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Palomar Medical Technologies Inc. Q1 2008 Earnings Call Transcript

May 13, 2008 | about stocks: PMTI

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Palomar Medical Technologies Inc. (PMTI)

Q1 2008 Earnings Call

May 1, 2008 11:30 am ET

Executives

Kayla Castle - Investor Relations Manager

Dan Valente - Chairman

Joe Caruso - President and CEO

Paul Weiner - CFO

Analysts

Dalton Chandler - Needham and Company

Anthony Vendetti - Maxim Group

Andy Schopick - Nutmeg Securities

San Shaban - Maxim Group

Jose Haresco - Merriman

Julie Hoggatt - Noble Financial

Bill Dezellem - Tieton Capital Management

Isaac Ro - Leerink Swan

Anthony Vendetti - Maxim

Richard Rinkoff - Craig-Hallum

Dalton Chandler - Needham & Company

Assaf Guterman - Lazard Capital Markets

Presentation

Operator

Everyone, Welcome to Palomar Medical Technologies First Quarter 2008 Financial Results Conference Call. Please be aware that each of the lines is in a listen-only mode. At the conclusion of Palomar's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask the question

I would like to turn the conference over to Kayla Castle, Investor Relations Manager of Palomar. Ms. Castle, you may begin.

Kayla Castle - Investor Relations Manager

Thank you. Good morning and welcome to the Palomar Medical Technologies first quarter 2008 conference call. Before we start this morning's call, there are a couple of items we would like to cover. This conference call is on a recorded line and you may access a telephone replay of the call at 888-286-8010, passcode 38414246 or a webcast replay at Palomar's website, www.palomarmedical.com through Thursday, May 15th.

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, 2007 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 statements 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 a substitute for the financial information prepared and presented in accordance with GAAP.

In addition, the non-GAAP financial measures included in this call maybe 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 reconciliation between these financial measures.

Palomar's management believe 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 accessing Palomar's performance and when planning, forecasting, and analyzing future periods. These non-GAAP financial measures also facilitate managements' internal comparison to Palomar's historical performance and our competitors 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 and its financial and operational decision making. The information in this conference call related to rejections or other forward looking statements may be relied upon subject to the previous safe harbors statement as of the day of this call. The information in this conference call is property of Palomar and should not to 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 this conference call. As you know, Palomar's financial results for the first quarter 2008 were a disappointment. The major cause was a shortfall in our domestic product sales. We believe some of this may be due to our more cautionary spending by consumers and our customers. During the last several last years, Palomar has built up both a strong balance sheet and a broad intellectual property portfolio to allow us to weather difficult times and continue to grow in the future.

Palomar has accelerated its research program and is getting prepared for the next upturn in the market. Now let us hear from Joe.

Joe Caruso

Thank you Dan. We are disappointed with our product revenue this quarter. As stated in previous calls, we lost a number of the domestic reps in various territories in 2007. That turn over in our domestic sales force continues to affect our product revenue. Although we have filled all open territories with new sales reps, some of the territories have had additional turn over and we're working through that as well. About 50% of our sales force has been with us for less than one year. Based on history, it generally takes about nine months to a year for new sales reps to get up to speed with our technology and competitive products. We saw some positive signs of improvement from our North American sales group in the fourth quarter, but lost ground in the first quarter this year.

As indicated during our last call, we will continue to have an aggressive training and mentoring program, and we have instituted measures geared towards employee retention. We have also taken additional steps to increase productivity of our seasoned reps. We believe another fact that's contributing to lower product revenue this quarter is the economy. We are seeing a negative effect on product revenue that we believe is directly tied to general economic conditions. This quarter, for the first time, we have had a substantial decrease in sales from some of our more seasoned sales reps. Position appear to be postponing major buying decisions.

This trend is fuelled by a decrease in physician confidence and consumer spending, and could be with us for a while. Although we may see some decrease in demand for our products during the short term, we feel that the long-term outlook for our light based cosmetic devices remains a great opportunity. Based on an analysis of our sales during the first quarter, we have not had a decrease in average selling price. The decrease in gross margin is attributed solely to a decrease in volume.

Last month we introduced our newest product, the Aspire platform. This new system is a diode laser platform that is focused on the body sculpting market. The first application we are addressing is the minimally invasive laser assisted lipolysis market. We introduced this platform at the ASLMS meeting in Orlando the first week of April. Podium presentations highlighted the unique selectivity of the Aspire, which uses a wavelength that is highly absorbed in the fat cells, versus other devices on the market that simply target water.

This selectivity allows the Aspire to treat the target fat cells more effectively and much faster than devices on the market today. This message was very well received, and will be a focus of our product positioning. Along with body sculpting, fractional technology was also prominently discussed at the ASLMS, and there were many presentations highlighting our new fractional ablative 2940 device. I am pleased to say that Palomar is well positioned in both areas.

Turning to the rest of the world, we announced a bold move to expand our presence outside North America. In January we announced a strategic collaboration with the Swedish company Q-Med. Q-Med is a leading biotech medical device company and a 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 Restalyne globally through a network of fully owned sales companies partners and distributors in over 70 countries worldwide.

We believe that dermal fillers and toxins that are first step for a new physician getting into the aesthetic treatment market. This is often the first step of patients as well, Q-Med is a very large sales force outside North America that calls upon tens of thousand of accounts. A large portion of these accounts either have only some of the light-based technologies we offer at 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 who do have fillers, toxins and light-based devices many times use all three products on the same patient. With our Q-Med collaboration, we can market the use of all these technologies together, with a unified marketing campaign. In addition, Q-Med has the best brand recognition of any filler, Restylane, worldwide

Together with Q-Med we now can offer full suite of products to the professional market outside North America. We believe this collaboration will catapult us years beyond the growth available outside North America, that we could have expected on our own. As a result of this agreement, over the next few years, we work together to determine which countries outside North America would be best served through the Q-Med relationship and transition those countries to their control.

This is long and difficult process. Each country has its own unique situation and will have to be handled separately. We have planned and initiated the transition of the first two countries. We have had some negative impact on our international sales and anticipate that in the short-term, we could see additional negative impact as our international sales transition from countries in our own distributions network to Q-Med's control. We believe that the full transition will take a few years, but if successful, we believe that we could have the best distribution system in the industry.

Our European office will support Q-Med in Europe, and we will anticipate additional support locations around the world as we expand our collaboration. The collaboration with Q-Med management team over the past few months has been excellent, and we are very happy with the open spirit of collaboration.

We've made tremendous progress over the past few years with our plans to take our technology to the mass market. The Johnson and Johnson program is moving along well, we are pleased with that collaboration and believe that the products we are working on today will provide us to 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 removals in the mass market, including receiving FDA, OTC approval for our device.

We have a proven intellectual property position in light-based hair removal, and have defended it successfully against some fringes. We believe that light-based hair removal in the home is a near term reality, and this project is one of the most valuable assets we have. As such we intend to exploit it to the maximum benefit for our shareholders. On February 29th, we announced a new agreement with P&G that replaced our original agreement with Gillette. Under this new agreement, P&G retains a non-exclusive license to Palomar's broad portfolio as well as a non-exclusive license to extensive technology developed by Palomar before enduring the five year term of the prior agreement. We are now free to work with other potential partners and are actively pursuing additional partners to exploit this technology.

Under our agreement, P&G will pay us $1.25 million for a quarter, prior to the commercial launch of a product and a percentage of worldwide sales thereafter. We are also executing on our intellectual property enforcement strategy. We have a portfolio of very broad patents in a number of areas. Over the past few years, we have increased the number of licensees of our hair removal patents to nine and we are in negotiations with many other companies.

To-date, we have received over $70 million in royalty payments from this valuable asset. We will continue to enforce our patent portfolio, to protect our investment in research and development including against infringes that chose to enter the consumer market. Our patent enforcement strategy is expensive, but are steadfast in our position, and will continue to enforce our intellectual property position at a vigorous space.

In the short term, our business like many other, is being affected by down turn 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 haul. We intend to remain focused on investing in the long term through research and development and will continue to strengthen our valuable intellectual property assets.

Our products allow people to look better and feel better. The market for our products is not going away and in fact should grow with time. We recognize that we have issues to work through in a short term and feel confident that we will get things back on track. We are very bullish on the long term growth prospects of the light based cosmetic market and will continue to focus on the assets needed to exploit this lucrative business opportunity for our shareholders.

Now Paul will brief some financial performance for the quarter.

Paul Weiner

Thank you, Joe. Revenues for the quarter were $23 million, as compared to $31.5 million for the same quarter last year. Product revenues for the quarter was $17.7 million, as compared $27.4 million for the same quarter last year. 64% of product revenues were in North America and 36% were outside North America. As Joe has early commented, product revenues for the quarter were negatively affected by the turnover in our sales force and a weakened economy and we expect the weakened economy to continue to delay buying decisions over the near term.

Royalty revenues include an additional $682,000 related to the recognition of the remaining portion of back owed royalties from Alma. Excluding these back owed royalties, royalty revenue was $2.6 million. Funded product development revenues include funding from both Johnson& Johnson and Gillette. Other revenues include a $1.25 million quarterly payment from P&G and $250,000 related to the recognition of the remaining portion of trade rest fees from Alma. Product gross margin was 63% this quarter, or 64% excluding an additional FAS 123R, non-cash charge of $264,000 as compared to 69% for the same quarter last year.

Product gross margin was negatively affected by lower product revenues, which resulted in lower overhead absorption. Based on our analysis, average selling prices remain constant and therefore did not negatively affect margins. As a percentage of worldwide product revenues, product revenues increased to 36% outside North America this quarter, versus 28% for the same quarter last year. Thus 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 $5.4 million, as compared to $4.3 million for the same quarter last year. Research and development, as a percentage of total revenue was 23% this quarter, or 18% excluding an additional FAS 123R non-cash charge of $1.3 million as compared to 14% for the same quarter last year. Selling and marketing expense for the quarter was $6.8 million, as compared to $6.3 million for same quarter last year. Selling and marketing as a percentage of total revenue increased to 29% this quarter or 27% excluding an additional FAS 123R non-cash charge of $522,000 as compared to 20% for the same quarter last year.

Now our administrative expense for the quarter was $6.2 million, as compared to $3.1 million for the same quarter last year. G&A expense as a percentage of total revenue increased to 27% this quarter. When 19% excluding an expense for investment banking fees related, to a completion of our international distribution agreement with Q-Med of $1 million and an additional FAS 123R non-cash charge of $896,000 as compared to 10% for the same quarter last year.

We also incurred litigation cost associated with our law suits with Candela of $2.4 million as compared to $400,000 for the same quarter last year. Loss before tax this quarter was $1.8 million as compared to $9.5 million profit for the same quarter last year. Net loss this quarter was $1 million or $0.05 per share, as compared to net income of $5.9 million or $0.30 per diluted share for the same quarter last year. The balance sheet is solid with ample cash and investments of a $128 million. As of today, we have approximately $21 million in auction rate securities which have been reclassified as long-term marketable securities through the liquidity in the auction rate securities market.

We recorded $341,000 loss in stockholders equity, net of taxes to reflect a temporary impairment of our auction rate securities. There was no P&L effect related to that. During the quarter we used $1.3 million to buy back 100,000 shares at an average price of $13.37 per share. We are now ready to take you questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Dalton Chandler with Needham and Company. Please proceed.

Dalton Chandler - Needham and Company

Good morning.

Joe Caruso

Good morning Dalton.

Dalton Chandler - Needham and Company

I am going to start with you Joe you mentioned you are still experiencing some sales force turnover. At this point is that coming from new hires who just aren’t making it, or are you continuing to lose some established people who you'd prefer to keep?

Dan Valente

Mostly new hires. We've had a pretty stable core sales people that have been with us for a while, but we had to hire a lot of sales people last year as we started to lose them in the beginning of '07. Some of those sales people just have not turned out to be that productive and we've replaced them again. So, we are in our second cycle with some of those sales people.

Dalton Chandler - Needham and Company

Okay and then at this point do you still have all your territories filled?

Dan Valente

Right now we have all of our territories filled.

Dalton Chandler - Needham and Company

And can you remind us how many territories there are?

Dan Valente

40 territories.

Dalton Chandler - Needham and Company

Okay. And you mentioned that you haven't seen any deterioration of ASPs, but have you had difficulties with physicians obtaining financing?

Dan Valente

No, it really hasn't been a major problem. There has been some delays in some of the non-core markets, but relatively short delays in that. Part of the market that once was able to get financing more than [MedSpa] market, might not be able to get that financing as readily, but that was a smaller percentage of our market anyway. So overall, the financing situation and credit tightening has not materially affected our sales now.

Dalton Chandler - Needham and Company

Okay. And then on the, looking for additional partners for the home use product. Any sense of when you might be able to announce a new partner or partners there?

Joe Caruso

I really can't comment on that Dalton. We are actively pursuing that strategy now, but I can't give you an idea about when we might be announcing something.

Dalton Chandler - Needham and Company

Okay, then I'll just ask one last question and get back in the queue. On the IP, you now have, on your website, you posted the fractional patent that you hold and so far, as far as we are aware, you haven't attempted to enforce that. Can you talk about what your strategy is there and what we might expect to see?

Joe Caruso

We are executing our strategy to split value from that patent and that asset. We haven't talked about what that strategy is, but we are actively going through that strategy right now.

Dalton Chandler - Needham and Company

Since you haven't done anything publicly about that should we assume that you are having some private conversations.

Joe Caruso

That's a good assumption.

Dalton Chandler - Needham and Company

Okay, thanks a lot.

Operator

Your next question comes from the line of Anthony Vendetti with Maxim. Please proceed.

Anthony Vendetti - Maxim Group

Thanks. Good morning. I was wondering if you could just talk a little bit more about the number of new hires that were replaced. And then I just wanted to get some percentage growth in the international or OUS and then North America broken out if you can?

Joe Caruso

Right. As I indicated just a few minutes ago, we have about 50% of our sales force that has been with us for less than one year. Some of that 50% has churned more than once, so we do have a substantial number of new reps, new to this market, new to our products and new to the competitors. So, it is difficult and it does take some time to get those reps up to speed. And they are not as productive on average, as a rep that's been with us for more than a year.

Anthony Vendetti – Maxim Group

No, I mean, you mentioned last quarter that over 50% had turned over last year. My question is how many have actually, how many additional ones, or some of those new ones, how many actually turned over, over the last four months, so far in 2008?

Joe Caruso

It's more than a handful. Let me put it that way.

Anthony Vendetti – Maxim Group

And then in terms of you said the product revenue is 36% OUS, Paul. Since I don't have first quarter '07 handy here, can you talk about what the percent change was year-over-year for OUS and North America in product revenues?

Paul Weiner

Yes. It was, like you said, 36% of our sales were outside of North America this quarter, as compared to 28% the year before. And that leaves also 64% in North America this quarter, as compared to 72% in the same quarter a year ago, in North America.

Anthony Vendetti – Maxim Group

Okay I mean I could go back and do the math, but you don't have the number handy in terms of year-over-year change. Not the percentage broken out revenue, but year-over-year decrease in terms of sales.

Paul Weiner

So as far as the dollar are concerned?

Anthony Vendetti – Maxim Group

Percentage change as oppose to percentage of revenues, the percentage changed year-over-year for North American sales. Am I ?

Paul Weiner

Okay, the percentage change from last year to this year in North America was a decrease of 43% in North America

Anthony Vendetti – Maxim Group

Okay

Paul Weiner

And internationally outside North America was 15%.

Anthony Vendetti – Maxim Group

Okay, great. And then in terms of the legal expenses $2.4 million this quarter, any update either Texas or Boston. I understand July 14th is still the date for the Texas trial in which you are the defendant and Candela is the plaintiff and that's correct, right?

Joe Caruso

That's correct.

Anthony Vendetti – Maxim Group

Okay. And then has there been any development in terms of when the case will be set for Boston when you are the plaintiff?

Joe Caruso

No, there hasn’t been any movement on that. I anticipate a scheduling, hearing coming up but that has not happen yet

Anthony Vendetti – Maxim Group

Okay. And then lastly on the home based hair removal system for women, whether it's with P&G/Gillette or another partner? Do you have a timetable as to when you think there might be a product actually on the market at this point?

Paul Weiner

We do but, we are not publicly talking about where that is

Anthony Vendetti – Maxim Group

Okay. And then what about J&J? You said that was moving along well. That would - is it safe assumption to assume that would be after the home based hair removal system?

Joe Caruso

Not necessarily, no.

Anthony Vendetti – Maxim Group

No okay.

Joe Caruso

Not necessarily.

Anthony Vendetti – Maxim Group

Okay, all right. Great thanks guys.

Operator

Your next question comes from the line of Andy Schopick with Nutmeg Securities. Please proceed.

Andy Schopick - Nutmeg Securities

Guys what happened? How did a company that was performing so well and has proven the value of its IP lose so much sales momentum and become vulnerable to this kind of sales turnover?

Joe Caruso

Well I don’t understand the link in IP.

Andy Schopick - Nutmeg Securities

Well, what I am really trying to say is that, clearly, the company has demonstrated the strength of its technology and its product in the marketplace which was clearly a very big contributor to the success you were having.

Joe Caruso

It's really sales person by sales person, territory by territory. Even though we have as you pointed out very good products; great IP, advanced research development and ideas and things like that. At the end of the day it comes down to the presentation of that technology to the customer at the customer's site by the sales person. And it's the quality of the sales person that will make a big determination whether or not we get that sale. Now, because the technology has over the pat few years become more complicated, more sophisticated, it takes a pretty seasoned sales person to be able to talk intelligently about not only the attributes of our product. And remember our product has multiple applications, but also to be able to talk intelligently about how that compares to some of our competitors. As we have turnover that becomes more difficult because it does take time to get these people up to speed and to keep them up to speed with all the changes in what's happening out there.

Andy Schopick - Nutmeg Securities

Joe, I clearly understand the problem you are facing today, I guess what really surprises me, is that the company became vulnerable to this kind of turn over in its sales force.

Joe Caruso

Fine, great. We are not happy about it, believe me.

Andy Schopick - Nutmeg Securities

Let me ask you one more question, because I know this is a difficult time for you and you know its real challenge on how to get back the momentum in the business. With respect to Candela, will it continue to be the company's policy that should it prevail in it's litigation against Candela that it will not license Candela, if this goes to trial and they loose?

Joe Caruso

That's correct.

Andy Schopick - Nutmeg Securities

Okay, thank you.

Joe Caruso

Thanks Andy.

Operator

Your next question comes from the line of the [San Shaban] with Maxim Group. Please proceed.

San Shaban - Maxim Group

Good morning gentlemen.

Joe Caruso

Good morning.

San Shaban - Maxim Group

I just had a couple of questions about the Aspire platform. You are targeting the shift date in third quarter, is that correct?

Joe Caruso

That's correct.

San Shaban - Maxim Group

Is that early, mid, late?

Joe Caruso

We will ship a number of products, we hope in third quarter.

San Shaban - Maxim Group

Okay.

Joe Caruso

It will be mid-to-late third quarter.

San Shaban - Maxim Group

Okay, mid-to-late. Okay now, correct me if I'm wrong, this platform is - are there applications that you can use a platform for or is it strictly for liposuction?

Joe Caruso

First application is the laser assisted lipolysis, but there will be initial applications that we will attach to the system. The laser-assisted lipolysis market, if you follow the industry is a very hot segment of the market and has seen a very high growth rate. So we believe that positioning in the laser-assisted lipolysis segment is important to launch the product, and to get it out there, and get some traction with it. It should be an important product for us, and we're very excited about it.

We've been working, as you know, we've been working, maybe you know, but I know that a lot of investors know that we've been working in the fat reduction area for a long time, and we have done a lot of basic research on the type of wavelengths that are best absorbed by fat cells. And we have actually a very nice joint pact with Mass General Hospital that speaks of three particular wavelengths that are very important.

And our approach has always been to get a product to market that really has some differentiation and really means something. And we believe that we've done that with this Aspire platform. Because the wavelength that we are using when compared to wavelengths that are absorbed by water are many times more effective in melting fat than the water absorbing wavelengths.

So we believe it's going to be a good platform, we think we can quickly gain traction in that product, and we believe that by targeting more towards, targeting the system, the platform, more towards body contouring, that we will have additional advantages in the marketplace.

San Shaban - Maxim Group

Okay. So as far as your initial steps in entering this market, are you planning on offering any promotional programs to support the uptake of this device?

Joe Caruso

I am not sure I understand your question.

San Shaban - Maxim Group

Excuse me?

Joe Caruso

I am not sure I understand your question.

San Shaban - Maxim Group

I'm wondering if you're going to run any promotions to, when you initially offer the device in 3Q, the Aspire?

Joe Caruso

No, nothing special, nothing different than we have done in other introductions of products.

San Shaban - Maxim Group

Okay and then if we can move on to Q-Med, the distribution agreement. How much progress have you made, is there a some of sort of metric that you can offer as far as the transitioning process is concerned.

Joe Caruso

The first steps in the process of transitioning is to make sure that they have the right infrastructure to accept this type of business because remember they are little different business they more like a pharmaceutical company than device company. So, we are going through those steps now, making sure they understand and set up for the entry into the device world. So, we have been working on that. We have been working very closely with them on all of those different things that an asset that we need.

Second step is to identify, certain countries that we feel are best suited for the initial transition and we have identified those countries and we are going through the process of transitioning those countries now. We will do that over the next few months, couple of quarters and I am sure there will be some adjustments of the program and as we move forward pass that, we will identify more countries to transition and circle back and have that cycle ongoing.

San Shaban - Maxim Group

I see and as far the countries that you had identified. What regions specifically deal could you just close that?

Joe Caruso

Mostly in Europe

San Shaban - Maxim Group

Mostly in Europe and I believe that's all my questions. Thank you, gentleman.

Dan Valente

Thank you.

Operator

Your next question comes from the line of Amelia Balonek with Ladenburg Thalmann. Please proceed.

Amelia Balonek - Ladenburg Thalmann

Good morning gentleman. It’s Amelia from Ladenburg. I wanted to ask a follow-up question on Q-MED? How is the developing relative to your expectations?

Joe Caruso

We are on track with where we thought we would be. We are always indicated that it's a slow process because previously caller we getting them up to speed in the device business. So, it's a slow process to get them set up to do this type of business, but I think once we're set up because they have a pretty wide distribution base outside North America. We'll be successful in transitioning countries at a more rapid pace the longer it goes. The first year will be slow. We'll make some mistakes I am sure in the first few, but then once we have the model down pat, I think that we'll see some acceleration in that.

Amelia Balonek - Ladenburg Thalmann

Excellent and so I would expect to see impact of the Q-MED agreement when 2010?

Joe Caruso

No, we would say, well we plan on the first countries that we plan on transitioning overall be the towards the end of the second quarter and primarily really in the third quarter.

Amelia Balonek - Ladenburg Thalmann

Okay.

Joe Caruso

Where we'll start to see more positive effect I’d think would be towards the end of this year.

Amelia Balonek - Ladenburg Thalmann

Okay.

Joe Caruso

And certainly more solid going into next year for sure.

Amelia Balonek - Ladenburg Thalmann

Okay, excellent. And I have a follow-up question on the sales force turnover. What is the timeline I guess for the new sales force initiative? Are we looking basically at this continuing through 2008 and are you going to change the incentive, the incentive programs for the reps?

Joe Caruso

This is two part question. The first part of the question is, we have some initiatives in place right now. We've added some different things to the mix. We are also trying to identify some programs that may make a difference on productivity of even the more seasoned sales reps, but it’s a process because we need to get through some time period to make sure that things are changing in a positive direction and then reinforce those things that are making those changes. So, it's not something that is, in our mind, it going to be a very quick fix, but a process that will take some time to get sales force back to where we it want to take.

Amelia Balonek - Ladenburg Thalmann

Okay

Paul Weiner

As far as feedback on the incentives that we have done, how we revised the plan, incentive plan in 2007 and even more recently in 2008.

Amelia Balonek - Ladenburg Thalmann

Right

Paul Weiner

The feedback that we are getting from our sales reps is that they are happy with the how we set up the plan. So, I think it’s not necessarily tie to incentives that are set out.

Amelia Balonek - Ladenburg Thalmann

It is more on the hiring side?

Paul Weiner

Yeah, it relates lot the…

Joe Caruso

Hiring and training incentive.

Amelia Balonek - Ladenburg Thalmann

Hiring and training.

Paul Weiner

To our hirers that we have over the past year.

Amelia Balonek - Ladenburg Thalmann

Okay, excellent. Can you provide me with the percentage of product sales from new products in the quarter? I guess by new products released within one year.

Paul Weiner

I’m sorry say it again

Amelia Balonek - Ladenburg Thalmann

I’m sorry I guess by new products I mean products released or launched within the past year.

Paul Weiner

I’d say majority of them are new products the StarLux 500, which was introduced in the first quarter of last year that represents higher percentage of our sales, majority of our sales. So, I would say that's where that, that stands.

Amelia Balonek - Ladenburg Thalmann

Is it possible for you to quantify that?

Paul Weiner

Yeah, I’d say some where in between 75% to 80% of our sales tied to StarLux 500.

Amelia Balonek - Ladenburg Thalmann

Okay.

Paul Weiner

And that's been the case in the past as well as we’ve introduced new product.

Amelia Balonek - Ladenburg Thalmann

Right

Paul Weiner

Customers tend to lean towards that side.

Amelia Balonek - Ladenburg Thalmann

Okay, thank you gentleman.

Paul Weiner

Thank you, Amelia.

Operator

Your next question comes from the line of Jose Haresco with Merriman. Please proceed

Jose Haresco - Merriman

Hi, Good morning gentlemen. Paul you mentioned US sales, oh sorry OUS sales were 36% of total revenue. When I look at just the product sales line, is it a similar breakdown or is there a material difference?

Paul Weiner

Well, we were talking about the product sales, right?

Jose Haresco - Merriman

Okay. So you're looking at product sales as 36%, okay.

Paul Weiner

Yeah, not total revenues, no.

Jose Haresco - Merriman

Okay, right.

Paul Weiner

Yeah, when we talked about that just the product, it doesn't include royalties and other things.

Jose Haresco - Merriman

Okay. And it with 72% in the year ago quarter?

Paul Weiner

It was, yes, it was 72%, that’s correct.

Jose Haresco - Merriman

Okay. R&D jumped a bit sequentially, is that a good figure for us to model with, or is that mostly stock options expense?

Paul Weiner

If you back out the numbers that I gave you when we went through it, it's pretty comparable to what it was the year before. If you take the charge out then it's right in line with what it was the year before. That's pretty much the case across the Board, when you're talking about G&A as well, when you back out the unusual items that we talked about as well as the difference in the litigation costs, it's pretty much right in line with, our expenses are right in line with where they were a year ago.

Jose Haresco - Merriman

Okay. Great thanks. With regard to the laser-assisted lipolysis, can you give us an idea what the ASP is going to be, when that launches, are there any disposable was associated with that?

Joe Caruso

The ASP will be similar to the ASP that you're seeing on the spot light, but which is around $130,000 list price, so it would be competitively priced. There is a one-time use disposable. There's a tip and that tip is what actually gets inserted into the local fat area. It's a very unique design and I think the implementation of it should give us a big edge in the market place as compared to some of the other devices that might be out there. But the biggest differentiator in our product versus some other products that might be out there is really the wavelength. Selectivity of the wavelength that we are using is, so they said before many times higher and as such as many times faster in melting.

Jose Haresco - Merriman

At what point can we expect any presentations on the performance of the products from your physicians are work with you?

Joe Caruso

It’s actually presentation at the ASLMS there was a special session on Body Sculpting and Fat Removal and Dr. Weiss presented some very interesting data. We can get that information to you online

Jose Haresco - Merriman

Any upcoming one at ASPS - in the fall at APS?

Joe Caruso

There will be presentations throughout the year on the product.

Jose Haresco - Merriman

Okay, great. Thank you.

Operator

Your next question comes from the line of Julie Hoggatt with Noble Financial. Please proceed.

Julie Hoggatt - Noble Financial

Hey, guys. Thanks for taking my question. First, if you could give me an idea of what percentage of sales is from your installed base or what percentage your sales were from your current installed base? So basically what were more of the hand piece type cell or upgrades to the StarLux 500 from your current installed base? Do you have that number?

Joe Caruso

I don't have that number in front of me, but just an estimate would probably be again, probably somewhere maybe about 25% of our sales or within our current installed base leaving majority of its, certainly to new customers.

Julie Hoggatt - Noble Financial

Okay.

Paul Weiner

That may change going forward with the new Aspire platform, because the body sculpt thing application it could really round out the applications that our current customers have with the StarLux platform.

Julie Hoggatt - Noble Financial

Okay. And to go back to the sales people issue, can you give us a little bit more clarity on what exactly it is you're doing to maintain your current sales people? Can you give us an idea of the incentives that you're providing, and what you're doing to attract maybe better sales people?

Joe Caruso

Well, the recruiting process is a little more stringent now, and we're looking at profiling what makes a good sales person and trying to fit as many of our sales people into that as possible. We are doing a lot of training, and aggressive training, with sales people. And we are also having some of the senior sales people ride with or work with some of the less experienced sales people to try to get them up speed as fast as they can as well. As you can imagine, it's a little difficult in monitoring new sales people because it's a one on one sales situation outside the office with a doc. So, we want to get as close to that as possible with people that have been with us for a while, and make the right assessments as fast as we can.

Julie Hoggatt - Noble Financial

Okay. And can you give us an idea if you've had your quarterly conference call with Gillette this quarter, and an idea of maybe time to shelf or where you are with Gillette? Can you give us some clarity there?

Dan Valente

Well, as you know February 29th, we changed that deal around, so we are now non-exclusive with P&G/Gillette. So, they are currently working on their own. They've got access to our patents and the technology that we work with them on over the past five years, but they are working independently with Palomar. We on the other hand are now free to potentially work with other parties and advance the technology forward on our own as well using the technology as well as the patents. So, that's were we are with P&G in the hair removal home products.

Julie Hoggatt - Noble Financial

So, there no more quarterly conference calls or updates on where they are?

Dan Valente

That is correct.

Julie Hoggatt - Noble Financial

Okay. That's all the question I have. Thank you.

Joe Caruso

Thanks, Julie.

Dan Valente

Thank you, Julie.

Operator

Your next question comes from the line of Bill Dezellem with Tieton Capital Management. Please proceed

Bill Dezellem - Tieton Capital Management

Thank you. We had a group of questions. First of all relatives to the Q-MED relationship I believe in your opening remarks you had mentioned that there was some disruption in the quarter. Would you please provide a bit more detail of your view of what that disruption was?

Joe Caruso

Well, as you can imagine the current distributor that we have outside North America are a little bit nervous on if they are country that will be transition and when they might be transition. So, as such some of those distributors are hesitating on pushing the products or advertising more in the products. Some though are pushing the products very aggressively because they want to get as many sales they can before we transition.

We have had a number of conversations with the number of distributors to get them comfortable with the timing that they might see on a transition, some countries remain at transition for a long time. So, there is some disruption there. We try to manage it as best we can, but in the long run we think that transitioning countries to Q-MED that are appropriate, we will be a much better position for us than just a group of independent distributors.

Bill Dezellem - Tieton Capital Management

And then secondarily, relative to the Aspire product, will you be using the same sales force that you currently have? Or will you be bringing any different sales force to sell that product, given that the invasive nature of laser-lipo may lead to a different potential customer?

Joe Caruso

We'll be tapping into our existing sales force, but we will be adding capability and some additional people to help with the process.

Bill Dezellem - Tieton Capital Management

And then, one bookkeeping question; you've delayed the recognition of some of the past royalties that you’ve recognized here in the quarter. Could you share with us why that is the case?

Dan Valente

Because there are certain amounts related to the settlement that we had with Alma last year that were under audit. And the audit got completed in this first quarter, so we were able to recognize the remaining portion in this quarter.

Bill Dezellem - Tieton Capital Management

That’s helpful. Thank you both.

Dan Valente

Thank you.

Joe Caruso

Thank you.

Operator

Your next question comes from the line of Isaac Ro with Leerink Swan. Please proceed.

Isaac Ro - Leerink Swan

Hey guys. Thanks for taking the question. The first would be on the sales force turnover sort of the second time in 12 months that you guys have had some issues there. I'm wondering, as you do the interviews for these individuals, and is there one-item that really stands out as a reason that explains the turnover?

Joe Caruso

Not really. There are a number of reasons why we lose sales people. Sometimes they are lost to competitors, sometimes we hire some sales people that look good on paper and check out fine in references and fit the profile, but within few months or six months they really not getting up the speed and we have turn that territory over again. That's probably one of the biggest issues and disappointments we have. When we do hire sales person, we think they are going to be very good. We try to get them train as well, as possible and they just don't work out that well.

Isaac Ro - Leerink Swan

Okay. So, it would be fair to characterize them turnover as people that you prefer to lose versus when you didn't want to lose something like that?

Joe Caruso

For the most part.

Isaac Ro - Leerink Swan

Okay. And then second question would be on Aspire, obviously its hard market, as you mentioned there are numbers of companies out there most notably the Smartlipo platform and I am wondering, the price point that you cited 130 that sounds like sort of bumping up against the low end of what they are pricing their new version of MPX (Inaudible). And that one, I know, has sort dual wavelengths. You mention sort of your wavelength is having an improvement over I think speed of procedure and I am wondering, is there an efficacy component to that wavelengths that you think is also advantageous? Just trying to get a sense of how you think you will compete at that price point with the established (Inaudible).

Joe Caruso

Well, at that price point. It's a good price point for us. And I think that because we have I think a superior wavelength once we get traction in the Aspire platform, we may revisit, where the price point is. In addition of that because we are introducing this as a platform technology as time goes on. You know we will be adding additional capability and with that additional capability, you may also see some adjustment upward of list price. I think that (Inaudible) has done nice job with adding new capabilities and they have increased prices and you may see same thing with us.

Isaac Ro - Leerink Swan

Okay. Last question would be on expense do you sense how the equation? Given that you guys had a bit of different revenues here and you are trying to get new people ramped up with new products and new sales people. Would be these fair to assume that you guys will keep a careful eye on expenses and trying to get the business to a level of operating profits or you guys going to continue invest for the future and assume the business snaps back in the back half of the year.

Joe Caruso

Our approach is not to cut back on the investments that we've been successful with research and development in the positions that we have been in. I think that we do see some pressure, overall pressure with the economy. We see some individual issues that we have to work through in our sales force. But I don't think there are issues that we can't get passed and because of that we really would feel very uncomfortable with cutting back on research and development investments. It's a very good use of our cash. We have some ideas on products and new products. Coming out especially with this Aspire platform that I think will be very large contributors to revenue downstream and it just doesn't seem like the right thing to for us right now.

Isaac Ro - Leerink Swan

Okay. Thanks very much.

Operator

Next question is from the line of Anthony Vendetti with Maxim. Please proceed.

Anthony Vendetti - Maxim

Okay. Thanks, just a two quick follow-ups on the Aspire the technology you are using with this tip hey you said it’s a disposable tip. Can you give the price of what the disposable would be?

Paul Weiner

We haven't actually given that price out of yet, but it will be good price point for us as far as margin and profitability and it will also be very acceptable to our customer base we think.

Anthony Vendetti - Maxim

Okay. And is it correct that this tip is going to be used without a cannula?

Paul Weiner

That's correct.

Anthony Vendetti - Maxim

Great, is there any advantage or disadvantages to that based on your research?

Joe Caruso

I think there is lot of advantages because of the way that we can configure the tip for different energy delivery situations and because it’s a one-time, we can set that in, in the factory and have very consistent treatment that way. I think that's big advantage.

Anthony Vendetti - Maxim

Any risk that the tip could break while inserted into the patient.

Joe Caruso

No. We don't see that as an issue.

Anthony Vendetti - Maxim

Okay. And then lastly on the option grant they would reprise on February 29th of this year, which was the date at which you renegotiated the agreement with Gillette. a) is that correct and then, b) we understand the rational of for the grants at that particular time, which I think based on my calculation is about 7% of your outstanding shares is about 1.3 million shares, is that correct?

Paul Weiner

That's correct well 1.3 million just go to your first part. This is not a reprising of options, related to the old deal that we had, the original that we had with Gillette in that we signed up in 2003. In 2004, we granted to number of employees incentives in the form of equity and their performance based incentives tied to Gillette making what was in the original agreement termed a launch decision, which was in January up for January of this year. So, back in 2004, we’ve made the conscious decision of tying them performance based as opposed to just granting them and having them time based, which is the norm in what we've done in the past.

So, when we terminate this agreement in order to continue incentivizing key employees, new equity was granted, but as opposed to the fully vesting, which would have taken place with the old performance based options, where a big percentage of them would have been about 70% of them would've been vested in January of this year and the remaining portion would've been vested in the first quarter of 2009. Instead, we vested some of them immediately, as the other ones would've been and the remainder, we extended the vesting term over a three year period to lengthen the vesting period and the incentives. So, in some way to replace and continue to incentivize the key employees.

Anthony Vendetti - Maxim

When you said some vested immediately, is that the non-cash charge of approximately $3 million you took this quarter?

Joe Caruso

That’s right. There was an additional related to the portion that was vested immediately. There was an additional $3 million charge non-cash charge, in addition to whatever our normal charge might be. And then, related to the portion of these options that vest over three years, there will approximately $180,000 non-cash charge every quarter thereafter, through the first quarter of 2011.

Anthony Vendetti - Maxim

But this new grant that went into effect on February 29th of '08, this year, is to retain and incentivize current employees. And since it's a new grant and Gillette is doing -- you're pursuing other potential partners and Gillette's looking to pursue their avenue of potentially launching this product. This grant is not tied to the joined agreement correct anymore, correct?

Joe Caruso

Yeah, is correct. It just tied to overall business, key employees and incentives as we have done in the past.

Anthony Vendetti - Maxim

Okay, great. Alright, thank you very much.

Operator

Your next question is from the line of the Richard Rinkoff with Craig-Hallum. Please proceed.

Richard Rinkoff - Craig-Hallum

Thank you. You have been slow to execute on your buyback program and if I read between the lines on your comments a while ago seems like you might even been considering an acquisition perhaps of a private company in this space. Can you link those two things together? Or am I just imagining things?

Joe Caruso

I wouldn’t necessarily link those; it can't really be linked. There is very limited time as far as, when the window is open for us to do buybacks, but we have been doing as you know in the fourth quarter, we were in a blackout period. That whole quarter so we purchased some in the third quarter, when we first instituted it. We did some in the first quarter and we will continue expect the opportunistic in the future as well, as far as our active buyback program.

Richard Rinkoff - Craig-Hallum

What about possibility of acquiring another company?

Joe Caruso

That's always the possibility I wouldn't tie those two together.

Richard Rinkoff - Craig-Hallum

Okay. Could you give me the breakdown of US as suppose to North America in terms of product revenue.

Joe Caruso

As far as…

Richard Rinkoff - Craig-Hallum

US sales that would separate Canada from US?

Joe Caruso

Yeah. US was represented 56% of our sales this quarter.

Richard Rinkoff - Craig-Hallum

Okay. Thank you.

Joe Caruso

Thank you, Rich

Operator

Your next question is from the line of Dalton Chandler with Needham & Company. Please proceed.

Dalton Chandler - Needham & Company

Yeah. Hi, just a quick housekeeping follow-up. Could you give us the cash from operations CapEx and the depreciation and amortization for the quarter?

Paul Weiner

The CapEx was about $300,000. Depreciation is really not all that material. The cash flow from operations is about, I figured it might be was a negative $1 million, I believe.

Dalton Chandler - Needham & Company

Okay. Thanks a lot.

Operator

Your next question is from the line of Assaf Guterman with Lazard Capital Markets. Please proceed.