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 MARCH 31, 2003
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-2058100
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
147 Keystone Drive, Montgomeryville, Pennsylvania 18936
-------------------------------------------------------
(Address of principal executive offices, including zip code)
(215) 619-3600
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(Registrant's telephone number, including area code)
Indicated 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 ___
--
Indicated by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act.
Yes___ No X
--
The number of shares outstanding of the issuer's Common Stock as of May 14,
2003, was 31,439,058 shares.
PHOTOMEDEX, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: PAGE
- ------------------------------ ----
ITEM 1. Financial Statements:
a. Consolidated Balance Sheets, March 31, 2003 (unaudited) and
December 31, 2002 (audited) 3
b. Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 (unaudited) 4
c. Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 (unaudited) 5
d. Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 23
ITEM 4. Controls and Procedures 24
Part II. Other Information:
- ---------------------------
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities and Use of Proceeds 24
ITEM 3. Defaults Upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Certifications 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
--------------- ----------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 2,550,503 $ 4,008,051
Restricted cash, cash equivalents and short-term investments 362,817 2,000,000
Accounts receivable, net of allowance for doubtful accounts of
$954,856 and $1,169,486, respectively 2,162,799 2,536,334
Inventories 5,317,892 5,055,783
Prepaid expenses and other current assets 433,432 283,001
--------------- ----------------
Total current assets 10,827,443 13,883,169
Property and equipment, net 3,600,505 3,672,438
Goodwill, net of accumulated amortization of $452,992 2,944,423 2,944,423
Patents and licensed technologies, net 889,792 933,802
Other assets 73,760 79,372
--------------- ----------------
Total assets $ 18,335,923 $ 21,513,204
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 253,998 $ 75,263
Current portion of long-term debt 511,134 2,143,425
Accounts payable 2,689,883 2,833,361
Accrued compensation and related expenses 919,830 822,999
Other accrued liabilities 845,463 1,246,433
Deferred revenues 284,604 183,475
--------------- ----------------
Total current liabilities 5,504,912 7,304,956
Notes payable 20,453 -
--------------- ----------------
Long-term debt 1,174,541 899,626
--------------- ----------------
Stockholders' equity:
Common Stock, $.01 par value, 50,000,000 shares authorized;
31,439,058 shares issued and outstanding 314,391 314,391
Additional paid-in capital 76,828,582 76,828,582
Accumulated deficit (65,493,724) (63,819,517)
Deferred compensation (13,232) (14,834)
--------------- ----------------
Total stockholders' equity 11,636,017 13,308,622
--------------- ----------------
Total liabilities and stockholders' equity $18,335,923 $ 21,513,204
=============== ================
The accompanying notes are an integral part of these
consolidated financial statements.
3
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
March 31,
2003 2002
---------------- --------------
Revenues:
Product sales $ 1,869,292 $712,000
Services 1,604,185 240,343
---------------- --------------
3,473,477 952,373
Cost of revenues:
Product cost of revenues 1,149,472 322,639
Services cost of revenues 1,400,786 729,471
---------------- --------------
2,550,258 1,052,110
---------------- --------------
Gross profit 923,219 (99,737)
---------------- --------------
Operating expenses:
Selling, general and administrative 2,154,592 1,800,482
Engineering and product development 411,932 222,226
---------------- --------------
2,566,524 2,022,708
---------------- --------------
Loss from operations before interest
and other expense, net (1,643,305) (2,122,445)
Interest expense, net 31,023 1,068
Other expense, net - 4,961
---------------- --------------
Net loss $ (1,674,328) $ (2,128,474)
================ ==============
Basic and diluted net loss per share $ (0.05) $ (0.09)
================ ==============
Shares used in computing basic and
diluted net loss per share 31,439,058 24,179,953
================ ==============
The accompanying notes are an integral part of
these consolidated financial statements.
4
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
2003 2002
----------------- ----------------
Operating activities:
Net loss $ (1,674,328) $ (2,128,474)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 479,334 424,376
Stock options and warrants issued to
consultants for services - 34,295
Amortization of deferred compensation 1,602 2,268
Provision for bad debt 84,000 -
Changes in operating assets and liabilities:
Accounts receivable 289,535 84,530
Inventories (216,462) 187,032
Prepaid expenses and other assets (6,819) (16,660)
Accounts payable 27,522 (218,051)
Accrued compensation and related expenses 96,831 56,343
Other accrued liabilities (400,849) 92,072
Deferred revenues 101,129 (10,350)
----------------- ----------------
Net cash used in operating activities (1,218,505) (1,492,619)
----------------- ----------------
Investing activities:
Purchases of property and equipment, net (21,136) (32,560)
Lasers placed into service (293,401) (2,000)
----------------- ----------------
Net cash used in investing activities (314,537) (34,560)
----------------- ----------------
Financing activities:
Proceeds from issuance of notes payable - 4,000
Payments on long-term debt (44,426) -
Payments on notes payable (109,812) (40,670)
Net repayments on line of credit (1,407,451) -
Decrease in restricted cash, cash equivalents
and short-term investments 1,637,183 -
----------------- ----------------
Net cash provided by (used in) financing activities 75,494 (36,670)
----------------- ----------------
Net decrease in cash and cash equivalents (1,457,548) (1,563,849)
Cash and cash equivalents, beginning of period 4,008,051 4,066,820
----------------- ----------------
Cash and cash equivalents, end of period $ 2,550,503 $ 2,502,971
================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
5
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY:
BACKGROUND
PhotoMedex, Inc. and subsidiaries (the "Company") is a medical device company
focused on facilitating the cost-effective use of technologies for doctors,
hospitals and surgery centers. The Company develops, manufactures and markets
phototherapy excimer laser-based instrumentation designed to treat psoriasis,
vitiligo, atopic dermatitis and leukoderma. In January 2000, the Company
received the first Food and Drug Administration ("FDA") clearance to market an
excimer laser system, the XTRAC(R) system, for the treatment of psoriasis. In
March 2001, the Company received FDA clearance to treat vitiligo; in August
2001, the Company received FDA clearance to treat atopic dermatitis; and in May
2002, the FDA granted 510(k) clearance to market the XTRAC system for the
treatment of leukoderma. The Company launched the XTRAC phototherapy treatment
system commercially in the United States in August 2000.
Through the acquisition of Surgical Laser Technologies, Inc. ("SLT") on December
27, 2002 (see Note 2), the Company also develops, manufactures and markets
proprietary lasers and delivery systems for both contact and non-contact surgery
and provides surgical services utilizing these and other manufacturers'
products.
LIQUIDITY AND GOING CONCERN
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 engineering and product development
and general and administrative expenses. During the first quarter of 2003, the
Company re-launched its marketing of the XTRAC system in the U.S. following the
issuance of CPT codes and associated reimbursement rates by CMS. The Company has
historically financed its activities from borrowings and the private placement
of debt and equity securities. As of March 31, 2003, the Company had an
accumulated deficit of $65,493,724.
The Company expects to incur operating losses for 2003 as it plans to invest
substantial amounts on the marketing of its psoriasis, vitiligo, atopic
dermatitis and leukoderma treatment products and expansion of its manufacturing
operations. Management cannot assure that the Company 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 depend 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 from
sales to international customers. 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 change, 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 $2,550,503 as of March 31, 2003. Management
believes that the existing cash balance together with its existing financial
resources, including the credit line facility (see Note 8) and access to lease
financing for capital expenditures, and any revenues from sales, distribution,
licensing and manufacturing relationships, will be sufficient to meet the
Company's operating and capital requirements through the first quarter of 2004.
The 2003 operating plan reflects anticipated revenue growth from the use of the
XTRAC system based on the recent approval of reimbursement codes and expected
private insurance coverage in the United States. In addition, the operating plan
reflects significant costs savings from the integration of the combined
companies. However, depending upon the Company's rate of growth and other
operating factors, the Company may require additional equity or debt financing
6
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, could be obtained on terms satisfactory to the
Company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
QUARTERLY FINANCIAL INFORMATION AND RESULTS OF OPERATIONS
The financial statements as of March 31, 2003 and for the three months ended
March 31, 2003 and 2002, are unaudited and, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position as of March 31, 2003, and the
results of operations and cash flows for the three months ended March 31, 2003
and 2002. The results for the three months ended March 31, 2003 are not
necessarily indicative of the results to be expected for the entire year. While
management of the Company 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, 2002.
The Company acquired Surgical Laser Technologies, Inc., or SLT, on December 27,
2002 and, as such, the operating results of SLT are not included in the
consolidated statement of operations for the three months ended March 31, 2002.
In addition, the operating results for the period ended March 31, 2002 have been
reclassified to conform to the current period presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company invests its excess cash in highly liquid, short-term investments.
The Company considers short-term investments that are purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consisted of cash and money market accounts at March 31, 2003 and
December 31, 2002.
RESTRICTED CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
A line of credit agreement, amended February 27, 2003 and March 26, 2003,
extended to SLT by a bank requires that SLT maintain cash and cash equivalents
(including short-term investments), for any amount on the line in excess of $1
million, as collateral for the line of credit (see Note 8). Previous to the
amendment, SLT was required to maintain $2 million of cash and cash equivalents
(including short-term investments) as collateral for the line of credit. The
restricted assets at March 31, 2003 and December 31, 2002 consisted of the
following:
March 31, 2003 December 31, 2002
---------------------- ----------------------
Cash and cash equivalents $ - $1,200,121
Short-term investments 362,817 799,879
---------------------- ----------------------
Total restricted cash, cash equivalents and
short-term investments $362,817 $2,000,000
====================== ======================
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has classified its entire portfolio of short-term investments as available for
sale as they are available to take advantage of other investment opportunities.
Securities available for sale are stated at fair value with unrealized gains and
losses, if any, included in stockholders' equity as accumulated other
comprehensive income. Dividend and interest income are recognized when earned
and are recorded in interest income. The amortized cost of debt securities is
adjusted for accretion of discounts to maturity. Such accretion is also included
in interest income. The Company currently invests only in high-quality,
short-term securities in accordance with its investment policy. Unrealized gain
and loss from such securities was immaterial at March 31, 2003 and December 31,
2002.
7
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost is determined at the latest cost for raw materials and at
production cost (materials, labor and indirect manufacturing cost) for
work-in-process and finished goods. Throughout the laser manufacturing process,
the related production costs are recorded within inventory.
The Company's skin disorder treatment equipment will either (i) be sold to
distributors or physicians directly or (ii) be placed in a physician's office
and remain the property of the Company. For lasers that are placed in a
physician's office, the cost is transferred from inventory to "lasers in
service" within property and equipment. The Company earns revenue each time the
laser is used for a patient treatment. Lasers that are not placed in a
physician's office are maintained in inventory until the unit is sold.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, primarily
three to seven years for lasers in service, computer hardware and software,
furniture and fixtures, automobiles, and machinery and equipment. Leasehold
improvements are amortized over the lesser of the useful lives or lease terms.
Expenditures for major renewals and betterments to property and equipment are
capitalized, while expenditures for maintenance and repairs are charged to
operations 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 statements of operations.
Laser units and laser accessories located at medical facilities for sales
evaluation and demonstration purposes or those units/accessories used for
development and medical training are included in property and equipment under
the caption "machinery and equipment". These units and accessories are being
depreciated over a period of up to five years. Laser units utilized in the
provision of surgical services are included in property and equipment under the
caption "lasers in service."
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 March 31, 2003, no such write-down was required (see
Impairment of Long-Lived Assets below).
PATENT COST AND LICENSED TECHNOLOGIES
Costs incurred to obtain or defend patents are capitalized and amortized over
the shorter of the estimated useful lives or eight to 12 years. Developed
technology relates to the purchase of the minority interest of Acculase, a
former subsidiary of the Company, and is being amortized on a straight-line
basis over seven 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 March 31, 2003, no such write-down was required (see Impairment of
Long-Lived Assets below).
ACCRUED WARRANTY COSTS
The Company offers a warranty on product sales generally for a one to two year
period. The Company provides for the estimated future warranty claims on the
date the product is sold. The activity in the warranty accrual during the
quarter ended March 31, 2003 is summarized as follows:
Accrual at January 1, 2003 $415,463
Additions charged to warranty expense 36,969
Claims paid and charged against the accrual (197,534)
-------------
Accrual at March 31, 2003 $254,898
=============
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
number of treatments or treatment cards. When the Company sells a laser to a
distributor or directly to a physician, revenue is recognized upon shipment of
the product. Under the terms of the distributor agreements, the distributors do
8
not have the right to return any unit. However, the Company does allow products
to be returned by its distributors in redress of product defects or other
claims.
When the Company places the laser in a physician's office, it recognizes service
revenue when the physician administers the actual treatments. Treatment cards
sold to physicians but not yet used are deferred and recognized as a liability
until the treatment occurs.
In the first quarter of 2003, the Company implemented a limited program to
support certain physicians in addressing treatments with the XTRAC system that
may be denied reimbursement by private insurance carriers. The Company
recognizes service revenue from the sale of treatment cards to physicians
participating in this program only if and to the extent the physician has been
reimbursed for the treatments. This program is scheduled to terminate on June
30, 2003. In the first quarter of 2003, the Company deferred revenues of
$122,756 under this program.
Through the surgical businesses, the Company generates revenues primarily from
three channels. The first is through sales of recurring laser delivery systems
and accessories; the second is through the per-procedure surgical services; and
the third is through the sale of laser systems and related maintenance service
agreements. The Company recognizes revenues from product sales, including sales
to distributors, upon shipment of the products. For per-procedure surgical
services, the Company recognizes revenue upon the completion of the procedure.
Revenue from maintenance service agreements is deferred and recognized on a
straight-line basis over the term of the agreements. Revenue from billable
services, including repair activity, is recognized when the service is provided.
PRODUCT DEVELOPMENT COSTS
Costs of research, new product development and product redesign are charged to
expense as incurred.
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
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and 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.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." In accordance with SFAS No. 128, basic net loss per share
is calculated by dividing net loss available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted net
loss per share reflects the potential dilution from the conversion or exercise
of securities into common stock, such as stock options and warrants.
In these consolidated financial statements, diluted net loss per share is the
same as basic net loss per share. No additional shares for the potential
dilution from the conversion or exercise of securities into common stock are
included in the denominator, since the result would be anti-dilutive.
RECLASSIFICATIONS
The 2002 consolidated statement of operations has been revised to present
product sales and services and related costs separately.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
provides a single accounting model for long-lived assets to be disposed. SFAS
No. 144 also changes the criteria for classifying an asset as held for sale,
broadens the scope of businesses to be disposed of that qualify for reporting as
9
discontinued operations, and changes the timing of recognizing losses on such
operations. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of
SFAS No. 144 did not affect the Company's consolidated financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and would no longer be
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
STOCK OPTIONS
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, as amended in SFAS No. 148, the Company has elected to continue to
apply the intrinsic-value-based method of accounting described above, and has
adopted only the disclosure requirements of SFAS No. 123 and SFAS No. 148.
Had stock compensation cost for the Company's common stock options been
determined based upon the fair value of the options at the date of grant, as
prescribed under SFAS No. 123, as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation," the Company's net loss and net loss per share would
have been increased to the following pro forma amounts:
Three Months Ended March 31,
-----------------------------------------
2003 2002
----------------- --------------------
Net loss:
As reported ($1,674,238) ($2,128,474)
Less: stock-based employee compensation expense
included in reported net loss 1,602 2,268
Impact of total stock-based compensation expense
determined under fair value based method for all
grants and awards (512,313) (761,799)
----------------- --------------------
Pro-forma ($2,184,949) ($2,888,005)
================= ====================
Net loss per share:
As reported ($0.05) ($0.09)
================= ====================
Pro-forma ($0.07) ($0.12)
================= ====================
The above pro forma amounts may not be indicative of future pro forma amounts
because future options are expected to be granted.
10
The fair value of the options granted is estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions applicable
to options granted in the three-month periods:
Three Months Ended March 31,
--------------------------------------
2003 2002
----------------- -----------------
Risk-free interest rate 3.05% 4.49%
Volatility 100% 100%
Expected dividend yield 0% 0%
Expected option life 5 years 5 years
SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 2003, the Company financed vehicle and
equipment purchases of $94,501 under capital leases, financed an insurance
policy through a note payable for $138,000 and financed certain acquisition
costs, which were included in accounts payable at December 31, 2002, through a
note payable for $171,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company was required to adopt SFAS No.
143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material
effect on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishments of debt to prohibit the classification of the gain or loss as
extraordinary. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback
accounting for certain lease modifications that have equivalent economic effects
to sale-leaseback transactions. Except for its provisions dealing with SFAS No.
13, SFAS No. 145 is applied in fiscal years beginning after May 15, 2002. The
provisions of the Statement related to SFAS No. 13 were effective for
transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not
have a material effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity."
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material effect on the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Interpretation did not have a
material effect on the Company's financial statements and required disclosures
are included in the notes to the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
11
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation, and disclosures related to
such consolidation. The Interpretation applies immediately to variable interests
in variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. For
public enterprises with a variable interest in a variable interest entity
created before February 1, 2003, the Interpretation is applied to the enterprise
no later than the beginning of the first annual reporting period beginning after
June 15, 2003. The Interpretation requires certain disclosures in an entity's
financial statements issued after January 31, 2003 if it is reasonably possible
that the entity will consolidate or disclose information about variable interest
entities when the Interpretation becomes effective. The application of this
Interpretation is not expected to have a material effect on the Company's
financial statements.
NOTE 2
ACQUISITION:
On December 27, 2002, the Company acquired all of the outstanding common shares
of SLT. The results of SLT's operations since that date have been included in
the consolidated financial statements. The Company acquired SLT in order to gain
market share in surgical products and services markets through a business model
that is compatible with the Company's own approach to the dermatology market.
The Company also acquired SLT with an expectation that it could reduce costs
through economies of scale.
SLT has focused on lasers used in surgery in such venues as hospitals,
surgi-centers and doctors' offices. SLT has employed a similar business model to
the Company's domestic services by charging a per-procedure fee. With the
addition of SLT, the Company now offers laser services over a wide range of
specialties, including urology, gynecology, orthopedics, and general and ENT
surgery. Surgical services are offered using such lasers as the holmium, diode,
Nd:YAG and CO2 lasers. In addition, SLT develops, manufactures and markets
healthcare lasers and their disposables.
The aggregate purchase price was $6,760,445 and was paid through the issuance of
2,716,354 shares of common stock valued at $1.32 per share, the assumption of
$2,937,858 of debt and the incurrence of $237,000 of capitalizable transaction
costs. Non-capitalizable costs of $115,000 were incurred in registering the
common stock issued in connection with the acquisition.
12
Based on the initial purchase price allocation, the following table summarizes
the recorded fair value of the assets acquired and liabilities assumed at the
date of acquisition.
Cash and cash equivalents $ 120,500
Restricted cash, cash equivalents and short-term
investments 2,000,000
Accounts receivable 1,508,460
Inventories 2,731,811
Prepaid expenses and other current assets 148,506
Property and equipment 1,910,674
Patents and licensed technologies 317,346
Other assets 43,020
-----------------
Total assets acquired 8,780,317
Current portion of notes payable (53,470)
Current portion of long-term debt (2,143,425)
Accounts payable (1,084,055)
Accrued compensation and related expenses (250,356)
Other accrued liabilities (575,410)
Deferred revenues (56,350)
Long-term debt (794,433)
-----------------
Total liabilities assumed (4,957,499)
-----------------
Net assets acquired $3,822,818
=================
The fair value of the net assets acquired, excluding the debt assumed, exceeded
the purchase price by $1,825,819, resulting in negative goodwill. In accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets", the negative goodwill
was recorded as a reduction of intangibles and property and equipment of
$773,604 and $1,052,215, respectively.
The accompanying consolidated financial statements do not include any revenues
or expenses related to the acquisition prior to December 27, 2002, the closing
date. Following are the Company's unaudited proforma results for the three
months ended March 31, 2002, assuming the acquisition occurred on January 1,
2002.
March 31, 2002
--------------
Net revenues $3,711,000
Net loss (1,807,000)
Basic and diluted loss per share ($0.07)
Shares used in calculating basic and diluted loss
per share 26,787,273
These unaudited proforma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually resulted had the acquisition occurred on January 1, 2002, or
of future results of operations.
NOTE 3
INVENTORIES:
Set forth below is a detailed listing of inventories.
March 31, 2003 December 31, 2002
---------------------- ----------------------
Raw materials $3,065,542 $3,297,942
Work-in-process 73,130 328,081
Finished goods 2,179,220 1,429,760
---------------------- ----------------------
Total inventories $5,317,892 $5,055,783
====================== ======================
13
NOTE 4
PROPERTY AND EQUIPMENT:
Set forth below is a detailed listing of property and equipment.
March 31, 2003 December 31, 2002
------------------ -----------------
Lasers in service $5,440,535 $5,147,134
Computer hardware and software 251,495 251,495
Furniture and fixtures 189,162 173,507
Machinery and equipment 214,750 271,497
Autos and trucks 219,805 137,039
Leasehold improvements 103,863 100,106
------------------ -----------------
6,419,610 6,080,778
Accumulated depreciation and
amortization (2,819,105) (2,408,340)
------------------ -----------------
Property and equipment, net $3,600,505 $3,672,438
================== =================
Depreciation expense was $435,324 and $390,285 for the three months ended March
31, 2003 and 2002, respectively. At March 31, 2003 and December 31, 2002, net
property and equipment included $397,499 and $336,910, respectively, of assets
recorded under capitalized lease arrangements, of which $322,858 and $272,783
was included in long-term debt at March 31, 2003 and December 31, 2002,
respectively (see Note 8).
NOTE 5
PATENTS AND LICENSED TECHNOLOGIES:
Set forth below is a detailed listing of patents and licensed technology.
March 31, 2003 December 31, 2002
-------------- -----------------
Patents, net of accumulated amortization of $77,737 and
$65,730 $324,407 $336,414
Licensed technologies, net of accumulated amortization of
$271,615 and $239,612 565,385 597,388
-------------- -----------------
Total patents and licensed technologies, net $889,792 $933,802
============== =================
Amortization expense was $44,010 and $34,081 for the three months ended March
31, 2003 and 2002, respectively.
NOTE 6
OTHER ACCRUED LIABILITIES:
Set forth below is a detailed listing of other accrued liabilities.
March 31, 2003 December 31, 2002
------------------ ------------------
Accrued professional and consulting fees $99,437 $190,182
Accrued warranty 254,898 415,463
Accrued liability from matured notes 249,122 249,130
Royalty liability 128,594 169,368
Other accrued expenses 113,412 222,290
------------------ ------------------
Total other accrued liabilities $845,463 $1,246,433
================== ==================
In May 2002, SLT acquired a CO2 laser product line from Reliant Technologies,
Inc., which included a commitment to prepay royalties of $268,023 over 18
months. The remaining portion of $128,594 and $169,368 is included in accrued
liabilities at March 31, 2003 and December 31, 2002, respectively.
During 2002, SLT resumed direct control of $223,000 of funds previously set
aside for the payment of SLT's subordinated notes, which matured and ceased to
bear interest on July 30, 1999, and $31,000 of funds set aside to pay related
14
accrued interest. As of March 31, 2003 and December 31, 2002, the matured
principal and related interest was $249,122 and $249,130, respectively.
Note 7
NOTES PAYABLE:
Set forth below is a detailed listing of notes payable.
March 31, 2003 December 31, 2002
------------------- ---------------------
Note payable - unsecured creditor, interest at 6.6%, payable in monthly
principal and interest installments of $5,524 through April
2003. $ 5,493 $ 21,793
Note payable - secured creditor, interest at 10%, payable in monthly
principal and interest installments of $9,173 through June 2003.
27,068 53,470
Note payable - unsecured creditor, interest at 6.29%, payable in monthly
principal and interest installments of $20,130 through
September 2003. 118,594 -
Note payable - unsecured creditor, interest at 7.47%, payable in monthly
principal and interest installments of $7,827 through June
2004. 123,296 -
------------------- ---------------------
274,451 75,263
------------------- ---------------------
Less: current maturities (253,998) (75,263)
------------------- ---------------------
Notes payable, net of current maturities $ 20,453 $ -
=================== =====================
Note 8
LONG-TERM DEBT:
Set forth below is a detailed listing of the Company's long-term debt.
March 31, 2003 December 31, 2002
-------------- -----------------
Borrowings on credit facility $1,362,817 $2,770,268
Capital lease obligations (see Note 4) 322,858 272,783
Less: current portion (511,134) (2,143,425)
-------------- -----------------
Total long-term debt $1,174,541 $899,626
============== =================
Concurrent with the SLT acquisition, the Company assumed a $3,000,000 credit
facility from a bank, subsequently amended on February 27 and March 26, 2003 to
$1,400,000. The credit facility has a commitment term of four years, expiring
May 31, 2004, permits deferment of principal payments until the end of the
commitment term, and is secured by SLT's business assets, including
collateralization of $2,000,000 of SLT's cash and cash equivalents and
short-term investments. On February 27, 2003 and March 26, 2003, the bank agreed
to allow the Company to apply the cash collateral to a paydown of the facility
in 2003 and, as such, the $2,000,000 is included in the current portion of
long-term debt in the accompanying 2002 consolidated balance sheet. In the first
quarter of 2003, the Company paid the credit facility down to $1,362,817; as
various certificates of deposit mature in the second quarter of 2003, the
Company expects that the credit facility will be paid down and limited to
$1,000,000. The credit facility has an interest rate of the 30 day LIBOR plus
2.25%. The rate at March 31, 2003 was 3.59%.
The credit facility is subject to certain restrictive covenants and borrowing
base limitations. At December 31, 2002, SLT did not meet the covenants set by
the bank. The bank waived the non-compliance with the covenants at that date.
The restrictive covenants and borrowing base limitations will continue in 2003
to apply to SLT. In addition, the Company has agreed to meet certain restrictive
covenants at the consolidated group level. In the first two quarters of fiscal
2003, the group must maintain unrestricted cash, cash equivalents and/or
short-term investments in an amount equal to or greater than the amount by which
the line under the credit facility has been drawn down. In the last two quarters
of fiscal 2003 and beyond, the group must meet two cash flow covenants. For all
of 2003 and beyond, the group must maintain a minimum ratio of debt to the bank
15
as compared to tangible net worth. The Company fulfilled all covenants
applicable to the first quarter 2003; management expects to be able to meet all
covenants, both those applying to SLT and those applying to the consolidated
group, in the remaining three quarters of fiscal 2003. The Company has agreed to
be guarantor to SLT's obligations under the credit facility. At March 31, 2003,
the Company had $1,362,817 in outstanding obligations and had $37,183 of
availability under the credit facility. In June 2003, outstanding obligations
under the credit facility will be classified as current as they will be due in
the next twelve months.
The assets of SLT, including the subsidiaries of SLT, may not be transferred to
PhotoMedex without meeting certain restrictions imposed on SLT by the terms of
the credit facility with its bank. Under a restriction on dividends provision in
the agreement, the assets of SLT may not be dividended, distributed or otherwise
transferred by way of purchase, redemption or retirement of SLT's capital stock
if such a dividend, distribution or transfer would cause SLT to be in default of
the financial covenants it has made to the bank. Given this restriction, no
dividend, distribution or other transfer could have been made as of March 31,
2003 or December 31, 2002. On the other hand, under a restriction under the
credit facility on other, non-dividend transfers, SLT is permitted to engage in
other transactions with affiliated entities, including PhotoMedex, provided such
transactions are in the ordinary course of, and pursuant to the reasonable
requirements of, SLT's business and are based upon fair and reasonable terms no
less favorable to SLT than would be obtained in comparable arm's length
transactions with non-affiliated entities. Notwithstanding the terms covering
such other transactions, SLT is not permitted to transfer to PhotoMedex any of
the cash, amounting to $362,817, that is pledged to the bank as collateral.
The obligations under capital leases are at fixed interest rates and are
collateralized by the related property and equipment (see Note 4).
Note 9
BUSINESS SEGMENT AND GEOGRAPHIC DATA:
The Company is engaged in one business segment: the design, development and
manufacture of laser products and the marketing of those laser products as well
as other instruments for medical applications. The Company markets its offering
through traditional products sales as well as through the provision of fee-based
medical procedures services. The Company's customers are primarily doctors,
hospitals and surgery centers. For the three months ended March 31, 2003 and
2002, the Company did not have material net revenues from any individual
customer.
The Company reported net revenues in the following categories:
For the Three Months Ended March 31,:
2003 2002
------------------ -----------------
Excimer treatment procedures $ 153,164 $ 240,343
Surgical procedures 1,451,021 -
------------------ -----------------
Total services $ 1,604,185 $ 240,343
================== =================
Disposables and accessories $ 1,102,352 $ -
Laser system sales 766,940 712,000
------------------ -----------------
Total product sales $ 1,869,292 $ 712,000
================== =================
For the three months ended March 31, 2003 and 2002, there were no material net
revenues attributed to an individual foreign country. Net revenues by geographic
area were as follows:
For the Three Months Ended March 31,:
2003 2002
--------------------- -----------------
Domestic $ 2,935,080 $ 240,243
Foreign 538,397 $712,000
--------------------- -----------------
$ 3,473,477 $ 952,373
===================== =================
16
Note 10
SIGNIFICANT ALLIANCES/AGREEMENTS:
As of April 1, 2003, the Company entered into a sales and marketing agreement
with GlobalMed Technologies Co., or GlobalMed. Under this agreement, the Company
designated GlobalMed as the exclusive master distributor of the XTRAC system for
dermatological applications in certain countries in Europe and the Pacific Rim
of Asia. The agreement has a two-year term, subject to early termination by the
Company in the event that GlobalMed does not meet certain performance standards
set forth in the agreement with respect to the purchase of specified quantities
of XTRAC systems. GlobalMed will be responsible for promoting and marketing the
XTRAC system in the designated countries by itself and through its network of
sub-distributors and other subcontractors in the designated countries.
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q, OR THE
REPORT, ARE "FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT THE PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS OF PHOTOMEDEX, INC., A DELAWARE CORPORATION
(REFERRED TO IN THIS REPORT AS "WE," "US," "OUR" OR "REGISTRANT") AND OTHER
STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT HISTORICAL FACTS.
FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHER
PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
OR THE COMMISSION, REPORTS TO OUR STOCKHOLDERS 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. WHEN USED IN THIS REPORT, THE WORDS "EXPECT,"
"ANTICIPATE," "INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE" AND SIMILAR
EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS,
BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THERE
ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS, INCLUDING OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER FACTORS DISCUSSED UNDER
THE SECTION ENTITLED "RISK FACTORS," IN OUR ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2002.
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 our
proprietary XTRAC(R), or XTRAC, excimer laser and fiber optic equipment and
techniques directed toward the treatment of psoriasis, vitiligo, atopic
dermatitis and leukoderma. We acquired Surgical Laser Technologies, Inc., or
SLT, on December 27, 2002, and therefore only the first quarter of 2003 of
business in surgical products and revenues from SLT have been included in our
results of operations, but not the comparable period for 2002.
We currently believe that our excimer laser and other surgical laser
technologies provide the basis for reliable, cost-effective systems that will
increasingly be used in connection with a variety of applications.
In connection with our current business plan, the initial medical
applications for our excimer laser technology are intended for the treatment of
psoriasis, vitiligo, atopic dermatitis and leukoderma. In January 2000, we
received approval of our 510(k) submission from the Food and Drug
Administration, or FDA, relating to the use of our XTRAC system for the
treatment of psoriasis. The 510(k) establishes that our XTRAC system has been
determined to be substantially equivalent to currently marketed devices for
purposes of treating psoriasis.
In February 2002, the Current Procedural Terminology Editorial Board of
the AMA approved the request by the American Academy of Dermatology to issue
reimbursement codes for the 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 published three CPT code numbers
covering the treatment of psoriasis and other inflammatory skin diseases with
the XTRAC system. These new codes became effective in the first quarter of 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.
17
As 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. We believe that this strategy will create incentives for these
dermatologists to adopt the XTRAC system and will further market penetration.
But this strategy has its own challenges, including how to identify and target
appropriate dermatologists and how to balance the planned roll-out of our XTRAC
lasers in 2003 against uncertainties in acceptance by physicians, patients and
health plans and constraints on the number of XTRAC systems we are able to
provide. Our marketing force has limited experience in dealing with such
challenges. Outside of the United States, our strategy includes selling XTRAC
systems directly to dermatologists through distributors and, potentially,
placing XTRAC systems with dermatologists to provide us with a usage-based
revenue stream.
In similar fashion, we have growing, but still limited marketing
experience in expanding our surgical services business. The preponderance of
this business is in the southeastern part of the United States. New procedures
and new geographies with new customers and different business habits and
networks will likely pose different challenges than the ones we have encountered
in the past. There can be no necessary assurance that our experience will be
sufficient to overcome such challenges.
RESULTS OF OPERATIONS
REVENUES
We generated revenues of $3,473,477 during the three months ended March
31, 2003, of which $3,157,013 were from SLT. Of the remaining amounts, $163,300
related to the sale of our excimer lasers and spare parts to distributors
outside of the United States and $153,164 related to treatments performed with
our excimer laser in the United States. We generated revenues of $952,373 during
the three months ended March 31, 2002. Of these amounts, $712,000 related to the
sale of our excimer lasers to distributors outside of the United States and
$240,373 related to treatments performed with our excimer laser in the United
States.
In the quarter ended March 31, 2003, we also deferred excimer laser
treatment revenues of $122,756 that were sold under a limited domestic program
expiring June 30, 2003. We recognize service revenue from the sale of treatment
cards to physicians participating in this program only if and to the extent the
physician has been reimbursed for the treatments. Billings for these treatment
cards have been recorded as a deferred revenue liability.
COST OF REVENUES
Product cost of revenues for the three months ended March 31, 2003 were
$1,149,472, compared to $322,639 for the three months ended March 31, 2002.
Included in these costs were $826,866 related to SLT product revenues, for the
three months ended March 31, 2003. The remaining product cost of revenues during
these periods related primarily to the production costs of the XTRAC laser
equipment sold outside of the United States.
Services cost of revenues was $1,400,786 and $739,471 in the three
months ended March 31, 2003 and 2002, respectively. Included in these costs were
$876,301 related to SLT service revenues, for the three months ended March 31,
2003. The remaining services cost of revenues, during the periods ended March
31, 2003 and 2002, represented depreciation and field service on the lasers in
service. The decrease in the services cost of sales, excluding SLT costs,
relates to the improvements made to the lasers, so there was less field service
costs in the three months ended March 31, 2003 compared to March 31, 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 2003 were $2,154,592, compared to $1,800,482 for the three months
ended March 31, 2002, an increase of 20%. This increase was principally due to
the addition of sales, marketing and administrative personnel in connection with
the acquisition of SLT.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses for the three months ended
March 31, 2003 increased to $411,932 from $222,226 for the three months ended
18
March 31, 2002. These increases related primarily to the addition of SLT's
engineering and product development expenses of $126,297 in 2003.
INTEREST EXPENSE, NET
Net interest expense during for the three months ended March 31, 2003
increased to $31,023, as compared to $1,068 for the three months ended March 31,
2002. The increase in net interest expense in the comparable periods related to
the interest on the line of credit and on long term-debt that was assumed with
the acquisition of SLT.
NET LOSS
The aforementioned factors resulted in a net loss of $1,674,328 during
the three months ended March 31, 2003, as compared to a net loss of $2,128,474
during the three months ended March 31, 2002, a decrease of 21%. This decrease
was primarily the result of the acquisition of SLT along with a reduction of
operating and production costs.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations through the use of working
capital provided from loans and equity and debt financing.
From September 1997 through June 2002, we issued certain securities,
including shares of our common stock and other securities convertible or
exercisable into shares of common stock, in order to finance our business
operations.
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 were not
exercisable until December 14, 2002. We have used and will continue to use the
proceeds of this financing to pay for working capital and other general
corporate purposes.
On December 27, 2002, we acquired SLT. While the impact of the
acquisition was marginal on our results of operations for 2002, we expect that
the surgical products and services provided by SLT will increase revenues for
2003. Revenues from surgical products and services amounted to $3,157,013 for
the three months ended March 31, 2003. We also expect to save costs from the
consolidation of the administrative and marketing infrastructure of the combined
company. With the consolidated infrastructure in place, we expect that growth of
our revenues, both in phototherapy and surgical products and services, may
occur, without commensurate growth in our fixed costs. We believe that results
of operations in the three months ended March 31, 2003 have reflected each of
these expectations. We believe that the results of operations during the three
months ended March 31, 2003 have reflected that the established revenues from
surgical products and services will serve to absorb the costs of the
infrastructure of the combined company.
At March 31, 2003, the ratio of current assets to current liabilities
was 1.97 to 1.00 compared to 1.90 to 1.00 at December 31, 2002. The improvement
in this ratio was due in part to the fact that as of the end of fiscal 2002, we
had classified $2,000,000 of the obligation to SLT's bank as currently due
inasmuch as we expect to pay this down by applying in 2003 the cash collateral
under the credit facility with that bank. We paid the line down by $1,637,183 in
March 2003. As of March 31, 2003, we had $5,322,531 of working capital.
Cash and cash equivalents were $2,550,503 as of March 31, 2002, as
compared to $4,008,051 as of December 31, 2002.
We believe that our existing cash balance together with our other
existing financial resources, including the line of credit facility and access
to lease financing for capital expenditures, and any revenues from sales,
distribution, licensing and manufacturing relationships, will be sufficient to
meet our operating and capital requirements through the first quarter of 2004.
The 2003 operating plan reflects anticipated revenue growth from an increase in
expected treatment fees for use of the XTRAC system based on the recent approval
19
of applicable reimbursement codes and wider insurance coverage in the United
States and significant costs savings from the integration of the combined
companies. However, negative deviations from the business plan may require us to
obtain additional equity or debt financing to meet our working capital
requirements or capital expenditure needs. Similarly, if our growth outstrips
the business plan, we may require additional equity or debt financing. There can
be no assurance that additional financing, if needed, will be available when
required or, if available, will be on terms satisfactory to us. In such an
event, we would further rationalize our plans and operations to seek to balance
cash inflows and outflows.
Concurrent with the SLT acquisition, we assumed a $3,000,000 credit
facility from a bank subsequently amended on February 27 and March 26, 2003 to
$1,400,000. The credit facility has a commitment term expiring May 31, 2004,
permits deferment of principal payments until the end of the commitment term,
and is secured by SLT's business assets, including collateralization of
$2,000,000 of SLT's cash and cash equivalents and short-term investments. In the
first quarter of 2003, we paid the credit facility down to $1,362,817. As
various certificates of deposit mature in the second quarter of 2003, we expect
that the credit facility will be paid down and limited to $1,000,000. The credit
facility has an interest rate of the 30 day LIBOR plus 2.25%. The rate at March
31, 2003 was 3.59%.
The credit facility is subject to certain restrictive covenants and
borrowing base limitations. At March 31, 2003, SLT was in compliance with all
covenants set by the bank. The restrictive covenants and borrowing base
limitations set under the credit facility will continue in 2003 to apply to SLT.
In addition, we have agreed to meet certain restrictive covenants at
the consolidated group level. In the first two quarters of fiscal 2003, we, as a
group, must maintain unrestricted cash, cash equivalents and/or short-term
investments in an amount equal to or greater than the amount by which the line
under the credit facility has been drawn down. At December 31, 2003, the group
must meet two cash flow covenants. For all of 2003 and beyond, we, as a group,
must maintain a minimum ratio of debt to the bank as compared to tangible net
worth. We have also agreed to be guarantor to SLT's obligations under the credit
facility.
Our management expects to be able to meet all covenants, both those
applying to SLT and those applying to the consolidated group, in fiscal 2003.
At March 31, 2003, we had $1,362,817 in outstanding obligations and had
$37,183 of availability under the credit facility. In June 2003, outstanding
obligations under the credit facility will be classified as current, as they
will be due within the next twelve months.
The assets of SLT, including the subsidiaries of SLT, may not be
transferred to PhotoMedex without meeting certain restrictions imposed on SLT by
the terms of the credit facility with its bank. Under a provision in the
agreement restricting dividends, the assets of SLT may not be dividended,
distributed or otherwise transferred by way of purchase, redemption or
retirement of SLT's capital stock, if such a dividend, distribution or transfer
would cause SLT to be in default of the financial covenants it has made to the
bank. Given this restriction, no dividend, distribution or other transfer could
have been made as of December 31, 2002. On the other hand, under a restriction
under the credit facility on other, non-dividend transfers, SLT is permitted to
engage in other transactions with affiliated entities, including PhotoMedex,
provided such transactions are in the ordinary course of, and pursuant to the
reasonable requirements of, SLT's business and are based upon fair and
reasonable terms no less favorable to SLT than would be obtained in comparable
arm's length transactions with non-affiliated entities. Notwithstanding the
terms covering such other transactions, SLT is not permitted to transfer to
PhotoMedex any of the cash that is pledged to the bank as collateral.
For the three months ended March 31, 2003, net cash used in operating
activities was $1,218,505. The net loss of $1,674,328 for the three months ended
March 31, 2003 included $479,334 of non-cash depreciation and amortization
expense and $84,000 of non-cash provisions for doubtful accounts. The usage also
included a net increase in inventory of $216,462 and a net decrease in current
liabilities of $175,367, the effects of which were offset, in part, by a
decrease in accounts receivable of $289,535.
For the three months ended March 31, 2002, net cash used in operating
activities was $1,492,619. The net loss of $2,128,474 for the three months ended
March 31, 2002 included $424,376 of non-cash depreciation and amortization
expense and $34,295 of payment in our securities (including common stock options
20
and warrants) of fees for services to consultants. The usage was offset by a net
decrease in accounts receivable and inventory of $84,530 and $187,032,
respectively, and a net increase in current liabilities of $79,986.
Net cash used in investing activities was $314,537 and $34,560 for the
three months ended March 31, 2003 and 2002, respectively. During the three
months ended March 31, 2003 and 2002, we utilized $293,401 and $2,000,
respectively, for production of our lasers in service. During the three months
ended March 31, 2003 and 2002, we used $21,136 and $32,560, respectively, for
purchases of computer and manufacturing equipment as well as leasehold
improvements to support our excimer laser business operations.
Net cash provided by financing activities was $75,494 for the three
months ended March 31, 2003 compared to cash used of $36,670 for the three
months ended March 31, 2002. In the three months ended March 31, 2003, we
received $1,637,183 from the release of restricted cash, cash equivalents and
short-term investments, which was offset by a net payment of $1,407,451 on the
line of credit, and $154,238 for the payment of certain debts. In the three
months ended March 31, 2002, we utilized $40,670 for the payment of certain
debts, which was offset by an issuance of a note payable for $4,000.
Our ability to expand our business operations is currently dependent in
significant part on financing from external sources. There can be no assurance
that changes in our manufacturing and marketing, engineering and product
development plans or other changes affecting our operating expenses and business
strategy will not require financing from external sources before we will be able
to develop profitable 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 in 2003 because we plan to spend
substantial amounts on the marketing of products for the treatment of psoriasis,
vitiligo, atopic dermatitis and leukoderma as well as for the expansion of
operations. We expect, based on our current business plan, and our present
outlook, that we will have the resources to market our current products and
services through the first quarter of 2004. Nevertheless, we cannot assure you
that we will market any products successfully, operate profitably in the future,
or that we may not require significant additional financing in order to
accomplish our business plan.
During the three months ended March 31, 2003, there have been no items
that significantly impact our commitments and contingencies as discussed in the
notes to the 2002 annual financial statements as filed on Form 10-K. In
addition, we have no significant off-balance sheet arrangements.
IMPACT OF INFLATION
We have not operated in a highly inflationary period, and we do not
believe that inflation has had a material effect on sales or expenses.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires us to record the fair value of an
asset retirement obligation as a liability in the period in which we incur a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. We are also required to record a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. We were required to adopt SFAS No. 143 on
January 1, 2003. The adoption of SFAS No. 143 did not have any impact on our
consolidated financial statements.
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
21
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 our consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary. SFAS No. 145 also amends SFAS No. 13 to require
sale-leaseback accounting for certain lease modifications that have equivalent
economic effects to sale-leaseback transactions. Except for its provisions
dealing with SFAS No. 13, SFAS No. 45 is applied in fiscal years beginning after
May 15, 2002. The provisions of the Statement related to SFAS No. 13 were
effective for transactions occurring after May 15, 2002. The adoption of SFAS
No. 145 did not have any impact on our consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS No.
146 did not have any impact on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57, and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under issued
guarantees. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on our financial statements. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." This Statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are accordingly included in the
notes to the consolidated financial statements found elsewhere in this Report.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public enterprises, such as us, with a
variable interest in a variable interest entity created before February 1, 2003,
the Interpretation is applied to the enterprise no later than the beginning of
the first annual reporting period beginning after June 15, 2003. The application
of this Interpretation is not expected to have a material effect on our
consolidated financial statements. The Interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that we will consolidate or disclose information about
variable interest entities when the Interpretation becomes effective.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations in this Report are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expense and disclosures at the date of the
financial statements. On an on-going basis, we evaluate our estimates,
22
including, but not limited to, those related to revenue recognition, accounts
receivables, inventories, impairment of property and equipment and of
intangibles and accruals for warranty claims. We use authoritative
pronouncements, historical experience and other assumptions as the basis for
making estimates. Actual results could differ from those estimates. Management
believes that the following critical accounting policies affect our more
significant judgments and estimates in the preparation of its consolidated
financial statements. These critical accounting policies and the significant
estimates made in accordance with them have been discussed with our Audit
Committee.
REVENUE RECOGNITION.
We have two distribution channels for our phototherapy treatment
equipment. We 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 number of
treatments or treatment cards. When we sell a laser to a distributor or directly
to a physician, revenue is recognized upon shipment of the product. Under the
terms of the distributor agreements, the distributors do not have the right to
return any unit. However, we do allow products to be returned by our
distributors in redress of product defects or other claims. When we place the
laser in a physician's office, service revenues are recognized based on an
estimate of patient treatments. To use the laser, 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.
In the first quarter of 2003, we implemented a limited program to
induce some physicians to perform treatments with the XTRAC system and at the
same time to support these physicians in coping with claims for such treatments
that may be denied reimbursement by private insurance carriers. Under this
limited program, we record deferred revenue when we sell treatment cards to the
participating physicians and relieve the deferred service revenue account only
when the physician has received reimbursement for the treatment.
Through our surgical businesses, we generate revenues primarily from
three channels. The first is through sales of recurring laser delivery systems
and accessories; the second is through the per-procedure surgical services; and
the third is through the sale of laser systems and related maintenance service
agreements. We recognize revenues from product sales, including sales to
distributors, upon shipment of the products. For per-procedure surgical
services, we recognize revenue upon the completion of the procedure. Revenue
from maintenance service agreements is deferred and recognized on a
straight-line basis over the term of the agreements. Revenue from billable
services, including repair activity, is recognized when the service is provided.
INVENTORY. We account for inventory at the lower of cost (first-in,
first-out) or market. Cost is determined at latest cost for raw materials and at
production cost (materials, labor and indirect manufacturing cost) for
work-in-process and finished goods. Reserves for slow moving and obsolete
inventories are provided based on historical experience and product demand.
Management evaluates the adequacy of these reserves periodically based on
forecasted sales and market trend.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Accounts receivable are reduced by an
allowance for amounts that may become uncollectible in the future. The majority
of receivables, related to phototherapy sales, are due from various distributors
located outside of the United States. The majority of receivables, related to
surgical product sales, are due from various customers and distributors located
inside the United States. From time to time, our clients dispute the amounts due
to us, and, in other cases, our clients experience financial difficulties and
cannot pay on a timely basis. In certain instances, these factors ultimately
result in uncollectible accounts. The determination of the appropriate reserve
needed for uncollectible accounts involves significant judgment. A change in the
factors used to evaluate collectibility could result in a significant change in
the reserve needed. Such factors include changes in the financial condition of
our customers as a result of industry, economic or customer specific factors.
PROPERTY AND EQUIPMENT. As of March 31, 2003 and December 31, 2002, we
had net property and equipment of $3,600,505 and $3,672,438, respectively. The
most significant component of these amounts relates to the lasers placed by us
in physicians' offices. We own the equipment and charge the physician on a
per-treatment basis for use of the equipment. The realizability of the net
carrying value of the lasers is predicated on increasing revenues from the
physicians' use of the lasers. We believe that such usage will increase in the
future based on the recently approved CPT codes and wider insurance
reimbursement.
INTANGIBLES. Our balance sheet includes goodwill and other intangible
assets which affect the amount of future period amortization expense and
possible impairment expense that we will incur. Management's judgments regarding
23
the existence of impairment indicators are based on various factors, including
market conditions and operational performance of its business. As of March 31,
2003 and December 31, 2002, we had $3,834,215 and $3,878,225, respectively, of
goodwill and other intangibles, accounting for 21% and 18% of our total assets
at the respective dates. The determination of the value of such intangible
assets requires management to make estimates and assumptions that affect our
consolidated financial statements.
WARRANTY ACCRUALS. We establish a liability for warranty repairs based
on estimated future claims for XTRAC systems and based on historical analysis of
the cost of the repairs for surgical laser systems. However, future returns on
defective laser systems and related warranty liability could differ
significantly from estimates and historical patterns, which would adversely
affect our operating results.
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 treasury 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.
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, 2002 for descriptions of our legal
proceedings.
The attorney appointed by Lastec and us to conduct the defense in the
suit brought by City National Bank in Orlando, Florida for unpaid rent with
respect to our former facility, has withdrawn from the representation because
Lastec, and Yorke and Thompson have not paid the attorney for his services.
Lastec, along with Yorke and Thompson, had agreed, as part of their settlement
with us, to be responsible for the conduct of the defense, including paying the
attorney's fees in the Orlando proceedings. We are evaluating our options in how
best to respond to this situation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Issuances of Unregistered Securities
During the three months ended March 31, 2003, we granted options to
purchase up to an aggregate of 250,000 shares of common stock to various of our
directors and employees as follows: (i) options to purchase up to 75,000 shares
of common stock under our 2000 Stock Option Plan at a weighted average exercise
price of $1.83 per share; and (ii) options to purchase up to 175,000 shares of
common stock under our Non-Employee Director Stock Option Plan at a weighted
average exercise price of $1.92 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
24
ITEM 5. OTHER INFORMATION
As of April 1, 2003, we entered into a sales and marketing agreement
with GlobalMed Technologies Co., or GlobalMed. Under this agreement, we
Certificate of designated GlobalMed as the exclusive master distributor of our
XTRAC system for Chief Executive dermatological applications in certain
countries in Europe and the Pacific Rim of Officer pursuant Asia. The agreement
has a two-year term, subject to early termination by us in to 18 U.S.C. the
event that GlobalMed does not meet certain performance standards set forth in
Section 1350, as the agreement with respect to the purchase of specified
quantities of XTRAC adopted pursuant systems. GlobalMed will be responsible for
promoting and marketing the XTRAC to Section 906 of system in the designated
countries by itself and through its network of the Sarbanes sub-distributors and
other subcontractors in the designated countries. Oxley Act of 2002
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Reports on Form 8-K
On February 13, 2003, we filed Amendment No. 1 to a Report on Form
8-K/A containing supplemental information about the acquisition of Surgical
Laser Technologies, Inc. described in the Form 8-K filed on December 30, 2002.
B. Other Exhibits
99.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002
99.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002
25
DOCUMENTS INCORPORATED BY REFERENCE
We are currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549; at its New York
Regional Office, 233 Broadway, New York, New York 10297; and its Chicago
Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604,
and copies of such materials can be obtained from the Public Reference Section
of the Commission at its principal office in Washington, D.C., at prescribed
rates. In addition, such materials may be accessed electronically at the
Commission's site on the World Wide Web, located at http://www.sec.gov. We
intend to furnish our stockholders with annual reports containing audited
financial statements and such other periodic reports as we 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: May 14, 2003 By: /s/ Jeffrey F. O'Donnell
-----------------------------------------
Jeffrey F. O'Donnell
President and Chief Executive Officer
Date: May 14, 2003 By: /s/ Dennis M. McGrath
----------------------------------------
Dennis M. McGrath
Chief Financial Officer
26
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-Q of
the Company for the quarter ended March 31, 2003, 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-Q of the Company
for the quarter ended March 31, 2003 (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):
(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: May 14, 2003 By: /s/ Jeffrey F. O'Donnell
-------------------------------
Jeffrey F. O'Donnell
Chief Executive Officer
27
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-Q of
the Company for the quarter ended March 31, 2003, 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-Q of the Company
for the quarter ended March 31, 2003 (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):
(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: May 14, 2003 By: /s/ Dennis M. McGrath
----------------------
Dennis M. McGrath
Chief Financial Officer
28