Palomar Medical Technologies, Inc. Q2 2008 Earnings Call Transcript

Palomar Medical Technologies, Inc. (PMTI)

Q2 2008 Earnings Call Transcript

July 31, 2008 12:00 pm ET

Executives

Kayla Castle – Manager, IR

Dan Valente – Chairman

Joe Caruso – President and CEO

Paul Weiner – SVP, CFO and Treasurer

Analysts

Anthony Vendetti – Maxim Group LLC

Dalton Chandler – Needham & Co.

Julie Hoggatt – Noble Financial Group

Rick Rinkoff – Craig-Hallum Capital Group

Isaac Rowe – Leerink Swan

Ross Nelson

David [ph] – Doucette Asset Management

Presentation

Operator

Welcome to the Palomar Medical Technologies second quarter 2008 financial results conference call. Please be aware that each of your line is in a listen-only mode. At the conclusion of Palomar's presentation, we will open the floor for questions. (Operator instructions) I would now like to turn the conference over to Kayla Castle, Investor Relations manager of Palomar. Miss Castle, you may proceed.

Kayla Castle

Thank you. Good morning and welcome to the Palomar Medical Technologies second quarter 2008 conference call. Before we start this morning's call, there are 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 888-2868010, pass code 86399673 or webcast replay at Palomar's web site, www.palomarmedical.com through Thursday, August 14^th.

Various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially than 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 31^st, 2007 and the company's quarterly reports on Form 10-Q which are on file with the SEC and available through Palomar's web site.

To supplements Palomar's consolidated financial statements presented in accordance of GAAP, management uses the following measures to find the non-GAAP financial measures by the SEC. Non-GAAP income before taxes, non-GAAP provision for income taxes, non-GAAP net income, and non-GAAP diluted earnings per share. The presentation of these financial information is not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with GAAP. In addition, the non-GAAP financial measures included in this call may be different from, and therefore not comparable to, similar measures used by other companies. For more information on these non-GAAP financial measures, please see the non-GAAP data included in the press release. This data has more details of the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures. Palomar's management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core operating business results. Palomar believes that both management and investors benefit from referring to these non-GAAP financial measures and accepting Palomar's performance and when planning, forecasting, and analyzing future periods. These Non-GAAP financial measures also facilitate management's internal comparisons to Palomar's historical performance and our competitors operating result. Now, Palomar believes that these non-GAAP measures are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. The information in this conference call related to projections and/or forward-looking statements may be relied upon subject to the previous Safe-Harbor statements as of the date of this call. The information in this conference call is a property of Palomar and should not be reproduced, recorded, or otherwise published without the express prior written consent of the company. Joining us this morning are Dan Valente, Chairman; Joe Caruso, President and Chief Executive Officer; and Paul Weiner, Chief Financial Officer. I would now like to turn the call over to Dan.

Dan Valente

Thanks, Kayla, and thank you all for tuning into the conference call. Palomar's financial results for the second quarter indicate improvement in both top and bottom line. Hopefully, the industry may have weather the worst of the storm. At Palomar, we have not deviated from our longer range plan. We have accelerated our R&D and in the process of launching a new project in the hottest area of the aesthetic market and fortifying our sales force. Results of these actions should be evident in the second half of this year and throughout 2009. 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 aesthetic market today, working toward driving our technology to the mass market and capitalizing on the value of our extensive patent portfolio.

We continue to feel the effects of an overall economic slowdown and we believe this is contributing to lower product revenues as many physicians appear to be postponing major buying decisions. Fueled by a decrease in physician confidence in consumer spending, this trend 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 of light-based cosmetic devices remains a great opportunity.

Based on an analysis of our sales during the quarter, we have not had a decrease in average selling price, and in fact experienced an increase in product gross margin as compared to prior quarter. Approximately 40% of our sales force has been with us for less than a year. This has hampered our efforts in returning to our previous revenue levels with a season sales loss. We are, however, continuing to make headway and our domestic sales group is starting to show improvement. Sales from North America grew 30% in the second quarter as compared to the previous quarter. We will continue to have an aggressive training and mentoring program, and we have instituted measures geared toward employee retention.

This is a very exciting time for us. We are aggressively looking to increase our product offerings and will focus our sales efforts on those physicians that are willing to invest in their practice. During the quarter, we introduced our newest product, the Aspire platform, at the ASLMS meeting in Orlando. This new system is a diode laser platform that is focused on body sculpting. The first application we are addressing is the minimally invasive laser assisted lipolysis market.

Podium presentations highlighted the unique selectivity of Aspire, which uses a particular wavelength that is highly absorbed by the lipids present in fat cells. This compares to other devices on the market that simply target water. This selectivity allows the Aspire to treat the – and target fat cells more effectively and much faster than devices offer today. This message was very well received and will be the focus of our product positioning. We are marketing the procedure as SLIMLIPOs. The Aspire system uses a proprietary one-time use delivery system. This is the first time we have incorporated a per treatment disposable revenue stream into our products.

Along with body sculpting, we are also well positioned with fractional technology. We have a full suite of ablative and non-ablative product offerings that complement our light and laser-based hand pieces. Fractional technology provides a higher level of safety and efficacy to certain applications in non-fractional treatments and we are a leader in this technology.

Turning to the rest of the world. In the beginning of this year, we announced a strategic collaboration with the Swedish company, Q-Med. Q-Med is 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 for a network of fully owned sales companies, partners, and distributors in over 70 countries. We believe that dermal fillers and toxins are the first step for a new physician getting into aesthetic treatments.

This is often the first step for patients as well. Q-Med has a very live sales force outside North America but call upon 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. Q-Med will use its marketing presence and installed base to feed leads to a new sales group that will be hired by Q-Med. These dedicated capital equipment sales force within Q-Med will work with their existing restaurant [ph] sales force. It will time to build a new sales force and we are in a process of transitioning the first country.

I anticipate a slow start as we work out many operational issues between us and Q-Med in the first test country and as we help them get up to speed with our technology. In the meantime, we will work to enhance our distribution for our existing and new distributors and we will make future transition decisions based on the success of the first test country.

Last week, we announced that we entered into a distribution agreement with Astron Clinica, a global skin imaging company based in England, to distribute a range of aesthetic imaging products in the United States and Canada. Physicians using the Astron Clinica Beau Visage imaging system in conjunction with Palomar light-based aesthetic systems are able to better tailor treatments to the specific needs of each client and then demonstrate and quantify the before and after effect of Palomar treatments. This should enable Palomar customers to sell more treatments, thereby increasing revenue and return on investment in Palomar aesthetic light-based systems.

We have made a great deal of progress over the past few years with our plans to take our technology to the mass market. The Johnson & Johnson program is moving along well. We are pleased with the 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 FDA-OTC approval for our device. We have a proven intellectual property position in light-based hair removal and have defended it successfully against infringes. We believe that light-based hair removal in the home is a near-term reality. As such, we intend to exploit it to the maximum benefit for our shareholders.

During the quarter, we announced a new agreement with P&G during the year – at first quarter, sorry, we announced an agreement with P&G that retains a non-exclusive license to Palomar's broad patent portfolio as well as non-exclusive license to the extensive technology developed by Palomar before and during 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 pays us $1.25 million per quarter prior to commercial launch of the 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 numbers of licensees of our hair removal patents to nine [ph] and 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 choose to enter the consumer market. Our patent enforcement strategy is expensive but we are steadfast in our position and will continue to enforce our intellectual property at a vigorous pace.

In the short-term, our business, like many others, is being affected by a downturn in the overall economy. Over the past five years, we have successfully built our business and accumulated the assets needed for continued growth over the long haul. We are expanding our product portfolio with the Aspire Body Sculpting platform to address an ever changing market. We intend to remain focused on investing in the long-term for research and development and will continue to strengthen our valuable intellectual property position.

Our products enhance the quality of life for people around the globe and make them look and feel better. The market for our products is not going away, and in fact, it should grow substantially with time. And Now, Paul will brief us on the financial performance for the quarter.

Paul Weiner

Thank you, Joe. Revenues for the quarter were $23.1 million as compared to $32.8 million for the same quarter last year. Product revenues for the quarter were $19.2 million as compared to $28.3 million for the same quarter last year. 76% of product revenues were North America and 24% were outside North America. As Joe had already commented, product revenues for the quarter were negatively affected by the turnover in our sales force, although our domestic sales group is starting to show improvement. Product revenues are also affected by the weakened economy.

On going royalty revenues are consistent with past quarters. Funded product development revenues include funding from Johnson & Johnson. Other revenues include the $1.25 million quarterly payment from P&G related to the non-exclusive license granted to P&G for home use light-based hair removal for women.

Product gross margin was 67% this quarter as compared to 64% for the same quarter last year. Gross margin's increase due to the fact that as a percentage of worldwide product revenues, product revenues increased to 76% in North America this quarter versus 71% in North America for the same quarter last year. As a percentage of worldwide product revenues, product revenues decreased to 24% outside (inaudible) a marketing percentage of total revenue with 24% this quarter, as compared to 19% to the same quarter last year. General and Administrative expense for the quarter was $5.1 million, as compared to $4.2 million for the same quarter last year. General and administrative expense to the percentage of total revenue was 22% this quarter, as compared to 13% same quarter last year. Included in G&A, our litigation cost associated with our lawsuits with Kendala of $2.9 million, as compared to $1.8 million for the same quarter last year.

Income before tax this quarter was $1.4 million, as compared to $9.1 million for the same quarter last year. Interest income was reduced by almost half, or $700,000, as compared to the same quarter last year due to the substantial reduction in interest rates. We do expect to earn interest at this lower rate for the foreseeable future.

Net income this quarter was at $760,000, or $0.04 per diluted share, as compared to net income of $5.8 million, or $0.30 per diluted share, for the same quarter last year. The effective tax rate increased to 47% this quarter due to some adjustments in equity. We expect the effective tax rate to be approximately 39% for the remainder of this year.

The balance sheet is solid with ample cash and investments of $128 million. As of today, we have approximately $7.2 million in auction-rate securities, down from $21.4 million last year, which have been reclassified as long-term marketable securities due to the illiquidity in the auction-rate securities market. We recorded a $193,000 loss in stockholder's equity, net of taxes, to reflect the temporary impairment of our auction-rate securities. There was no effect on our income statement.

During the quarter, we used $3.3 million to buy-back 300,000 shares at an average price of $10.95 per share. We have now purchased a total of 505,000 shares out of over the 1 million shares authorized, for a total of $7.6 million at an average price of $15.13 per share. We are now ready to take your questions. Operator?

Question-and-Answer Session

Operator

At this time, we will open the floor for questions. (Operator instructions). Your first question comes from the line of Anthony Vendetti. You may proceed.

Anthony Vendetti – Maxim Group LLC

Thank you. Good morning guys.

Joe Caruso

Good morning.

Anthony Vendetti – Maxim Group LLC

Just a couple of questions on – a little bit about the Aspire and you are expecting to launch at some time here in the third quarter. When are you expecting FDA approval for that?

Joe Caruso

We already have FDA approval.

Anthony Vendetti – Maxim Group LLC

You have? Okay.

Joe Caruso

We received FDA approval in April and then a subsequent one in May.

Anthony Vendetti – Maxim Group LLC

Okay. So, it's all set to launch. So, what's the targeted actual first shipment?

Joe Caruso

As we – as we stated in previous calls, and we haven't any change to this, during the third-quarter, the quarter that we are in right now, we'll start to ship our first few systems. And, we intend to be at full scale production during the fourth-quarter of this year.

Anthony Vendetti – Maxim Group LLC

(inaudible) Okay. And then on the sales force, I think, Paul, you mentioned that you started to see some improvements there. Because in the first-quarter you mentioned that there were still some sales force issues you are working through. Can you quantify that improvement a little bit, what are you seeing that's different?

Paul Weiner

Well, the turnover rate certainly has decreased over where it was last year when we were talking about this in 2007. And, if you look at the performance of our seasoned sales reps that have been here for awhile, there's also a marketable improvement over where it was before. So, you can see some improvement there based on where the economy is from those effects but also within our newest sales reps, for the mentoring programs and the training that has been going on and the decrease in turnover from prior year, we're seeing marketable improvement there as well.

Anthony Vendetti – Maxim Group LLC

The sales force is staying constant in terms of territories right around 30-40, is that right?

Paul Weiner

That is correct.

Anthony Vendetti – Maxim Group LLC

Okay.

Paul Weiner

And that's all resulted in the 30% increase that we've seen in North America sales from last quarter to this quarter.

Anthony Vendetti – Maxim Group LLC

The sequential increase. Okay. And the humid relationship – I think, Joe, you mentioned they're going to roll out a specific sales force that focus on the Palomar products, how is that going to occur? How many people are they looking to hire? Are you going to be involve in that hiring process and what is going to be considered a full complement for your international distribution?

Joe Caruso

What we planned with Q-Med is to roll out a test country. We've identified a test country with Sonic [ph] and ruled that out. We will fine tune all of the standard operating procedures and processes that go along with that in this test country and make our adjustments accordingly. So it's still a little bit early. So you talk about how many salespeople per country, obviously, every country is different. They might have some in one country and more in other country and all of that. So, it's a little bit early. We have our plans to roll it out. We're working very closely with them to try to help them roll it out, at the same time, we're helping them get up to speed with their technology because this is, obviously, it's quite different than their technology. But we feel that it's a good opportunity for us.

Anthony Vendetti – Maxim Group LLC

Okay. And then last question is on the Kendala litigation. I understand that the litigation, which Kendala is the plaintiff, has been pushed out two weeks, is that correct, until September 29^th?

Joe Caruso

That's correct. That's the right date.

Anthony Vendetti – Maxim Group LLC

And the case in which you're the plaintiff, has that been set yet?

Joe Caruso

We don't have a date yet.

Anthony Vendetti – Maxim Group LLC

Okay. Your expectation on that is hard to pin down, late '09? Is that a good guess or –?

Joe Caruso

I'm hopeful it will be earlier – in the first part of '09 but we don't have a date yet so we can't (inaudible).

Anthony Vendetti – Maxim Group LLC

Okay. And the 2.9 in litigation, is that all related to Kendala or is there any other litigation expenses in there?

Joe Caruso

That's all related to Kendala.

Anthony Vendetti – Maxim group

And is that expected to continue to around that range or fluctuates a little bit?

Joe Caruso

I would say it's around that rate since it certainly we're going to gearing up for a trial which will, again, like you said, start the 29th. So, we're gearing up for trial in the third quarter and then in the fourth quarter we'll be in trial. So, I would expect that to continue for these next two quarters and then we should be done with that.

Anthony Vendetti – Maxim group

Okay. Great, guys. I'll hop back in the queue. Thanks.

Joe Caruso

Thank you.

Operator

Our next question comes from Dalton Chandler.

Joe Caruso

Good morning, Dalton.

Dalton Chandler – Needham & Co.

Good morning. You had a nice improvement in revenue from first quarter to second quarter. I was wondering if there's any particular product or products that were driving that.

Joe Caruso

No, we – during the quarter, we did not introduce any new product that we did not have in the prior quarter. There is, obviously, Starlux 500 continues to be our flagship product. There are some standard handpieces hair removal, skin rejuvenation type hand pieces that obviously are stable hand pieces for us. The ablative, fractional, and non-ablative fractional is also a very good handpieces and we sold quite a bit of those as well. So, same complement of technology through the platform. I don't think there was any differences in trends of one hand piece over another and there was no difference in the focus on Starlux 500 versus the other products.

Dalton Chandler – Needham & Co.

Okay. And you've mentioned a little bit about investments you've made in the sales force and how you think that's stabilizing things there. Could you be a little more specific about what it is you're doing that you think is working well for you?

Joe Caruso

Well, we are a lot closer today the sales force, we being Paul & I, than I think, you know, a year or two ago. We have a series of meetings that we have with representatives of the sales force, so we look at issues, we look at trends, we look at things that we want to enhance or change with that group. We put in place, you know, those changes, and we monitor those changes and sentence [ph] for various some very, very good suggestions coming out of the sales force themselves. Some of the mentoring programs that we're putting in place, some of the training programs that we're putting in place, you know, actually are coming from the field, which is nice to see because when you have some good suggestions from the field and you're able to analyze, digest them, and then implement them, it works out well because they are the closest to what's going on a day-to-day basis.

Dalton Chandler – Needham & Co.

Okay, and then on the new Astron Clinica relationship. Can you talk a little bit about the Beau Visage, how that product is priced and how your revenue works through that, and then I know, they have a lot of other products beyond that. Is this the only you're going to sell, or is there the potential to sell some others as well?

Louis Valente

Yeah. On the Beau Visage imaging system, which will be the main system of theirs that we'll be selling, it is proven technology and that's why we really like this. Comes from – they have the same mentality as we do, with very strong research and development going into this technology, and is able to penetrate under the skin to get a true picture of melanin and blood content and this system is competitively priced where it is below with some of the other competitive imaging systems are. And the range of pricing depends on which modules you want to add to this but you can start at around $13,000 for this system and it can go up to as high as $20,000 – $25,000 depending on which add-ons you put on to it.

The other system, they also have the Physiometrix system, which is a full body imaging system and that could work up here up well with our laser lipo or the slim lipo product. Both of these are non-contact imaging systems and have proven themselves well. We've been looking for a complimentary imaging system to be able to sell along with our systems for a while and we believe that this firmly meets our needs. They also yet, as you've mentioned, have some other imaging systems and we are looking at those, and there's a high probability that we'll be distributing all, if not most, of their imaging systems.

Dalton Chandler – Needham & Co.

Okay.

Joe Caruso

And we're starting – just to conclude on that, we are starting in North America on this and, if this works out successfully, then there's potential to expand this throughout the world.

Dalton Chandler – Needham & Co.

Okay. And do you get – is it a transfer price or is it a percentage, or how does that work?

Joe Caruso

Yes, it's correct. It is a transfer price. So, we'll be purchasing it from them at a transfer price and selling it at the regular retail pricing.

Dalton Chandler – Needham & Co.

Okay. And just last question on the Aspire platform, I know you've eluded to the fact that there are – there will be additional applications beyond the liposuction application. Can you talk at this point about what some of those things might be or if not at least what the timing of additional applications might be?

Joe Caruso

No, we haven't disclosed either one of those at this time. They will be complementary to the first application, which is the SLIMLIPO application. But we haven't get into detail on timing on what type of applications goes out.

Dalton Chandler – Needham & Co.

Okay. Alright, thanks a lot, guys.

Operator

Our next question comes from Julie Hoggatt.

Joe Caruso

Morning, Julie.

Julie Hoggatt – Noble Financial Group

Hi, guys. Most of my questions have been answered, but, in terms of tax rate, as a percentage, it was a bit higher than what we were expecting. Can you give us some guidance on that going forward?

Paul Weiner

Yes. As I have said in the call earlier, we should be at the normal or around – we expect to be at 39% for the next two quarters. That's our expectation. So that for the year, we average out to be 39%. The first-quarter was lower; the second-quarter is obviously much higher at 47%. But, we should have this 39% for the rest of the quarters of this year.

Julie Hoggatt – Noble Financial Group

Okay. And on the Procter & Gamble contract, can you give us some insight as to possible timing or what your conversations with them are in the last quarter or have been in the last quarter?

Paul Weiner

Yes. We can't really give you any timing. And as you know, we've changed that deals that it's no longer exclusive, it's now non-exclusive. So that

Julie Hoggatt – Noble Financial Group

Right.

Paul Weiner

We could be working on our own products; we could be working with other partners, if you will. So, a lot of the communications that we had regarding the details of the project we're no longer heavily involve in that part. We have transferred a lot of the information – all the information over to P&G so that we are quite confident that they can successfully address this project on their own. But certainly, we – and we on our side can certainly continue to address devices on our own as well.

Operator

Okay, thank you.

Louis Valente

Thank you, Julie.

Operator

Our next question comes from Rick Rinkoff.

Rick Rinkoff – Craig-Hallum Capital Group

Thank you. Paul, could you tell me what the U.S. revenues were as opposed to North American revenues, please?

Paul Weiner

Sure. The United States – U.S. revenues were $12.1 million as compared to the North America was $14.566. So, $12.1 million in the US.

Rick Rinkoff – Craig-Hallum Capital Group

Okay. I haven't run all the numbers on this, but it would suggest that if the North America – if the US number improved significantly from Q1 to Q2, that the European market went down substantially. Is that true and what would have caused that?

Paul Weiner

Yeah, that is true. The international market or outside the North America went down primarily due to a couple change that we're having. One is obviously with the trends additional [ph] over to Q-Med. It has been, as we have mentioned in the past, and as expected some disruption, it would– our distribution in certain areas which we believe that we've gotten our arms around all that and now we are, as we said early in the call, adding new distributors and working with our existing distributors to increase that distribution.

Another area that we've also made a change and that's in Australia, and we've now converted from a distributor to our very first direct office, out of Australia, and that should help us substantially in that area as that was in the past a strong area for us.

Rick Rinkoff – Craig-Hallum Capital Group

Would you anticipate anywhere near the same kind of increase in non-U.S. sales in Q3 that you saw this quarter in the U.S.?

Paul Weiner

We're not– we can't really talk about a specific quarter or making that increase from the second quarter to third quarter, but I think that there's a lot of potential out there for us to start increasing sales internationally as we had in the past. Once we get past disruption and we are currently working on that as we speak.

Rick Rinkoff – Craig-Hallum Capital Group

Okay. Are you seeing any discounting in the market either from your own reps or from others?

Paul Weiner

Not really more than what we've seen in the past. That's why if you look at our gross margins, they stay quite stable. And I think the changes are overall gross margins depending on our mix of national versus domestic. But our average selling prices have remained constant. So, we haven't seen any change, no.

Rick Rinkoff – Craig-Hallum Capital Group

Okay. And you are not seeing it from others either?

Paul Weiner

We haven't seen anything more so than anything atypical from what it was in the past.

Rick Rinkoff – Craig-Hallum Capital Group

Okay. Should we, given that the U.S. is now a higher percent of revenues, should we assume that 67% gross margin going forward would be about right?

Paul Weiner

Not necessarily because we are working as we have been quite a bit internationally as far as improving international and getting back to the progress that we made in 2007. So, it was successful in that area then international should continue to represent a larger percentage of our sales and if that's the case, then our average selling prices – I should say our gross margins we still thinking should be in the mid 60's.

Rick Rinkoff – Craig-Hallum Capital Group

Okay. Thank you very much.

Paul Weiner

Thank you, Rick.

Operator

Our next question comes from Isaac Rowe.

Isaac Rowe – Leerink Swan

Hi, guys. Thanks for taking the question. So, just to clarify on the international disruption you saw in the quarter. Is it fair to say that was largely internal-based given your transition with Q-Med and not due to any share losses or competitive pressures in that market specifically?

Joe Caruso

Yes, I would say that that is – that's a good assumption. As Paul says, we are making some other moves with distributors. He mentioned Australia. So, it is – it's from a few different issues but in our mind they were all transition issues.

Isaac Rowe – Leerink Swan

Okay. And then just looking at the P&L here, sales and marketing down about a million dollars year-over-year as well as sequentially, is that the new run rate that you guys are operating on, given this new distribution deal? Or how should we look at that number going forward?

Paul Weiner

Yes, I mean, it really is tied to revenues, so if you look at the revenue last year versus this year, a lot of sales and marketing expense relates to commissions and certainly when revenues are down and the commission expense are a lot less.

Isaac Rowe – Leerink Swan

Got it. Okay, and then just lastly on the M&A landscape. There obviously been a couple of high profile deals done in the last 90 days. They've given you cash balance and more importantly the depressed nature of the valuations we're seeing across the group, particularly among the private companies. How is your outlook changed on M&A, if at all?

Joe Caruso

Well few years ago we were asked this question and we thought that there would not be a lot of M&A activity a few years ago because all of the companies we're growing at such robust rates. But now with downturn in the economy and the valuation of some of these companies, the landscape has changed a little bit and I do expect to see additional M&A activity. We look at it as potential M&A transactions ourselves. We can't comment on anything specific, but with the type of economy we have right now, with the valuations the way they are, and the cash balances that are present in the industry, there is opportunity for M&A activity and we think we'll see more M&A.

Isaac Rowe – Leerink Swan

Okay, I guess need to ask you in a more pointed way. It really feels like you guys have taken a build versus buy approach to your- technology to your credit, but at the same time a lot of your competitors have either acquired technology or done so through joint ventures with other entities and a result have been a little quicker to innovate. Do you guys feel the need to sort of step up the pace there internally? Because, if your looking at your R&D, it sort of – up marginally year-over-year but it really isn't growing at a level that would suggest that your going to pump out tons of new products. So if you're not going to build it, would you consider buying it?

Joe Caruso

Could you be specific with an example of somewhat that's acquired a company that's added a technology?

Isaac Rowe – Leerink Swan

Well, sure. Well, Thermage just bought Reliant [ph], so they're adding a technology and medicines (inaudible) LipoSonics.

Paul Weiner

Right. So that's a technology that we already – the Reliant technology, that's a technology that we already have a very good position in. The LipoSonics is a different situation. That's a technology that's pretty far out and it's something that we would look at or we may look at from time to time. Something that we may not have in our backroom.

Isaac Rowe – Leerink Swan

Okay. Thank you.

Operator

Our next question comes from Ross Nelson.

Ross Nelson

Hi guys, nice quarter. Couple of quick questions for you. Is it, the $0.10 non-GAAP number for the quarter doesn't include the legal expense, I presume? And then, do you have kind of a grand total for the legal expense and in grand total of what you're suing Kendala for? Now, I presume that 2.9 million is tacked on to that amount? And then, lastly, with regards to the buyback, were there any factors that prevented you from being a bit more aggressive, I guess, at the prices that were presented? Thanks.

Paul Weiner

You're talking about the non-GAAP number, the $0.10, and whether the legal expense related to the Kendala lawsuit is included in there, much of which way that question is. But the $0.10, we did not reverse out Kendala legal expense out of that number. So, if we did, that $0.10 certainly would be a higher number. But, we're not looking at that as reversing out of that pro forma numbers. Did that answer that question?

Ross Nelson

Yes, that answered that question.

Paul Weiner

Then, as far as total legal spend on Kendala to date, I would say it's probably somewhere in the neighborhood of about – I'd say it's probably somewhere in the neighborhood of, I'd say, $12 to $13 million. Somewhere in that range.

Ross Nelson

So, what is the total amount that you are suing them for now? This is – is the $2.9 million accrued into that number?

Paul Weiner

It's in that number, yes.

Ross Nelson

Okay. But, you – can you disclose what's the kind of grand total that you think you guys are owed?

Joe Caruso

As far as what we're owed – well, first of all, a lot of the spending that – a lot of the spending has been on the Texas file, where we are the defendant in that action. But, we believe that the amount that Kendala would owe us on the hair removal patent, which is in the case in Massachusetts, by far exceeds any spending that we've had in legal today or would expect to have.

Paul S. Weiner

Yes.

Ross Nelson

Okay. And then as far as the buy-back, it seems like you are modestly aggressive. Was there anything that preventing you from being a little bit more aggressive?

Paul Weiner

No. We are being a little being opportunistic that certainly restrictions as far volume and other things that we can do. But, we were being opportunistic on a daily basis throughout the six weeks that we had an open period to do the buy-back. And, I think that worked out quite well, and we'll continue to be opportunistic in the future.

Ross Nelson

Okay. Thanks again, good quarter.

Paul Weiner

Thank you, Ross.

Operator

Our next question comes from Anthony Vendetti.

Anthony Vendetti – Maxim Group LLC

Oh, yes. Just a real quick follow-up on the Aspire. Cynosure in their conference call mentioned that they had notified two other companies regarding patent infringement for their laser light pulsed product. One company that have already publicly disclosed is Cooltouch, and they said there is two additional ones, I was just wondering if you were one of the two notified or not?

Paul Weiner

No, we have not been notified.

Anthony Vendetti – Maxim Group LLC

Okay. Okay, great. Thank you.

Operator

Our next question comes from Chris Doucette, you may proceed.

David – Doucette Asset Management

Hey, gentlemen. Good improvement on this quarter. This is actually David from Doucette Asset Management, but you've answered most of our questions. I just wanted to see if you could comment, or maybe you already have, about the build in the – your inventories since December. That's about– let's see, rough number 26% higher. Is that relate to Aspire products, or is that to relate to the– you said the trends and doctors delaying the purchase, or maybe just give us some color on that?

Joe Caruso

I'd say, I mean, there's part of it, that might– that certainly does relate to the Aspire buildup but I'll say a majority of it does relate to the delay of some of the purchasing and some of the long lieu items that you need to order in inventory, having caught up as far as sales are concerned. So we've adjusted our ordering for the future and so these additional materials as they come in, certainly we would plan on using those in future Starluxes as sales ramp up all the time, but there is a build up in inventory over the short-term, yes.

David Doucette – Doucette Asset Management

It does look like, back to the balance sheet, that you're making some great progress with collecting receivables. You mentioned in the last call that that wasn't bad debt, wasn't a concern, or like doctors are not paying for your products. Is that still, or is that consistent with how you still feel?

Joe Caruso

That is. In fact, I'm glad you mentioned it because with been running at around 60 days as our DSOs and this quarter we were able to bring it down to 49 days which is the lowest, I think, we've ever had. So, it's just the opposite. Our collections—when the credit crunch or crisis happened towards the back half of last year and we had a spike in DSOs, and I think it was the third quarter, we made some adjustments relatively quickly to tighten up our credit and it's worked out quite well. We're– the sales that we are making, we verify the credit and we're able to collect on those sales a lot quicker that we've ever done in the past. So, we're able to adjust to the current times quite quickly. So, it's not negatively affecting us. In fact it's positively affecting our DSOs.

David Doucette – Doucette Asset Management

Right. Okay. Last question. You guys, get thrown with this question every quarter but– any more, I guess, plans for the big cash balance you're carrying or the healthy attractive cash balance you're carrying?

Paul Weiner

It's not specifically earmarked for anything at this point in time. We are obviously active in our buy back program but beyond that it's not earmarked for anything specifically.

David Doucette – Doucette Asset Management

Okay. Great. Well, thanks again for taking my questions.

Paul Weiner

Thank you.

Operator

There are no more questions at this time. I would now like to turn the call over to Dan Valente for closing comments.

Dan Valente

Thank you all for tuning in. I just want to – hope we answered all of your question as directly and clearly as possible. Thanks for tuning in and we will look forward to our next call with you schedule for October 30^th and have a good day.

Operator

This concludes Palomar's second quarter 2008 financial results conference call. Thank you for attending. You may disconnect at this time.

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