金百利克拉克 (KMB) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the I-Flow Second Quarter 2008 Results Conference Call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded, Tuesday, August 5, 2008.

It is now my pleasure to turn the conference over to Mr.

Donald Earhart, Chief Executive Officer.

Please go ahead, sir.

Thank you, Shauna.

Good morning, everyone, and thank you for joining us for I-Flow's 2008 Second Quarter Results Conference Call.

Chief Financial Officer Jim Talevich and I will be available to answer your questions following our prepared remarks.

Earlier this morning, we announced for the three months ended June 30, 2008, the revenue from continuing operations increased 21% to a record $35.3 million, compared to $29.1 million for the same period of the prior year.

Sales of acute care products, which include regional anesthesia consisting of ON-Q and AcryMed revenues, increased 21% for the second quarter of 2008 to $27.9 million, compared to $23 million for the second quarter of 2007.

IV infusion therapy revenue increased 22% to $7.4 million for the second quarter of 2008 from $6.1 million a year earlier.

The loss from continuing operations before income taxes for this year's second quarter was $11.5 million.

The $11.5 million loss amount included $12.2 million of certain litigation and insurance charges, including a $3.5 million expense to purchase retroactive insurance policies to significantly increase the Company's product liability insurance coverage and $8.7 million in loss contingency that the Company accrued in connection with ongoing litigation.

Excluding the litigation and insurance charges, the income from continuing operations before income taxes for the second quarter of 2008 would have been approximately $630,000.

This compares to a loss from continuing operations before income taxes of $2.4 million for the second quarter of 2007 and a loss of $1.3 million for the first quarter of 2008.

The solid second quarter revenue growth overall and improved bottom line performance, excluding the litigation and insurance charges, are especially noteworthy in view of the weak economy and the resulting fall-off in the number of elective and non-life-threatening surgical procedures during the period.

We continued to see published reports and hear [anecdotally] throughout the quarter that an increasing number of Americans postponed their healthcare.

Many people, including those with health insurance, delayed or opted against receiving medical care or elective procedures because of the concerns about cost and, in some cases, missing days of work.

Our sales force saw the effect of the reported slowdown on scheduled hospital surgeries across the U.S.

and had to respond quickly to mitigate the impact on our ON-Q revenues.

By focusing on utilization of our ON-Q family of products for relief of post-surgical pain without narcotics in bariatric, colorectal, thoracic, heart, trauma and other non-elective and crucial procedures, our team delivered a 13% increase in RA revenues versus last year's second quarter.

Perhaps more notable and a better indication of the second quarter's performance is the increase in regional anesthesia revenues of 15% compared to the first quarter of 2008, despite the continued slowdown in total surgeries and with little or no change in headcount in our sales organization compared to the first quarter.

The ON-Q C-bloc continuous nerve block system, which is optimized for anesthesiologists and continuous peripheral nerve blocks, primarily used for orthopedic surgeries, was a standout performer once again in this year's second quarter, just as it has been every quarter since we launched this line extension several years ago.

ON-Q's C-bloc sales increased 59% for the second quarter of 2008 to $6.1 million from $3.8 million for the second quarter of 2007.

Driving this growth is the shift in orthopedic surgery such as shoulders, hips and knees, that are moving to continuous peripheral nerve blocks, largely because of the better patient outcomes and reimbursement for the physician.

In addition, we are educating and training anesthesiologists across the U.S.

in seven dedicated ON-Q training centers to help accelerate the adoption of this therapy for treating the pain following orthopedic surgery.

Our newest member of the I-Flow team, AcryMed Incorporated, a developer of innovative infection control and wound healing products acquired in February 2008, contributed revenues of approximately $1.8 billion for the second quarter.

This marks further progress in I-Flow's continuing evolution into an integrated acute care products company focused on developing and marketing proprietary disposable medical devices that improve patient outcomes.

We are confident in our strategy to leverage our dedicated regional anesthesia sales and marketing organization to sell other acute care products, made special by the unique AcryMed Silver antimicrobial nanocoating.

It should be noted that AcryMed had numerous projects they were working on prior to the acquisition and since then, have added many more new customers, bringing with them new projects.

You may recall from our last conference call that AcryMed develops products for our acute care sales force and also outlicenses technology to companies like Baxter and Medline.

A typical project takes an average of 18 months from conception to having a product ready to market.

This timeline is driven by the product development, testing, regulatory approvals and finally, the development of the manufacturing process which is typically unique to each new product.

The average selling price of our ON-Q pumps continues to increase.

Second quarter average selling prices for our regional anesthesia products increased 5% versus last year's second quarter.

Gross margins were strong, increasing to 73% versus 72% in the second quarter a year ago.

Both of these improvements are partially due to the increased efforts of our sales force to grow nonelective surgeries, resulting in higher second quarter sales of our larger, more expensive and higher margin ON-Q pump models and to a mix shift away from smaller pumps used mainly in elective or postponable surgeries.

We are pleased with the results of our efforts to control SG&A expenses to well below our revenue growth.

SG&A expenses from continuing operations increased only 9% for the second quarter of 2008.

Our tight control over SG&A expenses played a significant role in our ability to deliver a year-over-year and sequential improvement in bottom line performance before taxes and litigation and insurance charges, as I mentioned earlier.

I will have additional comments after Jim reviews the numbers.

Jim?

Thanks, Don.

Before we continue, please note that this conference call will include forward-looking statements.

These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management.

These statements are not guarantees of future performance and actual results may differ materially.

A more detailed discussion of these risks and uncertainties is contained in this morning's press release and I-Flow Corporation's various filings with the SEC.

The statements made during this call are made only as of today's date and we undertake no obligation to update these statements.

For the three months ended June 30, 2008, revenue from continuing operations increased 21% to a record $35.3 million from $29.1 million for the same period of the prior year.

Sales of I-Flow's acute care products, which include RA, consisting of ON-Q, and AcryMed revenues, increased 21% to $27.9 million, compared to $23 million for the second quarter of 2007.

Total revenue from RA increased 13% for the second quarter of 2008 versus the prior year quarter to $26.1 million from $23 million last year.

AcryMed revenues were $1.8 million for this year's second quarter.

IV infusion therapy revenues increased 22% to $7.4 million for the second quarter of 2008, from $6.1 million a year earlier.

Gross profit was 73% of total revenues for the second quarter of 2008, versus 72% for the second quarter of 2007.

SG&A expenses from continuing operations increased 9% to $24.9 million for the second quarter of 2008, from $23 million for the second quarter of 2007, which included stock-based compensation expense of $1.9 million for the second quarter of 2008 versus $1.8 million for the second quarter of 2007.

The Company also incurred a total of $12.1 million in certain litigation and insurance charges to significantly increase the Company's product liability insurance coverage and accrue a loss contingency related to the [Conder license] lawsuits.

The loss before income taxes from continuing operations was $11.5 million for the second quarter of 2008.

Excluding the $12.2 million from litigation and insurance charges, the Company would have reported a pretax profit of $630,000 for the quarter, as shown in the reconciliation table attached to today's press release.

The loss from continuing operations net of tax for the second quarter of 2008 was $11.4 million or $0.47 per basic and diluted share.

This compares to a loss from continuing operations net of tax for the second quarter of 2007 of $1.6 million or $0.06 per basic and diluted share.

Income from discontinued operations related to the Company's former InfuSystem subsidiary, divested on October 25, 2007, net of tax, for the second quarter of 2007 was $2.2 million or $0.09 per basic and diluted share.

The net loss for the three months ended June 30, 2008, was $11.4 million or $0.47 per basic and diluted share.

This compares to net income for the three months ended June 30, 2007, including both continuing and discontinued operations, of $0.6 million or $0.03 per basic and diluted share.

At June 30, 2008, I-Flow reported net working capital of approximately $69.9 million, including cash and cash equivalents and short-term investments of $47.8 million, no long term-debt and shareholders equity of $132.9 million.

Now, I will turn the call over to Don Earhart for some final comments before we take questions.

Don?

Thank you, Jim.

As Jim just mentioned, this year's second quarter results include certain litigation and insurance charges of approximately $3.5 million to purchase retroactive insurance policies to significantly increase the Company's product liability insurance coverage and $8.7 million in loss contingency that the Company accrued in connection with ongoing litigation.

As we have reported previously, I-Flow has been named as a defendant in lawsuits seeking damages as a result of Conder license in the shoulder joint, allegedly due to the continuous infusion of a local anesthetic into the joint space following surgery using an infusion pump.

We believe these lawsuits are without merit and as to I-Flow, and we will defend ourselves vigorously.

Having said that, however, we are not prepared to bet the Company on a favorable outcome and therefore, we have taken what we believe to be prudent and responsible steps to protect I-Flow and our shareholders from the unpredictable and potentially high cost of this litigation.

We are in the middle of launching a new marketing campaign for ON-Q that centers on having physicians make our products an essential part of all their surgeries.

We are doing this by focusing physicians on the significant narcotic reduction when ON-Q is used, coupled with the superior pain relief and the possibility of reduced infections.

The latter is particularly relevant in the face of the pending October 1, 2008, Medicare changes that eliminate payments for hospital-acquired conditions and even opens up additional sales call points, like infection control in the hospital.

Even though most hospitals know about the pending changes in CMS reimbursement, our customer and sales force feedback says that few have started doing anything special to get ready.

We believe our new campaign will not only help hospitals to recognize their need, but at the same time, will offer them a best practice solution for treating the pain following surgery.

We have officially launched our newest product in the ON-Q family of infusion pumps, the ON-Q E, a disposable epidural pump for labor and delivery.

Our competition is non-sterile electronic pumps, requiring programming each time they are used.

We are positioning ON-Q E as the simpler way to do epidurals and since each ON-Q E is delivered sterile to the patient and used by one patient only, there is less chance of an infection being transported from patient to patient.

In addition, ON-Q E does not need to be programmed, which today is a major cause of hospital errors when electronic pumps are used.

We believe ON-Q E is not only the simplest way, it is the safest way to do labor and delivery epidurals.

With the present market size in the U.S.

believed to be in excess of $300 million, and the call point in the hospital the anesthesiologist, we are well positioned to introduce this new and exciting pump to, in many cases, the same customer we sell the [c block] pumps to.

The first half of 2008 has not been an easy environment to obtain growth.

With the number of surgeries performed in many hospitals growing at a much slower rate, and in many cases, not growing at all, we must meet the challenge by finding other ways to grow our revenue.

So far, we have been successful in doing so.

Saying all of that, we continue to expect growth and total revenue of approximately 20% for 2008.

This will be driven by revised growth expectations for 2008 of approximately 23% growth in acute care products and approximately 17% growth in regional anesthesia revenues, with growth being stronger in the second half of the year as we launch the ON-Q E and other new products.

These changes in acute care and regional anesthesia guidance are being made based on current market conditions.

Finally, we now anticipate that I-Flow will be profitable for the second half of 2008, with the possible exception of non-cash purchase accounting adjustments from our acquisition of AcryMed.

And there is a good chance that before any special charges, I-Flow will be profitable for the full year.

I-Flow is today a supplier of acute care products that relieve pain, help reduce the incidence of infections, enhance healing while getting patients well sooner.

We are confident that our plan to leverage the ON-Q sales force and marketing infrastructure by layering in complementary new medical products for the acute care market, will deliver sustained rapid growth and will enhance shareholder value in the long-term.

We have many of the right products now, a host of exciting new products and product line extensions in the pipeline, as well as the financial resources and the experienced management team we need to implement our strategy.

We believe our second quarter and year-to-date results show that we are making good progress toward our two goals of becoming both a profitable and a high growth acute care products company.

And now, Shauna, we are ready for the first question.

Certainly.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Matt Dolan with Roth Capital.

Please go ahead.

Hi guys, good morning.

Hi, Matt.

First question on the guidance, given that growth continued to be challenging in this environment and your reduction in options for the second half of the year, are you -- can you help us out relative to how you are formulating your guidance?

Are you becoming more conservative than you were previously or how much are you now counting on new products and the impact of anti-infection, et cetera, on hitting those goals?

Well, Matt, the guidance we are giving is based on what we know today and what we believe our opportunities are for the second half of the year.

If the economy gets much worse, that could affect our ability to achieve that guidance.

If we get a little help from the economy, that could help us beat that guidance.

So all I can say at this time is, that is the guidance that we think is the best number to give at this time, based on what we know today.

Okay, and secondly, a couple of questions on the charges, the litigation and insurance side of things.

Can you give us how many cases have been filed, when they were filed, just some more commentary there?

And then with this insurance, how much coverage do you have relative to the worst case scenario in this outcome, however likely?

The -- again, we don't really talk about our legal plans or I should say, our strategy to fight these cases.

But there are approximately 30 cases today.

Most of them fall into the previous insurance period, which is where we bought the additional insurance.

So we have today about $35 million in coverage, which we've identified for that period.

Going forward, into the new insurance period in which I don't believe we have any cases at this time, we have about $50 million in insurance in place.

So we think we are well covered and can handle whatever outcome would be expected.

But again, we will fight this vigorously, because we do not believe that the ON-Q pump causes Conder license.

Okay, and then just to clarify on the profitability guidance, would you be guiding to profitability for the year or maintaining that guidance excluding the litigation charges?

Well, as I said in my conference calls, we believe we have a very good chance of being profitable for the total year.

The guidance is for the second half, but I did say we believe we can be profitable for the total year as well.

We have an excellent chance at that.

Okay.

And finally, on AcryMed, a nice result there, I think running ahead of what we expect4ed, at least on a run rate basis for the year.

Any new deals in the pipeline there that we could expect in the second half of the year?

Matt, again, there are lots of new deals going on at AcryMed, but nothing we can announce at this time.

But keep in mind, any new deals since the acquisition, before we see any meaningful revenues, could take about 18 months.

However, there were deals already in place when we bought AcryMed, and so we could see something sooner than that on those deals that were already in place.

Okay, but no timing expectations so we can get on those existing -- ?

Well, we have to be very careful, Matt, because the customers who deal with us at AcryMed want everything kept confidential and secret until they are ready to launch, for obvious reasons.

All right, fair enough.

Thanks, guys.

Okay.

Our next question comes from the line of Greg Brash with Sidoti & Company.

Please go ahead.

Hi, guys.

Thanks for taking my call.

Yes, Greg.

Hi, Don.

Could you possible just help clarify the new marketing campaign from the previous one you had?

Is the main difference just your focus on infection prevention here?

No, we have -- the campaign has always been about reducing narcotics, which leads to all kinds of good things, including reduced infections and people getting well faster.

All we are doing is going back to the basics and reemphasizing, because sometimes our sales force gets off track a little bit and they want to lead with something else.

They need to lead with the fact that we reduce narcotics first, which then leads to fewer infections, people getting well faster, and going home sooner.

And that's really all we are doing.

So it is not really anything new, it is just making sure that they lead with the narcotic reduction and they end up also making a call on the infection control people.

Because we do have a great infection control story.

Okay, that makes a lot of sense.

And then, just regarding the CMS rules regarding infection and the October 1 date, do you feel your best opportunity to benefit from that rule is in licensing AcryMed to new technologies and selling your infection preventative wound care products?

Or do you think there is an opportunity in selling, say, an ON-Q with Silver soaker where a doctor may be more willing to use it just because it is coated with silver and it could reduce the risk of infection?

Well, we have always had an infection reduction product from the first day, because once you eliminate the narcotics or reduce them significantly, you improve the immune system.

One of the biggest negatives about narcotics is, they suppress the immune system, which hinders the body from fighting its own infections.

So we have an infection story today, we just have not been pounding on it as hard as we should and that is what we are going to do.

So we believe when we call on Infection Control today, we have a couple of things to offer.

We can help them achieve their goal by having fewer infections if they can reduce treating the pain with narcotics and using a local anesthetic, because we will keep the body then strong and not compromise the immune system.

Plus, we get people out sooner.

The sooner you get people out of the hospital, the less chance there is of an infection.

You don't want to stay in the hospital any longer than you have to, and we have proven we send people home sooner.

In addition to that, we do have products from AcryMed, like we have the silver-coated dressings, we have catheter of course, which helps eliminate any chance of an infection when our product is used, and we have other new products coming from AcryMed that we'll be talking to them about as well.

So it is really two-pronged.

Eliminate the narcotics, you have fewer infections.

You eliminate or you add silver, and you help eliminate them a second time.

And by the way, the introduction of the ON-Q E, the epidural pump, we believe that is also going to reduce the chance of an infection, because every patient will now get a sterile, clean, never used before pump which will now be placed on them for their epidural.

Today, they are receiving electronic devices, which we know have bugs covered all over them and they have been used from patient to patient and there is lots of opportunity for an infection.

So we are attacking this many different ways.

Okay, all right.

And then just referring to the elective procedures, obviously you are seeing a slowdown there.

Would it be possible to quantify maybe what percent of your business in the ON-Q side is exposed to elective procedures?

Is it 10%, is it 30%?

I'd say it is probably less than 10% of our business is exposed.

But again, you have to be careful here, because surgeries like knees, shoulders, ankles, those are not elective, necessarily, but you could postpone them.

So you have really got to count those as well, because there is a lot of surgeries like hernias, that if I don't have money right now or I can't afford to be off work, I may postpone those.

Yes.

And that is what we are seeing.

I may postpone those.

Now, you can't postpone heart or any of the cancer surgeries.

So they are delayed, but they are not lost.

That's the key.

Sooner or later, we'll get them.

Okay, so you when say maybe less than 10% of your business is elective procedures, and then on top of that, you would add orthopedic surgeries where maybe some procedures are getting postponed at the moment?

Yes, at one time we did a survey of our orthopedic surgeries and they were about 25% of our total, and a significant portion of those would be considered postponable.

Okay, that is very helpful, Don.

One final question for Jim.

Can you just break down the SG&A between selling and marketing and the G&A?

Sure.

Yes, selling and marketing was $19.4 million -- I will give you the number, [$19.353 million].

G&A is [$5.585 million].

Great.

All right, thank you, guys, thanks for taking my questions.

Thank you, Greg.

Our next question comes from the line of Bill Miller with Hartwell.

Please go ahead.

Hi, Don.

Hello, Bill.

It's always good to talk to you.

I am going back to the October 1 deadline for a second, if I could.

The hospitals, are they just going to cocoon and don't know what is going on?

What is it going to take besides your sales force to educate them?

Is it the first time they don't get reimbursed by the insurance company?

What pressures are the insurance companies putting on the hospitals or other decision makers?

Why isn't this happening, is what I am really asking?

Because here we are, August, and from what you say, it is not happening very easily.

So where does the pressure have to come from and how will it come?

What will be the wakeup call, in other words?

(inaudible - background noise) broken up, and then I have got another question.

Well, Bill, and again, this is conjecture on my part, but I think it is going to take them not getting paid a few times for them to wake up.

I think it has only been until recently that hospitals even understood they had a problem.

Because they were not reporting most of their infections, they were not reporting most of their problems.

It has only been recently that they have had to actually report these things, so that the world actually knows that there is a problem in the hospital.

I think it has been ignored for years.

So I think it is going to take them some financial hits before they are going to wake up.

But now, some hospitals are getting ready, but it is in the minority.

But I think now is the time for us to lay the seeds that we help immediately.

I don't know what else to tell you there.

Is there any competitor which is at all akin to the silver coating that AcryMed has?

Is there anybody out there with anything else that could be substituted for the silver coating that AcryMed has?

And what is your strategy in terms of licensing it to people, to companies obviously, that don't have the products that you will ever want to develop to take advantage of your silver coating?

Well, there is other coatings out there.

There is antimicrobial coatings out there besides silver.

There are other silver processes as well.

As I mentioned on the conference call several quarters ago when we bought AcryMed, that we did a complete analysis of the marketplace and we believe that the nanocoating at AcryMed was the best and had the greatest opportunity to go on the most different products or the largest number of different products.

So that is why we bought AcryMed.

But there is always competition out there.

But we believe we have a leg up, because I think we have the best coating.

Our strategy on licensing is to license products to people that we have no intentions of selling.

And that is exactly what we have done with the Baxter product, because we have no intentions of selling an IV connector.

And on the Medline side, those licensing agreements have been in place for years, but we would not sell those types of dressings even if we had them today.

So we strategically license to those areas where we don't intend to play.

Okay.

And then finally, how does the colorectal study, which was terribly successful, play at this point, given the October 1 deadline?

Can you bring that out?

Is that something you can use as a competitive advantage in some way, because nobody else has that kind of data, I assume?

Has that just been put on the back burner, or where does that stand now and how important is it?

Well, it is part of our pitch to infection control today.

But again, to make that study as credible as we want it to be, we need to get it published.

We are in the process of doing that as I speak.

It doesn't happen overnight, but we hope to have it published by early next year.

So that is right now going through the review process to be published.

As soon as that is published -- I am sorry?

Whose review is it that is the gating factor on getting it published?

FDA or who?

No, no, it will be the magazine, the journal, et cetera, who does the publication.

Okay, and it will be New England Journal of Medicine or something akin to that?

Something like that.

We have to get in there -- first of all, we have to be accepted, and then we have to get into their queue.

I see, okay.

And finally, you have repurchased some stock.

You have probably been out of the box because you have been [reporting].

Are you planning on repurchasing more?

Will you increase the amount that you can purchase of and how soon can you be back doing that?

And then finally, can you talk about your InfuSystems position and what is going on there?

The stock purchase, we expect to continue on that and we can start purchasing again in 48 hours.

So yes, we intend to purchase up to the million.

We have not authorized anything beyond that, but that doesn't mean we won't authorize beyond that.

Again, that will be a board decision, and so I can't really talk anymore about it than that.

Okay.

And what is the question on InfuSystems?

Well, you have, I assume, still got a bunch of stock in InfuSystems.

You wrote it down in the last quarter.

Has there been any effort to liquefy that or are we going to hang onto it or what is your current stance?

Well, I am open to any offer, Bill, and if you'd like to buy some, we'd be glad to sell it.

(inaudible - multiple speakers) at this price, Don.

I am sorry?

Not at this price.

Okay, well, that's kind of the feeling everybody else has.

We have been trying to sell it and been unsuccessful.

Okay.

Okay, great.

Thanks.

Okay.

Our next question comes from the line of Tim Vestal with Kleinheinz Capital Partners.

Please go ahead.

Hi, Tim.

Hi, good morning, guys.

Thanks for the color on your new products and kind of the market opportunity for those.

Can you comment a little bit more on just the general market environment?

You said surgeries, elective surgeries were weak in the quarter.

Just a little more color on the progression throughout the quarter, maybe regions that were weak?

And I have a couple more questions.

Yes, that is tough, Tim.

All I can tell you is that we continue to see surgery boards half empty.

Hospitals are not seeing the number of surgeries they saw in the past, but all our reps are doing is they are focusing on the ones that are on the board and they typically are the ones that can't be postponed or are not elective.

The nice thing there is when we do that, we sell larger pumps that cost more money and cost us very little more to make.

So the margins get better.

In fact, the margins would have been out of sight if it had not been for the 22% increase in IV products, which significantly lowered our margins because those products don't have the big margins that our ON-Q products have.

So you would have seen a really high gross margin if our IV products had not grown as much as they had.

So we are watching it closely -- yes, I'm sorry?

Was June -- April, May, June, did things progressively weaken?

No, we had a very strong April, as I said before.

May slowed down a little bit, but we think a lot of that is because of vacations.

But June came back strong.

Okay.

Yes, so I think the quarter -- the real positive here, Tim, is with actually fewer salespeople than we had at the end of the first quarter, we are down about ten or 15 salespeople from first quarter, we were able to deliver 15% growth over first quarter in the second quarter, which we think is pretty good, especially in a tough market.

Right, thank you.

Let me ask a couple questions on the retroactive insurance policy.

One, can you just elaborate a little bit more on what exactly retroactive insurance is?

And then for the $3.5 million charge, the way I thought I heard you say it was that the $3.5 million buys you $50 million more of insurance coverage.

Is that correct?

Let me let Jim answer that one for you.

Hi.

By retroactive insurance, we mean the fact that we have a policy year that goes from June 1 to June 1 -- to the next June 1 of each year.

And we bought addition insurance for the year that just expired.

We paid $3.5 million in premiums for that additional insurance, which increased our coverage from $10 million to a tier of $35 million.

Okay.

Okay, so $3.5 million bought you the $35 million of coverage?

And Tim, important there is that's where the lawsuits are.

Right.

So it was the right thing to do.

Sure.

So the $8.7 million in contingency charges that you took, if worst case scenario comes to pass, would you -- you would be covered by your insurance, correct?

Right.

Within those layers of insurance, the $35 million layers of insurance, there is a $5 million self-insured retention, and then there is also deductibles within those policies as well.

And what we did was we simply accrued all the self-insured retentions on all the layers of insurance.

And that's what that number is, that [$8.6 million] number is.

Okay.

Great.

Thank you, guys.

Thanks, Tim.

(OPERATOR INSTRUCTIONS)

Our next question is a follow-up from the line of Mr.

Bill Miller with Hartwell.

Please go ahead, sir.

Don, just -- are you planning to replace those ten or 15 salespeople that you have lost, given the October 1 deadline?

Or are they just gone and you are going to reduce the sales force and keep it at this level?

What is your strategy?

No, Bill, we intend to replace them.

Does the October 1, the AcryMed, et cetera, give you a chance to upgrade or just how do you -- what kind of salesmen are you now looking for that you didn't have before?

Well, the opportunity to hire is actually very good, because not every company in the country anymore is growing.

In fact, there have been a lot of layoffs, especially in the pharmaceutical industry, and we are bringing on, in many cases, pharmaceutical reps who have good background in anatomy and all we have to do is teach them then what they need to know about our pump and catheter placements.

So getting good people is something we are continuing to do.

We just happen to be at this time down about ten of our quota-carrying reps, but we intend to replace those people.

So we weren't down to ten for the whole quarter.

How soon will you have them, for the fourth quarter, for instance, out there?

Well, I just signed recs to hire three people yesterday, so we are moving.

Yes, okay.

So will that not help you significantly in terms of meeting your sales goals?

Yes.

Get them on-stream this quarter and then have them for the fourth quarter?

Oh, yes.

Yes, we need them onboard anyway to help us with the ON-Q E, Bill.

Okay, great.

Good.

Sounds like a good move.

Thank you.

Okay.

We have no further questions at this time, Mr.

Earhart.

I will turn the call back to you.

Thank you, Shauna.

I-Flow's products treat pain, reduce infections and speed healing, helping patients get better faster and saving money for hospitals and insurers.

These benefits are the foundation for the rapid growth we have delivered over the past few years and we believe they've put us in an excellent position for continued rapid growth in the future, despite the slowdown in the number of surgeries we are presently experiencing.

We look forward to reporting our progress on our third quarter conference call in about three months.

Thank you, and we look forward to talking to you again.

Ladies and gentlemen, that does conclude today's conference call.

We thank you all for your participation and ask that you please disconnect your lines.