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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________
Commission File Number 0-11365
-------
PHOTOMEDEX, INC.
----------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-2058100
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Radnor Corporate Center, Suite 470, Radnor, Pennsylvania 19087
-------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(610) 971-9292
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock as of November 13,
2002, was 28,505,453 shares.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOTOMEDEX, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, December 31,
ASSETS 2002 2001
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,708,389 $ 4,066,820
Accounts receivable, net 1,382,093 1,694,493
Inventories 2,600,357 2,558,846
Prepaid expenses and other current assets 194,490 100,681
------------- -------------
Total current assets 8,885,329 8,420,840
PROPERTY AND EQUIPMENT, net 2,075,004 3,298,154
GOODWILL 2,944,423 2,944,423
DEVELOPED TECHNOLOGY, net of accumulated
amortization of $207,609 and $111,600 629,391 725,400
PATENT COSTS, net of accumulated
amortization of $63,642 and $57,377 21,156 27,421
OTHER ASSETS 397,153 168,753
------------- -------------
$ 14,952,456 $ 15,584,991
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 44,428 $ 65,017
Accounts payable 1,378,880 1,862,499
Accrued compensation and related expenses 367,597 350,429
Other accrued liabilities 1,022,979 427,266
Deferred revenues 131,625 170,100
------------- -------------
Total current liabilities 2,945,509 2,875,311
------------- -------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000 shares
authorized, 28,337,953 and 24,179,953 shares issued
and outstanding, respectively 283,380 241,800
Additional paid-in capital 72,984,100 67,245,367
Accumulated deficit (61,244,060) (54,747,204)
Deferred compensation (16,473) (30,283)
------------- -------------
Total stockholders' equity 12,006,947 12,709,680
------------- -------------
$ 14,952,456 $ 15,584,991
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
2
PHOTOMEDEX, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
-----------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES $ 832,045 $ 802,636 $ 2,627,117 $ 4,113,990
COSTS AND EXPENSES:
Cost of revenues, excluding depreciation 167,434 195,160 593,704 1,087,320
Selling, general and administrative 2,004,979 3,136,347 6,420,379 10,685,755
Research and development 325,952 469,180 859,188 1,833,064
Depreciation and amortization 413,417 620,924 1,264,321 1,553,365
------------- ------------- ------------- -------------
Loss before interest income and other
expense, net (2,079,737) (3,618,975) (6,510,475) (11,045,514)
INTEREST INCOME, NET 14,908 9,508 18,276 206,844
OTHER EXPENSE, NET (286) (46,326) (4,657) (16,021)
------------- ------------- ------------- -------------
NET LOSS $ (2,065,115) $ (3,655,793) $ (6,496,856) $(10,854,691)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.07) $ (0.19) $ (0.25) $ (0.58)
============= ============= ============= =============
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE 28,337,953 19,138,027 25,858,184 18,728,003
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
PHOTOMEDEX, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
-----------
Nine Months Ended September 30,
-------------------------------
2002 2001
------------- -------------
OPERATING ACTIVITIES:
Net loss $ (6,496,856) $(10,854,691)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization 1,264,321 1,553,365
Provision for doubtful accounts 429,590 66,305
Stock options and warrants issued to consultants for services 34,295 214,652
Amortization of deferred compensation 6,781 5,535
Loss on disposition of assets -- 20,665
Changes in operating assets and liabilities -
Accounts receivable (117,190) (3,062,690)
Inventories (41,511) (1,582,806)
Prepaid expenses and other assets (92,209) 81,186
Accounts payable (483,619) 1,814,701
Accrued compensation and related expenses 17,168 (165,883)
Other accrued liabilities 365,713 503,663
Deferred revenues (38,475) 54,750
------------- -------------
Net cash used in operating activities (5,151,992) (11,351,248)
------------- -------------
INVESTING ACTIVITIES:
Sale of short-term investments -- 2,000,000
Purchases of property and equipment (73,538) (158,357)
Lasers placed into or retired from service 134,641 (2,784,000)
------------- -------------
Net cash provided by (used in) investing activities 61,103 (942,357)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 5,706,047 5,506,442
Proceeds from issuance of note payable 60,905 236,320
Proceeds from exercise of options 18,000 18,937
Proceeds from exercise of warrants 29,000 --
Payments on notes payable (81,494) (199,960)
------------- -------------
Net cash provided by financing activities 5,732,458 5,561,739
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
641,569 (6,731,866)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
4,066,820 7,561,040
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,708,389 $ 829,174
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Background
- ----------
PhotoMedex, Inc. and subsidiaries ("the Company") develops,
manufactures and markets therapeutic excimer laser-based instrumentation
designed to treat psoriasis, vitiligo, atopic dermatitis and leukoderma. The
Company is also developing technologies for the treatment of other skin
disorders, and other medical and non-medical applications. In January 2000, the
Company received the first Food and Drug Administration ("FDA") approval to
market an excimer laser system, the XTRAC system, for the treatment of
psoriasis. The Company commercially launched the XTRAC system in the United
States in August 2000. In March 2001, the Company received FDA approval to
market its XTRAC system for the treatment of vitiligo, and shortly thereafter,
in August 2001, the Company received FDA approval to market its XTRAC system for
the treatment of atopic dermatitis. In May 2002, the Company received an
additional approval for the treatment of leukoderma.
Liquidity
- ---------
The Company has incurred significant losses and has had negative cash
flows from operations since emerging from bankruptcy in May 1995. To date, the
Company has dedicated most of its financial resources to research and
development and general and administrative expenses and in the fourth quarter of
2000 began to market the XTRAC system for commercial sale. The Company has
historically financed its activities from borrowings and the private placement
of debt and equity securities. As of September 30, 2002, the Company had an
accumulated deficit of $61,244,060.
The Company expects to incur operating losses for at least the next
twelve months as it plans to spend substantial amounts on the marketing of its
psoriasis, vitiligo, atopic dermatitis and leukoderma treatment products and
expansion of its manufacturing operations. The Company cannot assure that it
will market any products successfully, operate profitably in the future, or that
it will not require significant additional financing in order to accomplish its
business plan.
The Company's future revenues and success depends upon its excimer
laser systems for the treatment of a variety of skin disorders. The Company's
excimer laser system for the treatment of psoriasis, vitiligo, atopic dermatitis
and leukoderma is currently generating revenues in both the United States and 19
countries around the world. The Company's ability to successfully introduce new
products based on its new business focus and the expected benefits to be
obtained from these products may be adversely affected by a number of factors,
such as unforeseen costs and expenses, technological changes, economic
downturns, competitive factors or other events beyond the Company's control.
Consequently, the Company's historical operating results cannot be relied upon
as indicators of future performance, and management cannot predict whether the
Company will obtain or sustain positive operating cash flow or generate net
income in the future.
Cash and cash equivalents were $4,708,389 as of September 30, 2002.
Management believes that the existing cash balance together with existing
financial resources and revenues from its sales, distribution, licensing and
manufacturing relationships, will be sufficient to meet the Company's operating
and capital requirements through the third quarter of 2003. Management has
decided to limit its domestic placement of lasers until physicians obtain
broader insurance reimbursement for treatments using its laser system. However,
depending upon the Company's rate of growth and other operating factors, the
5
Company may require additional equity or debt financing to meet its working
capital requirements or capital expenditure needs. There can be no assurance
that additional financing, if needed, will be available when required or, if
available, on terms satisfactory to the Company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quarterly Financial Information and Results of Operations
- ---------------------------------------------------------
The financial statements as of September 30, 2002 and for the three and
nine months ended September 30, 2002 and 2001, are unaudited and, in the opinion
of management, include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 2002, and the results of operations and cash flows for the three and nine
months ended September 30, 2002 and 2001. The results for the three and nine
months ended September 30, 2002 are not necessarily indicative of the results to
be expected for the entire year. While management believes that the disclosures
presented are adequate to make the information not misleading, these
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Management's Use of Estimates
- -----------------------------
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The critical estimates and judgments made by management in the
preparation of the financial statements relate to revenue recognition,
impairments of long-lived assets and adequacy of the accounts receivable
reserve.
Cash and Cash Equivalents
- -------------------------
For the purposes of the consolidated statements of cash flows, the
Company considers investment instruments purchased with an original maturity of
three months or less to be cash equivalents. As of September 30, 2002, cash
equivalents are primarily comprised of an investment in a money market fund and
certificates of deposit with a bank.
Inventories
- -----------
Inventories are stated at the lower of cost or market, determined by
the first-in, first-out method and consist of the following:
September 30, December 31,
2002 2001
----------- -----------
Finished Goods $ 177,080 $ --
Raw materials 2,078,751 2,074,174
Work-in-process 344,526 484,672
----------- -----------
$2,600,357 $2,558,846
=========== ===========
6
The Company's skin disorder treatment equipment will either be (i)
placed in a physician's office and remain the property of the Company or (ii)
sold to distributors or physicians directly. With respect to the equipment
placed in a physician's office, the Company earns revenue each time the laser is
used for a patient treatment.
Throughout the laser manufacturing process the related production costs
are recorded within inventory. Once a laser is completed and placed in a
physician's office, the cost is transferred from inventory to "lasers in
service" within property and equipment. Lasers that are completed and not placed
in a physician's office are maintained in inventory until the unit is sold.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the assets, which
range from three to seven years. Improvements and betterments are capitalized,
while maintenance and repair costs are charged to expense as incurred. Upon
retirement or disposition, the applicable property amounts are relieved from the
accounts and any gain or loss is recorded in the consolidated statement of
operations. Property and equipment consists of the following:
September 30, December 31,
2002 2001
------------ ------------
Lasers in service $ 3,908,720 $ 4,229,280
Computer hardware and software 251,495 213,619
Furniture and fixtures 151,637 151,637
Machinery and equipment 77,187 58,714
Leasehold improvements 95,905 78,716
------------ ------------
4,484,944 4,731,966
Accumulated depreciation and amortization (2,409,940) (1,433,812)
------------ ------------
$ 2,075,004 $ 3,298,154
============ ============
Lasers in service represent phototherapy treatment equipment currently
located in physician offices. Lasers in service are depreciated over an
estimated useful life of three years. The Company began to generate revenues
from these lasers in the fourth quarter of 2000.
The Company evaluates the realizability of property and equipment based
on estimates of undiscounted future cash flows over the remaining useful life of
the asset. If the amount of such estimated undiscounted future cash flows is
less than the net book value of the asset, the asset is written down to the net
realizable value. As of September 30, 2002, no such write-down was required (see
New Accounting Pronouncements below).
Intangible Assets
- -----------------
Intangible assets consist of goodwill, developed technology and
patents, which are carried at cost less accumulated amortization. Patents are
amortized on a straight-line basis over the estimated useful lives of eight to
12 years. Developed technology relates to the purchase of the minority interest
of Acculase, Inc. (see Note 2) and is being amortized on a straight-line basis
over seven years. Prior to December 31, 2001, goodwill relating to the purchase
of the minority interest of Acculase was amortized on a straight-line basis over
10 years.
The Company evaluates the realizability of intangible assets based on
estimates of undiscounted future cash flows over the remaining useful life of
the asset. If the amount of such estimated undiscounted future cash flows is
less than the net book value of the asset, the asset is written down to the net
realizable value. As of September 30, 2002, no such write-down was required (see
Note 6 and New Accounting Pronouncements below).
7
Accrued Warranty Costs
- ----------------------
The Company offers a warranty on products sold for a period of
one-year. The Company provides for estimated future warranty claims on the date
the product is sold.
Revenue Recognition
- -------------------
The Company has two distribution channels for its phototherapy
treatment equipment. The Company will either (i) sell the laser through a
distributor or directly to a physician or (ii) place the laser in a physician's
office (at no charge to the physician) and charge the physician a fee for an
agreed upon set of treatments. When the Company sells a laser to a distributor
or directly to a physician, revenue is recognized upon shipment of the product.
The Company does not allow products to be returned by its distributors. When the
Company places the laser in a physician's office, service revenues are
recognized based on an estimate of patient treatments. The physician purchases a
treatment card that allows performance of a specified number of treatments. This
amount is included in deferred revenues on the accompanying consolidated balance
sheets until the treatment occurs.
Research & Development
- ----------------------
Research and development expenses are charged to operations in the
period incurred.
Net Loss Per Share
- ------------------
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No.
128 requires dual presentation of basic and diluted net income (loss) per share
for complex capital structures on the face of the statements of operations. In
accordance with SFAS No. 128, basic net income (loss) per share is calculated by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted net income
(loss) per share reflects the potential dilution from the exercise or conversion
of securities into common stock, such as stock options and warrants.
Diluted net loss per share is the same as basic net loss per share as
no additional shares for the potential dilution from the exercise of securities
into common stock are included in the denominator as the result would be
anti-dilutive.
Fair Value of Financial Instruments
- -----------------------------------
The estimated fair values for financial instruments under SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", are determined at
discrete points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision. The fair value of
cash is based on its demand value, which is equal to its carrying value. The
fair values of notes payable are based on borrowing rates that are available to
the Company for loans with similar terms, collateral and maturity. The estimated
fair values of notes payable approximate the carrying values. Additionally, the
carrying value of all other monetary assets and liabilities is equal to its fair
value due to the short-term nature of these instruments.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the liability method is used
to account for income taxes. Under this method, deferred tax assets and
8
liabilities are determined based on differences between the financial reporting
and the tax basis of assets and liabilities and are measured using enacted tax
rates and laws that are expected to be in effect when the differences reverse.
New Accounting Pronouncements
- -----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB")
approved SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of
interest method of accounting for business combinations initiated after June 30,
2001. SFAS No. 142 required companies to cease amortizing goodwill on December
31, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001
is not amortized. SFAS No. 142 also establishes a new method of testing goodwill
for impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The adoption of SFAS No. 142 has resulted in the Company's
discontinuation of amortization of its goodwill; however, the Company is
required to test goodwill for impairment under the new standard. In January
2002, management performed an analysis of the recoverability of goodwill and
concluded that there has been no impairment of the carrying value. The net book
value of intangible assets at September 30, 2002 was $3,594,970.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability associated with an asset retirement be recognized in the period in
which it is incurred, with the associated retirement costs capitalized as part
of the carrying amount of the long-lived asset and subsequently depreciated over
its useful life. The adoption of SFAS No. 143 did not have any impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of and clarifies certain issues related to SFAS
No. 121. SFAS No. 144 supercedes SFAS No. 121 and APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company was required to adopt SFAS No. 144 for fiscal year
2002. The adoption of SFAS No. 144 did not have any impact on the results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses the recognition, measurement and
reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS No. 146 also addresses recognition of certain
costs related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees and termination of benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred compensation contract. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Adoption of SFAS
No. 146 is not expected to have an impact on the financial position or results
of operations of the Company.
2. ACQUISITION:
------------
Effective August 31, 2000, the Company issued 300,000 shares of common
stock for the remaining 23.9% of Acculase which the Company did not already own.
The Company granted certain registration rights with respect to the shares
issued. The transaction was accounted for as a purchase. The Company has
historically consolidated the results of Acculase in its financial statements
and has recognized all of Acculase's losses as the Company has historically
funded the operations. In addition, due to the significant historical losses of
Acculase, the Company did not have any investment recorded for its 76.1%
ownership of Acculase. Accordingly, the total purchase price of $4,234,415,
9
including transaction costs of $409,415, was allocated to Acculase's net
tangible and intangible assets based on the estimated fair values as of the date
of the transaction. Based upon an analysis of the acquired assets, $837,000 of
the purchase price has been allocated to developed technology and the remaining
$3,397,415 has been allocated to goodwill. Beginning January 1, 2002, the
developed technology is being amortized over seven years on a straight-line
basis. For the years ended December 31, 2001 and 2000, developed technology was
being amortized over 10 years on a straight-line basis. For the three months
ended September 30, 2002 and 2001, amortization of developed technology was
$32,003 and $20,925, respectively, and $96,009 and $62,775 for the nine months
ended September 30, 2002 and 2001, respectively. For the years ended December
31, 2001 and 2000, goodwill was being amortized over 10 years on a straight-line
basis. As of January 1, 2002, consistent with SFAS No. 142 (see Note 1),
goodwill is no longer amortized; rather, it is subject to certain impairment
tests. Amortization of goodwill for the three and nine months ended September
30, 2001, was $84,935 and $254,806, respectively. Excluding amortization of
goodwill, the net loss for the three and nine months ended September 30, 2001
would have been $3,570,858 and $10,599,885, respectively, and the corresponding
basic and diluted net loss per share would have been $0.19 and $0.57,
respectively.
3. OTHER ACCRUED LIABILITIES:
--------------------------
Other accrued liabilities consist of the following:
September 30, December 31,
2002 2001
----------- -----------
Accrued professional and consulting fees $ 334,000 $ 128,000
Accrued warranty 537,582 267,714
Other accrued expenses 151,397 31,552
----------- -----------
$1,022,979 $ 427,266
=========== ===========
10
4. NOTES PAYABLE:
--------------
Notes payable consists of the following:
September 30, December 31,
2002 2001
------------- -------------
Note payable - lessor, interest at 10%, payable in monthly principal
and interest installments of $1,775 through 2002, unsecured. $ 5,238 $ 20,195
Note payable - unsecured creditor, interest at 9.0%, payable
in monthly principal and interest installments of $461 through 2002. 1,363 --
Note payable - unsecured creditor, interest at 6.7%, payable
in monthly principal and interest installments of $5,524 through 2003. 37,827 --
Note payable - unsecured creditor, interest at 6.7%, payable
in monthly principal and interest installments of $9,065 through 2002. -- 44,822
------------- -------------
44,428 65,017
Less-current maturities (44,428) (65,017)
------------- -------------
$ -- $ --
============= =============
5. PRIVATE STOCK OFFERING:
-----------------------
On June 13, 2002, the Company completed a private offering of 4,115,000
shares of common stock at $1.50 per share resulting in gross proceeds of
$6,172,500. The closing price of the Company's common stock on June 13, 2002 was
$1.68 per share. In connection with this offering, the Company paid a commission
and other costs of $466,453, thereby providing the Company with net proceeds of
$5,706,047. In addition, the investors received warrants to purchase 1,028,750
shares of common stock at an exercise price of $1.90 per share. The warrants
have a five-year term and may not be exercised until the day immediately
following six (6) months after the closing date of this private offering.
6. SIGNIFICANT ALLIANCES/AGREEMENTS:
---------------------------------
In 1997, the Company executed a series of agreements with Edwards
Lifesciences Corp. ("Edwards") to develop laser technology used in
Transmyocardial Revascularization (TMR). Reference is made to the Company's Form
10-K for the period ended December 31, 2001 for further information on the
agreements.
There were no revenues recognized under this agreement for the three
and nine months ended September 30, 2002 or 2001.
In January 2001, Edwards stopped performance under the agreement and
began to commercialize a TMR product with an unrelated third party. Management
believes that Edwards has breached this agreement, and has notified Edwards of
its position regarding the agreement. The Company has reserved all of its rights
under the agreement and is evaluating what legal action should be taken in this
11
regard. Accordingly, the Company currently does not have a strategic partner
with whom to market its TMR laser and does not currently have sufficient
financial resources to commercialize the TMR laser on its own.
On September 23, 1997, Edwards purchased from a third party rights to
related patents for the use of an excimer laser to ablate tissue in vascular and
cardiovascular applications for $4,000,000. The ablation technology underlying
the patents has been successfully used in other applications for many years. In
December 1997, the Company acquired a license to these patent rights from
Edwards thereby entitling the Company to sell an excimer laser and related
products for use in cardiovascular procedures. A license fee was recorded for
the $4,000,000 cash payment made by the Company to Edwards to acquire the
license.
Due to the non-performance of Edwards under the Edwards Agreement
described above, the Company evaluated various alternatives for exploiting the
license. During the fourth quarter of 2001, the Company completed its evaluation
and concluded that the projected undiscounted cash flows expected to be derived
from this license are less than the carrying value of the license. Management of
the Company also believes that any operations relating to this license will
generate negative cash flows over the next several years due to the additional
costs that would need to be incurred to further develop and market products
based on this technology. Accordingly, the Company recorded an impairment charge
in the fourth quarter of 2001 of approximately $2,000,000 associated with the
write down of the license agreement with Edwards.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q (THE "REPORT"), INCLUDING THE DISCLOSURES
BELOW, CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE TERMS "ANTICIPATES," "EXPECTS,"
"ESTIMATES," "BELIEVES" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO US OR OUR
MANAGEMENT, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHER
PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION"), REPORTS TO THE STOCKHOLDERS OF PHOTOMEDEX, INC., A DELAWARE
CORPORATION ("WE", "US" OR "OUR") AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED
OR RELEASED BY US INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS WHICH COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE
(FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST
ESTIMATES BASED UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF
OPERATIONS. THESE RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS SET FORTH IN
OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001, AND IN SUCH
OTHER DOCUMENTS FILED WITH THE COMMISSION, EACH OF WHICH COULD ADVERSELY AFFECT
OUR BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN. OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS MAY DIFFER MATERIALLY
FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.
OVERVIEW OF BUSINESS OPERATIONS
We are engaged in the development, manufacturing and marketing of
proprietary excimer laser and fiber optic equipment and techniques directed
toward the treatment of inflammatory and cosmetic skin disorders. In connection
with our current business plan, the initial medical applications for our excimer
laser technology are intended to be used in the treatment of psoriasis,
vitiligo, atopic dermatitis and leukoderma. We are also developing technology
for the treatment of other skin disorders. In January 2000, we received the
first Food and Drug Administration, or FDA, clearance to market an excimer laser
12
system, the XTRAC system, for the treatment of psoriasis pursuant to a 510(k)
submission. The 510(k) establishes that the XTRAC system has been determined to
BE substantially equivalent to currently marketed devices for purposes of
treating psoriasis. Accordingly, we commercially launched the XTRAC system in
the United States in August 2000. In March 2001, we received FDA clearance to
market the XTRAC system for the treatment of vitiligo and shortly thereafter, in
August 2001, received FDA clearance to market the XTRAC system for the treatment
of atopic dermatitis. In May 2002, we received approval for the treatment of
leukoderma. XTRAC, PhotoMedex and its logo are registered trademarks of
PhotoMedex, Inc.
In August 2000, after significant progress toward completing beta
testing of our psoriasis products, we shipped our first four XTRAC systems to
dermatologists for commercial use. During fiscal 2001, we continued our
concerted efforts to commercialize the XTRAC phototherapy system by refining the
laser design and enhancing reliability. These efforts allowed us to achieve
certain levels of acceptance by the insurance reimbursement community. To date,
we have received approval from approximately 50 health plans in 30 states to
reimburse for claims submitted by patients or their doctors for treatment of
psoriasis utilizing the XTRAC system. We have also received approval from eight
insurers for reimbursement for treatment of vitiligo utilizing the XTRAC system.
In February 2002, the Current Procedural Terminology Editorial Board of
the American Medical Association, or AMA, approved the request by the American
Academy of Dermatology to issue reimbursement codes for laser therapies in the
treatment of psoriasis and other inflammatory diseases, which would include
laser therapy using the XTRAC system to treat such conditions. The AMA has
published three CPT code numbers covering the treatment of psoriasis and other
inflammatory skin diseases with the XTRAC system, including:
o laser treatment for inflammatory skin disease (psoriasis) -
total area less than 250 square centimeters;
o laser treatment for inflammatory skin disease (psoriasis) -
total area 250-500 square centimeters; and
o laser treatment for inflammatory skin disease (psoriasis) -
total area over 500 square centimeters.
These new codes will become effective on January 1, 2003. We believe
that the publication of these codes will facilitate our ability to obtain
broader approvals for reimbursement for treatment of psoriasis and other
inflammatory skin diseases using the XTRAC system. We anticipate that the AMA's
Relative Value Update Committee will ascribe economic values for each of these
codes by the end of 2002.
As a part of our commercialization strategy in the United States, we
are providing the XTRAC system to targeted dermatologists at no initial capital
cost to them and believe that this strategy will create substantial incentives
for these dermatologists to adopt the XTRAC system and will accelerate further
market penetration. Accordingly, we expect to receive a recurring stream of
revenue from per-treatment charges to dermatologists for use of the XTRAC
system. We have, however, decided to limit our domestic placement of lasers
until the aforementioned broader approvals for reimbursement for treatment
utilizing the XTRAC system are obtained. Outside of the United States, our
strategy includes selling XTRAC systems through distributors or directly to
dermatologists, as well as placing XTRAC systems with dermatologists thereby
providing a usage-based revenue stream. As of September 30, 2002, we had
generated cumulative revenues of $1,584,075 from the phototherapy treatment
system usage and $6,113,000 from sales of XTRAC systems.
13
PROPOSED MERGER WITH SURGICAL LASER TECHNOLOGIES, INC.
On September 25, 2002, we entered into an Agreement and Plan of Merger,
or the Merger Agreement, with Surgical Laser Technologies, Inc., or SLT.
Pursuant to the Merger Agreement, subject to certain conditions, a wholly-owned
subsidiary formed by us for purposes of the Merger Agreement, will be merged
with and into SLT with SLT continuing as the surviving corporation and our
wholly-owned subsidiary, or the Merger. As a result of the Merger, each issued
and outstanding share of SLT common stock will be automatically converted into
the right to receive 1.12 shares, or the Exchange Ratio, of our common stock.
When the Merger is completed, we will not assume any SLT stock options or
substituted any of our own stock options. Each warrant to purchase SLT common
stock outstanding immediately before the completion of the Merger will
automatically become a fully vested warrant to purchase shares of our common
stock. The number of shares of our common stock for which a warrant is
exercisable and the exercise price will be adjusted for the Exchange Ratio in
the Merger. The consummation of the Merger is subject to the approval of the
stockholders of SLT and other customary closing conditions. There can be no
guarantee that the Merger or the other transactions contemplated by the Merger
Agreement will close by any particular date, if at all.
To our knowledge, none of our executive officers or directors of or
other 5% or greater beneficial owner of our common stock has an ownership
interest in SLT, except for Richard J. DePiano, who is currently the chairman of
the board of directors of SLT and a member of our board of directors, and a
stockholder of each company, and who will continue to serve as one of our
directors following the Merger. Mr. DePiano beneficially owns: (i) 55,000 shares
of SLT common stock (including options to purchase up to 40,000 shares of SLT
common stock), and (ii) 70,000 shares of our common stock (including options to
purchase up to 55,000 shares of our common stock).
RESULTS OF OPERATIONS
We generated revenues of $832,045 and $2,627,117 during the three and
nine months ended September 30, 2002, respectively. Of these amounts, $630,000
and $1,939,500 related to the sale of our excimer lasers and spare parts to
distributors outside of the United States for the three and nine months ended
September 30, 2002, respectively. Additionally, for the three and nine months
ended September 30, 2002, we generated $202,045 and $687,617, respectively, in
revenues from treatments performed with our excimer laser in the United States.
We generated revenues of $802,636 and $4,113,990 during the three and nine
months ended September 30, 2001, respectively. Of these amounts, $593,000 and
$3,517,500 related to the sale of our excimer lasers to distributors outside of
the United States. Additionally, for the three and nine months ended September
30, 2001, we generated $209,636 and $596,490, respectively, in revenues from
treatments performed with our excimer laser in the United States.
Cost of revenues during the three and nine months ended September 30,
2002 was $167,434 and $593,704, respectively. Cost of revenues during these
periods related primarily to the production costs of the XTRAC laser equipment
and spare parts sold outside of the United States. Cost of revenues during the
three and nine months ended September 30, 2001 was $195,160 and $1,087,320,
respectively. Cost of revenues during these periods also related primarily to
the production costs of the XTRAC laser equipment sold outside of the United
States.
Selling, general and administrative expenses for the three and nine
months ended September 30, 2002 were $2,004,979 and $6,420,379 compared to
$3,136,347 and $10,685,755 in 2001, respectively. Included in selling, general
and administrative expenses during the three and nine months ended September 30,
2002 were approximately $0 and $320,000, respectively, of warranty expenses
accrued for continued product upgrades related to international lasers sold.
These overall period to period decreases related to reductions in consulting and
professional fees related to marketing expenses for our XTRAC systems and
reductions in personnel and overhead expenses with respect to the infrastructure
to maximize the use of operating cash while we advance the implementation of our
business plan to commercialize our XTRAC system.
14
Research and development expenses during the three months ended
September 30, 2002 decreased to $325,952 from $469,180 for the three months
ended September 30, 2001. During the nine months ended September 30, 2002,
research and development expenses decreased to $859,188 from $1,833,064 for the
nine months ended September 30, 2001. These decreases related primarily to our
focus on refining the operability of our phototherapy laser products.
Depreciation and amortization during the three months ended September
30, 2002 decreased to $413,417 from $620,924 for the three months ended
September 30, 2001. Depreciation and amortization during the nine months ended
September 30, 2002 decreased to $1,264,321 from $1,553,365 for the nine months
ended September 30, 2001. These decreases related primarily to the elimination
of the amortization of goodwill associated with our purchase of the remaining
23.9% of Acculase and the elimination of the amortization of the license fee
that was written off through an impairment charge in the fourth quarter of 2001.
This decrease was offset by additional depreciation associated with additions to
property and equipment balances.
Net interest income during the three months ended September 30, 2002
increased to $14,908, as compared to $9,508 for the three months ended September
30, 2001. Net interest income during the nine months ended September 30, 2002
decreased to $18,276, as compared to $206,844 for the nine months ended
September 30, 2001. The increase for the three months related primarily to
investment of the proceeds of our stock offering in June 2002, while the year to
date decrease related to our smaller average balance of cash and cash
equivalents and lower interest rates during the nine months ended September 30,
2002.
Net other expense during the three months ended September 30, 2002 was
$286 as compared to $46,326 during the three months ended September 30, 2001.
Net other expense during the nine months ended September 30, 2002 was $4,657 as
compared to $16,021 during the nine months ended September 30, 2002.
The aforementioned factors resulted in a net loss of $2,065,115 and
$6,496,856 during the three and nine months ended September 30, 2002, as
compared to a net loss of $3,655,793 and $10,854,691 during the three and nine
months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations through the use of working
capital provided from loans and equity and debt financing.
In 1997, our strategy changed to focus our efforts on our excimer laser
technology. We began to develop a broad base of excimer laser and excimer laser
delivery products for both medical and non-medical applications.
On March 27, 2001, we completed a private placement of 1,230,000 shares
of our common stock at $5.00 per share and received gross proceeds of
$6,150,000. The closing price of the common stock on the date that the
transaction was negotiated was $5.75 per share and on March 27, 2001, the
closing date of the transaction, the closing price was approximately $4.875 per
share. We paid Pacific Growth Equities, Inc. a commission of 6.5% of the gross
proceeds, or approximately $400,000 and additional financing costs of
approximately $244,000 were also incurred. We have used the proceeds of this
financing to pay for the marketing of our products (including our psoriasis,
vitiligo, atopic dermatitis and leukoderma treatment products), research and
development expenses and working capital.
15
On October 24, 2001, we completed a private placement of 5,040,714
shares of common stock at $1.05 per share and warrants to purchase 1,260,179
shares of common stock at $1.16 per share. We have filed a registration
statement for the securities issued in the private placement. We based the per
share purchase price of the shares on the closing sale price of our common stock
on October 12, 2001, or $1.05. We received gross proceeds of $5,292,750. We paid
Investec PMG Capital and Emerging Growth Equities Limited a commission of
approximately $322,000. We have used the proceeds of this financing to pay for
working capital and other general corporate purposes.
On June 13, 2002, we completed a private offering of 4,115,000 shares
of common stock at a price of $1.50 per share providing gross proceeds of
$6,172,500. The closing price of our common stock on June 13, 2002 was $1.68 per
share. In connection with this offering, we paid commissions and other expenses
of $466,453, resulting in net proceeds of $5,706,047. In addition, the investors
received warrants to purchase 1,028,750 shares of common stock at an exercise
price of $1.90 per share. The warrants have a five-year term and may not be
exercised until December 14, 2002. We have filed a registration statement for
the securities issued in the private offering. We have used and will continue to
use the proceeds of this financing to pay for working capital and other general
corporate purposes.
At September 30, 2002, the ratio of current assets to current
liabilities was 3.02 to 1.00 compared to 2.93 to 1.00 at December 31, 2001. As
of September 30, 2002, we had $5,939,820 of working capital.
Cash and cash equivalents were $4,708,389 as of September 30, 2002, as
compared to $4,066,820 as of December 31, 2001. This increase was primarily
attributable to the receipt of $5,706,047 in net cash proceeds from the June 13,
2002 financing, net of funding for the net loss incurred during the nine months
ended September 30, 2002.
We believe that our existing cash balance, together with our existing
financial resources, and any revenues from our sales, distribution, licensing
and manufacturing relationships, will be sufficient to meet our operating and
capital requirements through the third quarter of 2003. Accordingly, we have
decided to limit domestic placement of lasers until we obtain broader approvals
for reimbursement for treatments using the laser system. However, depending upon
our rate of growth and other operating factors, we may require additional equity
or debt financing to meet our working capital requirements or capital
expenditure needs. There can be no assurance that additional financing, if
needed, will be available when required or, if available, on terms satisfactory
to us.
As of September 30, 2002, we had borrowings in the aggregate amount of
$44,428. As of December 31, 2001, we had borrowings in the aggregate amount of
$65,017. The decrease in borrowings related to the normal scheduled repayment of
the obligations.
Net cash used in operating activities was $5,151,992 and $11,351,248
for the nine months ended September 30, 2002 and 2001, respectively. Net cash
used in operating activities during the nine months ended September 30, 2002 and
2001 primarily consisted of net losses and increases in current assets (2001
only). These uses were offset by depreciation and amortization, decreases in
current assets (2002 only) and increases in current liabilities.
Net cash provided by investing activities was $61,103 for the nine
months ended September 30, 2002, as compared to net cash used in investing
activities of $942,357 for the nine months ended September 30, 2001. In the nine
months ended September 30, 2002, we utilized $73,538 to purchase computer and
manufacturing equipment as well as leasehold improvements to support our excimer
laser operations. In the nine months ended September 30, 2001, we utilized
$158,357 to acquire equipment for our excimer laser business operations and
$2,784,000 associated with the construction of our psoriasis treatment lasers.
16
Net cash provided by financing activities was $5,732,458 and $5,561,739
during the nine months ended September 30, 2002 and 2001, respectively. In the
nine months ended September 30, 2002, we received $5,706,047 from the net
proceeds of the sale of 4,115,000 shares of common stock in connection with the
June 13, 2002 financing, $18,000 from the exercise of options, $29,000 from the
exercise of warrants and $60,905 from the issuance of notes payable, which was
offset by the utilization of $81,494 for the payment of certain debts. In the
nine months ended September 30, 2001, we received $5,506,442 from the net
proceeds of the sale of 1,230,000 shares of common stock in connection with the
March 27, 2001 financing, $236,320 of proceeds from the issuance of notes
payable, and $18,937 from the exercise of options, which was offset by the
utilization of $199,960 for the payment of principal on the aforementioned notes
payable.
Our ability to expand our business operations is currently dependent on
financing from external sources. There can be no assurance that changes in our
manufacturing and marketing research and development plans or other changes
affecting our operating expenses and business strategy will not result in the
expenditure of such resources before such time or that we will be able to
develop profitable operations prior to such date, or at all, or that we will not
require additional financing at or prior to such time in order to continue
operations. There can be no assurance that additional capital will be available
on terms favorable to us, if at all. To the extent that additional capital is
raised through the sale of additional equity or convertible debt securities, the
issuance of such securities could result in additional dilution to our
stockholders. Moreover, our cash requirements may vary materially from those now
planned because of results of marketing, product testing, changes in the focus
and direction of our marketing programs, competitive and technological advances,
the level of working capital required to sustain our planned growth, litigation,
operating results, including the extent and duration of operating losses, and
other factors. In the event that we experience the need for additional capital,
and are not able to generate capital from financing sources or from future
operations, management may be required to modify, suspend or discontinue our
business plan.
We expect to incur operating losses for at least the next twelve months
because we plan to spend substantial amounts on the marketing of our psoriasis,
vitiligo, atopic dermatitis and leukoderma treatment products and expansion of
our operations. We cannot assure you that we will market any products
successfully, operate profitably in the future, or that we will not require
significant additional financing in order to accomplish our business plan. We
anticipate generating increased cash flows from operations during 2003 in
connection with: (a) the issuance of the CPT codes and its impact on our ability
to obtain broader reimbursement approvals relating to treatments using our XTRAC
system; and, (b) the proposed merger with SLT, if the merger should close.
However, we cannot assure you that such improvement in cash flow, in either
case, will result in profitable operations. Further, we cannot assure you that
the proposed merger will close.
Our future revenues and success depends upon our XTRAC system for the
treatment of a variety of skin disorders. Our XTRAC system for the treatment of
psoriasis, vitiligo, atopic dermatitis and leukoderma is currently generating
revenues in both the United States and 19 countries around the world. Our
ability to successfully introduce new products based on our new business focus
and the expected benefits to be obtained from these products may be adversely
affected by a number of factors, such as unforeseen costs and expenses,
technological change, economic downturns, competitive factors or other events
beyond our control. Consequently, our historical operating results cannot be
relied upon as indicators of future performance, and management cannot predict
whether we will obtain or sustain positive operating cash flow or generate net
income in the future.
IMPACT OF INFLATION
We have not operated in a highly inflationary period, and our
management does not believe that inflation has had a material effect on sales or
expenses.
17
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB")
approved Statement of Financial Accounting Standard ("SFAS"). 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142 required
companies to cease amortizing goodwill on December 31, 2001. Any goodwill
resulting from acquisitions completed after June 30, 2001 is not amortized. SFAS
No. 142 also establishes a new method of testing goodwill for impairment on an
annual basis or an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value. The
adoption of SFAS No. 142 resulted in the discontinuation of amortization of
goodwill; however, we are required to test goodwill for impairment under the new
standard. In January 2002, management performed an analysis of the
recoverability of goodwill and concluded that there had been no impairment of
the carrying value. The net book value of intangibles at September 30, 2002 was
$3,594,970.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability associated with an asset retirement be recognized in the period in
which it is incurred, with the associated retirement costs capitalized as part
of the carrying amount of the long-lived asset and subsequently depreciated over
its useful life. The adoption of SFAS No. 143 did not have any impact on our
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of and clarifies certain issues related to SFAS
No. 121. SFAS No. 144 supersedes SFAS No. 121 and APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." We were required to adopt SFAS No. 144 for fiscal year 2002. The
adoption of SFAS No. 144 did not have any impact on the results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses the recognition, measurement and
reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS No. 146 also addresses recognition of certain
costs related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees and termination of benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred compensation contract. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Adoption of SFAS
No. 146 is not expected to have an impact on our financial position or results
of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are not currently exposed to market risks due to changes in interest
rates and foreign currency rates and therefore, we do not use derivative
financial instruments to address risk management issues in connection with
changes in interest rates and foreign currency rates.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this Report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings, in our Annual Report on
Form 10-K for the year ended December 31, 2001 and our Registration
Statement on Form S-4 (Registration Number 333-10069) in the section
entitled "Information about PhotoMedex - Business of PhotoMedex - Legal
Proceedings," for descriptions of our legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Stock Options
During the three months ended September 30, 2002, we granted options to
purchase up to 10,000 shares of common stock to an employee under our
2000 Stock Option Plan at an exercise price of $1.26.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Changes in Our Certifying Accountant
On July 31, 2002, at the direction of our board of directors and upon
the recommendation and approval of our Audit Committee, we dismissed Arthur
Andersen LLP ("Andersen") as our principal independent public accountants, and
engaged KPMG LLP ("KPMG") as our principal independent public accountants.
In connection with the audits for the two (2) most recent years ended
December 31, 2001 and 2000, and the subsequent interim period through July 31,
2002, there were no disagreements with Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which, if not resolved to the satisfaction of Andersen, would have
caused Andersen to make reference to the subject matter of such disagreements in
connection with its reports on our consolidated financial statements for such
years; and there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
The reports of Andersen on our consolidated financial statements, as
of and for the years ended December 31, 2001 and 2000, did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.
We provided Andersen with the foregoing disclosures and requested
Andersen to furnish a letter addressed to the Securities and Exchange
Commission, stating whether it agreed with the above statements. Although we
have received no information from Andersen that Andersen has a basis for
disagreement with such statements, we have been unable to obtain such a letter
from Andersen principally due to the fact that the personnel at Andersen
(including the engagement partner and manager) primarily responsible for
auditing our financial statements have left Andersen.
19
During the years ended December 31, 2001 and 2000 and through July 31,
2002, neither we nor anyone on our behalf consulted KPMG regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, or any other matters or reportable events, as set
forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
-------------------
1. On July 31, 2002, we filed a Report on Form 8-K with respect to the
dismissal of Arthur Andersen as our principal independent public accountants and
the engagement of KPMG as our principal independent public accountants.
2. On August 14, 2002, we filed a Report on Form 8-K with respect to
the filing of certifications of our Chief Executive Office and Chief Financial
Officer relating to our Quarterly Report on Form 10-Q for the quarter ended June
30, 2002, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
3. On September 25, 2002, we filed a report on Form 8-K with respect to
our entering into an Agreement and Plan of Merger with Surgical Laser
Technologies, Inc.
20
DOCUMENTS INCORPORATED BY REFERENCE
We are a reporting company and file annual, quarterly and special
reports, proxy statements and other information with the Commission. You may
inspect and copy these materials at the Public Reference Room maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Commission at 1-800-SEC-0330 for more information on the Public
Reference Room. You can also find our Commission filings at the Commission's
website at www.sec.gov. You may also inspect reports and other information
concerning us at the offices of the Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006. We intend to furnish our stockholders with annual
reports containing audited financial statements and such other periodic reports
as we may determine to be appropriate or as may be required by law.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHOTOMEDEX, INC.
Date: November 14, 2002 By: /s/ Jeffrey F. O'Donnell
-------------------------------------
Jeffrey F. O'Donnell
President and Chief Executive Officer
Date: November 14, 2002 By: /s/ Dennis M. McGrath
-------------------------------------
Dennis M. McGrath
Chief Financial Officer
21
PHOTOMEDEX, INC.
A Delaware Corporation
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, Jeffrey F. O'Donnell, Chief Executive Officer of PhotoMedex, Inc., a
Delaware corporation (the "Company"), do hereby certify, in accordance with
Rules 13a-14 and 15d-14, as created pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002, with respect to the Quarterly Report on Form 10-QSB
of the Company for the quarterly period ended September 30, 2002 (the "Quarterly
Report"), as filed with the Securities and Exchange Commission herewith under
Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), that:
(1) I have reviewed this Quarterly Report on Form 10-QSB of PhotoMedex,
Inc., a Delaware corporation (the "Company") for the quarterly period
ended September 30, 2002 (the "Quarterly Report");
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this Quarterly Report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the Company as of, and for, the periods presented in
this Quarterly Report;
(4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this Quarterly Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
(c) presented in this Quarterly Report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
22
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the Company's internal controls; and
(6) The Company's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: November 14, 2002 By: /s/ Jeffrey F. O'Donnell
------------------------
Jeffrey F. O'Donnell
Chief Executive Officer
23
PHOTOMEDEX, INC.
A Delaware Corporation
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, Dennis M. McGrath, Chief Financial Officer of PhotoMedex, Inc., a
Delaware corporation (the "Company"), do hereby certify, in accordance with
Rules 13a-14 and 15d-14, as created pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002, with respect to the Quarterly Report on Form 10-QSB
of the Company for the quarterly period ended September 30, 2002 (the "Quarterly
Report"), as filed with the Securities and Exchange Commission herewith under
Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), that:
(1) I have reviewed this Quarterly Report on Form 10-QSB of PhotoMedex,
Inc., a Delaware corporation (the "Company") for the quarterly period
ended September 30, 2002 (the "Quarterly Report");
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this Quarterly Report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the Company as of, and for, the periods presented in
this Quarterly Report;
(4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this Quarterly Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
(c) presented in this Quarterly Report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
24
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the Company's internal controls; and
(6) The Company's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: November 14, 2002 By: /s/ Dennis M. McGrath
-----------------------
Dennis M. McGrath
Chief Financial Officer
25