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 JUNE 30, 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.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2058100
-------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
147 Keystone Drive, Montgomeryville, Pennsylvania 18936
-------------------------------------------------------
(Address of principal executive offices, including zip code)
(215) 619-3600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate 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 August 14,
2003, was 37,655,440 shares.
PHOTOMEDEX, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: PAGE
- ------------------------------ ----
ITEM 1. Financial Statements:
a. Consolidated Balance Sheets, June 30, 2003 (unaudited) and
December 31, 2002 (audited) 3
b. Consolidated Statements of Operations for the three months
ended June 30, 2003 and 2002 (unaudited) 4
c. Consolidated Statements of Operations for the six months
ended June 30, 2003 and 2002 (unaudited) 5
d. Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 (unaudited) 6
e. Notes to Consolidated Financial Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 25
ITEM 4. Controls and Procedures 25
Part II. Other Information:
- ---------------------------
ITEM 1. Legal Proceedings 25
ITEM 2. Changes in Securities and Use of Proceeds 25
ITEM 3. Defaults Upon Senior Securities 26
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 26
Signatures 27
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
------------ ------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents ........................................................ $ 9,594,224 $ 4,008,051
Restricted cash, cash equivalents and short-term investments ..................... -- 2,000,000
Accounts receivable, net of allowance for doubtful accounts of
$745,435 and $1,169,486, respectively ............................................ 2,863,558 2,536,334
Inventories ...................................................................... 4,684,398 5,055,783
Prepaid expenses and other current assets ........................................ 687,283 283,001
------------ ------------
Total current assets .......................................................... 17,829,463 13,883,169
Property and equipment, net ............................................................ 4,025,022 3,672,438
Goodwill, net .......................................................................... 2,944,423 2,944,423
Patents and licensed technologies, net ................................................. 849,092 933,802
Other assets ........................................................................... 69,169 79,372
------------ ------------
Total assets ..................................................................... $ 25,717,169 $ 21,513,204
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable ................................................. $ 399,106 $ 75,263
Current portion of long-term debt ................................................ 1,171,837 2,143,425
Accounts payable ................................................................. 2,024,373 2,833,361
Accrued compensation and related expenses ........................................ 889,178 822,999
Other accrued liabilities ........................................................ 845,729 1,246,433
Deferred revenues ................................................................ 585,208 183,475
------------ ------------
Total current liabilities ..................................................... 5,915,431 7,304,956
------------ ------------
Long-term debt ......................................................................... 310,461 899,626
------------ ------------
Commitments and Contingencies
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;.
37,422,868and 31,439,058 shares issued and outstanding,
respectively ...................................................................... 374,229 314,391
Additional paid-in capital ......................................................... 86,308,485 76,828,582
Accumulated deficit ................................................................ (67,179,826) (63,819,517)
Deferred compensation .............................................................. (11,611) (14,834)
------------ ------------
Total stockholders' equity .................................................... 19,491,277 13,308,622
------------ ------------
Total liabilities and stockholders' equity ....................................... $ 25,717,169 $ 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
June 30,
2003 2002
------------ ------------
Revenues:
Product sales ................................................................. $ 2,089,132 $ 597,500
Services ...................................................................... 1,753,567 245,199
------------ ------------
3,842,699 842,699
Cost of revenues:
Product cost of revenues ...................................................... 1,355,993 245,427
Services cost of revenues ..................................................... 1,405,197 734,902
------------ ------------
2,761,190 980,329
------------ ------------
Gross profit (loss) ................................................................ 1,081,509 (137,630)
------------ ------------
Operating expenses:
Selling, general and administrative .......................................... 2,292,062 1,591,467
Engineering and product development .......................................... 465,134 579,196
------------ ------------
2,757,196 2,170,663
------------ ------------
Loss from operations before interest and other expense (income) .................... (1,675,687) (2,308,293)
Interest expense (income), net ..................................................... 10,415 (4,436)
Other (income), net ................................................................ -- (590)
------------ ------------
Net loss ........................................................................... $ (1,686,102) $ (2,303,267)
============ ============
Basic and diluted net loss per share ............................................... $ (0.05) $ (0.09)
============ ============
Shares used in computing basic and diluted net loss per share ...................... 33,644,326 25,010,953
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended
June 30,
2003 2002
------------ ------------
Revenues:
Product sales ................................................................ $ 3,958,424 $ 1,309,500
Services ..................................................................... 3,357,752 485,572
------------ ------------
7,316,176 1,795,072
Cost of revenues:
Product cost of revenues ..................................................... 2,505,465 568,066
Services cost of revenues .................................................... 2,805,983 1,464,373
------------ ------------
5,311,448 2,032,439
------------ ------------
Gross profit (loss) ............................................................... 2,004,728 (237,367)
------------ ------------
Operating expenses:
Selling, general and administrative ......................................... 4,446,654 3,391,949
Engineering and product development ......................................... 877,066 801,422
------------ ------------
5,323,720 4,193,371
------------ ------------
Loss from operations before interest and other expense (income) ................... (3,318,992) (4,430,738)
Interest expense (income), net .................................................... 41,438 (3,368)
Other expense, net ................................................................ -- 4,371
------------ ------------
Net loss .......................................................................... $ (3,360,430) $ (4,431,741)
============ ============
Basic and diluted net loss per share .............................................. $ (0.10) $ (0.18)
============ ============
Shares used in computing basic and diluted net loss per share ..................... 32,547,784 24,597,749
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
2003 2002
----------- -----------
Operating activities:
Net loss ...................................................................... $(3,360,430) $(4,431,741)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ......................................... 1,026,733 850,904
Stock options issued to consultants for services ...................... 38,164 34,295
Amortization of deferred compensation ................................. 3,223 4,512
Provision for bad debts ............................................... 246,029 --
Loss on disposal of assets ............................................ 7,574 --
Changes in operating assets and liabilities:
Accounts receivable ........................................................ (573,253) 73,843
Inventories ................................................................ 445,043 283,662
Prepaid expenses and other assets .......................................... 72,916 (58,743)
Accounts payable ........................................................... (637,988) (474,784)
Accrued compensation and related expenses .................................. 66,179 93,600
Other accrued liabilities .................................................. (400,583) 321,150
Deferred revenues .......................................................... 401,733 (17,100)
----------- -----------
Net cash used in operating activities ............................. (2,664,660) (3,320,402)
----------- -----------
Investing activities:
Purchases of property and equipment ........................................... (17,999) (45,761)
Lasers (placed into) or retired from service .................................. (1,035,419) 40,582
----------- -----------
Net cash used in investing activities ............................. (1,053,418) (5,179)
----------- -----------
Financing activities:
Proceeds from issuance of common stock, net ................................... 9,500,046 5,706,047
Proceeds from exercise of options ............................................. 1,531 18,000
Proceeds from exercise of warrants ............................................ -- 29,000
Proceeds from issuance of notes payable ....................................... -- 4,000
Payments on long-term debt .................................................... (90,584) --
Payments on notes payable ..................................................... (314,151) (55,972)
Net repayments on line of credit .............................................. (1,792,591) --
Decrease in restricted cash, cash equivalents and short-term
investments .................................................................. 2,000,000 --
----------- -----------
Net cash provided by financing activities ......................... 9,304,251 5,701,075
----------- -----------
Net increase in cash and cash equivalents .......................................... 5,586,173 2,375,494
Cash and cash equivalents, beginning of period ...................................... 4,008,051 4,066,820
----------- -----------
Cash and cash equivalents, end of period ............................................ $ 9,594,224 $ 6,442,314
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
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
excimer-laser-based instrumentation designed to treat phototherapeutically
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 the marketing of its XTRAC system in the United States
following the issuance of common procedural terminology (CPT) codes and
associated reimbursement rates by Center for Medicare and Medicaid Services
(CMS). The Company has historically financed its activities from borrowings and
the private placement of debt and equity securities. As of June 30, 2003, the
Company had an accumulated deficit of $67,179,826.
The Company expects to incur operating losses throughout 2003 as it plans to
invest substantial amounts on the marketing of its psoriasis, vitiligo, atopic
dermatitis and leukoderma treatment products and on the 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-based
systems for the treatment of a variety of skin disorders. The Company's
excimer-laser-based system for the treatment of psoriasis, vitiligo, atopic
dermatitis and leukoderma is currently generating revenues in both the United
States and abroad. The Company's ability to introduce successful, 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 $9,594,224 as of June 30, 2003. Management
believes that the existing cash balance together with its existing financial
resources, including the credit line facility (see Note 8), 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 second 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 anticipated
growth in private insurance coverage in the United States. In addition, the
operating plan reflects 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
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.
7
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
QUARTERLY FINANCIAL INFORMATION AND RESULTS OF OPERATIONS
The financial statements as of June 30, 2003 and for the three and six months
ended June 30, 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 June 30, 2003, and the
results of operations and cash flows for the three and six months ended June 30,
2003 and 2002. The results for the three and six months ended June 30, 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 SLT on December 27, 2002 and the operating results of SLT
are not included in the consolidated statement of operations for the three and
six months ended June 30, 2002.
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 and be
based on events different from those assumptions.
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 June 30, 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, was
extended to SLT by a bank and requires that SLT maintain cash and cash
equivalents (including short-term investments), for any amount borrowed 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 December 31, 2002 consisted of the
following:
Cash and cash equivalents ......................................... $1,200,121
Short-term investments ............................................ 799,879
----------
Total restricted cash, cash equivalents and short-term
investments ..................................................... $2,000,000
==========
SLT applied cash collateral in the second quarter of 2003 and thereby reduced
the amount due on the line of credit to $1 million. SLT then entered a new note
payable with the bank, in the face amount of $1 million, on May 13, 2003.
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
securities in accordance with its investment policy. Unrealized gain and loss
from such securities was immaterial at June 30, 2003 and December 31, 2002.
8
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."
Management 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 fair
value. As of June 30, 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 was recorded in connection with 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.
Management 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 fair value. As of June
30, 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 six
months ended June 30, 2003 is summarized as follows:
Accrual at January 1, 2003 $415,463
Additions charged to warranty expense 143,313
Claims paid and charged against the accrual (270,544)
--------
Accrual at June 30, 2003 $288,232
========
9
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
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 based on an estimate of patient 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, or equivalent
treatment codes, to physicians participating in this program only if and to the
extent the physician has been reimbursed for the treatments. This program,
originally scheduled to terminate on June 30, 2003, has been extended to
September 30, 2003. During the six months of 2003, the Company deferred revenues
of $461,454, under this program, net of $22,118 in revenues recognized during
the second quarter due to physician reimbursements for the treatments.
Through its 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 or are otherwise
realized in the Company's tax returns.
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, since the result would be anti-dilutive.
RECLASSIFICATIONS
The 2002 consolidated statement of operations has been revised to present
product sales and services revenues and their 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
10
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
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets, " 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.
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 exceeds 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 June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss:
As reported ....................................... ($1,686,102) ($2,303,267) ($3,360,430) ($4,431,741)
Less: stock-based employee
compensation expense included
in reported net loss ............................ 1,621 2,244 3,233 4,512
Impact of total stock-based
compensation expense determined
under fair-value-based method
for all grants and awards
(437,317) (465,160) (847,500) (1,009,036)
----------- ----------- ----------- -----------
Pro-forma ......................................... ($2,121,798) ($2,766,183) ($4,204,697) ($5,436,265)
=========== =========== =========== ===========
Net loss per share:
As reported ...................................... ($0.05) ($0.09) ($0.10) ($0.18)
=========== =========== =========== ===========
Pro-forma ........................................ ($0.06) ($0.11) ($0.13) ($0.22)
=========== =========== =========== ===========
The above pro-forma amounts may not be indicative of future pro-forma amounts
because future options are expected to be granted.
11
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 and six-month periods:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
------- ------- ------- -------
Risk-free interest rate .................. 2.943% 4.533% 2.977% 4.512%
Volatility ............................... 100% 100% 100% 100%
Expected dividend yield .................. 0% 0% 0% 0%
Expected option life ..................... 5 years 5 years 5 years 5 years
SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 2003, the Company financed vehicle and
equipment purchases of $329,351 under capital leases, financed insurance
policies through notes payable for $466,995 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 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 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.
In December 2002, the FASB finalized EITF Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." This issue addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The final consensus of
this issue is applicable to agreements entered into in fiscal periods beginning
after June 15, 2003. Additionally, companies will be permitted to apply the
guidance in this issue to all existing arrangements as the cumulative effect of
a change in accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes." The Company does not believe that adoption of this issue
will have a material impact on its consolidated financial position, consolidated
results of operations, or liquidity.
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.
12
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.
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 pro-forma results for the three and
six months ended June 30, 2002, assuming the acquisition had occurred on January
1, 2002.
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
------------------ ----------------
Net revenues .................................................................. $ 3,668,944 $ 7,380,217
Net loss ...................................................................... (1,997,413) (4,178,982)
Basic and diluted loss per share .............................................. ($0.07) ($0.15)
Shares used in calculating basic and diluted loss
per share ................................................................... 27,618,273 27,205,069
These unaudited pro-forma 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.
13
Note 3
INVENTORIES:
Set forth below is a detailed listing of inventories.
June 30, December 31,
2003 2002
---------- ------------
Raw materials $2,846,012 $3,297,942
Work-in-process 250,712 328,081
Finished goods 1,587,674 1,429,760
---------- ------------
Total inventories $4,684,398 $5,055,783
========== ============
Note 4
PROPERTY AND EQUIPMENT:
Set forth below is a detailed listing of property and equipment.
June 30, 2003 December 31, 2002
------------- -----------------
Lasers in service .......................... $ 6,396,663 $ 5,147,134
Computer hardware and software ............. 251,495 251,495
Furniture and fixtures ..................... 189,162 173,507
Machinery and equipment .................... 125,780 271,497
Autos and trucks ........................... 196,870 137,039
Leasehold improvements ..................... 103,863 100,106
------------- -----------------
7,263,833 6,080,778
Accumulated depreciation and
amortization ........................... (3,238,811) (2,408,340)
------------- -----------------
Property and equipment, net ................ $ 4,025,022 $ 3,672,438
============= =================
Depreciation expense was $942,023 and $782,722 for the six months ended June 30,
2003 and 2002, respectively. At June 30, 2003 and December 31, 2002, net
property and equipment included $582,056 and $336,910, respectively, of assets
recorded under capitalized lease arrangements, of which $504,621 and $272,783
was included in long-term debt at June 30, 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 technologies.
June 30, 2003 December 31, 2002
------------------ ------------------
Patents, net of accumulated amortization of $86,434 and
$65,730 $315,710 $336,414
Licensed technologies, net of accumulated amortization of
$303,618 and $239,612 533,382 597,388
---------------- -------------------
Total patents and licensed technologies, net $849,092 $933,802
================ ===================
Amortization expense was $84,710 and $68,182 for the six months ended June 30,
2003 and 2002, respectively.
14
Note 6
OTHER ACCRUED LIABILITIES:
Set forth below is a detailed listing of other accrued liabilities.
June 30, 2003 December 31, 2002
----------------------- ---------------------
Accrued professional and consulting fees $85,273 $190,182
Accrued warranty 288,232 415,463
Accrued liability from matured notes 248,479 249,130
Royalty liability 86,792 169,368
Other accrued expenses 136,953 222,290
----------------------- ---------------------
Total other accrued liabilities $845,729 $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 $86,792 and $169,368 is included in accrued
liabilities at June 30, 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
accrued interest. As of June 30, 2003 and December 31, 2002, the matured
principal and related interest was $248,479 and $249,130, respectively.
Note 7
NOTES PAYABLE:
Set forth below is a detailed listing of notes payable.
June 30, 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. $ - $ 21,793
Note payable - secured creditor, interest at 10%, payable in monthly principal
and interest installments of $9,173 through June 2003.
- 53,470
Note payable - unsecured creditor, interest at 6.29%, payable in monthly
principal and interest installments of $20,130 through
September 2003. 59,762 -
Note payable - unsecured creditor, interest at 7.47%, payable in monthly
principal and interest installments of $7,827 through June
2004. 81,814 -
Note payable - unsecured creditor, interest at 7.37%, payable in
monthly principal and interest installments of $37,640 through
January 2004. 257,530 -
------------------- ---------------------
399,106 75,263
Less: current maturities (399,106) (75,263)
------------------- ---------------------
Notes payable, net of current maturities $ - $ -
=================== =====================
15
Note 8
LONG-TERM DEBT:
Set forth below is a detailed listing of the Company's long-term debt.
June 30, 2003 December 31, 2002
------------------- ---------------------
Borrowings on credit facility $977,677 $2,770,268
Capital lease obligations (see Note 4) 504,621 272,783
Less: current portion (1,171,837) (2,143,425)
------------------- ---------------------
Total long-term debt $310,461 $899,626
=================== =====================
Concurrent with the SLT acquisition, the Company assumed a $3,000,000 credit
facility from a bank, subsequently amended on February 27, 2003 and March 26,
2003 to $1,400,000 and on May 13, 2003 to $1,000,000. 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 (until May 13, 2003) 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. During 2003, the Company paid the credit facility
down to $1,000,000. The credit facility has an interest rate of the 30 day LIBOR
plus 2.25%. The rate at June 30, 2003 was 3.57%.
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
as compared to tangible net worth. The Company fulfilled all covenants
applicable to the first and second 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 two quarters of fiscal 2003. The Company
has agreed to be guarantor to SLT's obligations under the credit facility. At
June 30, 2003, the Company had $977,677 in outstanding obligations and had
$22,323 of availability under the credit facility. The outstanding obligations
under the credit facility are 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 June 30,
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. SLT did not transfer cash to
PhotoMedex in the six months ended June 30, 2003.
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,
16
hospitals and surgery centers. For the three and six months ended June 30, 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 For the Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------------- -------------- ------------- --------------
Laser system sales $ 1,069,030 $ 597,500 $ 1,835,970 $ 1,309,500
Disposables and accessories 800,262 - 1,902,614 -
--------------- -------------- ------------- --------------
Total product sales $ 1,869,292 $ 597,500 $ 3,958,424 $ 1,309,500
=============== ============== ============= ==============
Excimer treatment procedures $ 202,749 $ 245,199 $ 355,913 $ 485,572
Surgical procedures 1,550,818 - 3,001,839 -
--------------- -------------- ------------- --------------
Total services $ 1,753,567 $ 245,199 $ 3,357,752 $ 485,572
=============== ============== ============= ==============
For the three and six months ended June 30, 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 For the Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------------- -------------- ------------- --------------
Domestic $ 2,695,689 $245,199 $ 5,630,769 $ 485,572
Foreign 1,147,010 597,500 1,685,407 1,309,500
--------------- -------------- ------------- --------------
$ 3,842,699 $ 842,699 $ 7,316,176 $ 1,795,072
=============== ============== ============= ==============
Note 10
PRIVATE PLACEMENT:
On May 28, 2003, the Company closed on a private placement for 5,982,353 shares
of common stock at a price of $1.70 per share resulting in gross proceeds of
$10,170,000. The closing price of the Company's common stock on May 28, 2003 was
$2.07 per share. In connection with this private placement, the Company paid
commissions and other expenses of $669,954, resulting in net proceeds of
$9,500,046. In addition, the investors received warrants to purchase 1,495,588
shares of common stock at an exercise price of $2.00 per share. The warrants
have a five-year term and are not exercisable until November 29, 2003. The
Company intends to use the proceeds of this financing to pay for working capital
and other general corporate purposes. The shares sold in the private placement,
including the shares underlying the warrants, have been registered with the
Securities and Exchange Commission.
Note 11
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.
17
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.,
("SLT"), on December 27, 2002, and the business and revenues in surgical
products and services from SLT have been included in our results of operations
in the first and second quarters of 2003, but not the comparable periods for
2002.
We believe that our technologies for the excimer laser and other
surgical lasers 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.
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 will require us to identify and target appropriate
dermatologists and 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. We expect that as
we seek to increase the number of accepting health plans in the last half of
2003, we will encounter greater difficulties and uncertainties in overcoming
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.
18
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 $3,842,699 during the three months ended June
30, 2003, of which $2,869,230 were from the operations of SLT. Of the remaining
amounts, $770,720 related to the sale of our excimer lasers and spare parts to
distributors outside of the United States and $202,749 related to treatments
performed with our excimer laser in the United States. We generated revenues of
$842,699 during the three months ended June 30, 2002. Of these amounts, $597,500
related to the sale of our excimer lasers to distributors outside of the United
States and $245,199 related to treatments performed with our excimer laser in
the United States.
We generated revenues of $7,316,176 during the six months ended June
30, 2003, of which $6,026,243 were from the operations of SLT. Of the remaining
amounts, $934,020 related to the sale of our excimer lasers and spare parts to
distributors outside of the United States and $355,913 related to treatments
performed with our excimer laser in the United States. We generated revenues of
$1,795,072 during the six months ended June 30, 2002. Of these amounts,
$1,309,500 related to the sale of our excimer lasers to distributors outside of
the United States and $485,572 related to treatments performed with our excimer
laser in the United States.
In the first quarter of 2003, we implemented a limited program to
support certain physicians in addressing treatments with the XTRAC system that
may be denied reimbursement by private insurance carriers. We recognize service
revenue from the sale of treatment cards, or equivalent treatment codes, to
physicians participating in this program only if and to the extent the physician
has been reimbursed for the treatments. This program, originally scheduled to
terminate on June 30, 2003, has been extended to September 30, 2003. During the
first six months of 2003, we deferred revenues of $461,454, under this program,
net of $22,118 in revenues recognized during the second quarter due to physician
reimbursements for the treatments.
COST OF REVENUES
Product cost of revenues for the three months ended June 30, 2003 were
$1,355,993, compared to $245,427 for the three months ended June 30, 2002.
Included in these costs were $712,938 related to SLT product revenues, for the
three months ended June 30, 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.
Product cost of revenues for the six months ended June 30, 2003 were
$2,505,465, compared to $568,066 for the six months ended June 30, 2002.
Included in these costs were $1,539,801 related to SLT product revenues, for the
six months ended June 30, 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 $1,405,197 and $734,905 in the three
months ended June 30, 2003 and 2002, respectively. Included in these costs were
$925,569 related to SLT service revenues, for the three months ended June 30,
2003. The remaining services cost of revenues, during the periods ended June 30,
2003 and 2002, represented depreciation and field service on the lasers in
service.
Services cost of revenues was $2,805,983 and $1,464,373 in the six
months ended June 30, 2003 and 2002, respectively. Included in these costs were
$1,801,870 related to SLT service revenues, for the six months ended June 30,
2003. The remaining services cost of revenues, during the periods ended June 30,
2003 and 2002, represented depreciation and field service on the lasers in
service.
The decreases in the services cost of sales, excluding SLT costs,
related to the improvements made to the lasers, with the result that field
service costs were less in the three and six months ended June 30, 2003 compared
to the same periods ended June 30, 2002.
19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
June 30, 2003 were $2,292,062, compared to $1,591,467 for the three months ended
June 30, 2002, an increase of 44%. Selling, general and administrative expenses
for the six months ended June 30, 2003 were $4,446,654, compared to $3,391,949
for the six months ended June 30, 2002, an increase of 31%. These increases were
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
June 30, 2003 decreased to $465,134 from $579,196 for the three months ended
June 30, 2002. This decrease related primarily to clinical trial expenses of
$173,000 and product development expenses of $170,000, related to the
improvements to the excimer laser, for the three months ended June 30, 2002.
These decreases were offset, in part, by the recording of a severance of $87,500
and SLT's engineering expenses of $124,000 for the three months ended June 30,
2003.
Engineering and product development expenses for the six months ended
June 30, 2003 increased to $877,066 from $801,422 for the six months ended June
30, 2002. This increase related primarily to the recording of a severance of
$87,500 and SLT's engineering expenses of $247,000 for the six months ended June
30, 2003. These expenses were offset, in part, by clinical trial expenses of
$173,000 and product development expenses of $170,000, related to the
improvements to the excimer laser, for the six months ended June 30, 2002.
INTEREST EXPENSE, NET
Net interest expense for the three months ended June 30, 2003 was
$10,415, as compared to net interest income of $4,436 for the three months ended
June 30, 2002. Net interest expense for the six months ended June 30, 2003 was
$41,438, as compared to net interest income of $3,368 for the six months ended
June 30, 2002. The increases 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 $1,686,102 and
$3,360,430 during the three and six months ended June 30, 2003, as compared to a
net loss of $2,303,267 and $4,431,741 during the three and six months ended June
30, 2002, a decrease of 27% and 24%, respectively. These decreases in net losses
were 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 May 2003, 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 May 28, 2003, we closed on a private placement for 5,982,353 shares
of common stock at a price of $1.70 per share resulting in gross proceeds of
$10,170,000. The closing price of our common stock on May 28, 2003 was $2.07 per
share. In connection with this private placement, we paid commissions and other
expenses of $669,954, resulting in net proceeds of $9,500,046. In addition, the
investors received warrants to purchase 1,495,588 shares of common stock at an
exercise price of $2.00 per share. The warrants have a five-year term and are
not exercisable until November 29, 2003. We intend to use the proceeds of this
financing to pay for working capital and other general corporate purposes. The
shares sold in the private placement, including the shares underlying the
warrants, have been registered with the Securities and Exchange Commission.
On June 13, 2002, we completed a private placement of 4,115,000 shares
of common stock at a price of $1.50 per share resulting in 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 private placement, we paid commissions and other
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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 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 $2,869,230 and $6,026,243 for
the three and six months ended June 30, 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 for the six months ended June 30, 2003 have reflected each
of these expectations. We believe that the results of operations during the six
months ended June 30, 2003 have reflected that the established revenues from
surgical products and services will serve to help absorb the costs of the
infrastructure of the combined company and thereby improve cash flows.
At June 30, 2003, the ratio of current assets to current liabilities
was 3.01 to 1.00 compared to 1.90 to 1.00 at December 31, 2002. The improvement
in this ratio was due to the private placement in May 2003, detailed above, and
was also due in part that as of the end of fiscal 2002, we had classified
$2,000,000 of the obligation to SLT's bank as currently due, but as of June 30,
2003, we had applied the cash collateral to pay down the credit facility with
that bank to $977,677. As of June 30, 2003, we had $11,914,032 of working
capital.
Cash and cash equivalents were $9,594,224 as of June 30, 2003, 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 second 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
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, 2003 and March 26,
2003 to $1,400,000 and on May 13, 2003 to $1,000,000. 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 (until May 13, 2003) 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
matured in the second quarter of 2003, the proceeds were applied to pay down the
balance outstanding under the facility, bringing the credit limit down to
$1,000,000. The credit facility has an interest rate of the 30 day LIBOR plus
2.25%. The rate at June 30, 2003 was 3.57%.
The credit facility is subject to certain restrictive covenants and
borrowing base limitations. At June 30, 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.
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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 June 30, 2003, we had $977,677 in outstanding obligations and had
$22,323 of availability under the credit facility. The outstanding obligations
under the credit facility are 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. SLT did not transfer
cash to PhotoMedex in the six months ended June 30, 2003.
For the six months ended June 30, 2003, net cash used in operating
activities was $2,664,660. The net loss of $3,360,430 for the six months ended
June 30, 2003 included $1,026,733 of non-cash depreciation and amortization
expense, $38,164 of payment in our securities (including common stock options
and warrants) of fees for services to consultants and $246,029 of non-cash
provisions for doubtful accounts. The usage also included a net increase in
account receivables of $573,253 and a net decrease in current liabilities of
$570,659, the effects of which were offset, in part, by a decrease in
inventories of $445,043.
For the six months ended June 30, 2002, net cash used in operating
activities was $3,320,402. The net loss of $4,431,741 for the six months ended
June 30, 2002 included $850,904 of non-cash depreciation and amortization
expense and $34,295 of payment in our securities (including common stock
options) of fees for services to consultants. The usage was offset by a net
decrease in accounts receivable and inventory of $73,843 and $283,662,
respectively, and a net increase in current liabilities of $77,134.
Net cash used in investing activities was $1,053,419 and $5,179 for the
six months ended June 30, 2003 and 2002, respectively. During the six months
ended June 30, 2003, we utilized $1,035,419, for production of our lasers in
service. During the six months ended June 30, 2003 and 2002, we used $17,999 and
$45,761, 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 $9,304,251 for the six
months ended June 30, 2003 compared to net cash provided of $5,701,047 for the
six months ended June 30, 2002. In the six months ended June 30, 2003, we
received net proceeds of $9,500,046 from the private placement in May 2003. We
also received $2,000,000 from the release of restricted cash, cash equivalents
and short-term investments, which was offset by a net payment of $1,792,591 on
the line of credit, and $404,735 for the payment of certain debts. In the six
months ended June 30, 2002, we received net proceeds of $5,706,047 from the
private placement in June 2002 and $18,000 and $29,000 from the exercise of
options and warrants, respectively. These receipts were offset, in part, by
$55,972 for the payment of certain debts.
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
22
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 second 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 and six months ended June 30, 2003, there were no
items that significantly impacted 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 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.
In December 2002, the FASB finalized EITF Issue No. 00-21, "Accounting
for Revenue Arrangemetns with Multiple Deliverables." This issue addresses how
to account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The final consensus of
this issue is applicable to agreements entered into in fiscal periods beginning
after June 15, 2003. Additionally, companies will be permitted to apply the
guidance in this issue to all existing arrangements as the cumulative effect of
a change in accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes." We do not believe that adoption of this issue will have a
material impact on its consolidated financial position, consolidated results of
operations, or liquidity.
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,
including, but not limited to, those related to revenue recognition, accounts
receivable, inventories, impairment of property and equipment and of intangibles
and accruals for warranty claims. We use authoritative pronouncements,
23
historical experience and other assumptions as the basis for making estimates.
Actual results could differ from those estimates and be based on events
different from those assumptions. 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 a 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 or an access code 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, currently set to expire on September 30, 2003, we record
deferred revenue when we sell treatment cards or access codes 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 June 30, 2003 and December 31, 2002, we
had net property and equipment of $4,025,022 and $3,672,438, respectively. The
most significant component of these amounts related 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
the existence of impairment indicators are based on various factors, including
24
market conditions and operational performance of its business. As of June 30,
2003 and December 31, 2002, we had $3,793,515 and $3,878,225, respectively, of
goodwill and other intangibles, accounting for 15% 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
The Company's management, with the participation of the company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the company's disclosure controls and procedures as of June 30, 2003. Based
on this evaluation, the company's Chief Executive Officer and Chief Financial
Officer concluded that the company's disclosure controls and procedures are
effective for gathering, analyzing and disclosing the information the company is
required to disclose in the reports it files under the Securities Exchange Act
of 1934, within the time periods specified in the SEC's rules and forms. Such
evaluation did not identify any change in the quarter ended June 30, 2003 that
has materially affected, or is reasonable likely to materially affect, the
company's internal control over financial reporting.
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.
Regarding the suit brought by City National Bank in Orlando, Florida
for unpaid rent with respect to our former facility, Lastec, Yorke and Thompson
(the buyer, and buyer principals of our Orlando-based business) had agreed as
part of their settlement with us, to be responsible for the defenses of the
suit, but they have reneged on this. Accordingly, we have asked the appropriate
court to abrogate our settlement agreement with Lastec, Yorke and Thompson. The
court has granted this request.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Issuances of Unregistered Securities
During the three months ended June 30, 2003, we granted options to
purchase up to an aggregate of 539,000 shares of common stock to various of our
employees under our 2000 Stock Option Plan at a weighted average exercise price
of $1.65 per share. We also granted options to purchase an aggregate of 33,000
shares of common stock to members of our Scientific Advisory board and similar
consultants. Those grants were at an exercise price of $1.53, but were not made
under the 2000 Stock Option Plan.
On May 28, 2003, we closed on a private placement for 5,982,353 shares
of common stock at a price of $1.70 per share resulting in gross proceeds of
$10,170,000. The closing price of our common stock on May 28, 2003 was $2.07 per
share. In connection with this private placement, we paid commissions and other
expenses of $669,954, resulting in net proceeds of $9,500,046. In addition, the
investors received warrants to purchase 1,495,588 shares of common stock at an
exercise price of $2.00 per share. The warrants have a five-year term and are
not exercisable until November 29, 2003. We intend to use the proceeds of this
financing to pay for working capital and other general corporate purposes. The
shares sold in the private placement, including the shares underlying the
warrants, have been registered with the Securities and Exchange Commission.
25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Reports on Form 8-K
-------------------
On July 29, 2003, we filed a Report on Form 8-K with respect to our
press release, dated July 24, 2003, with respect to our second quarter 2003
earnings.
B. Other Exhibits
--------------
3.2 Amended and Restated Bylaws (corrected in Sec. 3.07)
10.43 Note for Business and Commercial Loans, dated May 13, 2003,
made by Surgical Laser Technologies, Inc.
in favor of AmSouth Bank
10.44 Addendum to Note for Business and Commercial Loans, LIBOR rate,
dated May 13, 2003, made by Surgical
Laser Technologies, Inc. in favor of AmSouth Bank
31.1 Rule 13a-14(a) Certificate of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 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
32.2 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
26
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: August 14, 2003 By: /s/ Jeffrey F. O'Donnell
--------------------------------------------
Jeffrey F. O'Donnell
President and Chief Executive Officer
Date: August 14, 2003 By: /s/ Dennis M. McGrath
--------------------------------------------
Dennis M. McGrath
Chief Financial Officer
27