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EX-32 - PALOMAR MEDICAL TECHNOLOGIES INC | ex32.htm |
EX-31 - PALOMAR MEDICAL TECHNOLOGIES INC | ex311.htm |
EX-31 - PALOMAR MEDICAL TECHNOLOGIES INC | ex312.htm |
EX-10 - PALOMAR MEDICAL TECHNOLOGIES INC | ex1072.htm |
UNITED STATES
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ý |
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 2009 |
o | 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: 0-22340
PALOMAR MEDICAL TECHNOLOGIES, INC. |
A Delaware Corporation | I.R.S Employer Identification No. 04-3128178 |
82 Cambridge Street, Burlington, Massachusetts 01803 Registrant's telephone number, including area code: (781) 993-2300 Securities registered pursuant to Section 12(b) of the Act: |
Title of each class Common Stock, $0.01 par value |
Name of each exchange on which registered NASDAQ -Global Select Market |
Preferred Stock Purchase Rights |
Securities registered pursuant to Section 12(g) of the Act: |
None. |
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing requirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b(2) of the Exchange Act. (Check one). |
Large accelerated filer o Accelerated filer ý
Non-accelerated filer o Smaller reporting company o
Indicate by check mark if the registrant is a shell company, in Rule 12b(2) of the Exchange Act. Yeso No ý The number of shares outstanding of the registrant's common stock as of the close of business on November 2, 2009 was 18,067,989. |
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Palomar Medical Technologies, Inc. and SubsidiariesTable of Contents |
|
Palomar Medical
Technologies, Inc. and Subsidiaries
|
September 30, 2009 |
December 31, 2008 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 109,359,977 | $ | 122,601,139 | ||||||||
Accounts receivable, net | 5,499,647 | 6,395,364 | ||||||||||
Inventories | 12,454,618 | 16,045,725 | ||||||||||
Deferred tax assets | 4,365,479 | 4,149,583 | ||||||||||
Other current assets | 1,721,407 | 2,613,003 | ||||||||||
Total current assets | 133,401,128 | 151,804,814 | ||||||||||
Investments, at fair value | 4,124,313 | 4,486,834 | ||||||||||
Property and equipment, net | 29,531,908 | 14,225,397 | ||||||||||
Deferred tax assets | 1,356,021 | 1,197,876 | ||||||||||
Other assets | 6,111 | 7,515 | ||||||||||
Total assets | $ | 168,419,481 | $ | 171,722,436 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||
Current liabilities | ||||||||||||
Note payable | $ | -- | $ | 6,000,000 | ||||||||
Accounts payable | 6,674,096 | 3,247,051 | ||||||||||
Accrued liabilities | 8,013,887 | 6,688,137 | ||||||||||
Deferred revenue | 4,115,936 | 6,166,246 | ||||||||||
Total current liabilities | 18,803,919 | 22,101,434 | ||||||||||
Accrued income taxes | 2,830,699 | 2,815,577 | ||||||||||
Total liabilities | $ | 21,634,618 | $ | 24,917,011 | ||||||||
Commitments and contingencies (Note 14) | ||||||||||||
Stockholders' equity | ||||||||||||
Preferred stock, $0.01 par value- | ||||||||||||
Authorized - 1,500,000 shares | ||||||||||||
Issued - none | -- | -- | ||||||||||
Common stock, $0.01 par value- | ||||||||||||
Authorized - 45,000,000 shares | ||||||||||||
Issued - 18,479,345 shares | 184,794 | 184,794 | ||||||||||
Additional paid-in capital | 206,759,047 | 205,306,957 | ||||||||||
Accumulated other comprehensive loss | (283,628 | ) | (542,443 | ) | ||||||||
Accumulated deficit | (54,502,132 | ) | (52,547,173 | ) | ||||||||
Treasury stock, at cost - 411,356 and 413,255 shares, respectively | (5,373,218 | ) | (5,596,710 | ) | ||||||||
Total stockholders' equity | $ | 146,784,863 | $ | 146,805,425 | ||||||||
Total liabilities and stockholders equity | $ | 168,419,481 | $ | 171,722,436 | ||||||||
The accompanying notes to condensed consolidated financial statements. 3 |
Palomar Medical
Technologies, Inc. and Subsidiaries
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 |
2008 |
2009 |
2008 | |||||||||||||||||
Revenues | ||||||||||||||||||||
Product revenues | $ | 11,229,156 | $ | 19,223,597 | $ | 34,823,566 | $ | 56,118,901 | ||||||||||||
Royalty revenues | 1,264,022 | 2,777,627 | 4,032,039 | 8,294,211 | ||||||||||||||||
Funded product development revenues | 806,482 | 954,907 | 1,636,082 | 1,949,944 | ||||||||||||||||
Other revenues | 1,250,000 | 1,250,000 | 3,750,000 | 3,997,625 | ||||||||||||||||
Total revenues | 14,549,660 | 24,206,131 | 44,241,687 | 70,360,681 | ||||||||||||||||
Costs and expenses | ||||||||||||||||||||
Cost of product revenues | 4,775,259 | 6,764,284 | 15,266,663 | 19,689,284 | ||||||||||||||||
Cost of royalty revenues | 505,609 | 1,111,051 | 1,612,816 | 3,317,685 | ||||||||||||||||
Research and development | 3,305,311 | 4,219,677 | 10,125,279 | 14,153,284 | ||||||||||||||||
Selling and marketing | 4,062,930 | 5,946,025 | 13,464,732 | 18,371,742 | ||||||||||||||||
General and administrative | 2,451,496 | 5,952,934 | 7,566,053 | 17,284,595 | ||||||||||||||||
Total costs and expenses | 15,100,605 | 23,993,971 | 48,035,543 | 72,816,590 | ||||||||||||||||
(Loss) income from operations | (550,945 | ) | 212,160 | (3,793,856 | ) | (2,455,909 | ) | |||||||||||||
Interest income | 218,169 | 798,522 | 551,817 | 3,058,056 | ||||||||||||||||
Other income (expense) | 156,941 | (68,908 | ) | 506,761 | (61,164 | ) | ||||||||||||||
(Loss) income before income taxes | (175,835 | ) | 941,774 | (2,735,278 | ) | 540,983 | ||||||||||||||
Provision for (benefit from) income taxes | 120,752 | 345,300 | (780,319 | ) | 189,032 | |||||||||||||||
Net (loss) income | $ | (296,587 | ) | $ | 596,474 | $ | (1,954,959 | ) | $ | 351,951 | ||||||||||
Net (loss) income per share | ||||||||||||||||||||
Basic | $ | (0.02 | ) | $ | 0.03 | $ | (0.11 | ) | $ | 0.02 | ||||||||||
Diluted | $ | (0.02 | ) | $ | 0.03 | $ | (0.11 | ) | $ | 0.02 | ||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||
Basic | 18,065,655 | 18,091,419 | 18,058,246 | 18,175,772 | ||||||||||||||||
Diluted | 18,065,655 | 18,289,995 | 18,058,246 | 18,450,464 | ||||||||||||||||
Comprehensive (loss) income: | ||||||||||||||||||||
Net (loss) income | $ | (296,587 | ) | $ | 596,474 | $ | (1,954,959 | ) | $ | 351,951 | ||||||||||
Unrealized (loss) gain from marketable securities | (24,138 | ) | 67,949 | 142,645 | (125,150 | ) | ||||||||||||||
net of taxes (benefit) of $14,279, $(43,736) | ||||||||||||||||||||
$(119,834) and $80,553, respectively | ||||||||||||||||||||
Foreign currency translation adjustment | (24,690 | ) | 21,260 | (115,680 | ) | 17,139 | ||||||||||||||
Comprehensive (loss) income | $ | (345,415 | ) | $ | 685,683 | $ | (1,927,994 | ) | $ | 243,940 | ||||||||||
See accompanying notes to condensed consolidated financial statements. 4 Palomar Medical
Technologies, Inc. and Subsidiaries
|
Nine Months Ended September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|
2009 |
2008 | ||||||||||
Operating activities | |||||||||||
Net (loss) income | $ | (1,954,959 | ) | $ | 351,951 | ||||||
Adjustments to reconcile net (loss) income to net cash from operating activities: | |||||||||||
Depreciation and amortization | 469,167 | 515,085 | |||||||||
Stock-based compensation expense | 2,573,483 | 5,104,338 | |||||||||
Provision for bad debt | 139,810 | 302,228 | |||||||||
Inventory write-off | 151,274 | 440,000 | |||||||||
Change in deferred tax asset | (1,179,411 | ) | (2,104,833 | ) | |||||||
Tax benefit from the exercise of stock options | (264,100 | ) | (1,994,199 | ) | |||||||
Other non-cash items | 178,000 | 17,139 | |||||||||
Changes in assets and liabilities: | |||||||||||
Accounts receivable | 738,195 | 4,795,435 | |||||||||
Inventories | 3,690,047 | (3,492,896 | ) | ||||||||
Other current assets | 894,688 | 123,622 | |||||||||
Other assets | 2,538 | (8,494 | ) | ||||||||
Accounts payable | 2,947,087 | 2,359,232 | |||||||||
Accrued liabilities | 1,428,661 | (2,452,065 | ) | ||||||||
Accrued income taxes | 15,122 | -- | |||||||||
Deferred revenue | (2,047,346 | ) | 122,058 | ||||||||
Net cash from operating activities | 7,782,256 | 4,078,601 | |||||||||
Investing activities | |||||||||||
Capital expenditures | (15,775,678 | ) | (889,904 | ) | |||||||
Purchases of investments | -- | (1,250,000 | ) | ||||||||
Proceeds from sale of investments | 625,000 | 37,635,000 | |||||||||
Net cash (used in) from investing activities | (15,150,678 | ) | 35,495,096 | ||||||||
Financing activities | |||||||||||
Proceeds from the exercise of stock options and warrants | 117,415 | 429,509 | |||||||||
Tax benefit from the exercise of stock options | 264,100 | 1,994,199 | |||||||||
Costs incurred related to issuance of common stock | -- | (44,700 | ) | ||||||||
Costs incurred related to purchase of stock for treasury | (258,491 | ) | (4,622,245 | ) | |||||||
Proceeds from borrowings on credit facility | 14,000,000 | -- | |||||||||
Payments on credit facility | (20,000,000 | ) | -- | ||||||||
Net cash used in financing activities | (5,876,976 | ) | (2,243,237 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | 4,236 | -- | |||||||||
Net (decrease) increase in cash and cash equivalents | (13,241,162 | ) | 37,330,460 | ||||||||
Cash and cash equivalents, beginning of the period | 122,601,139 | 90,460,350 | |||||||||
Cash and cash equivalents, end of the period | $ | 109,359,977 | $ | 127,790,810 | |||||||
Supplemental disclosure of cash flow information | |||||||||||
Cash paid for income taxes | $ | 36,493 | $ | 914,574 | |||||||
Supplemental noncash investing activities | |||||||||||
Unrealized gain on marketable securities, net of taxes | $ | 142,645 | $ | (125,150 | ) | ||||||
Number of Shares |
Exercise Price |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (in Years) |
Aggregate Intrinsic Value | |
---|---|---|---|---|---|
Outstanding, December 31, 2008 | 3,228,299 | $0.90 - $26.00 | $ 15.81 | 6.88 | $ 2,208,789 |
Granted | -- | -- | -- | ||
Exercised | (36,899) | $1.97 - $ 8.11 | 3.18 | ||
Canceled | (12,875) | $13.31 - $16.53 | $ 13.56 | ||
Outstanding, September 30, 2009 | 3,178,525 | $0.90 - $26.00 | $ 15.96 | 6.20 | $6,627,629 |
Exercisable, September 30, 2009 | 2,784,776 | $0.90 - $26.00 | $ 16.34 | 5.89 | $5,485,756 |
The total intrinsic value for stock options exercised during the nine months ended September 30, 2009 and 2008 was $0.3 million and $1.5 million, respectively. The following table summarizes information about stock options outstanding as of September 30, 2009: |
Options Outstanding |
Options Exercisable |
||||||||
---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices |
Options Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Options Exercisable |
Weighted Average Exercise Price | ||||
$0.90 - $10.72 | 208,367 | 2.35 years | $ 2.41 | 208,367 | $ 2.41 | ||||
13.31 - 13.31 | 1,282,500 | 8.41 years | 13.31 | 888,751 | 13.31 | ||||
13.66 - 16.53 | 1,033,158 | 4.60 years | 16.49 | 1,033,158 | 16.49 | ||||
23.61 - 26.00 | 654,500 | 5.60 years | 24.64 | 654,500 | 24.64 | ||||
$0.90 - $26.00 | 3,178,525 | 6.20 years | $15.96 | 2,784,776 | $16.34 | ||||
In October 2009, our Board of Directors reviewed our outstanding equity compensation arrangements and determined to provide our management, employees and directors with appropriate incentives to achieve our business and financial goals while at the same time minimizing the accounting costs of these incentives and reducing the overhang caused by stock options that are significantly underwater. As a result of this review and determination, in October 2009, our Board approved a stock option exchange program for some of our significantly underwater options. As part of this program, during the fourth quarter of 2009 we expect to provide certain employees, officers and directors who were previously granted stock options for the purchase of a total of 650,500 shares of our common stock with exercise prices of $24.63 and $26.00 per share with the opportunity to amend these options to (i) reduce the number of shares that are the subject of these options based on a conversion ratio which will not create (or will minimize to the maximum extent possible) any incremental stock-based compensation expense on the date of amendment (the Amendment Date), (ii) reduce the exercise price to an amount equal to the closing price of our common stock on The Nasdaq Global Select Market on the Amendment Date and (iii) extend the expiration date until 10 years from the Amendment Date. In addition, certain participants in this program will be granted a number of fully vested shares of restricted common stock under our 2004 Stock Incentive Plan equal to the difference between the number of shares of common stock that was the subject of the stock option initially granted under the 2004 Stock Incentive Plan and the number of shares evidenced by the option following the amendment. We estimate we will incur a one-time stock-based compensation charge of between $4 million and $5 million in the fourth quarter of 2009 as a result of these restricted stock awards. Stock-Settled Stock Appreciation Rights The granted stock-settled stock appreciation rights (SARs) are awards that allow the recipient to receive an amount of our common stock equal to the appreciation (if any) in the fair market value of our common stock on the date of exercise over the initial SAR valuation set on the date of grant per share of common stock for the number of shares vested. Since 2007, stock-settled SARs were granted and the conversion price was set at 50 percent of the fair market value of our common stock on the date of grant, and the holders right to receive shares of common stock under these grants occurs automatically on the vesting date. The SARs become exercisable over a four-year period with one-third vesting on the second, third, and fourth anniversaries of the date of grant. The related compensation expense is being recognized over the four-year period on a straight-line basis. During the three and nine months ended September 30, 2009, there were 0 and 1,000 stock-settled SARs granted, respectively. 7 On August 10, 2009, 143,184 SARs which were granted on August 10, 2007 vested. As the fair market value of our common stock on August 10, 2009 was less than the SARs conversion price, these SARs expired without any benefit to the grantees. The following table summarizes our stock-settled stock appreciation rights activity since December 31, 2008: |
Number of Shares |
Weighted Average Conversion Price |
Weighted Average Remaining Contractual Term (in Years) |
Aggregate Intrinsic Value | |
---|---|---|---|---|
Outstanding, December 31, 2008 | 797,500 | $ 11.61 | 2.17 | $1,240,814 |
Granted | 1,000 | 5.60 | ||
Converted | -- | -- | ||
Canceled | (186,784) | $ 13.75 | ||
Outstanding, September 30, 2009 | 611,716 | $ 10.95 | 1.67 | $3,220,114 |
Vested, September 30, 2009 | -- | -- | -- | -- |
SARs Outstanding |
||||||
---|---|---|---|---|---|---|
Range of Conversion Prices |
SARs Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Conversion Price | |||
$5.44 - $7.97 | 325,400 | 1.88 years | $ 7.91 | |||
14.40 - 14.40 | 286,316 | 1.36 years | 14.40 | |||
$5.44 - $14.40 | 611,716 | 1.67 years | $10.95 | |||
Warrants The following table summarizes our warrant activity since December 31, 2008: |
Number of Shares |
Exercise Price |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value | |
---|---|---|---|---|---|
Outstanding, December 31, 2008 | 10,000 | $ 2.81 | $2.81 | 1.43 | $87,175 |
Granted | -- | -- | -- | ||
Exercised | -- | -- | -- | ||
Canceled | -- | -- | -- | ||
Outstanding, September 30, 2009 | 10,000 | $ 2.81 | $2.81 | 0.68 | $133,975 |
Exercisable, September 30, 2009 | 10,000 | $ 2.81 | $2.81 | 0.68 | $133,975 |
The total intrinsic value for warrants exercised for the nine months ended September 30, 2009 and 2008 were $0 and $815,000, respectively. 8 Note 3 InventoriesInventories are valued at the lower of cost (first-in, first-out method) or market, and include material, labor and manufacturing overhead. At September 30, 2009 and December 31, 2008, inventories consisted of the following: |
September 30, 2009 |
December 31, 2008 | |
---|---|---|
Raw materials | $ 4,887,576 | $ 7,757,417 |
Work in process | 1,625,027 | 1,517,400 |
Finished goods | 5,942,015 | 6,770,908 |
Total | $12,454,618 | $16,045,725 |
Note 4 Property and equipmentProperty and equipment are recorded at cost. Repairs and maintenance costs are expensed as incurred. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of property and equipment. Land and construction in progress assets are not depreciated. At September 30, 2009 and December 31, 2008, property and equipment consisted of the following: |
September 30, 2009 |
December 31, 2008 |
Estimated useful life | ||
---|---|---|---|---|
Land | $ 10,680,000 | $ 10,680,000 | ||
Machinery and equipment | 2,100,331 | 2,100,331 | 3-8 years | |
Furniture and fixtures | 3,321,171 | 3,248,093 | 5 years | |
Leasehold improvements | 537,648 | 537,648 | Shorter of estimated useful life or term of lease | |
Construction in progress | 18,188,464 | 2,485,864 | ||
34,827,614 | 19,051,936 | |||
Accumulated depreciation | (5,295,706) | (4,826,539) | ||
Total | $ 29,531,908 | $ 14,225,397 | ||
On November 19, 2008, we purchased land for $10.7 million on which we are building our new operational facility. Construction of the building is expected to be completed during the first quarter of 2010. We anticipate that capital expenditures related to the building for 2009 will be approximately $24 million. During the three and nine months ended September 30, 2009, we had $6.3 million and $15.7 million, respectively, of capital expenditures related to the building. The total cost of the building (exclusive of land) is expected to be approximately $25 million. We are financing this project by using cash on hand. Note 5 Warranty costsWe typically offer a one year warranty on our base systems. Warranty coverage provided is for labor and parts necessary to repair the systems during the warranty period. We account for the estimated warranty cost of the standard warranty coverage as a charge to cost of revenue when revenue is recognized. The estimated warranty cost is based on units sold, historical product performance and the cost per repair. We assess the adequacy of the warranty provision and we may adjust this provision if necessary. 9 The following table provides the detail of the change in our product warranty accrual, which is a component of accrued liabilities on the Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008: |
September 30, 2009 |
December 31, 2008 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Warranty accrual, beginning of year | $ | 856,158 | $ | 1,051,432 | ||||||||
Charges to cost and expenses relating to new sales | 952,768 | 1,822,196 | ||||||||||
Costs of product warranty claims | (1,255,584 | ) | (2,017,470 | ) | ||||||||
Warranty accrual, end of period | $ | 553,342 | $ | 856,158 | ||||||||
Note 6 Fair Value of Financial InstrumentsIn September 2006, the FASB issued new guidance on fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The guidance applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and we adopted on January 1, 2008. In February 2008, the FASB issued an update to the fair value measurement guidance. This guidance permits the delayed application of the fair value measurement guidance for all non-recurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. The adoption of this guidance had no impact on the Companys consolidated financial statements. We performed an analysis of our investments held at September 30, 2009 to determine the significance and character of all inputs to their fair value determination. The standard requires additional disclosures about the inputs used to develop the measurements and the effect of certain measurements on changes in fair value for each reporting period. The FASBs fair value measurement guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories. |
o | Level 1 Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. |
o | Level 2 Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instruments anticipated life. |
o | Level 3 Inputs reflect managements best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
Fair Value on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations. The following table presents our assets measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008. |
Assets (In thousands) |
Fair Value as of September 30, 2009 |
||||||
---|---|---|---|---|---|---|---|
Level 1 |
Level 2 |
Level 3 |
Total | ||||
Auction-rate preferred securities | $ -- | $ -- | $2,622 | $2,622 | |||
Auction-rate municipal securities | -- | -- | 1,502 | 1,502 | |||
Total | $ -- | $ -- | $4,124 | $4,124 | |||
10 |
Assets (In thousands) |
Fair Value as of December 31, 2008 |
||||||
---|---|---|---|---|---|---|---|
Level 1 |
Level 2 |
Level 3 |
Total | ||||
Auction-rate preferred securities | $ -- | $ -- | $3,166 | $3,166 | |||
Auction-rate municipal securities | -- | -- | 1,321 | 1,321 | |||
Total | $ -- | $ -- | $4,487 | $4,487 | |||
At September 30, 2009, the amortized cost basis of the auction-rate preferred securities and auction-rate municipal securities were $2.9 million and $1.6 million, respectively. At December 31, 2008, the amortized cost basis of the auction-rate preferred securities and auction-rate municipal securities were $3.5 million and $1.6 million, respectively. As described in more detail below, all of our auction-rate securities have unrealized temporary losses in accumulated other comprehensive income. We have no other-than-temporary impairments. There is no maturity date of the auction-rate preferred securities while the maturity date for our auction-rate municipal securities is in December 2045. Level 3 Gains and Losses The table presented below summarizes the change in balance sheet carrying values associated with Level 3 financial instruments for the nine months ended September 30, 2009. |
(In thousands) |
Auction-rate preferred securities |
Auction-rate municipal securities |
Total | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2008 | $ | 3,166 | $ | 1,321 | $ | 4,487 | |||||
Net payments, purchases and sales | (625 | ) | -- | (625 | ) | ||||||
Net transfers in/(out) | -- | -- | -- | ||||||||
Gains/(losses) | |||||||||||
Realized | -- | -- | -- | ||||||||
Unrealized | 81 | 181 | 262 | ||||||||
Balance at September 30, 2009 | $ | 2,622 | $ | 1,502 | $ | 4,124 | |||||
All of the above auction-rate securities (ARS) have been in a continuous unrealized loss position for 12 months or longer. We continue to receive regular dividends from each of our ARS at current market rates. Historically, the ARS market was an active and liquid market where we could purchase and sell our ARS on a regular basis through auctions. As such, we classified our ARS as Level 1 investments in accordance with the FASBs guidance at December 31, 2007. Subsequent to December 31, 2007, several of our ARS failed at auction due to a decline in liquidity in the ARS and other capital markets. We will not be able to access our investments in ARS until future auctions are successful, ARS are called for redemption by the issuers, or until sold in a secondary market. As approximately $4.1 million of our investments in ARS currently lack short-term liquidity, we have classified these investments as non-current investments as of September 30, 2009. The fair value of our holdings of ARS at September 30, 2009 was $4.1 million. To value our ARS, we determined the present value of the ARS at the balance sheet date by discounting the estimated future cash flows based on a fair value rate of interest and an expected time horizon to liquidity. We also evaluated the credit rating of the issuer and found them all to be investment grade securities. There was no change in our valuation method during the three months ended September 30, 2009 as compared to prior reporting periods. Our valuation analysis showed that our ARS have no credit risk. The impairment is due to liquidity risk. Additionally, as of September 30, 2009, we do not intend to sell the ARS, it is not more likely than not that we will be required to sell the ARS before recovery of their amortized cost bases, which may be at maturity, and we expect to recover the full amortized cost basis of these securities. As a result of our valuation analysis, our investment strategy, reoccurring dividend stream from these investments, and our strong cash and cash equivalents position, we have determined that the fair value of our ARS was temporarily impaired as of September 30, 2009. For the three and nine months ended September 30, 2009, we marked to market our ARS and recorded an unrealized loss of $24,000 and an unrealized gain of $143,000, respectively, net of taxes in accumulated other comprehensive income in stockholders equity to reflect the cumulative temporary impairment of approximately $200,000, net of taxes, on our ARS as of September 30, 2009. 11 We continue to monitor the market for ARS and consider its impact, if any, on the fair value of our investments. If current market conditions deteriorate further, we may be required to record additional unrealized losses in accumulated other comprehensive (loss) income. If the credit rating of the security issuers deteriorates, the anticipated recovery in market values does not occur, or we stop receiving dividends, we may be required to adjust the carrying value of these investments through impairment charges in our Consolidated Statements of Operations. Note 7 Geographic informationNorth America product revenue was $7.1 million and $12.0 million for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, North America product revenue was $20.9 million and $37.8 million, respectively. International product revenue outside North America, consisting of revenue from our Australian subsidiary, distributors and our sales shipped directly to customers was $4.2 million and $7.2 million for the three months ended September 30, 2009 and 2008, respectively, while international product revenue for the nine months ended September 30, 2009 and 2008 was $13.9 million and $18.3 million, respectively. The following table represents the percentage of product revenue by geographic region for the three and nine months ended September 30, 2009 and 2008: |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||
---|---|---|---|---|---|---|
2009 |
2008 |
2009 |
2008 | |||
North America | 62.9% | 62.6% | 60.1% | 67.4% | ||
Europe | 17.0% | 18.4% | 17.7% | 15.1% | ||
South and Central America | 9.9% | 10.1% | 7.8% | 8.6% | ||
Asia/Pacific Rim | 3.2% | 3.9% | 5.4% | 4.7% | ||
Australia | 4.2% | 1.7% | 5.2% | 1.2% | ||
Middle East | 2.8% | 3.3% | 3.8% | 3.0% | ||
Total | 100.0% | 100.0% | 100.0% | 100.0% | ||
Note 8 Net (loss) income per common shareBasic net (loss) income per share was determined by dividing net (loss) income by the weighted average common shares outstanding during the period. Diluted net (loss) income per share was determined by dividing net (loss) income by the diluted weighted average shares outstanding. Diluted weighted average shares reflect the dilutive effect, if any, of stock options, stock appreciation rights, and warrants based on the treasury stock method. 12 A reconciliation of basic and diluted shares for the three and nine months ended September 30, 2009 and 2008, is as follows: |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||
---|---|---|---|---|---|---|
2009 |
2008 |
2009 |
2008 | |||
Basic weighted average number of shares | ||||||
outstanding | 18,065,655 | 18,091,419 | 18,058,246 | 18,175,772 | ||
Potential common shares pursuant to stock | ||||||
options, stock appreciation rights and warrants | -- | 198,576 | -- | 274,692 | ||
Diluted weighted average number of shares | ||||||
outstanding | 18,065,655 | 18,289,995 | 18,058,246 | 18,450,464 | ||
For the three months ended September 30, 2009 and 2008, approximately 2.3 million and 4.1 million, respectively, weighted average options, stock-settled SARs, and warrants to purchase shares of our common stock were excluded from the computation of diluted earnings per share because the effect of including the options would have been antidilutive. Note 9 Development and License Agreement with The Gillette Company and License Agreement with The Procter & Gamble Company (and its wholly owned subsidiary The Gillette Company) Effective as of February 14, 2003, we entered into a Development and License Agreement (the Agreement) with Gillette to complete the development and commercialize a home-use, light-based hair removal device for women. In October 2005, The Procter & Gamble Company (P&G) (NYSE: PG) completed its acquisition of Gillette. Under the Agreement, Procter & Gamble, as the acquiring party, assumed all of Gillettes rights and obligations. The agreement provided for up to $7 million in support of research and development to be paid by Gillette over approximately 30 months. Effective as of June 28, 2004, we completed the initial phase of the Agreement and both parties decided to move onto the next phase. Accompanying this decision, we amended the Agreement, whereby, Gillette provided $2.1 million in additional development funding to further technical innovations over a 9-month extension of the development phase, which was completed on August 31, 2006 (the Development Phase). On September 29, 2006, in response to a first decision point in the Agreement, Gillette decided to continue with the project. On December 8, 2006, over-the-counter clearance was obtained from the United States Food and Drug Administration for the device and, per the Agreement, Gillette was obligated to make a development completion payment to us of $2.5 million, which was paid on December 26, 2006. The $2.5 million payment was recorded as revenue over a 12 month period, as we were obligated to perform additional services to Gillette during that period in consideration for this payment. Gillette was to conduct approximately 12 months of commercial assessment tests with respect to the device. Based on the commercial assessment tests, Gillette was to decide by January 7, 2008 whether or not to continue with the project (the Launch Decision). On February 21, 2007, we announced an amendment to our agreement with Gillette to include the development and commercialization of an additional home-use, light-based hair removal device for women, and we also announced that we had executed an amended and restated joint development agreement to incorporate other amendments, including several new amendments to allow for more open collaboration through commercialization. With regard to the additional home-use, light-based hair removal device for women, we completed certain development activities in consultation with Gillette during an eleven month program. Gillette provided us with $1.2 million and an additional $300,000 upon the completion of certain deliverables which was recognized over an eleven month period as costs were incurred and services were provided. On December 21, 2007, we announced an agreement with Gillette to extend the Launch Decision until no later than February 29, 2008. During this extension period, we negotiated with Gillette and its parent company P&G for a new agreement to replace the existing one. On February 29, 2008, we entered into a License Agreement with P&G under which we granted a non-exclusive license to certain patents and technology to commercialize home-use, light-based hair removal devices for women. This License Agreement terminated and replaced the prior Development and License Agreement. 13 For the three months ended September 30, 2009 and 2008, we recognized $0 and $18,000 of funded product development revenues from P&G and Gillette under the Development and License Agreement and various other agreements. For the nine months ended September 30, 2009 and 2008, we recognized $0 and $216,000 of funded product development revenues from P&G and Gillette, respectively, under the Development and License agreement and various other agreements. Under the License Agreement, for each of the three months ended September 30, 2009 and 2008, we recognized $1.25 million of other revenues from P&G, respectively. In each of the nine months ended September 30, 2009 and 2008, we recognized $3.75 million of other revenues from P&G. The $1.25 million payments are quarterly technology transfer payments (TTP Quarterly Payment as defined in the License Agreement). TTP Quarterly Payments will be made by P&G during the term of the License Agreement up to and including the quarter in which P&G launches the first Licensed Product (as defined in the License Agreement). Thereafter, TTP and royalty payments will be based on product sales as set forth in the License Agreement. TTPs, including the TTP Quarterly Payments, are non-creditable and non-refundable and there is no right of offset. As of September 30, 2009 and December 31, 2008, there were $0 and $1.25 million of advance payments received from P&G for which services were not yet provided were included in deferred revenue, under the License Agreement. For more information, please see the License Agreement filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 3, 2008, the Development and License Agreement and subsequent amendments filed as Exhibit 10.1 to our Current Report on Form 8-K filed on February 19, 2003, Exhibits 99.1, 99.2, and 99.3 to our Current Report on Form 8-K filed on June 28, 2004, Exhibit 10.30 to our Annual Report on Form 10-K filed on March 6, 2006, and Exhibits 10.1 and 10.2 to our Current Report on Form 8-K filed on February 21, 2007. Note 10 Joint Development and License Agreement with Johnson & Johnson Consumer Companies, Inc.Effective as of September 1, 2004, we entered into a Joint Development and License Agreement with Johnson & Johnson Consumer Companies, Inc. to develop and commercialize home-use, light-based devices in the fields of (i) reducing or reshaping body fat including cellulite; (ii) reducing appearance of skin aging; and (iii) reducing or preventing acne. Under the agreement, Johnson & Johnson funds our research and clinical studies during an initial proof-of-principle phase. At the end of the proof-of-principle phase, Johnson & Johnson will decide whether or not to continue with one or more of the devices in one or more of the fields into a development phase. If Johnson & Johnson decides to continue, Johnson & Johnson will be obligated to fund the development of the selected devices. If Johnson & Johnson decides not to continue, we may proceed in fields not selected by Johnson & Johnson to develop and commercialize these and other devices on our own or with a different party. At the end of the development phase, Johnson & Johnson will decide whether or not to commercialize one or more of the devices in one or more fields. If Johnson & Johnson decides to commercialize one or more of the devices, Johnson & Johnson will make payments to us for each selected field. Upon commercial launch of the first device in each selected field, Johnson & Johnson will make a payment to us, and for all devices sold for use in each selected field, Johnson & Johnson shall pay us a percentage of sales of such devices and certain topical compounds. If Johnson & Johnson decides not to commercialize or fails to launch a device, we may proceed in fields not selected by Johnson & Johnson to develop and commercialize these and other devices on our own or with a different party. On August 22, 2007 and June 29, 2009, we signed amendments to our agreement with Johnson & Johnson to provide for additional development funding for certain development activities. Johnson & Johnson will provide us with quarterly payments for these development activities. We will recognize this revenue as costs are incurred and services are provided. 14 On October 16, 2009, we announced the termination of our Joint Development and License Agreement with Johnson & Johnson Consumer Companies, Inc. Despite having met all of our deliverables under the agreement, Johnson & Johnson terminated the agreement referencing the current unfavorable economic conditions as the reason for its decision. With this decision, Johnson & Johnson avoids having to make a large commercialization payment to us and avoids having to commit to the significant level of funding required to successfully launch a new product into the consumer market. For more information, please see our press release filed as an Exhibit 99.1 to our Current Report on Form 8-K filed October 16, 2009. For the three months ended September 30, 2009 and 2008, we recognized approximately $806,000 and $937,000, respectively, of funded product development revenues from Johnson & Johnson. For the nine months ended September 30, 2009 and 2008, we recognized approximately $1.6 million and $1.7 million, respectively, of funded product development revenues from Johnson & Johnson. As of September 30, 2009 and December 31, 2008, $199,000 and $726,000, respectively, of advance payments received from Johnson & Johnson for which services were not yet provided were included in deferred revenue. For more information, please see the Joint Development and License Agreement and amendments filed as Exhibit 99.1 to our Current Report on Form 8-K filed on September 7, 2004, Exhibit 10.45 to our Quarterly Report on Form 10-Q filed on May 8, 2007, Exhibits 10.47 and 10.48 to our Quarterly Report on Form 10-Q filed on November 2, 2007, and Exhibit 10.71 to this Quarterly Report on Form 10-Q filed on August 5, 2009. Note 11 Notes PayableIn December 2008, we secured access to a revolving note through December 17, 2013. Through December 16, 2010, we have access to $30 million. The credit limit is subsequently reduced to $26 million, $22 million, and $18 million on December 17, 2010, December 17, 2011, and December 17, 2012, respectively. Outstanding balances on the revolving note bear interest at a rate equal to the sum of the LIBOR Advantage rate plus 0.75% per annum. At September 30, 2009 and December 31, 2008, we had outstanding debt of $0 million and $6 million, respectively. The average interest rate at December 31, 2008 was 1.22%. The interest expense was capitalized into Construction in Progress which is a component of Property and Equipment on the consolidated balance sheets and was immaterial for the three and nine months ended September 30, 2009. Any outstanding debt is due on December 17, 2013. On January 2, 2009, we repaid the $6 million borrowed as of December 31, 2008. On July 1, 2009, we repaid the $12 million outstanding as of June 30, 2009. As of September 30, 2009, we had no debt outstanding. Our revolving note requires that we maintain certain financial covenants. In order to be in compliance with the covenants, unencumbered cash and marketable securities less outstanding debt must be greater than the credit limit. For all periods in which we had outstanding debt, we were in compliance with the financial covenants. If we were to default on our debt, the building would be used as collateral. Note 12 Income TaxesWe provide for income taxes under the liability method in accordance with the FASBs guidance on accounting for income taxes. Under this guidance, we can only recognize a deferred tax asset for future benefit of our tax loss, temporary differences and tax credit carry forwards to the extent that it is more likely than not that these assets will be realized. In 2008 and 2009, we either expect to, or have incurred operating losses in foreign jurisdictions. We believe that it is more likely than not that the associated tax asset will expire prior to utilization. Therefore, in 2008 and 2009, we established a full valuation allowance on this deferred tax asset. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. Although we have determined that a valuation allowance is not required with respect to our remaining net short-term and long-term deferred tax assets totaling $5.7 million at September 30, 2009, their recovery is dependent on achieving future operating income. Failure to achieve future operating income targets or negative changes to expected trends may change the assessment regarding the recoverability of the net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of the deferred tax assets. Any increase in a valuation allowance would result in additional income tax expense and could have a significant impact on our earnings in future periods. 15 Additionally, under the FASBs stock-based compensation guidance, we decreased our deferred tax assets by $0.9 million in the quarter ended September 30, 2009 due to the expiration of stock appreciation rights. The adjustment did not impact income tax expense as it was realized through a decrease to stockholders equity. At September 30, 2009, we have $2.8 million of net unrecognized tax benefits, all of which would affect our effective tax rate if recognized. We establish reserves for uncertain tax positions based on managements assessment of exposure associated with tax deductions, permanent tax differences and tax credits. The tax reserves are analyzed periodically and adjustments are made, as events occur to warrant adjustment to the reserve. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2009, we had approximately $36,000 of accrued interest and penalties related to uncertain tax positions. The tax years 2006-2008 remain open to examination by the major taxing jurisdictions to which we are subject. We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Note 13 Stock Repurchase ProgramOn August 13, 2007, our Board of Directors approved a stock repurchase program under which our management is authorized to repurchase up to one million shares of our common stock. The timing and actual number of shares purchased will depend on a variety of factors such as price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. Stock repurchases under this program, if any, will be made using our cash resources, and may be commenced or suspended at any time or from time to time at managements discretion without prior notice. The following table shows our stock repurchase activity since June 30, 2009: |
Period |
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced program |
Maximum number of shares that may yet be purchased under program |
---|---|---|---|---|
July 1, 2009 through July 31, 2009 | - | - | - | 324,500 |
August 1, 2009 through August 31, 2009 | - | - | - | 324,500 |
September 1, 2009 through September 30, 2009 | - | - | - | 324,500 |
Total | - | - | - | 324,500 |
o | Forward-looking statements |
o | Critical accounting policies |
o | Overview |
o | Results of operations |
o | Liquidity and capital resources |
o | Off-balance sheet arrangements |
o | Contractual obligations |
Forward-looking statementsThe condensed consolidated financial statements of Palomar Medical Technologies, Inc. in this document present the Companys balance sheet, statement of operations, and statement of cash flows, and should be read in conjunction with the following discussion and analysis. References to we, us, our, Company, and Palomar mean Palomar Medical Technologies, Inc. and its subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in filings with the SEC, in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like expects, anticipates, intends, likely will result, estimates, projects, or variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, information set forth in Item 1A. Risk Factors in our Form 10-K for the year ended December 31, 2008 that was filed with the SEC on March 5, 2009 and in this Form 10-Q. In making these statements, we are not undertaking to address or update these factors in future filings or communications regarding our business or results. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document might not occur. There may also be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward-looking statements. 19 Critical accounting policies The discussion and analysis of our financial condition and results of operations 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 these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, inventories, investments, warranty obligations, contingencies and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in the Annual Report on our Form 10-K fiscal year 2008. There have been no material changes to our critical accounting policies as of September 30, 2009. Recent Accounting Pronouncements In December 2007, the FASB ratified guidance on accounting for collaborative arrangements. This guidance focuses on defining a collaborative arrangement as well as the accounting for transactions between participants in a collaborative arrangement and between the participants in the arrangement and third parties. The EITF concluded that both types of transactions should be reported in each participants respective income statement. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and should be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. We adopted this guidance on January 1, 2009. The adoption of this guidance has not materially impacted our consolidated financial statements nor do we currently expect a material impact on our future consolidated financial statements. In December 2007, the FASB issued new accounting guidance on business combinations. The new guidance retains the fundamental requirements of previous guidance, but requires the recognition of all assets acquired and liabilities assumed in a business combination at their fair values as of the acquisition date. It also requires the recognition of assets acquired and liabilities assumed arising from contractual contingencies at their acquisition date fair values. Additionally, the new guidance supersedes previous guidance which required research and development assets acquired in a business combination that had no alternative future use to be measured at their fair values and expensed at the acquisition date. The new guidance now requires that purchased research and development be recognized as an intangible asset. We adopted the new guidance on January 1, 2009. As we had no acquisitions in the three and nine months ended September 30, 2009, the adoption had no impact on our consolidated financial statements. In December 2007, the FASB issued new accounting guidance on noncontrolling interests in consolidated financial statements. This guidance clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for, and reporting of, transactions between the reporting entity and holders of such noncontrolling interests. Under this guidance, noncontrolling interests are considered equity and should be reported as an element of consolidated equity. Net income will encompass the total income of all consolidated subsidiaries, and there will be separate disclosure on the face of the statement of operations of the attribution of that income between the controlling and noncontrolling interests; increases and decreases in the noncontrolling ownership interest amount will be accounted for as equity transactions. This new guidance is effective for the first annual reporting period beginning on or after December 15, 2008, and earlier application is prohibited. The guidance is required to be adopted prospectively, except for reclassifying noncontrolling interests to equity, separate from the parents shareholders equity, in the consolidated balance sheets and recasting consolidated net income to include net income attributable to both the controlling and noncontrolling interests, both of which are required to be adopted retrospectively. We adopted the new guidance on January 1, 2009. As our subsidiaries are 100% owned, the adoption had no impact on our consolidated financial statements. In April 2009, the FASB issued new guidance on interim disclosures about the fair value of financial instruments. This guidance is effective for interim and annual periods ending after June 15, 2009. The staff position requires fair value disclosures of financial instruments on a quarterly basis, as well as new disclosures regarding the methodology and significant assumptions underlying the fair value measures and any changes to the methodology and assumptions during the reporting period. We have adopted this guidance and included the disclosures in our consolidated financial statements. In April 2009, the FASB issued new guidance on the recognition and presentation of other-than-temporary impairments. This guidance is effective for interim and annual periods ending after June 15, 2009. The new guidance incorporates impairment guidance for debt securities from various sources of authoritative literature and clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. The adoption of this guidance did not materially impact our consolidated financial statements. In April 2009, the FASB issued new guidance on the determination of fair value when the volume and level of activity for the asset or liability have significantly decreased and how to identify transactions that are not orderly. This guidance is effective for interim and annual periods ending after June 15, 2009. The guidance provides additional guidance for estimating fair value in accordance with the FASBs previous fair value measurement guidance when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate if a transaction is not orderly (i.e., a forced liquidation or distressed sale). The adoption of this guidance did not materially impact our consolidated financial statements. 20 In May 2009, the FASB issued new guidance on subsequent events which provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. The guidance distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. Furthermore, the guidance requires disclosure of the date through which subsequent events were evaluated. This guidance is effective for interim and annual periods after June 15, 2009. We have adopted this guidance and have evaluated subsequent events through November 5, 2009. In June 2009, the FASB issued new accounting guidance entitled, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (ASC), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This new guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this guidance has changed how we reference various elements of GAAP when preparing our financial statement disclosures, but did not have an impact on our financial position, results of operations or cash flows. In September 2009, the FASB issued new accounting guidance entitled, Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force. It updates the existing multiple-element revenue arrangements guidance in Emerging Issues Task Forces guidance entitled, Revenue Arrangements with Multiple Deliverables. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. The update will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently assessing the future impact of this new accounting update to our consolidated financial statements. 21 OverviewWe are engaged in research, development, manufacturing and distribution of proprietary light-based systems for medical and cosmetic treatments. Since our inception, we have been able to develop a differentiated product mix of light-based systems for various treatments through our own research and development as well as with our partnerships throughout the world. We are continually developing and testing new indications and technologies to further the advancement in light-based treatments. We generate our revenues through the sales of our products, royalties derived from sales by our licensees, and funded product development programs from other companies. Our total revenues for the three and nine month periods ended September 30, 2009, decreased by 40% and 37%, respectively, as compared to the same periods in 2008. The global economic downturn continues to negatively affect our business and the aesthetic device industry as a whole. At September 30, 2009, our balance sheet includes $109.4 million in cash and cash equivalents and no debt. During the three and nine months ended September 30, 2009, we had $3.6 million and $7.8 million, respectively, of positive cash flow from operations. Results of operationsThe following table contains selected income statement information, which serves as the basis of the discussion of our results of operations for the three and nine months ended September 30, 2009 and 2008, respectively (in thousands, except for percentages): |
Three Months Ended September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 |
2008 |
Change | |||||||||||||||||||||||||||
Amount |
As a % of Total Revenue |
Amount |
As a % of Total Revenue |
$ |
% | ||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||
Product revenues | $ | 11,229 | 77 | % | $ | 19,223 | 79 | % | $ | (7,994 | ) | (42 | %) | ||||||||||||||||
Royalty revenues | 1,264 | 9 | % | 2,778 | 12 | % | (1,514 | ) | (54 | %) | |||||||||||||||||||
Funded product development revenues | 806 | 5 | % | 955 | 4 | % | (149 | ) | (16 | %) | |||||||||||||||||||
Other revenues | 1,250 | 9 | % | 1,250 | 5 | % | -- | -- | % | ||||||||||||||||||||
Total revenues | 14,549 | 100 | % | 24,206 | 100 | % | (9,657 | ) | (40 | %) | |||||||||||||||||||
Cost and expenses | |||||||||||||||||||||||||||||
Cost of product revenues | 4,775 | 33 | % | 6,764 | 28 | % | (1,989 | ) | (29 | %) | |||||||||||||||||||
Cost of royalty revenues | 506 | 3 | % | 1,111 | 5 | % | (605 | ) | (54 | %) | |||||||||||||||||||
Research and development | 3,305 | 23 | % | 4,220 | 17 | % | (915 | ) | (22 | %) | |||||||||||||||||||
Selling and marketing | 4,063 | 28 | % | 5,946 | 25 | % | (1,883 | ) | (32 | %) | |||||||||||||||||||
General and administrative | 2,451 | 17 | % | 5,953 | 24 | % | (3,502 | ) | (59 | %) | |||||||||||||||||||
Total cost and expenses | 15,100 | 104 | % | 23,994 | 99 | % | (8,894 | ) | (37 | %) | |||||||||||||||||||
(Loss) income from operations | (551 | ) | (4 | %) | 212 | 1 | % | (763 | ) | (360 | %) | ||||||||||||||||||
Interest income | 218 | 1 | % | 799 | 3 | % | (581 | ) | (73 | %) | |||||||||||||||||||
Other income (expense) | 157 | 1 | % | (69 | ) | -- | % | 226 | 328 | % | |||||||||||||||||||
(Loss) income before income taxes | (176 | ) | (1 | %) | 942 | 4 | % | (1,118 | ) | (119 | %) | ||||||||||||||||||
Provision for income taxes | 121 | 1 | % | 345 | 1 | % | (224 | ) | (65 | %) | |||||||||||||||||||
Net (loss) income | $ | (297 | ) | (2 | %) | $ | 597 | 3 | % | $ | (894 | ) | (150 | %) | |||||||||||||||
22 |
Nine Months Ended September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 |
2008 |
Change | |||||||||||||||||||||||||||
Amount |
As a % of Total Revenue |
Amount |
As a % of Total Revenue |
$ |
% | ||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||
Product revenues | $ | 34,824 | 79 | % | $ | 56,119 | 80 | % | $ | (21,295 | ) | (38 | %) | ||||||||||||||||
Royalty revenues | 4,032 | 9 | % | 8,294 | 12 | % | (4,262 | ) | (51 | %) | |||||||||||||||||||
Funded product development revenues | 1,636 | 4 | % | 1,950 | 3 | % | (314 | ) | (16 | %) | |||||||||||||||||||
Other revenues | 3,750 | 8 | % | 3,998 | 5 | % | (248 | ) | (6 | %) | |||||||||||||||||||
Total revenues | 44,242 | 100 | % | 70,361 | 100 | % | (26,119 | ) | (37 | %) | |||||||||||||||||||
Cost and expenses | |||||||||||||||||||||||||||||
Cost of product revenues | 15,267 | 34 | % | 19,689 | 28 | % | (4,422 | ) | (22 | %) | |||||||||||||||||||
Cost of royalty revenues | 1,613 | 4 | % | 3,318 | 5 | % | (1,705 | ) | (51 | %) | |||||||||||||||||||
Research and development | 10,125 | 23 | % | 14,153 | 20 | % | (4,028 | ) | (28 | %) | |||||||||||||||||||
Selling and marketing | 13,465 | 30 | % | 18,372 | 26 | % | (4,907 | ) | (27 | %) | |||||||||||||||||||
General and administrative | 7,566 | 17 | % | 17,285 | 25 | % | (9,719 | ) | (56 | %) | |||||||||||||||||||
Total cost and expenses | 48,036 | 108 | % | 72,817 | 103 | % | (24,781 | ) | (34 | %) | |||||||||||||||||||
Loss from operations | (3,794 | ) | (8 | %) | (2,456 | ) | (3 | %) | (1,338 | ) | 54 | % | |||||||||||||||||
Interest income | 552 | 1 | % | 3,058 | 4 | % | (2,506 | ) | (82 | %) | |||||||||||||||||||
Other income (loss) | 507 | 1 | % | (61 | ) | -- | % | 568 | 931 | % | |||||||||||||||||||
(Loss) income before income taxes | (2,735 | ) | (6 | %) | 541 | 1 | % | (3,276 | ) | (606 | %) | ||||||||||||||||||
(Benefit from) provision for income taxes | (780 | ) | (2 | %) | 189 | -- | % | (969 | ) | (513 | %) | ||||||||||||||||||
Net (loss) income | $ | (1,955 | ) | (4 | %) | $ | 352 | 1 | % | $ | (2,307 | ) | (655 | %) | |||||||||||||||
Product revenues. Product revenues for the three and nine months ended September 30, 2009 decreased by approximately $8.0 million and $21.3 million, respectively, as compared to the same periods in 2008 due primarily from the global economic slowdown, a decrease in consumer confidence and additional tightening of available credit from lending facilities for our customers. For the three and nine months ended September 30, 2009, customer service revenue increased by 5% in both periods as compared to the same periods in 2008. Sales of the StarLux Laser and Pulsed Light Systems, including a base unit and multiple, optional handpieces and the Aspire body sculpting system were the leading contributors to our product revenues for the three and nine months ended September 30, 2009 and 2008. International product revenue, consisting of revenue from our Australian subsidiary as well as from distributors in Europe, Asia, the Pacific Rim, and South and Central America and our sales shipped directly to international customers, was 37% and 40%, respectively, of total product revenue for the three and nine months ended September 30, 2009 in comparison to 37% and 33%, respectively, for the same periods in 2008. Royalty revenues. Royalty revenues decreased for the three and nine months ended September 30, 2009 in comparison to the same periods in 2008. For the three months ended September 30, 2009, the decrease is attributed to lower on-going royalty payments from our licensees. For the nine months ended September 30, 2009, the decrease is attributed to lower on-going royalty payments from our licensees and the recognition in 2008 of $682,000 in back-owed royalties from a patent settlement agreement with Alma Lasers, Ltd. executed in 2007 as this amount was determinable based on the completion of an audit by an independent accounting firm during the first quarter of 2008. Funded product development revenues. Funded product development revenues decreased for the three and nine months ended September 30, 2009, in comparison to the same periods in 2008. Funded product development revenues were generated from the development agreements with Johnson & Johnson Consumer Companies, Inc. and Procter & Gamble (and its wholly owned subsidiary The Gillette Company). 23 For the three months ended September 30, 2009 and 2008, we recognized $0 and $18,000 of funded product development revenues from Procter & Gamble (and its wholly owned subsidiary The Gillette Company). For the nine months ended September 30, 2009 and 2008, we recognized $0 and $216,000, respectively, of funded product development revenues from Procter & Gamble (and its wholly owned subsidiary The Gillette Company). The decrease in funded product development revenue from Procter & Gamble is the result of the termination of the Development and License Agreement with Gillette in the first quarter of 2008. For the three months ended September 30, 2009 and 2008, we recognized $806,000 and $937,000 of funded product development revenues from Johnson & Johnson. The funded product development revenues from Johnson & Johnson in the three and nine months ended September 30, 2009 and 2008 are provided for in several agreement amendments with Johnson & Johnson to provide for additional development funding for certain development activities and a study to test consumer perception of a home-use product which was completed in the third quarter of 2008. These payments will be recognized as revenue as costs are incurred and services are provided. As of September 30, 2009 and December 31, 2008, $199,000 and $726,000, respectively, of advance payments received from Johnson & Johnson for which services were not yet provided were included in deferred revenue. On October 16, 2009, we announced the termination of our Joint Development and License Agreement with Johnson & Johnson Consumer Companies, Inc. Despite having met all of our deliverables under the agreement, Johnson & Johnson terminated the agreement referencing the current unfavorable economic conditions as the reason for its decision. With this decision, Johnson & Johnson avoids having to make a large commercialization payment and avoids having to commit to the significant level of funding required to successfully launch a new product into the consumer market. Other revenues. For the three months ended September 30, 2009 and 2008, we recognized $1.25 million each period of other revenues, consisting of quarterly payments relating to a License Agreement with The Procter & Gamble Company (see Note 9). For the nine months ended September 30, 2009 and 2008, we recognized $3.75 million and $4.0 million, respectively, of other revenues, consisting primarily of quarterly payments relating to a License Agreement with The Procter & Gamble Company. Other revenues for the nine months ended September 30, 2008, also include the recognition of the remaining portion of trade dress infringement fees associated with the Alma Lasers, Ltd. settlement agreement of $250,000. As of September 30, 2009 and December 31, 2008, $0 and $1.25 million, respectively, of advance payments received from Procter & Gamble for which services were not yet provided were included in deferred revenue. Cost of product revenues. For the three months ended September 30, 2009 and 2008, the cost of product revenues as a percentage of total revenues was 33% and 28%, respectively. For the nine months ended September 30, 2009 and 2008, the cost of product revenues as a percentage of total revenues was 34% and 28%, respectively. The increase is due to lower product sales volume which resulted in lower overhead absorption and a shift in product sales to outside North America between the nine months ended September 30, 2009 and 2008, where we sell the majority of our products at fixed transfer prices to our distributors. Cost of royalty revenues. The cost of royalty revenues decreased for the three and nine months ended September 30, 2009 in comparison to the same periods in 2008. For the three months ended September 30, 2009, the decrease is attributed to lower on-going royalty payments from our licensees. For the nine months ended September 30, 2009, the decrease is attributed to lower on-going royalty payments from our licensees and the recognition in 2008 of $682,000 in back-owed royalties from a patent settlement agreement with Alma Lasers, Ltd. executed in 2007 as this amount was determinable based on the completion of an audit by an independent accounting firm during the first quarter of 2008. As a percentage of royalty revenues, the cost of royalty revenues was consistent at 40% in accordance with our license agreement with Massachusetts General Hospital in comparison to the same periods in 2008. Research and development expense. Research and development expense is a direct result of our spending related to our continued commitment of introducing new technology as well as enhancing our current family of products. 24 Expenses relating to the Johnson & Johnson Joint Development and License Agreement (see Note 10) decreased during the three and nine months ended September 30, 2009 by $0.3 million and $1.0 million, respectively, as compared to the same periods in 2008. The decrease for the three months ended September 30, 2009 was mainly due to decreases of $122,000 for clinical expenses, $89,000 for payroll and payroll related expenses, $73,000 for general overhead expenses, and $35,000 for material costs. The decrease for the nine months ended September 30, 2009 was mainly due to decreases of $497,000 for payroll and payroll related expenses, $469,000 for material costs, offset by increases of $12,000 for clinical expenses and $10,000 for general overhead expenses. Expenses for internal research and development projects relating to the introduction of new products, enhancements made to the current family of products, and research and development overhead decreased by $0.6 million and $3.1 million for the three and nine months ended September 30, 2009 as compared to the same periods in 2008. The main drivers of the decrease in the three and nine months ended September 30, 2009 as compared to the same periods in 2008 are lower stock-based compensation expense and an overall reduction of expenses during the global economic slowdown. Selling and marketing expense. For the three months ended September 30, 2009, selling and marketing expense decreased by $1.9 million over the comparable period in 2008. For the three months ended September 30, 2009, factors driving the decrease in selling and marketing expense were decreases of $1.0 million from commission expense, $562,000 from payroll and payroll related expenses, and $239,000 from general overhead expenses as compared to the same period in 2008. For the nine months ended September 30, 2009, selling and marketing expense decreased by $4.9 million over the comparable period in 2008. For the nine months ended September 30, 2009, factors driving the decrease in selling and marketing expense were decreases of $2.2 million from commission expense, $1.4 million from general overhead expenses, and $1.4 million from payroll and payroll related expenses as compared to the same period in 2008. The majority of these decreases in selling and marketing expenses directly correlate with the decreases we have experienced in our product revenues as well as our intention to reduce expenses during this difficult economic period. Expenses related to our foreign subsidiaries totaled approximately $0.4 million in each of the three months ended September 30, 2009 and 2008 and $0.9 million and $0.7 million, respectively, in the nine months ended September 30, 2009 and 2008. General and administrative expense. For the three months ended September 30, 2009, general and administrative expenses decreased by $3.5 million over the comparable period in 2008. For the quarter ended September 30, 2009, factors driving the decrease in general and administrative expense were decreases of $3.8 million from legal expenses mainly related to patent litigation, $576,000 in general overhead expenses, and a decrease in bad debt expense of $159,000, offset by an increase of $1.1 million from incentive compensation as compared to the same period in 2008. For the nine months ended September 30, 2009, general and administrative expenses decreased by $9.7 million over the comparable period in 2008. For the quarter ended September 30, 2009, factors driving the decrease in general and administrative expense were decreases of $9.9 million from legal expenses mainly related to patent litigation, $1.5 million from payroll and payroll related expenses which consists mainly of a decrease in stock-based compensation expense, $1.1 million in general overhead expenses, and a decrease in bad debt expense of $442,000, offset by an increase of $3.0 million from incentive compensation as compared to the same period in 2008. Interest income. Interest income decreased for the three and nine months ended September 30, 2009 over the comparable periods in 2008 due to lower cash, cash equivalents, and investments balances mainly due to the construction of our new operational facility, lower interest rates and a more conservative investment strategy. For the nine months ended September 30, 2009 and 2008, we received $0 and $52,000 of interest, respectively, on back-owed royalty revenues related to the new patent license agreement with Alma Lasers, Ltd. Other income. Other income for the three and nine months ended September 30, 2009 and 2008, includes the foreign exchange gain (loss) resulting from transactions in currencies other than the U.S. dollar. 25 Provision for (benefit from) income taxes. We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Effective January 1, 2007, the Company adopted FIN No. 48, Accounting for Uncertainty in Income Taxes. Our effective benefit tax rate for the nine months ended September 30, 2009 and 2008 was 29% and 35%, respectively. We booked an adjustment in the third quarter 2009 which decreased our research credits. This resulted in an increase to tax expense and decreased our effective tax benefit for the period ended September 30, 2009. Liquidity and capital resourcesThe following table sets forth, for the periods indicated, a year over year comparison of key components of our liquidity and capital resources (in thousands): |
Nine months ended September 30, |
Change | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 |
2008 |
$ |
% | |||||||||||||||||
Cash flows from operating activities | $ | 7,782 | $ | 4,079 | 3,703 | 91 | % | |||||||||||||
Cash flows (used in) from investing activities | (15,151 | ) | 35,495 | (50,646 | ) | (143 | %) | |||||||||||||
Cash flows used in financing activities | (5,877 | ) | (2,243 | ) | 3,634 | 162 | % | |||||||||||||
Capital expenditures, including construction in | ||||||||||||||||||||
progress | $ | 15,776 | $ | 890 | 14,886 | 1,673 | % |
Additionally, our cash, investments, accounts receivable, inventories, working capital, and notes payable are shown below for the periods indicated (in thousands). |
September 30, | December 31, | Change | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 |
2008 |
$ |
% |
||||||||||||||
Cash and cash equivalents | $ | 109,360 | $ | 122,601 | (13,241 | ) | (11 | %) | |||||||||
Accounts receivable, net | 5,500 | 6,395 | (895 | ) | (14 | %) | |||||||||||
Inventories, net | 12,455 | 16,046 | (3,591 | ) | (22 | %) | |||||||||||
Working capital | 114,597 | 129,703 | (15,106 | ) | (12 | %) | |||||||||||
Non-current investments, at fair value | 4,124 | 4,487 | (363 | ) | (8 | %) | |||||||||||
Notes payable | -- | 6,000 | (6,000 | ) | (100 | %) |
We believe that our current cash balances and expected future cash flows will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities for at least the next twelve months. As of September 30, 2009, we had no debt outstanding. The $6.0 million of short-term debt outstanding on December 31, 2008 was repaid during 2009. At September 30, 2009, we held $4.1 million in auction-rate securities (ARS). The ARS we invest in are high quality securities, none of which are mortgage-backed. At December 31, 2007, because of the short-term nature of our investment in these securities, they were classified as available-for-sale and included in short-term investments on our consolidated balance sheets. Subsequent to December 31, 2007, our securities failed at auction due to a decline in liquidity in the ARS and other capital markets. We will not be able to access our investments in ARS until future auctions are successful, ARS are called for redemption by the issuers, or until sold in a secondary market. As our investments in ARS currently lack short-term liquidity, we have reclassified these investments as non-current as of September 30, 2009. In the nine months ended September 30, 2009, we sold $625,000 of the ARS held at December 31, 2008. We have determined that the fair value of our ARS was temporarily impaired as of September 30, 2009. For the three and nine months ended September 30, 2009, we marked to market our ARS and recorded an unrealized loss of $24,000 and an unrealized gain of $143,000, respectively, net of taxes in accumulated other comprehensive (loss) income in stockholders equity to reflect the temporary impairment of our ARS. The recovery of these investments is based upon market factors which are not within our control. As of September 30, 2009, we do not intend to sell the ARS and it is not more likely than not that we will be required to sell the ARS before recovery of their amortized cost bases, which may be at maturity. 26 Cash flows from operating activities for the nine months ended September 30, 2009, increased compared to the same period in 2008. This increase in operating activity cash flows reflects a decrease in working capital requirements, offset by a decrease in profitability, a decrease in tax benefit from the exercise of stock options, and a decrease in stock compensation expense in the first nine months of 2009, compared to the same period in 2008. Cash flows related to investing activities decreased for the nine months ended September 30, 2009, compared to the same period in 2008. These amounts primarily reflect cash used for purchases of property and equipment, purchases of investments, offset by proceeds from the sale of investments. Cash flows used in financing activities increased for the nine month period ended September 30, 2009, compared to the same period in 2008. This increase was primarily due to an increase in net payments on outstanding credit facilities and a decrease in tax benefits from stock option exercises, offset by a decrease in the purchase of treasury shares. In December 2008, we secured access to a revolving note through December 17, 2013. Through December 16, 2010, we have access to $30 million. The credit limit is subsequently reduced to $26 million, $22 million, and $18 million on December 17, 2010, December 17, 2011, and December 17, 2012, respectively. Outstanding balances on the revolving note bear interest at a rate equal to the sum of the LIBOR Advantage rate plus 0.75% per annum. At September 30, 2009 and December 31, 2008, we had outstanding debt of $0 and $6 million. The average interest rate at December 30, 2008 was 1.22%. The interest expense was capitalized into Construction in Progress which is a component of Property and Equipment on the consolidated balance sheets and was immaterial for the three and nine months ended September 30, 2009. Any outstanding debt is due on December 17, 2013. On January 2, 2009, we repaid the $6 million borrowed as of December 31, 2008. On July 1, 2009, we repaid the $12 million outstanding as of June 30, 2009. As of September 30, 2009, we had no debt outstanding. Our revolving note requires that we maintain certain financial covenants. In order to be in compliance with the covenants, unencumbered cash and marketable securities less outstanding debt must be greater than the credit limit. For all periods in which we had outstanding debt, we were in compliance with the financial covenants. If we were to default on our debt, the building would be used as collateral. Excluding the construction of our new operational facility, as discussed below, we anticipate that capital expenditures relating to machinery and equipment, furniture and fixtures, and leasehold improvements for the remainder of 2009 will total approximately $200,000. We expect to finance these expenditures with cash on hand. On November 19, 2008, we purchased land for $10.7 million on which we are building our new operational facility. Construction of the building is expected to be completed during the first quarter of 2010. We anticipate that capital expenditures related to the building for 2009 will be approximately $24 million. During the three and nine months ended September 30, 2009, we had $6.3 million and $15.7 million of capital expenditures related to the building. The total cost of the building (exclusive of land) is expected to cost approximately $25 million. We are financing this project by using cash on hand and drawing down on our line of credit. On August 13, 2007, our Board of Directors approved a stock repurchase program under which our management is authorized to repurchase up to one million shares of our common stock. The timing and actual number of shares purchased will depend on a variety of factors such as price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. Stock repurchases under this program, if any, will be made using our cash resources, and may be commenced or suspended at any time or from time to time at managements discretion without prior notice. During the nine months ended September 30, 2009, we used $258,000 to purchase 35,000 shares of our common stock at an average price of $7.39. 27 Off-balance sheet arrangementsWe do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2009, we were not involved in any unconsolidated transactions. Contractual obligationsWe are a party to three patent license agreements with Massachusetts General Hospital whereby we are obligated to pay royalties to Massachusetts General Hospital for sales of certain products as well as a percentage of royalties received from third parties. Royalty expense for the three and nine months ended September 30, 2009 totaled approximately $0.6 million and $1.9 million, respectively. For more information, please see the Amended and Restated License Agreement (MGH Case Nos. 783, 912, 2100), the License Agreement (MGH Case No. 2057) and the License Agreement (MGH Case No. 1316) filed as Exhibits 10.1, 10.2, and 10.3 to our Current Report on Form 8-K filed on March 20, 2008. We have obligations related to the adoption of FIN 48. Further information about changes in these obligations can be found in Note 12. We are obligated to make future payments under various contracts, including non-cancelable inventory purchase commitments and our operating lease relating to our Burlington, Massachusetts manufacturing, research and development and administrative offices. On July 30, 2007, we signed an amendment to our Burlington, Massachusetts lease to add an additional 13,600 square feet. The lease for this facility was to expire in August 2009. However, we have renegotiated a 12 month lease extension, expiring in August 2010, at an increase over our current rate to coordinate the timing between construction of our new facility and the expiration of our current facility lease. Rent expense, including these lease amendments, will be approximately $1.5 million in 2009. On November 19, 2008, we purchased land for $10.7 million on which we are building our new operational facility. For more information, please see the Purchase and Sale Agreement filed as Exhibit 10.1 to our Current Report on Form 8-K filed on September 16, 2008. The following table summarizes our estimated contractual cash obligations as of September 30, 2009, excluding construction in progress related to our new building, royalty and employment obligations because they are variable and/or subject to uncertain timing (in thousands): |
Payments due by period |
|||||||||
---|---|---|---|---|---|---|---|---|---|
Total |
Less than 1 year |
1 - 3 Years |
4 - 5 Years |
After 5 Years | |||||
Operating leases | $1,491 | $1,491 | $ -- | $ -- | $ -- | ||||
Purchase commitments | 3,499 | 3,499 | -- | -- | -- | ||||
Total contractual cash obligations | $4,990 | $4,990 | $ -- | $ -- | $ -- | ||||
o | FDA, other regulatory authorities or an institutional review board may place a clinical trial on hold; |
o | patients may not enroll in clinical trials, or patient follow-up may not occur, at the rate we expect; |
o | patients may not comply with trial protocols; |
o | institutional review boards and third party clinical investigators may delay or reject our trial protocol; |
34 |
o | third party clinical investigators may decline to participate in a trial or may not perform a trial on our anticipated schedule or consistent with the clinical trial protocol, good clinical practices, or other FDA requirements; |
o | third party organizations may not perform data collection and analysis in a timely or accurate manner; |
o | regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials, or invalidate our clinical trials; |
o | governmental regulations may change or administrative actions may occur that cause delays; and |
o | the interim or final results of the clinical trials may be inconclusive or unfavorable as to safety or effectiveness. |
Medical devices may be marketed only for the indications for which they are approved or cleared. The FDA may not approve or clear indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or pre-market approval of new products, new intended uses or modifications to existing products. Our clearances can be revoked if safety or effectiveness problems develop. To date, the FDA has deemed our products eligible for the 510(k) clearance process. We believe that our products in development will receive similar treatment. However, we cannot be sure that the FDA will not impose the more burdensome PMA approval process upon one or more of our future products, nor can we be sure that 510(k) clearance or PMA approval will ever be obtained for any product we propose to market, and our failure to do so could adversely affect our ability to sell our products. We often seek FDA clearance for additional indications for use. Clinical trials in support of such clearances for additional indications may be costly and time-consuming. In the event that we do not obtain additional FDA clearances, our ability to market products in the United States and revenue derived therefrom may be adversely affected. Medical devices may be marketed only for the indications for which they are approved or cleared, and if we are found to be marketing our products for off-label, or non-approved, uses we might be subject to FDA enforcement action or have other resulting liability. Our products are subject to similar regulations in many international markets. Complying with these regulations is necessary for our strategy of expanding the markets for sales of our products into these countries. Compliance with the regulatory clearance process in any country is expensive and time consuming. Regulatory clearances may necessitate clinical testing, limitations on the number of sales and limitations on the type of end user, among other things. In certain instances, these constraints can delay planned shipment schedules as design and engineering modifications are made in response to regulatory concerns and requests. We may not be able to obtain clearances in each country in a timely fashion or at all, and our failure to do so could adversely affect our ability to sell our products in those countries. After clearance or approval of our products, we are subject to continuing regulation by the FDA, and if we fail to comply with FDA regulations, our business could suffer. Even after clearance or approval of a product, we are subject to continuing regulation by the FDA, including the requirements that our facility be registered and our devices listed with the agency. We are subject to Medical Device Reporting regulations, which require us to report to the FDA if our products may have caused or contributed to a death or serious injury or malfunction in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. We must report corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug, and Cosmetic Act caused by the device that may present a risk to health, and we must maintain records of other corrections or removals. The FDA closely regulates promotion and advertising and our promotional and advertising activities could come under scrutiny. If the FDA objects to our promotional and advertising activities or finds that we failed to submit reports under the Medical Device Reporting regulations, for example, the FDA may allege our activities resulted in violations. 35 The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions: |
o | letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
o | repair, replacement, refunds, recall or seizure of our products; o operating restrictions or partial suspension or total shutdown of production; |
o | refusing or delaying our requests for 510(k) clearance or pre-market approval of new products or new intended uses; and |
o | criminal prosecution. |
If any of these events were to occur, they could harm our business. We have modified some of our products and sold them under prior 510(k) clearances. The FDA could retroactively decide the modifications required new 510(k) clearances and require us to cease marketing and/or recall the modified products. Any modification to one of our 510(k) cleared devices that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance. We may be required to submit pre-clinical and clinical data depending on the nature of the changes. We may not be able to obtain additional 510(k) clearances or pre-market approvals for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect our ability to introduce new or enhanced products into the market in a timely manner, which in turn would harm our revenue and operating results. We have modified some of our marketed devices, but we believe that new 510(k) clearances are not required. We cannot be certain that the FDA would agree with any of our decisions not to seek 510(k) clearance. If the FDA requires us to seek 510(k) clearance for any modification, we also may be required to cease marketing and/or recall the modified device until we obtain a new 510(k) clearance. Federal regulatory reforms may adversely affect our ability to sell our products profitably. From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. We may also be subject to state regulations. State regulations, and changes to state regulations, may prevent sales to particular end users or may restrict use of the products to particular end users or under particular supervision which may decrease revenues or prevent growth of revenues. Our products may also be subject to state regulations. Federal regulation allows our products to be sold to and used by licensed practitioners as determined on a state-by-state basis which complicates monitoring compliance. As a result, in some states non-physicians may purchase and operate our products. In most states, it is within a physicians discretion to determine whom they can supervise in the operation of our products and the level of supervision. However, some states have specific regulations as to appropriate supervision and who may be supervised. A state could disagree with our decision to sell to a particular type of end user or change regulations to prevent sales to particular types of end users or change regulations as to supervision requirements. In several states, applicable regulations are in flux. Thus, state regulations and changes to state regulations may decrease revenues or prevent growth of revenues. 36 Because we do not require training for all users of our products, and sell our products to non-physicians, there exists an increased potential for misuse of our products, which could harm our reputation and our business. Federal regulations allow us to sell our products to or on the order of practitioners licensed by state law. The definition of licensed practitioners varies from state to state. As a result, our products may be purchased or operated by physicians with varying levels of training and, in many states, by non-physicians, including nurse practitioners, chiropractors and technicians. Outside the United States, many jurisdictions do not require specific qualifications or training for purchasers or operators of our products. We do not supervise the procedures performed with our products, nor do we require that direct medical supervision occur. Our products come with an operators manual. We and our distributors offer product training sessions, but neither we nor our distributors require purchasers or operators of our products to attend training sessions. The lack of required training and the purchase and use of our products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation. Achieving complete compliance with FDA regulations is difficult, and if we fail to comply, we could be subject to FDA enforcement action or our business could suffer. We are subject to inspection and market surveillance by the FDA to determine compliance with regulatory requirements. The FDAs regulatory scheme is complex, especially the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation, and other quality assurance procedures. Because some of our products involve the use of lasers, those products also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products as well as incorporating certain safety features in the design of laser products. The FDA enforces the Quality System Regulation and laser performance standards through periodic unannounced inspections. We have been, and anticipate in the future being, subject to such inspections. The complexity of the Quality System Regulation makes complete compliance difficult to achieve. Also, the determination as to whether a Quality System Regulation violation has occurred is often subjective. If the FDA finds that we have failed to comply with the Quality System Regulation or other applicable requirements or failed to take satisfactory corrective action in response to an adverse Quality System Regulation inspection or comply with applicable laser performance standards, the agency can institute a wide variety of enforcement actions, including a public warning letter or other stronger remedies, such as fines, injunctions, criminal and civil penalties, recall or seizure of our products, operating restrictions, partial suspension, or total shutdown of our production, refusing to permit the import or export of our products, delaying or refusing our requests for 510(k) clearance or PMA approval of new products, withdrawing product approvals already granted or criminal prosecution, any of which could cause our business and operating results to suffer. We purchased land and began construction of a new operational facility during the fourth quarter of 2008. We are in the process of coordinating the transition from the current facility to the new facility. During this process, our operations may be disrupted during the move to our new facility and our business and operating results could be harmed. In the fourth quarter of 2008, we closed on the purchase of land for $10.7 million and entered into a construction management agreement for construction of a new operational facility on that land at a guaranteed maximum price of $23.5 million. We began construction in the fourth quarter of 2008. The lease for this facility was to expire in August 2009. However, we have negotiated a 12 month lease extension, expiring in August 2010, at an increase over our current rate to coordinate the timing between the construction of our new facility and the expiration of our current facility lease. During this time, we may incur many issues which would negatively affect our business and operating results, including: |
o | higher rental expenses after the lease on our current operational facility expires; |
o | permitting difficulties for our new operational facility; |
o | construction cost overruns; and |
o | disruption of operations during the move from our current facility to our new operational facility. |
37 Our effective income tax rate may vary significantly.Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changing interpretations of existing tax laws or regulations, changes in estimates of prior years items, changes in our deferred tax assets and related valuation allowances, future levels of research and development spending, stock option grants, deductions for employee stock option exercises being different than what we projected, and changes in overall levels of income before taxes. We may not be able to realize our deferred tax assets.Although we have generated a profit in recent years, we incurred losses during 2008 and the first nine months of 2009. We have a history of losses. If we do not achieve a certain amount of profitability in the near future, it may be more likely than not that we will not be able to realize some or all of our deferred tax assets. If we are unable to realize some or all of our deferred tax assets, we could have a significant charge to our statement of operations which would affect our profitability. Failure to manage our relationships with third party researchers effectively may limit our access to new technology, increase the cost of licensing new technology, and divert management attention from our core business. We are dependent upon third-party researchers over whom we do not have absolute control to satisfactorily conduct and complete research on our behalf. We are also dependent upon third-party researchers to grant us licensing terms, which may or may not be favorable, for products and technology they may develop. We provide research funding, light technology and optics know-how in return for licensing rights with respect to specific dermatologic and cosmetic applications and patents. In return for certain exclusive license rights, we are subject to due diligence obligations in order to maintain such exclusivity. Our success will be dependent upon the results of research with our partners and meeting due diligence obligations. We cannot be sure that third-party researchers will agree with our interpretation of the terms of our agreements, that we will meet our due diligence obligations, or that such research agreements will provide us with marketable products in the future or that any of the products developed under these agreements will be profitable for us. If our new products do not gain market acceptance, our revenues and operating results could suffer. The commercial success of the products and technology we develop will depend upon the acceptance of these products by providers of aesthetic procedures and their patients and clients. It is difficult for us to predict how successful recently introduced products, or products we are currently developing, will be over the long term. If the products we develop do not gain market acceptance, our revenues and operating results could suffer. We expect that many of the products we develop will be based upon new technologies or new applications of existing technologies. It may be difficult for us to achieve market acceptance of some of our products, particularly the first products that we introduce to the market based on new technologies or new applications of existing technologies. If demand for our aesthetic treatment systems by non-traditional physician customers and spas does not develop as we expect, our revenues will suffer and our business will be harmed. Our revenues from non-traditional physician customers and spa purchasers of our products continue to increase. We believe, and our growth expectations assume, that we and other companies selling light-based (lasers and lamps) aesthetic treatment systems have only begun to penetrate these markets and that our revenues from selling to these markets will continue to increase. If our expectations as to the size of these markets and our ability to sell our products to participants in these markets are not correct, our revenues will suffer and our business will be harmed. 38 If there is not sufficient consumer demand for the procedures performed with our products, practitioner demand for our products could decline, which would adversely affect our operating results. Most procedures performed using our aesthetic treatment systems are elective procedures that are not reimbursable through government or private health insurance. The cost of these elective procedures must be borne by the client. As a result, the decision to undergo a procedure that utilizes our products may be influenced by a number of factors, including: |
o | consumer awareness of and demand for procedures and treatments; |
o | the cost, safety and effectiveness of the procedure and of alternative treatments; |
o | the success of our and our customers' sales and marketing efforts to purchasers of these procedures; and |
o | consumer confidence, which may be affected by short-term or long-term economic and other conditions. |
If there is not sufficient demand for the procedures performed with our products, a weakening in the economy, or other factors, practitioner demand for our products may be reduced or buying decisions postponed, which would adversely affect our operating results. Our business and operations are experiencing rapid change. If we fail to effectively manage the changing market, our business and operating results could be harmed. We have experienced rapid change in the scope of our operations and the industry in which we operate. This change has placed significant demands on our management, as well as our financial and operational resources. If we do not effectively manage the changing market and its effect on our business, the efficiency of our operations and the quality of our products could suffer, which could adversely affect our business and operating results. To effectively manage this change, we will need to continue to: |
o | implement appropriate operational, financial and management controls, systems and procedures; |
o | change our manufacturing capacity and scale of production; |
o | change our sales, marketing and distribution infrastructure and capabilities; and |
o | provide adequate training and supervision to maintain high quality standards. |
Failure to receive shipments of critical components could reduce revenues and reduced reliability of critical components could increase expenses. We develop light-based systems that incorporate third-party components and we purchase some of these components from small, specialized vendors that are not well capitalized. We do not have long-term contracts with some of these third parties for the supply of parts. A disruption in the delivery of these key components, or our inability to obtain substitute components or subassemblies from alternate sources at acceptable prices in a timely manner, or our inability to obtain assembly or testing services could prevent us from manufacturing products and result in a decrease in revenue. We depend on an acceptable level of reliability for purchased components. Reliability below expectations for key components could have an adverse affect on inventory and inventory reserves. Any extended interruption in our supplies of third-party components could materially harm our business. We forecast sales to determine requirements for components and materials used in our products and if our forecasts are incorrect, we may experience either delays in shipments or increased inventory costs. 39 To manage our manufacturing operations with our suppliers, we forecast anticipated product orders and material requirements to predict our inventory needs and enter into purchase orders on the basis of these requirements. Our limited historical experience may not provide us with enough data to accurately predict future demand. If our business expands, our demand for components and materials would increase and our suppliers may be unable to meet our demand. If we overestimate our component and material requirements, we will have excess inventories, which would increase our expenses. If we underestimate our component and material requirements, we may have inadequate inventories, which could interrupt, delay, or prevent delivery of our products to our customers. Our proprietary technology has only limited protections which may not prevent competitors from copying our new developments. This may impair our ability to compete effectively. We may expend significant resources enforcing our intellectual property rights to prevent such copying, and our intellectual property could be determined to be not infringed, invalid or unenforceable. Our business could be materially and adversely affected if we are not able to adequately protect our intellectual property rights. We rely on a combination of patent, copyright, trademark and trade secret laws, licenses and confidentiality agreements to protect our proprietary rights. We own and license a variety of patents and patent applications in the United States and corresponding patents and patent applications in many foreign jurisdictions. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. We have granted certain patent licenses to several competitors, and in return for those license grants, we receive a significant ongoing royalty revenue stream. A few of these competitors entered into license agreements only after we sued them for patent infringement. We are currently enforcing certain of our patents against Candela Corporation, Syneron, Inc., Tria Beauty, Inc. and Alma Lasers, Ltd. and intend to enforce against other competitors in the future. We do not know how successful we will be in asserting our patents against Candela, Syneron, Tria, Alma or other suspected infringers. Whether or not we are successful in the pending lawsuits, litigation consumes substantial amounts of our financial resources and diverts managements attention away from our core business. Public announcements concerning this litigation that are unfavorable to us may in the future result in significant declines in our stock price. An adverse ruling or judgment in this matter could result in a loss of our significant ongoing royalty revenue stream and could also have a material adverse effect on license agreements with other companies both of which could have a material adverse effect on our business and results of operation and cause our stock price to decline significantly. (For more information about our patent litigation, see Part II, Item 1 Legal Proceedings.) In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We generally enter into agreements with our employees and third parties with whom we work, including but not limited to consultants and vendors, to restrict access to, and distribution of, our proprietary information and define our intellectual property ownership rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology, proprietary information and know-how and we may not have adequate remedies for any such breach. Monitoring unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete effectively could be harmed and the value of our technology and products could be adversely affected. Costly and time consuming lawsuits may be necessary to enforce and defend patents issued or licensed exclusively to us, to protect our trade secrets and/or know-how or to determine the enforceability, scope and validity of others intellectual property rights. Such lawsuits may result in patents issued or licensed exclusively to us to be found invalid and unenforceable. In addition, our trade secrets may otherwise become known or our competitors also may independently develop technologies that are substantially equivalent or superior to our technology and which do not infringe our patents. 40 Claims by others that our products infringe their patents or other intellectual property rights could prevent us from manufacturing and selling some of our products or require us to pay royalties or incur substantial costs from litigation or development of non-infringing technology. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. The light-based cosmetic and dermatology industry in particular is characterized by a large number of patents and related litigation regarding patents and other intellectual property rights. Because our resources are limited and patent applications are maintained in secrecy for a period of time, we can conduct only limited searches to determine whether our technology infringes any patents or patent applications. Any claims for patent infringement, regardless of merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause shipment delays, require us to develop non-infringing technology or to enter into royalty or licensing agreements. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Although patent and intellectual property disputes in the light-based industry have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and often require the payment of ongoing royalties, which could have a negative impact on gross margins. There can be no assurance that necessary licenses would be available to us on satisfactory terms, or that we could redesign our products or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling some of our products. This could have a material adverse effect on our business, results of operations and financial condition. Candela Corporation has one pending patent infringement lawsuit against us. (For more information about our patent litigation, see Part II, Item 1 Legal Proceedings.) Litigation with Candela is expected to be expensive and protracted, and our intellectual property position may be weakened as a result of an adverse ruling or judgment. Whether or not we are successful in the pending lawsuit, litigation consumes substantial amounts of our financial resources and diverts managements attention away from our core business. Public announcements concerning this litigation that are unfavorable to us may in the future result in significant declines in our stock price. An adverse ruling or judgment in this matter could cause our stock price to decline significantly. We may not be able to successfully collect licensing royalties. Material portions of our revenues consist of royalties from sub-licensing patents licensed to us on an exclusive basis by Massachusetts General Hospital. If we are unable to collect our licensing royalties, our revenues will decline. Quarterly revenue or operating results could cause the price of our common stock to fall. Our quarterly revenue and operating results are difficult to predict and may swing sharply from quarter to quarter. If our quarterly revenue or operating results fall below the expectations of investors or public market analysts, the price of our common stock could fall substantially. Our quarterly revenue is difficult to forecast for many reasons, some of which are outside of our control. For example, many factors are related to market supply and demand, including potential increases in the level and intensity of price competition between our competitors and us, potential decrease in demand for our products and possible delays in market acceptance of our new products. Other factors are related to our customers and include changes in or extensions of our customers budgeting and purchasing cycles and changes in the timing of product sales in anticipation of new product introductions or enhancements by us or our competitors. Factors related to our operations may also cause quarterly revenue or operating results to fall below expectations, including our effectiveness in our manufacturing process, unsatisfactory performance of our distribution channels, service providers, or customer support organizations, and timing of any acquisitions and related costs. The expense and potential unavailability of liability insurance coverage for our customers could adversely affect our ability to sell our products and our financial condition. 41 Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing coverage in some states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our products, and potential customers may elect not to purchase laser and other light-based products. We may be unable to attract and retain key executives and research and development personnel that we need to succeed. As a small company with approximately 200 employees, our success depends on the services of key employees in executive and research and development positions. The loss of the services of one or more of these employees could have a material adverse effect on our business. Our future success will depend in large part upon our ability to attract, retain, and motivate highly skilled employees. We cannot be certain that we will be able to do so. Product liability suits could be brought against us due to a defective design, material or workmanship or due to misuse of our products. These lawsuits could be expensive and time consuming and result in substantial damages to us and increases in our insurance rates. If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to substantial and costly litigation by our customers or their patients or clients. Furthermore, in the event that any of our products prove to be defectively designed and manufactured, we may be required to recall and redesign such products. Misusing our products or failing to adhere to operating guidelines for our products can cause severe burns or other damage to the eyes, skin or other tissue. We are routinely involved in claims related to the use of our products. Product liability claims could divert managements attention from our core business, be expensive to defend and result in sizable damage awards against us. Our current insurance coverage may not be sufficient to cover these claims. Moreover, in the future, we may not be able to obtain insurance in amount or scope sufficient to provide us with adequate coverage against potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales. We would need to pay any product losses in excess of our insurance coverage out of cash reserves, harming our financial condition and adversely affecting our operating results. We face risks associated with product warranties. We could incur substantial costs as a result of product failures for which we are responsible under warranty obligations. Because we derive a significant amount of our revenue from international sales, we are susceptible to currency fluctuations, long payment cycles, credit risks and other risks associated with conducting business overseas. We sell a significant amount of our products and services outside the United States. International product revenue consists of sales from our Australian subsidiary, distributors in Japan, Europe, Asia, the Pacific Rim, and South and Central America and sales shipped directly to international locations from the United States. We expect that international sales will continue to be significant. As a result, a major part of our revenues and operating results could be adversely affected by risks associated with international sales, including but not limited to political and economic instability and difficulties in managing our foreign operations. In particular, longer payment cycles common in foreign markets, credit risk and delays in obtaining necessary import or foreign certification or regulatory approvals for products may occur. In addition, significant fluctuations in the exchange rates between the U.S. dollar and foreign currencies could cause us to lower our prices and thus reduce our profitability, or could cause prospective customers to push out orders to later dates because of the increased relative cost of our products in the aftermath of a currency devaluation or currency fluctuation. 42 We are subject to fluctuations in the exchange rate of the U.S. dollar and foreign currencies. We do not actively hedge our exposure to currency rate fluctuations. While we transact business primarily in U.S. dollars, and a significant proportion of our revenue is denominated in U.S. dollars, a portion of our costs and revenue is denominated in other currencies, such as the Euro and Australian dollar. As a result, changes in the exchange rates of these currencies to the U.S. dollar will affect our net income. To successfully grow our international presence, we must address many issues with which we have little or no experience. We may not be able to properly manage our foreign subsidiaries which may have an adverse effect on our business and operating results. We have two international subsidiaries which are located in The Netherlands and Australia. In managing foreign operations, we must address many issues with which we have little or no experience which exposes our business to additional risk. Our foreign operations redirect managements time from other operating issues. We may not be successful in operating our foreign subsidiaries. If we are unsuccessful in managing our foreign subsidiaries, the foreign subsidiaries could be unprofitable and negatively impact our resources and financial position. We may not be able to sustain or increase profitability and we may seek additional financing to grow the business. Although we have generated a profit in recent years, we incurred losses during 2008 and the first nine months of 2009. We have a history of losses. We may not be able to regain, sustain or increase profitability on a quarterly or annual basis due to many factors including lower demand for our products by practitioners, including practitioners postponing their buying decisions due to the weakening economy, the tightening of the credit market, and other factors. If our operating results fall below the expectations of investors or public market analysts, the price of our common stock could decline. We may determine, depending upon the opportunities available, to seek additional debt or equity financing to fund the costs of expansion. Additionally, if we incur indebtedness to fund increased levels of accounts receivable, finance the acquisition of capital equipment, or if we issue debt securities in connection with any acquisition we will be subject to risks associated with incurring substantial additional indebtedness. The liquidity and market value of our investments may decrease. As of September 30, 2009, we held approximately $4.1 million of auction-rate securities. Recently, there have been disruptions in the market for auction-rate securities related to liquidity which has caused substantially all auctions to fail. All of our securities held as of September 30, 2009 failed in their last auction. We will not be able to access our investments in ARS until future auctions are successful, ARS are called for redemption by the issuers, or until we sell the securities in a secondary market. In the event that we are unable to sell the underlying securities at or above par, these securities may not provide us a liquid source of cash in the future. At September 30, 2009, due to the uncertainty and illiquidity in this market, we have classified our auction-rate securities as non-current assets and have recorded a cumulative unrealized loss of $0.2 million, net of taxes in accumulated other comprehensive (loss) income. The recovery of these investments is based upon market factors which are not within our control. As of September 30, 2009, we do not intend to sell the ARS and it is not more likely than not that we will be required to sell the ARS before recovery of their amortized cost bases, which may be at maturity. Our common stock could be further diluted by the conversion of outstanding options, warrants, and stock appreciation rights. In the past, we have issued and still have outstanding convertible securities in the form of options, warrants and stock appreciation rights. We may continue to issue options, warrants, stock appreciation rights, and other equity rights as compensation for services and incentive compensation for our employees, directors and consultants or others who provide services to us. We have a substantial number of shares of common stock reserved for issuance upon the conversion and exercise of these securities. Such a conversion would dilute our stockholders and could adversely affect the market price of our common stock. 43 Our charter documents, Delaware law and our shareholder rights plan may discourage potential takeover attempts. Our Second Restated Certificate of Incorporation and our By-laws contain provisions that could discourage takeover attempts or make more difficult the acquisition of a substantial block of our common stock. Our By-laws require a stockholder to provide to our Secretary advance notice of director nominations and business to be brought by such stockholder before any annual or special meeting of stockholders, as well as certain information regarding such nomination and/or business, the stockholder and others known to support such proposal and any material interest they may have in the proposed business. They also provide that a special meeting of stockholders may be called only by the affirmative vote of a majority of the board of directors. These provisions could delay any stockholder actions that are favored by the holders of a majority of our outstanding stock until the next stockholders meeting. In addition, the board of directors is authorized to issue shares of our common stock and preferred stock that, if issued, could dilute and adversely affect various rights of the holders of common stock and, in addition, could be used to discourage an unsolicited attempt to acquire control of us. We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 may limit the ability of stockholders to approve a transaction that they may deem to be in their best interests. These provisions of our Second Restated Certificate of Incorporation, By-laws and the Delaware General Corporation Law could deter certain takeovers or tender offers or could delay or prevent certain changes in control or our management, including transactions in which stockholders might otherwise receive a premium for their shares over the then current market price. In April 1999, we adopted a shareholder rights agreement or poison pill. This is intended to protect shareholders from unfair or coercive takeover practices. On October 28, 2008, we amended and restated the April 1999 shareholder rights agreement to (i) extend the expiration date to October 28, 2018, (ii) increase the purchase price to $200.00, (iii) amend the definition of Acquiring Person to exclude a Person qualified to file Schedule 13G as provided in the definition, (iv) amend the recitals to take account of the Recapitalization that occurred May 7, 1999, and (v) make any other additional changes deemed necessary. For more information, please see the Amended and Restated Rights Agreement dated October 28, 2008 filed as an exhibit to our Current Report on Form 8-K filed October 31, 2008. Any acquisitions that we make could disrupt our business and harm our financial condition. From time to time, we evaluate potential strategic acquisitions of complementary businesses, products or technologies, as well as consider joint ventures and other collaborative projects. We may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate any businesses, products or technologies that we acquire. Any acquisition we pursue could diminish our cash available to us for other uses or be dilutive to our stockholders, and could divert managements time and resources from our core operations. Our stock price may be volatile.Our common stock price may be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including: |
o | acceptance and success of new products or technologies; |
o | the success of competitive products or technologies; |
o | regulatory developments in the United States and foreign countries; |
o | developments or disputes concerning patents or other foreign countries; |
o | the recruitment or departure of key personnel; |
o | variations in our financial results or those of companies that are perceived to be similar to us; |
o | market conditions in our industry and issuance of new or changed securities analyst's reports or recommendations; and |
o | general economic, industry and market conditions. |
44 Item 2. Changes in securities, use of proceeds and issuer purchases of securities |
Period |
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced program * |
Maximum number of shares that may yet be purchased under program * |
---|---|---|---|---|
July 1, 2009 through July 31, 2009 | -- | -- | -- | 324,500 |
August 1, 2009 through August 31, 2009 | -- | -- | -- | 324,500 |
September 1, 2009 through September 30, 2009 | -- | -- | -- | 324,500 |
Total | -- | -- | -- | 324,500 |
10.72 | Amendment to the Palomar Medical Technologies, Inc. 2007 Stock Incentive Plan |
31.1 | Certification of Joseph P. Caruso, President and Chief Executive Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Paul S. Weiner, Vice President and Chief Financial Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certification of Joseph P. Caruso, President and Chief Executive Officer of the Company, pursuant to 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32 | Certification of Joseph P. Caruso, President and Chief Executive Officer of the Company, pursuant to 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Palomar Medical
Technologies, Inc. (Registrant) |
Date: November 5, 2009 | By:/s/ Joseph P. Caruso Joseph P. Caruso President, Chief Executive Officer and Director |
Date: November 5, 2009 | By:/s/ Paul S. Weiner Paul S. Weiner Vice President and Chief Financial Officer |
46 |