,000 shares being brought back by the end of the third quarter, and we still have about another 900,000 shares in the original plan.
Anthony Vendetti - Maxim Group
When does that window open back up?
Paul Weiner
It won't open back up until we're done with the renegotiations of the P&G. We know that.
Joe Caruso
And that assumes that there are no other material events taking place. We have to do the buyback. We're under the same rules, actually even stricter rules than individuals when we buy shares. We have any information that could be material as well as, certain timing restrictions on when we can buyback. So --
Anthony Vendetti - Maxim Group
Great. Thanks guys.
Operator
Your next question comes from the line of Anthony Petrone with Maxim Group. Please proceed.
Anthony Petrone - Maxim Group
Thanks, guys. Just first and foremost, I wanted to, my hat-off to the Boston Sports franchise is up there but we are all proud of funding of [Chinese]?
Joe Caruso
We appreciate that. Alright, operator. We're all done with this caller. Go ahead.
Anthony Petrone - Maxim Group
Just a couple of questions, sorry about it...
Dan Valente
Did you have a little bit of luck at the end of that gain that Palomar…
Anthony Petrone - Maxim Group
There was a little luck involved, was a little luck involved, but a tremendous team, the New England Patriots but we're still proud.
Dan Valente
That's a great team anyway.
Anthony Petrone - Maxim Group
Just a couple of follow-ups on the J&J development, you have body fat you're developing with them skin aging and acne. Of the three, I guess, the main focus I would tend to believe would be cellulite and body fat, is that safe to say and could we expect that to be up first before the other ones.
Joe Caruso
We can't comment on that.
Anthony Petrone - Maxim Group
Alright, great. And then last quarter you had a 12% actual decline in the Lux family products there, you had a little bit of offset with some of the Q-YAG sales and some service revenue. What was service revenue this quarter? Or how did it perform and what was the level of upgrades this quarter to the 500 platform?
Paul Weiner
No. I don't think those numbers are correct.
Anthony Petrone - Maxim Group
So, that was some of your last Q?
Paul Weiner
I have to go back and maybe…
Anthony Petrone - Maxim Group
I've just pull that out from you latest Q actually.
Paul Weiner
I mean are you talking about year-over-year?
Anthony Petrone - Maxim Group
Yeah, year-over-year, exactly.
Paul Weiner
Right. Okay. Yeah, there was a decrease in certainly our product sales year-over-year.
Anthony Petrone - Maxim Group
And within the Q, I'm just pulling verbiage from the Q. So, I guess the question really being here in this current quarter what was the level of upgrades to the 500 platform and how did service revenue performed in the quarter?
Paul Weiner
Okay. Just to clarify. I think that what you are talking about that was in the Q, may be the Q-YAG sales year-over-year increased but it's not a material amount of increase.
Anthony Petrone - Maxim Group
Exactly, yeah.
Paul Weiner
Majority of our sales come from the Lux product line. And, more specifically, it is historically, our newest product line. So, last year, most of our sales would have come from the StarLux300 in 2006 and in 2007, most of our sales, since we introduced it, it's coming from the StarLux500 in all the associated Lux Handpieces, so. And service revenue is still remaining under 10% of our total product revenues.
Anthony Petrone - Maxim Group
And again, I know there were some upgrades last quarter and upgrade revenue actually contributed quite a bit last quarter, what was that level of revenue this quarter, in terms of the upgrades?
Paul Weiner
They are pretty much normalized. I mean the big upgrades were in the second quarter of 2007, that's when they materially affected our gross margins. The third quarter went pretty much back to a normal amount of upgrades, and still the same in this fourth quarter.
Anthony Petrone - Maxim Group
Okay. And then, can you quantify of the existing, I guess 300 user base, what percentage of that user base is already upgraded to 500?
Paul Weiner
I don't have the numbers for you. I know number is the ones that we are looking to upgrade, I did so in the second quarter, that were on backlog, but we continue to have upgrades of 300 to 500, and would expect that over the next couple years. Generally, every quarter, we have upgrades from our older product line to our newer product line.
Anthony Petrone - Maxim Group
Okay. Great. And then just looking at the inventory balances this quarter, sequentially on an absolute basis they're down quite a bit, receivables as well are down. So, one way I am looking at this, I am trying to get my hands around and I know in making inventory decisions you do, I guess, do make some forecast into demand into the marketplace and when we are seeing the absolute decline here, why I guess there haven't been a net build of inventory into this quarter and is that a reflection of I guess your forecast on-demand into marketplace?
Paul Weiner
No. The difference in the inventory as we said in the third quarter, we built a forecast. And our product revenues were short of forecast in the third quarter, so we ended up with excess inventory in the third quarter of which, we stated that we would be bringing down our inventory in the fourth quarter, due to the fact that we had all this excess inventory left over from the third quarter and finished goods. And that's exactly what we did to bring our turns back up.
And the same thing with receivables, receivables we had commented on that, they were higher than we would like them to be, as far as dollars, as well DSOs and we were successful in bringing those back down to normalized levels. Where we are now, at the end of the fourth quarter is more normalized levels for both inventory and accounts receivable.
Anthony Petrone - Maxim Group
So, I guess the inventory outlook when you make that initial decision in terms of build, have you made that decision from the current quarter you were in and I guess should we pretty much expect that to remain at these current levels? Or will we see a build?
Joe Caruso
This is a reasonable level as it depends on where we are with revenues. If you go back to the prior year at the end of last year -- at the end of 2006 we had $11 million in inventory, now we have close to $13 million in inventory. So, inventory has grown year-over-year. It's just that during the year, we introduced the StarLux500, towards the beginning part of the year which had a sold up inventory, and then in the third quarter, we ended up with excess inventory, which we sold off in the fourth quarter.
Anthony Petrone - Maxim Group
I see and just final question on I guess the 12 month consumer assessment trial that Gillette was running. How did that end up and if you can give us a little bit of insight into the results of that run? And would you care, did those results I guess effect either party's decision with the contract renegotiation? Thank you.
Joe Caruso
As you can imagine, we can't comment on any of the particulars inside the work that we're doing with them.
Anthony Petrone - Maxim Group
Thank you very much.
Operator
Your next question comes from the line Jose Haresco with Merriman. Please proceed.
Jose Haresco - Merriman
Good morning gentlemen, how are you?
Joe Caruso
Good morning, Jose.
Jose Haresco - Merriman
Couple of questions. Could you guys give us a sense of the kind of activities that are going on right now on the international front? I just noticed that, it looks like over the course of '07, in sheer dollars or US sales have kind of fallen in flat line at some level. Are we expecting to add more distributors in their first half? Or is it pretty much status quo?
Joe Caruso
Yes. During the first half of 2008, this is the beginning of our relationship with Q-Med. And so, we don’t anticipate too many changes, certainly in the first half of 2008. And then, as we build our relationship with Q-Med, and start working with them on country-by-country basis. That's when we should start to see more of a continued increase in our international presence. It's a long-term plan; it's going to take some years to transition the countries that we are looking at transition.
Well, we should start seeing some of these countries transition over towards the back half of this year. And it's difficult to tell exactly what effect that's going to have on international revenues over the short-term.
Jose Haresco - Merriman
Okay. Excuse me. You mentioned that the level of legal activity will still be pretty high ended July. It's just fair to say it's going to be about the same as it is the fourth quarter when you have the marketing areas?
Joe Caruso
It should be, it's hard to tell exactly what we're going to get charged from our attorney's on a quarter-by-quarter basis, but the level should be comparable to what we did in the fourth quarter, yes. It's just difficult to tell what our charges going to be on a quarterly basis.
Jose Haresco - Merriman
Okay. On the R&D side, is it fair to assume some sort of just natural organic growth in dollar terms? Are you scaling back on that activity at all or ramping up excessively?
Joe Caruso
No. We're not planning on scaling back our research and development. We think that research and development is one of our core competencies. And there is still many different products and product ideas that we have, that we'd like to bring to the forefront and launch into the marketplace. So, unlike, maybe others in the industry, we have always invested a lot in research and development, and we intend to do so going forward.
Jose Haresco - Merriman
Okay. As part of the changes here your commission program. Is it best for us to model a change in the commission level for dollar equipment sold or, I guess, can you give more insight to how that was changed to help us figure out what the sales and marketing margin are going to be for '08?
Joe Caruso
I think that it's more of a structure of how we structured the commission program. I think there are more incentives in there, and in the commission program, so it could somewhat effect the ratio of sales and marketing to revenues. Also keep in mind, that as the industry progresses and develops, it does become more competitive as far as the industry is concerned. And when that happens, you do need to spend more in marketing as far as lead generation is concerned. So, all those factors I think sales and marketing dollars spend will remain strong as compared to revenues in order to generate the proper lead and properly incentivize and retain our sales force.
Jose Haresco - Merriman
Okay. Alright, thanks guys.
Operator
Your next question comes from the line of [John Sparks]. Please proceed.
John Sparks - Private Investor
Yes. I am interested in how you assess Palomar's abilities in the consumer market, both in the hair removal and in other areas, and what are your major competitors? In other words, how does Palomar stand up in relation to their major competitors? What are their strengths and weaknesses?
Joe Caruso
Yeah, you are talking about the home market, correct?
John Sparks - Private Investor
That's correct.
Joe Caruso
Yeah. We've been working towards technology solutions in the home markets since 1997. So we've had I think quite a head start on others and looking at what it takes from a technology standpoint to be successful in that marketplace and we have patents around those areas and intellectual property and know-how around those areas. So, we think that, we have quite a good position in the number of different areas. And we are executing on that, as we speak, and as time goes on I think you'll see some pretty valuable technologies being introduced in those areas.
John Sparks - Private Investor
Yes, the follow up I would have is, I realized you're limited on what you can talk about from a timeframe standpoint, but can you get us in the ballpark as far as when we will see some revenues from these properties?
Joe Caruso
No. We're not allowed to do that.
John Sparks - Private Investor
Okay, I understood.
Joe Caruso
Yeah we have very strict confidentiality agreements with our partners.
John Sparks - Private Investor
Yes. I understand. That's all.
Joe Caruso
Thank you.
Operator
Your next question comes from the line of Isaac Ro with Leerink Swann. Please proceed.
Isaac Ro - Leerink Swann
Hi guys. Thanks for taking the question.
Joe Caruso
Thank you.
Isaac Ro - Leerink Swann
First one would be, just coming out of AAD last weekend, how would you characterize the interest level that you got from clinicians and potential customers versus a year ago, and with that as a follow-up, when you think about the new fractional handpieces that you introduced, how would you think about fractional penetration in your installed base, current StarLux users?
Joe Caruso
Yeah, I think we really focused on a wide range of fractional technologies at the American Academy of Dermatology meeting. If you think about where we are today versus where we were a year or two ago in fractional, we have now many tools that a physician can use to really tap into this fractional market.
We have fractional deep heating, we have fractional ablative, fractional non-ablative; and because of that we can really provide solutions, clinical solutions that will cover a wide range of patients and procedures, so we feel really good about that. It's still pretty early in use of fractional technologies, but the amount of downtime versus the upside and benefit is pretty large, using all of these fractional approaches.
So that was the big buzz, that was what a lot of people were interested in, lot of people, lot of our customers don't have fractional technologies added yet to their systems so we think there is some good upside there, we think that by rounding out our product portfolio with fractional ablative and non-ablative, it also increases potential penetration of our technologies. So we like all those things. I think overall, the AAD was little less attended this year than last year. But the quality of the physicians that came by our booth, I think was higher. So I like the fact that we attracted a lot of very serious players to our technology at the meeting last week.
Isaac Ro - Leerink Swann
Okay, great. And then just regarding the sales force efforts and all that stuff for the new people that you have. Do you see yourselves engaged in any higher level of discussion with Medspa opportunities to sort of open the door with more bulk orders in '08. So you know that you have got a number of fractional handpieces to offer. Do you see more interest from those types of customers in ordering a large number of systems, and things like that?
Paul Weiner
Yeah it's certainly its possible, part of our marketing efforts is to market to individual physicians as well as to larger groups. And we are continuously doing that. But some of the newest handpiece that we are introducing with Lux2940 with ablative fractional is really more set for the high end user. But our platform is broad enough to cover all different potential users.
Isaac Ro - Leerink Swann
Okay, those are my questions. Thanks so much.
Operator
Your next question is from the line of Amelia Balonek with Ladenburg Thalmann. Please proceed.
Amelia Balonek - Ladenburg Thalmann
Good afternoon gentlemen. I just have a few quick questions on some details that I wanted to get from you, for the 2940 handpiece what's the joule?
Joe Caruso
It's a pretty wide range of joules per square centimeter.
Amelia Balonek - Ladenburg Thalmann
Okay.
Joe Caruso
We can do this offline if you want, but there is a number of different spot in feel factors, in each of those dots. So its probably best to take offline.
Amelia Balonek - Ladenburg Thalmann
Okay, excellent we can do that. Also wanted to that.
Joe Caruso
And I can also send you some of those specs too if you don't have them.
Amelia Balonek - Ladenburg Thalmann
Okay, with regard to the Q-Med deal, you had spoken briefly about the potential of a link between fillers and lasers and I was just curious as to what you are thinking with regard to clinical trials and how much we should expect those to cost to?
Joe Caruso
I think there is the added potential working with Q-Med in clinical effects and things like that, we're expert at energy based system and they are expert at compounds and things like that. We don't have anything planned right, but there is that potential that we can work together on those sorts of things. I don't expect that to be a big increase in research and development. We do quite a bit in clinical trials and clinical work already. And I think its just probably more of a shift.
Amelia Balonek - Ladenburg Thalmann
Okay.
Joe Caruso
Different directions and additions.
Amelia Balonek - Ladenburg Thalmann
Excellent, and then could you get me some more detail on what has fallen out from the funded development revenue?
Joe Caruso
As we said, I said in the call, we have a $2.5 million that we received related to FDA clearance in December of '06 that was being allocated on quarterly basis, throughout the year. We also received from the amendment in the Gillette contract in February, we also received addition funding for an additional hair removal product that we're allocating throughout 2007, that has now passed.
And anything that we're receiving related to the government product in 2007 is gone. So, that basically leaves us with the number that I talked about earlier before. About $400,000 in quarter, getting funded from Johnson and Johnson. That's really we're at today. That could fluctuate or vary as we go forward. But as of now, we see 400,000 coming in every quarter throughout 2008.
Amelia Balonek - Ladenburg Thalmann
Excellent. Thank you. I wasn't able to get all those notes down. I calculate that you've got about $7 of cash per share. Just wanted to get your thoughts outside of a charge buyback on usage of cash?
Paul Weiner
We don't have it earmarked for anything particular. But we are always looking at other technologies and other possibilities and beyond just the buyback and we'll continue to evaluate those possibilities moving forward.
Amelia Balonek - Ladenburg Thalmann
Okay. Thanks Paul. Thank you, gentlemen.
Paul Weiner
Thank you.
Operator: Your next question comes from the line of Julie Hoggatt with Noble Financial. Please proceed.
Julie Hoggatt - Noble Financial
Yes, can you give me some color on the Gillette contracting and do you still have weekly meetings with them or has communication kind of dropped off since they extended their contract?
Paul Weiner
No. We do still have weekly meetings with them. We're still operating under the current agreement which again we extended through February 29. So everything is stays close at this point in time while we're in renegotiations.
Julie Hoggatt - Noble Financial
And do you still expect that you will receive quarterly payments for access to the technology or do you think it will just be on commission?
Paul Weiner
I'm sorry, could you repeat that again?
Julie Hoggatt - Noble Financial
I'm sorry, do you still expect that you will be receiving some sort of quarterly payments for access to your technology or do you think it will only be on commission?
Paul Weiner
Are you saying, if we're able to renegotiate this they'll move forward or while they are currently under the existing agreement?
Julie Hoggatt - Noble Financial
No, no, on the renegotiated agreement?
Paul Weiner
We really can't talk about the potential terms within a new agreement at this point in time. Other than, we did talk about in the press release that we are looking at potentially some ongoing quarterly payments for a period of time and then those would convert into percentage of sales going forward. And that was in the original release.
Julie Hoggatt - Noble Financial
Right. Okay. And in terms of North America and Europe you gave the amount but can you give me the growth rate there?
Paul Weiner
Yeah. We are talking --
Julie Hoggatt - Noble Financial
For the quarter.
Paul Weiner
For the quarter, quarter over the prior quarter?
Julie Hoggatt - Noble Financial
Yes.
Paul Weiner
I am sorry, over the third quarter or the forth?
Julie Hoggatt - Noble Financial
Quarter-over-quarter growth in North America and European sales.
Paul Weiner
Okay. North America fourth quarter '07 versus fourth quarter of '06. North America was down 12% for the quarter and for the year 2007 over 2006, it was down 2%, so relatively flat. And as far as outside North America for the quarter, it was up 8% fourth quarter of '07 versus fourth quarter of '06 and 2007 versus 2006 it was up 74% outside of North America.
Julie Hoggatt - Noble Financial
Okay, okay.
Paul Weiner
Okay. Thank you, Julie.
Julie Hoggatt - Noble Financial
Thank you.
Operator
Your next question comes from the line of Richard Rinkoff with Craig-Hallum. Please proceed.
Richard Rinkoff - Craig-Hallum
Thank you. Why did the army stop funding the product? Did they develop a product or were they unhappy with that or what happened there?
Joe Caruso
We finished that program with them. We had a development program with them. We finished that with them. That's just one program.
Paul Weiner
It really depends on how they fund these projects. And they have to get through their budgets to fund additional work and they did at least at this point in time. So the original funding that they gave us that we got extended and it added to over the years has now come to completion and they just stopped allocating funds to this particular project going forward.
Richard Rinkoff - Craig-Hallum
So was the product developed or stopped in midstream?
Paul Weiner
That were pretty good, we did made some really good progress on that product. So we didn't necessarily stop in midstream now.
Richard Rinkoff - Craig-Hallum
But is there a finished product that they can come back and say well, we want to buy that?
Paul Weiner
Right. There is.
Joe Caruso
There is.
Richard Rinkoff - Craig-Hallum
Okay. And if I look at $400,000 a quarter and I take out P&G and I take out the army, that implies the rest is from J&J. But that's a lower number I believe than they spend quarterly in '07. Is that accurate and why will they be reducing their payments at this time?
Paul Weiner
It shouldn't be less than what we were doing in '07. I can go through with you in detail, but it should be certainly comparable to what we were getting in the past. But it depends also on any particular quarter, there could be a specific project that might be being worked on, which requires some additional upfront funding. But overall, our funding should be at or above our previous levels.
Richard Rinkoff - Craig-Hallum
Okay. Thank you.
Paul Weiner
Thank you, Rick.
Operator
Your next question comes from the line of Andy Schopick with Nutmeg Securities. Please proceed.
Andy Schopick - Nutmeg Securities
Hi, there. Couple of generalized questions. Can you give us any color on what you believe procedure growth, specially if the derms and plastics were over the course of the past year. Any generalized comments on what you are seeing from the excess of an economic slowdown on consumer spending and how this may be manifesting itself at this time among the physicians and how overall market demand for basic laser cosmetic devices is being affected?
Joe Caruso
Yeah. There is really no good, accurate data out there, one source per this data. So what we do is, we talk to a lot of the physicians that are in this business and have our products, and I know that some of the analysts do because I talk to them about it as well. And I think that there is consensus that physicians that have the equipment have not seen a drop off in the volumes that they are seeing.
So that's a pretty good sign to us. It doesn't mean that that there is no affect of economic conditions, but at least the physicians that are in the business today and are doing these procedures today have not seen any type of drop off and people, consumers, patients coming to them for these type of procedures.
Andy Schopick - Nutmeg Securities
How about the growth or demand for new equipment?
Joe Caruso
No I think that the growth and demand for new equipment is based on the type of technologies that are ruled out. So for instance we ruled out a non ablative fractional technology the growth in that product was good, very good. We are still selling our product and we will continue to sell that product as we move forward. I think fractional ablative has pretty bright future, because what we are trying to do is to get to the type of results or close to the type of result that we saw in the early days of CO2 resurfacing.
Very dramatic results, one treatment some down time, perfectly acceptable that's brand new. So its yet to be seen but I think that's another good addition we also have other additions that we plan on rolling out as well. So the growth in these technologies is somewhat based on new market, customers that have never brought our system before and additional technology that can be added to sites that are already in the business. And sometimes it's easier to add technology to a site that's already in the business because they already have a working patient base that they can tap into.
Andy Schopick - Nutmeg Securities
Sure. One last thing here about the at home hair removal market, I believe a company called SpectraGenics had just recently received FDA OTC approval for its device and I believe that's been available overseas, the TRIA. Can you comment about some of these other products or this one in particular in terms of how it might compare with capabilities that you have developed?
Joe Caruso
I think we've been at this for a long time and we have very broad and solid patent portfolio, we also have a superior technology approach than anything that we've seen out here. There are bunch of these types of entries or trials of entry into the marketplace. We're monitoring them, we look at them, we analyze them and every time we do that, we feel that we have a much better position than anything we've seen so far.
It does validate the approach, so that this type of technology shift belongs in the marketplace. It's a reality, the technology of light-based hair removal is here to stay, its going to be a big marketplace. We think we have a best solution so far.
Andy Schopick - Nutmeg Securities
What's been the pricing on product like the TRIA in the marketplace?
Joe Caruso
You can find these devices for a few $100, what we've seen outside United States.
Andy Schopick - Nutmeg Securities
Thank you.
Operator
Your next question comes from the line Ross Nelson with Vermillion Asset Management. Please proceed.
Ross Nelson - Vermillion Asset Management
Hi guys, quick question for you on capital structure, when this stock was trading the upper 20's or 30's. You initiated this 1 million share buyback, I realize there has been blackout period. But the stock right now, is kind of in the upper 12's, 13 range. I guess when you are able to start buyback shares again, presuming that, the stock is still in this range. Does that mean that there is a chance for an increased or updated number for a buyback I guess, backtracking for a second; if you had $120 million or so in cash back then, and you presume that your stock was around 30 and you offer has to million, so that means you had 30 million to work with of excess capital.
Back then if you translate that into a stock price now that would translate into a much higher share number, available for buyback. I mean how do you kind of think about this, that plus the fact that your quarter, although it might have been worst than prior quarters, you were still cash flow positive. You still have kind of a wildcard with the Gillette deal as possible upside. Is there upside to this buyback number or how do you think about available cash on hand?
Paul Weiner
Yeah, we have 1 million share buyback program of which we're not that far into yet. So we'll go through and we have plenty of authorized buyback potential and as we get through that and look at where we are, then we'll assess it. I mean it doesn't make sense to do anything else. And we look at that opportunity as well as other opportunities that we could use with, do with our cash. So we'll just keep assessing as we move forward. The thing is, as you say, I mean we are very --
Ross Nelson - Vermillion Asset Management
Pardon me?
Paul Weiner
Hello?
Ross Nelson - Vermillion Asset Management
Yes.
Paul Weiner
I think we got a little teed back on your line.
Ross Nelson - Vermillion Asset Management
Oh, sorry. No, I mean it's kind of obviously what's the best use of capital time and if buyback is good use of capital as 30% of share and maybe as good of an opportunity as an acquisition then certainly the risk awarded at $13 per share is obviously much more attractive and I would think would be more heavily weighted in favor of buyback at $13 than it was at $30. Correct?
Paul Weiner
Yes. That could be.
Ross Nelson - Vermillion Asset Management
Yeah. Okay. So I mean I would just suggest increasing the number of shares on your authorization of your buyback. Whether you use them or not it's irrelevant, but why not increase the number?
Paul Weiner
We already have enough shares authorized by the Board at this point in time. Once we get through those share then we'll certainly reassess.
Ross Nelson - Vermillion Asset Management
Okay.
Operator
Your next question comes from the line of David Ratliff with Doucet Asset Management. Please proceed.
David Ratliff - Doucet Asset Management
Thank you for taking my call. Fortunately I have been in the queue long enough where I have gotten the answer to most of my questions. But I just wanted to, on the army project, I know with budget cuts and budget funding, its impossible to know whether they are going to come back or not. But is any of the research and development that resulted from the project, are you able to apply that to products that you could develop and sale? Are you allowed to do that without them infringement on the agreement with the army?
Joe Caruso
Yes. We owned all the technology that we worked on with them and it certainly can be used outside of the army. Yes.
Paul Weiner
And we do see uses for that outside the army project.
David Ratliff - Doucet Asset Management
Okay. Is there any short-term products that you could comment on?
Joe Caruso
Not that we can comment on at this point in time.
David Ratliff - Doucet Asset Management
Okay. My only other question might be difficult to gauge, but I have been following the stock for that long. But in regards to your royalty revenues, your fourth quarter royalty revenues were about $2.4 million and for the third quarter if I back out you had a comment in there that $3.1 million of third quarter royalty revenues were due to back-owed royalty payment, so if I back that out, third quarter was $2.7 million?
Paul Weiner
Is that correct?
David Ratliff - Doucet Asset Management
So is that a good run rate? Or is that something that you really can comment on associates with sales of other firms?
Paul Weiner
Really does. And this year, I think on a quarterly basis ranged from 2.1 to 2.7, that's over last four quarters. It doesn't mean that it will stay within that range, that's just where it was over the last four quarters and as you said, it depends on our competitors' sales on a quarterly basis. We do receive payment for, the royalty payments we recognize the quarter after our competitors make their sales. We recognize it based on cash receipts to us.
David Ratliff - Doucet Asset Management
So there is a trick, a lag there?
Paul Weiner
There is. So what they are doing in the third quarter, we receive in the fourth quarter.
David Ratliff - Doucet Asset Management
Okay. Excellent. That was good information. Again, I appreciate your time.
Paul Weiner
Okay. Thanks.
Operator
Your next question comes from the line of Ashvin Dhingra with Glacier Bay Capital. Please proceed.
Ashvin Dhingra - Glacier Bay Capital
Hey, guys. On the $1.5 million royalty adjustment to product gross margin, that seems like one time type of event. And if you take reported EPS of $0.18 and you back that out, it looks like you are at about $0.13 for the quarter in earnings. We are trying to get a sense of going forward what the sustainable EPS level could be on a quarterly basis? Is that $0.13 the run rate number? Do you think you guys can do better than that? And I guess to take it a level down further on the gross margins. What is the sustainable level as it, is it that 67% margin or what is it?
Paul Weiner
Yeah. On the gross margins, we have said that we would expect to continue gross margin somewhere in the mid 60s and it depends on our domestic versus or North America versus international mix. One thing that certainly is negatively affecting our earnings per share is dollar for dollar decrease based on legal spending regarding our pattern law suits, that is expected to continue certainly at least through July of these year, so while that is in existence that will be a drag on our earnings per share. Other then that we don't give really financial guidance on our top and bottom line, but that is a major factor affecting our bottom line.
Ashvin Dhingra - Glacier Bay Capital
Okay, thanks for clarifying.
Paul Weiner
Okay, thank you.
Operator
There are no more questions at this time. Will like to turn the call over to Dan Valente for closing remarks.
Dan Valente
Thank you, operator and thank you all for participating. At least we tried but I hope we answered your question directly and clearly as possible. Thanks for tuning in and we will look forward to our next call with you. Have a good day.
Operator
This concludes the Palomar's fourth quarter and year end 2007 financial results conference call. Thank you for attending. You may disconnect at this time.
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