Attached files
file | filename |
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EX-32.1 - PALOMAR MEDICAL TECHNOLOGIES INC | ex32.htm |
EX-31.1 - PALOMAR MEDICAL TECHNOLOGIES INC | ex31.htm |
EX-31.2 - PALOMAR MEDICAL TECHNOLOGIES INC | ex312.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For the
Quarter Ended March 31, 2010
¨
|
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
15
Network Drive, 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
Preferred
Stock Purchase Rights
|
Name of each exchange on which
registered
NASDAQ
– Global Select Market
|
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 x No
¨
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 ¨
No ¨
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 ¨ Accelerated
filer x
Non-accelerated filer ¨ Smaller
reporting company ¨
(Do
not check if a smaller
reporting
company)
Indicate
by check mark if the registrant is a shell company, in Rule 12b(2) of the
Exchange Act. Yes ¨ No x
The
number of shares outstanding of the registrant’s common stock as of the close of
business on May 4, 2010 was 18,521,245.
Palomar
Medical Technologies, Inc. and Subsidiaries
Table of
Contents
Condensed
Consolidated Balance Sheets
(Unaudited)
March
31,
|
December
31,
|
||||||||
2010
|
2009
|
||||||||
Assets
|
|||||||||
Current assets | |||||||||
Cash
and cash equivalents
|
$ | 76,147,389 | $ | 81,948,482 | |||||
Short-term
investments
|
25,000,000 | 25,000,000 | |||||||
Total cash, cash equivalents and short-term investments
|
101,147,389 | 106,948,482 | |||||||
Accounts
receivable, net
|
5,355,148 | 4,436,219 | |||||||
Inventories
|
10,854,448 | 11,126,352 | |||||||
Other
current assets
|
1,859,402 | 2,179,233 | |||||||
Total current assets
|
119,216,387 | 124,690,286 | |||||||
Marketable securities, at estimated fair value | 3,583,747 | 4,024,313 | |||||||
Property and equipment, net | 36,861,680 | 34,629,410 | |||||||
Other assets | 205,587 | 126,087 | |||||||
Total
assets
|
$ | 159,867,401 | $ | 163,470,096 | |||||
Liabilities
and Stockholders' Equity
|
|||||||||
Current liabilities | |||||||||
Accounts
payable
|
$ | 2,601,007 | $ | 2,696,217 | |||||
Accrued
liabilities
|
7,306,669 | 8,959,679 | |||||||
Deferred
revenue
|
5,066,318 | 5,221,924 | |||||||
Total current liabilities
|
14,973,994 | 16,877,820 | |||||||
Accrued
income taxes
|
2,963,326 | 2,965,077 | |||||||
Total liabilities
|
$ | 17,937,320 | $ | 19,842,897 | |||||
Commitments and contingencies (Note 10) | |||||||||
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 - 18,521,245 shares
|
185,213 | 185,211 | |||||||
Additional
paid-in capital
|
207,696,378 | 206,740,492 | |||||||
Accumulated
other comprehensive loss
|
(441,265 | ) | (292,297 | ) | |||||
Accumulated
deficit
|
(65,510,245 | ) | (63,006,207 | ) | |||||
Total stockholders' equity
|
$ | 141,930,081 | $ | 143,627,199 | |||||
Total liabilities and stockholders’ equity | $ | 159,867,401 | $ | 163,470,096 | |||||
The
accompanying notes to condensed consolidated financial statements.
3
(Unaudited)
Three
Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
||||||||
Product
revenues
|
$ | 9,167,266 | $ | 8,074,550 | ||||
Service
revenues
|
3,944,870 | 3,399,004 | ||||||
Royalty
revenues
|
1,638,218 | 1,493,424 | ||||||
Funded
product development revenues
|
- | 431,133 | ||||||
Other
revenues
|
1,250,000 | 1,250,000 | ||||||
Total
revenues
|
16,000,354 | 14,648,111 | ||||||
Costs
and expenses
|
||||||||
Cost
of product revenues
|
3,317,193 | 3,351,249 | ||||||
Cost
of service revenues
|
1,654,543 | 1,873,422 | ||||||
Cost
of royalty revenues
|
655,287 | 597,369 | ||||||
Research
and development
|
4,185,800 | 3,743,467 | ||||||
Selling
and marketing
|
4,844,596 | 4,668,881 | ||||||
General
and administrative
|
3,951,683 | 2,873,246 | ||||||
Total
costs and expenses
|
18,609,102 | 17,107,634 | ||||||
Loss
from operations
|
(2,608,748 | ) | (2,459,523 | ) | ||||
Interest
income
|
110,252 | 193,201 | ||||||
Other
income (expense)
|
13,592 | (26,934 | ) | |||||
Loss
before income taxes
|
(2,484,904 | ) | (2,293,256 | ) | ||||
Provision
for (benefit from) income taxes
|
19,134 | (878,806 | ) | |||||
Net
loss
|
$ | (2,504,038 | ) | $ | (1,414,450 | ) | ||
Net
loss per share
|
||||||||
Basic
|
$ | (0.14 | ) | $ | (0.08 | ) | ||
Diluted
|
$ | (0.14 | ) | $ | (0.08 | ) | ||
Weighted
average number of shares outstanding
|
||||||||
Basic
|
18,521,141 | 18,059,624 | ||||||
Diluted
|
18,521,141 | 18,059,624 | ||||||
Comprehensive
loss:
|
||||||||
Net
loss
|
$ | (2,504,038 | ) | $ | (1,414,450 | ) | ||
Unrealized
loss on marketable securities,
|
||||||||
net
of taxes
|
(136,250 | ) | (129,880 | ) | ||||
Foreign
currency translation adjustment
|
(12,718 | ) | 6,022 | |||||
Comprehensive
loss
|
$ | (2,653,006 | ) | $ | (1,538,308 | ) |
See accompanying notes to condensed consolidated financial statements.
4
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
Three
Months Ended
March
31,
|
||||||||
2010
|
2009
|
|||||||
Operating
activities
|
||||||||
Net loss
|
$ | (2,504,038 | ) | $ | (1,414,450 | ) | ||
Adjustments
to reconcile net loss to net cash from operating
activities:
|
||||||||
Depreciation
and amortization
|
307,449 | 177,102 | ||||||
Stock-based
compensation expense
|
955,450 | 808,397 | ||||||
Provision
(benefit) for bad debt
|
2,673 | (68,234 | ) | |||||
Inventory
write-off
|
21,667 | 34,665 | ||||||
Change
in deferred tax asset
|
- | (997,847 | ) | |||||
Tax
benefit from the exercise of stock options
|
- | 109,999 | ||||||
Other
non-cash items
|
50,542 | 6,022 | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(936,482 | ) | 682,735 | |||||
Inventories
|
282,881 | 1,478,968 | ||||||
Other
current assets
|
319,377 | (377,377 | ) | |||||
Other assets
|
- | 2,730 | ||||||
Accounts
payable
|
(145,897 | ) | 1,155,320 | |||||
Accrued
liabilities
|
(1,656,951 | ) | (693,816 | ) | ||||
Accrued
income taxes
|
(1,751 | ) | 43,224 | |||||
Deferred
revenue
|
(158,864 | ) | (283,876 | ) | ||||
Net
cash (used in) from operating activities
|
(3,463,944 | ) | 663,562 | |||||
Investing
activities
|
||||||||
Purchases
of property and equipment
|
(2,539,719 | ) | (2,981,114 | ) | ||||
Proceeds
from sale of marketable securities
|
225,000 | - | ||||||
Net
cash used in investing activities
|
(2,314,719 | ) | (2,981,114 | ) | ||||
Financing
activities
|
||||||||
Proceeds
from the exercise of stock options and warrants
|
438 | - | ||||||
Tax
benefit from the exercise of stock options
|
- | (109,999 | ) | |||||
Costs incurred related to purchase of stock for treasury | - | (160,761 | ) | |||||
Proceeds
from borrowings on credit facility
|
- | 8,000,000 | ||||||
Payments on borrowings on credit facility | - | (6,000,000 | ) | |||||
Net
cash from financing activities
|
438 | 1,729,240 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (22,868 | ) | - | |||||
Net
decrease in cash and cash equivalents
|
(5,801,093 | ) | (588,312 | ) | ||||
Cash
and cash equivalents, beginning of the period
|
81,948,482 | 122,601,139 | ||||||
Cash
and cash equivalents, end of the period
|
$ | 76,147,389 | $ | 122,012,827 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Cash
paid for income taxes
|
$ | 52,000 | $ | 35,000 | ||||
Supplemental
noncash investing activities
|
||||||||
Unrealized
loss on marketable securities, net of taxes
|
$ | (136,250 | ) | $ | (129,880 | ) | ||
See accompanying notes to condensed consolidated financial
statements.
5
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
|
Note
1 –
Basis of presentation
|
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
information. The consolidated balance sheet at December 31, 2009 has
been derived from the audited balance sheet at that date; however, the
accompanying financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The results of operations
for the interim periods shown in this report are not necessarily indicative of
expected results for any future interim period or for the entire fiscal
year. We believe that the quarterly information presented includes
all adjustments (consisting of normal, recurring adjustments) necessary for a
fair presentation in accordance with accounting principles generally accepted in
the United States. The accompanying condensed consolidated financial
statements and notes should be read in conjunction with our Form 10-K for the
year ended December 31, 2009.
In 2010, we reclassified certain
balances within revenues and costs and expenses. To be consistent
with the 2010 presentation, we reclassified certain 2009 balances within
revenues and costs and expenses in the accompanying Condensed Consolidated
Statements of Operations. The reclassifications had no impact on
previously reported results of operations or cash flow related to operating
activities.
During
the first quarter of fiscal 2010, we adopted the guidance of ASU 2009-13, Multiple-Deliverable Revenue
Arrangements (ASU 2009-13). ASU 2009-13 amends existing revenue
recognition accounting standards that are currently within the scope of
FASB ASC, Subtopic 605-25, which is the revenue recognition guidance for
multiple-element arrangements. The impact of adoption was not
material to the first quarter of fiscal 2010, and if these new standards had
been applied in the same manner in fiscal 2009, the impact would not have been
material to the first quarter of fiscal 2009.
Note
2 – Stock-based compensation
Stock-based
compensation expense recorded was $1.0 million and $0.8 million for the three
months ended March 31, 2010 and 2009, respectively. As of March 31,
2010, there was $6.0 million of unrecognized compensation expense related to
non-vested share awards. The expense is expected to be recognized
over a weighted-average period of 1.9 years.
During
the three months ended March 31, 2010, no equity awards, including options,
warrants, restricted stock or stock-settled stock appreciation rights were
granted.
Note
3 – Inventories
Inventories are valued at the lower of
cost (first-in, first-out method) or market, and include material, labor and
manufacturing overhead. At March 31, 2010 and December 31, 2009, inventories
consisted of the following:
6
March
31,
|
December
31,
|
|||
2010
|
2009
|
|||
Raw
materials
|
$ 3,652,012
|
$ 4,365,150
|
||
Work
in process
|
1,480,741
|
361,931
|
||
Finished
goods
|
5,721,695
|
6,399,271
|
||
Total
|
$ 10,854,448
|
$ 11,126,352
|
||
Note
4 – Property and equipment
Property
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 March 31, 2010 and December 31, 2009, property and
equipment consisted of the following:
March
31,
|
December
31,
|
Estimated
|
||||
2010
|
2009
|
useful
life
|
||||
Land
|
$
|
10,680,000
|
$
|
10,680,000
|
||
Building
|
24,190,561
|
-
|
39
years
|
|||
Machinery
and equipment
|
2,126,575
|
2,100,331
|
3-8
years
|
|||
Furniture
and fixtures
|
5,073,517
|
3,364,989
|
5
years
|
|||
Leasehold
improvements
|
537,648
|
537,648
|
Shorter
of estimated useful life or term of lease
|
|||
Construction
in progress
|
-
|
23,385,614
|
||||
42,608,301
|
40,068,582
|
|||||
Accumulated
depreciation
|
(5,746,621)
|
(5,439,172)
|
||||
Total
|
$
|
36,861,680
|
$
|
34,629,410
|
On
November 19, 2008, we purchased land for $10.7 million on which we built our new
operational facility. Construction of the building was completed and
the building was placed into service during the first quarter of
2010. We financed the project by using cash on
hand.
Note
5 – Warranty costs
We
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.
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 March 31, 2010 and December 31,
2009:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Warranty
accrual, beginning of period
|
$ | 596,210 | $ | 856,158 | ||||
Charges
to cost and expenses relating to new sales
|
283,610 | 1,280,301 | ||||||
Costs
of product warranty claims
|
(277,280 | ) | (1,540,249 | ) | ||||
Warranty
accrual, end of period
|
$ | 602,540 | $ | 596,210 |
Note
6 – Fair Value of Financial Instruments
7
In
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 Company’s consolidated financial
statements.
We
performed an analysis of our investments held at March 31, 2010 and December 31,
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
FASB’s 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.
·
|
Level
1 - Inputs are unadjusted, quoted prices in active markets for identical
assets or liabilities at the measurement
date.
|
·
|
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 instrument’s anticipated
life.
|
·
|
Level
3 - Inputs reflect management’s 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 March 31, 2010 and December 31,
2009.
Assets
|
Fair
Value as of March 31, 2010
|
||||||||||||||
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||
Short-term,
investments
|
$
|
25,000
|
$
|
-
|
$
|
-
|
$
|
25,000
|
|||||||
Auction-rate
preferred securities
|
2,422
|
4
|
2,422
|
||||||||||||
Auction-rate
municipal securities
|
-
|
-
|
1,162
|
1,162
|
|||||||||||
Total
|
$
|
25,000
|
$
|
-
|
$
|
3,584
|
$
|
28,584
|
|
|
Assets
|
Fair
Value as of December 31, 2009
|
|||||||||||||||||
(In
thousands)
|
Level 1
|
Level
2
|
Level 3 |
Total
|
||||||||||||||
Short-term
investments
|
$
|
25,000
|
$
|
-
|
$
|
-
|
$
|
25,000
|
||||||||||
Auction-rate
preferred securities
|
-
|
-
|
2,622
|
2,622
|
||||||||||||||
Auction-rate
municipal securities
|
-
|
-
|
1,402
|
1,402
|
||||||||||||||
Total
|
$
|
25,000
|
$
|
-
|
$
|
4,024
|
$
|
29,024
|
At March 31, 2010, the amortized cost
basis of the auction-rate preferred securities and auction-rate municipal
securities were $2.6 million and $1.5 million, respectively. At
December 31, 2009, the amortized cost basis of the auction-rate preferred
securities and auction-rate municipal securities were $2.9 million and $1.5
million, respectively. As described in more detail below, all of our
auction-rate securities have unrealized losses which have been recorded in
accumulated other comprehensive loss.
8
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 three months ended March
31, 2010.
Auction-rate | Auction-rate | |||||||||||
(In thousands) | preferred securities | municipal securities |
Total
|
|||||||||
Balance at December 31, 2009 | $ | 2,622 | $ | 1,402 | $ | 4,024 | ||||||
Net payments, purchases and sales | (225 | ) | - | (225 | ) | |||||||
Net transfers in/(out) | - | - | - | |||||||||
Gains/(losses) | ||||||||||||
Realized | - | - | - | |||||||||
Unrealized | 25 | (240 | ) | (215 | ) | |||||||
Balance at March 31, 2010 | $ | 2,422 | $ | 1,162 | $ | 3,584 |
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 FASB’s 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 all of our investments in ARS
currently lack short-term liquidity, we have classified these investments as
non-current investments as of March 31, 2010.
The
fair value of our holdings of ARS at March 31, 2010 was $3.6
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 period ended March 31, 2010 as compared to
prior reporting periods. Our valuation analysis showed that our ARS
have nominal credit risk. The impairment is due to liquidity
risk. Additionally, as of March 31, 2010, 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 March 31, 2010.
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 – Net (loss) income per common share
Basic 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.
9
A
reconciliation of basic and diluted shares for the three months ended March 31,
2010 and 2009 is as follows:
Three
Months Ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
Basic
weighted average number of shares outstanding
|
18,521,141 | 18,059,624 | ||||||
Potential
common shares pursuant to stock options, stock appreciation rights and
warrants
|
- | - | ||||||
Diluted
weighted average number of shares outstanding
|
18,521,141 | 18,059,624 |
For the three months ended March 31,
2010 and 2009, approximately 3.1 million and 3.8 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, stock-settled SARs, and warrants
would have been antidilutive.
Note
8 – Notes Payable
In
December 2008, we secured access to a revolving note through December 17, 2013.
On February 12, 2010, we cancelled our revolving note. On January 2, 2009,
we repaid the $6 million borrowed as of December 31, 2008. At March
31, 2010 and December 31, 2009, we had no outstanding debt.
Our revolving note required 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 have been used as collateral.
Note
9 – Income Taxes
We provide for income taxes under the
liability method in accordance with the FASB’s 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. 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
In
evaluating our ability to recover our US and foreign deferred tax assets, we
considered all available positive and negative evidence, giving greater weight
to the recent current losses, the absence of taxable income in the carry back
periods and the uncertainty regarding our ability to project financial results
in future periods. We believe that it is more likely than no that the associated
deferred tax assets will not be utilized and have established a full valuation
allowance.
10
We
establish reserves for uncertain tax positions based on management’s 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. At March 31, 2010, we have
$3.0 million of net unrecognized tax benefits, all of which would affect our
effective tax rate if recognized.
We recognize interest and penalties
related to uncertain tax positions in income tax expense. As of March 31, 2010,
we had approximately $113,000 of accrued interest and penalties related to
uncertain tax positions.
The tax
years 2006-2009 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
10 – Contingencies
Candela Corporation,
Massachusetts Litigation
On August
9, 2006, we commenced an action for patent infringement against Candela
Corporation (now Syneron, Inc.) in the United States District Court for the
District of Massachusetts seeking both monetary damages and injunctive relief.
The complaint alleges Candela’s GentleYAG and GentleLASE systems, which use
laser technology for hair removal willfully infringe U.S. Patent No. 5,735,844
(the “’844 patent”), which is exclusively licensed to us by
MGH. Candela answered the complaint denying that its products
infringe valid claims of the asserted patent and filing a counterclaim seeking a
declaratory judgment that the asserted patent and U.S. Patent No. 5,595,568 (the
“’568 patent”) are invalid and not infringed. We filed a reply
denying the material allegations of the counterclaims.
We filed
an amended complaint on February 16, 2007 to add MGH as a
plaintiff. In addition, we further alleged that Candela’s GentleMAX
system willfully infringes the ‘844 patent and that Candela’s Light Station
system willfully infringes both the ‘844 and ‘568 patents. On
February 16, 2007, Candela filed an amended answer to our complaint adding
allegations of inequitable conduct, double patenting and violation of
Massachusetts General Laws Chapter 93A. On February 28, 2007, we
filed a response to Candela’s amended complaint pointing out many weaknesses in
Candela’s allegations. A claim construction hearing, sometimes called
a “Markman Hearing”, was held August 2, 2007, and we received what we consider
to be a favorable Markman ruling on November 9, 2007.
On
November 17, 2008, the Judge stayed the lawsuit pending the outcome of
reexamination procedures requested by a third party on both the ‘844 and ‘568
patents in the United States Patent and Trademark Office (the “Patent
Office”). On December 9, 2008, Candela also filed requests for
reexamination of both patents. Generally, a reexamination proceeding
is one which re-opens patent prosecution to ensure that the claims in an issued
patent are valid over prior art references. On January 16, 2009, we
filed a preliminary amendment to the ‘844 patent adding new claims 33-59 which
depend from claim 32 and a preliminary amendment to the ‘568 patent adding new
claims 23 and 24 which depend from claim 1. On June 9, 2009, the Patent Office
issued an office action confirming the validity of all claims of the ‘844 patent
except claims 12-14. Rejecting Candela's and the other company's
arguments to the contrary, the Patent Office confirmed that claims 1-3, 6-8, 11,
17-20, 27, 28, 30, 32 of the '844 patent are valid and patentable. The Patent
Office also confirmed new claims 33-59 as valid and patentable. The
Patent Office rejected only independent claim 12 and related dependent claims
13-14 of the ‘844 patent as unpatentable. We cancelled claims 12-14
from the '844 patent in order to expedite the reexamination proceeding. Claims
4, 5, 9, 10, 15, 16, 21-26, 29 and 31 are not under reexamination. Consequently,
all currently pending claims are valid. On November 18, 2009, the
Patent Office issued a Reexamination Certificate for the ‘844 patent that closed
the reexamination proceeding on the ‘844 patent.
On June
19, 2009, we filed a motion to lift the stay and reopen the
lawsuit. Because Candela has discontinued products which infringe the
‘568 patent, we dropped our claims of infringement of the ‘568 patent from the
lawsuit and we agreed to a covenant not to sue Candela for past infringement
under the ‘568 patent. On July 13, 2009, Candela filed their
opposition to our motion to lift the stay, and on July 17, 2009, we filed our
response to their opposition. On January 5, 2010 the Judge lifted the
stay. At a scheduling hearing held on February 10, 2010, the Judge set June 30,
2010 as the close of expert discovery and September 14, 2010 as the date for a
hearing on any dispositive motions. A trial date has not been set.
11
On August
10, 2006, Candela Corporation (now Syneron, Inc.) commenced an action for patent
infringement against us in the United States District Court for the District of
Massachusetts seeking both monetary damages and injunctive
relief. The complaint alleged that our StarLux System with the LuxV
handpiece willfully infringes U.S. Patent No. 6,743,222 (the “’222 patent”)
which is directed to acne treatment, that our QYAG5 System willfully infringes
U.S. Patent No. 5,312,395 which is directed to treatment of pigmented lesions,
and that our StarLux System with the LuxG handpiece willfully infringes U.S.
Patent No. 6,659,999 which is directed to wrinkle treatment. On
October 25, 2006, Candela filed an amended complaint which did not include U.S.
Patent No. 6,659,999. Consequently, Candela no longer alleges in this
lawsuit that the StarLux System with LuxG handpiece infringes its patents. With
regard to the two remaining patents, Candela is seeking to enjoin us from
selling these products in the United States if we are found to infringe the
patents, and to obtain compensatory and treble damages, reasonable costs and
attorney’s fees, and other relief as the court deems just and proper. On October
30, 2006, we answered the complaint denying that our products infringe the
asserted patents and filing counterclaims seeking declaratory judgments that the
asserted patents are invalid and not infringed. In addition, with
regard to U.S. Patent No. 5,312,395, we filed a counterclaim of inequitable
conduct.
In
February 2008, we filed a request for reexamination and then an amended request
for reexamination of Candela's ‘222 patent with the Patent Office. In
our request, we argued that Candela's ‘222 patent is unpatentable over our own
United States Patent No. 6,605,080 alone or in combination with other prior
art. About the same time, we filed a motion to stay all proceedings
in this action related to the ‘222 patent pending resolution of the amended
request for reexamination of the ‘222 patent. In March 2008, the
Patent Office granted our request for reexamination of the ‘222
patent. On June 11, 2008, the Court ordered the parties to
report back to the Court after the Patent Office made its decision in the
reexamination of the ‘222 patent, after which a claim construction hearing
(i.e., a Markman Hearing) would be scheduled for both the ‘222 and ‘395
patents. On June 12, 2008, the parties informed the Court that the total time
the reexamination will remain pending is not known. On January 19,
2010, the Patent Office issued a Notice of Intent to Issue Ex Parte
Reexamination Certificate for the ‘222 patent which will close the reexamination
proceeding on the ‘222 patent. When this lawsuit is re-started, we will continue
to defend the action vigorously and believe that we have meritorious defenses of
non-infringement, invalidity and inequitable conduct. However, litigation is
unpredictable and we may not prevail in successfully defending or asserting our
position. If we do not prevail, we may be ordered to pay substantial damages for
past sales and an ongoing royalty for future sales of products found to infringe
in the United States. We could also be ordered to stop selling any products in
the United States that are found to infringe.
Alma Lasers, Inc., Delaware
Litigation
On
September 11, 2008, Alma Lasers, Inc. filed a complaint requesting a declaratory
judgment that our fractional patent, U.S. Patent No. 6,997,923, is not infringed
by Alma's products and is invalid over prior art. Alma served this
lawsuit on us on November 6, 2008, and on November 21, 2008, we filed an answer
which denied Alma's allegations that the patent is invalid and not
infringed. We also filed a counterclaim accusing Alma's Pixel C02
Omnifit Fractional C02
Handpiece and Pixel C02
Fractional C02 Skin
Resurfacing System of infringing the patent. On December 16, 2008,
upon the request of both parties, a mediation conference was scheduled for June
30, 2009 before Magistrate Judge Mary Pat Thynge. On December 18,
2008, upon the request of both parties, the Judge presiding over the lawsuit,
stayed the lawsuit and later closed the lawsuit pending the outcome of the
mediation. Due to unforeseen circumstances, the mediation scheduled
for June 30, 2009 was postponed until October 13, 2009. Following our
request, Magistrate Judge Mary Pat Thynge cancelled the mediation on October 6,
2009. By letter dated October 13, 2009, we asked presiding Judge
Farnan to re-open the case. On December 28, 2009, Alma filed a First
Amended Complaint to add a claim that U.S. Patent No. 6,997,923 is unenforceable
due to inequitable conduct. On January 11, 2010, we filed our Amended
Answer and Counterclaim to Alma’s First Amended Complaint denying Alma’s
allegation of inequitable conduct. On March 4, 2010 the parties filed a joint
stipulated order of dismissal requesting that the court dismiss this action,
including all claims and counterclaims, in its entirety without prejudice, with
the parties agreeing that any future litigation between them over U.S. Patent
No. 6,997,923, any patent claiming priority (either directly or indirectly)
thereto, and/or any patents relating to fractional technology, shall be
commenced in this Court.
12
Syneron, Inc., Massachusetts
Litigation
On
November 14, 2008, we commenced an action for patent infringement against
Syneron, Inc. in the United States District Court for the District of
Massachusetts seeking both monetary damages and injunctive relief. The complaint
alleges Syneron's eLight, eMax, eLaser, Aurora DS, Polaris DS, Comet and Galaxy
Systems, which use light-based technology for hair removal, willfully infringe
the ‘568 patent and the ‘844 patent, which are exclusively licensed to us by
MGH. In March 2009, we served Syneron with this suit. On April 30,
2009, the parties filed a stipulation to stay the lawsuit pending the outcome of
the reexaminations of the ‘568 patent and the ‘844 patent.
On June
9, 2009, the Patent Office issued an office action confirming the validity of
all claims of the ‘844 patent except claims 12-14. The Patent Office
confirmed that claims 1-3, 6-8, 11, 17-20, 27, 28, 30, 32 of the '844 patent are
valid and patentable. The Patent Office also confirmed new claims 33-59 as valid
and patentable. The Patent Office rejected only independent claim 12
and related dependent claims 13-14 of the ‘844 patent as
unpatentable. We cancelled claims 12-14 from the '844 patent in order
to expedite the reexamination proceeding. Claims 4, 5, 9, 10, 15, 16, 21-26, 29
and 31 are not under reexamination. Consequently, all currently pending claims
are valid. On November 18, 2009, the Patent Office issued a
Reexamination Certificate for the ‘844 patent which closed the reexamination
proceeding on the ‘844 patent.
On
October 28, 2009, the Patent Office issued a Reexamination Certificate for the
‘568 patent which closed the reexamination proceeding on the ‘568 patent. The
Patent Office confirmed the validity and patentability of all the claims of the
‘568 patent including new claims 23 and 24.
On
September 23, 2009, we filed a motion to lift the stay and reopen the
lawsuit. On October 6, 2009, Syneron filed their opposition to our
motion to lift the stay, and on October 9, 2009, we filed our response to their
opposition. On November 13, 2009, the Judge re-opened the
case and a scheduling hearing took place on January 6, 2010. No trial
date has yet been set. The parties are in discovery.
Tria Beauty, Inc.,
Massachusetts Litigation
On June
24, 2009, we commenced an action for patent infringement against Tria Beauty,
Inc. (previously named Spectragenics, Inc.), in the United States District Court
for the District of Massachusetts seeking both monetary damages and injunctive
relief. The complaint alleged that the Tria System, which uses light-based
technology for hair removal, willfully infringes the ‘844 patent, which is
exclusively licensed to us by MGH. Tria answered the complaint
denying that its products infringe valid claims of the asserted patent and
filing a counterclaim seeking a declaratory judgment that the asserted patent is
not infringed, is invalid and not enforceable. We filed a reply
denying the material allegations of the counterclaims. On September
21, 2009, following successful re-examination of the ‘568 patent, we filed a
motion to amend our complaint to add a claim for willful infringement of the
‘568 patent, which is also exclusively licensed to us by MGH. Our
motion also included adding MGH as a plaintiff in the lawsuit. Tria
did not oppose the motion and the Judge granted the motion on October 8,
2009. No trial date has yet been set. The parties are in
discovery.
The
following discussion contains forward-looking statements, which involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth previously under the caption “Risk Factors” in our
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 5, 2010. This Management’s Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this
report.
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 2009. There have been no material changes to our
critical accounting policies as of March 31, 2010.
13
Recently
issued accounting standards
During
the first quarter of fiscal 2010, we adopted the guidance of ASU 2009-13, Multiple-Deliverable Revenue
Arrangements (ASU 2009-13). ASU 2009-13 amends existing revenue
recognition accounting standards that are currently within the scope of
FASB ASC, Subtopic 605-25, which is the revenue recognition guidance for
multiple-element arrangements. The impact of adoption was not
material to the first quarter of fiscal 2010, and if these new standards had
been applied in the same manner in fiscal 2009, the impact would not have been
material to the first quarter of fiscal 2009.
Overview
We are a
global medical device company 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 research
and development as well as with our partnerships throughout the world. We are
continually developing and testing new indications to further the advancement in
light-based treatments.
Our
corporate headquarters and United States operations are located in Burlington,
Massachusetts, where we conduct our manufacturing, warehousing, research and
development, regulatory, sales, customer service, marketing and administrative
activities. In the United States, we market, sell and service our
products primarily through our direct sales force and customer service
employees. Internationally, sales are generally made through our
worldwide distribution network in over 50 countries. In Australia, we
market, sell and service our products primarily through our direct sales force
and customer service employees.
.
Results
of operations
Revenues
for the quarter ended March 31, 2010 were $16.0 million, which represents a 9
percent increase over the $14.6 million reported in the first quarter of
2009. Product and service revenues increased to $13.1 million, a 14
percent increase over the $11.5 million in the first quarter of
2009. First quarter gross margin from product and service revenues
was 62 percent, an increase over the 55 percent in the first quarter of
2009. Loss before income taxes for the first quarter ended March 31,
2010 was $2.5 million, which included a $1.2 million charge related to the
write-off of our remaining lease obligation at our old facility, $0.6
million in patent litigation expenses and a $1.0 million non-cash FAS 123R
stock-based compensation expense.
The
following table contains selected income statement information, which serves as
the basis of the discussion of our results of operations for the three months
ended March 31, 2010 and 2009, respectively (in thousands, except for
percentages):
14
Three
Months Ended March 31,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
As
a % of
|
As
a % of
|
|||||||||||||||||||||||
Total
|
Total
|
Change
|
||||||||||||||||||||||
Amount
|
Revenue
|
Amount
|
Revenue
|
$ | % | |||||||||||||||||||
Revenues
|
||||||||||||||||||||||||
Product
revenues
|
$ | 9,167 | 57 | % | $ | 8,075 | 55 | % | $ | 1,092 | 14 | % | ||||||||||||
Service
revenues
|
3,945 | 25 | % | 3,399 | 23 | % | $ | 546 | 16 | % | ||||||||||||||
Royalty
revenues
|
1,638 | 10 | % | 1,493 | 10 | % | 145 | 10 | % | |||||||||||||||
Funded
product development revenues
|
- | - | % | 431 | 3 | % | (431 | ) | -100 | % | ||||||||||||||
Other
revenues
|
1,250 | 8 | % | 1,250 | 9 | % | -- | - | % | |||||||||||||||
Total
revenues
|
16,000 | 100 | % | 14,648 | 100 | % | 1,352 | 9 | % | |||||||||||||||
Costs
and expenses
|
||||||||||||||||||||||||
Cost
of product revenues
|
3,317 | 21 | % | 3,351 | 23 | % | (34 | ) | -1 | % | ||||||||||||||
Cost
of service revenues
|
1,655 | 10 | % | 1,873 | 13 | % | (218 | ) | -12 | % | ||||||||||||||
Cost
of royalty revenues
|
655 | 4 | % | 597 | 4 | % | 58 | 10 | % | |||||||||||||||
Research
and development
|
4,186 | 26 | % | 3,744 | 26 | % | 442 | 12 | % | |||||||||||||||
Selling
and marketing
|
4,845 | 30 | % | 4,670 | 32 | % | 175 | 4 | % | |||||||||||||||
General
and administrative
|
3,951 | 17 | % | 2,873 | 24 | % | 1,078 | 38 | % | |||||||||||||||
Total
costs and expenses
|
18,609 | 116 | % | 17,108 | 117 | % | 1,501 | 9 | % | |||||||||||||||
Loss
from operations
|
(2,609 | ) | (4 | %) | (2,460 | ) | -17 | % | (149 | ) | 6 | % | ||||||||||||
Interest
income
|
110 | 1 | % | 194 | 1 | % | (84 | ) | -43 | % | ||||||||||||||
Other
income (expense)
|
14 | 0 | % | (27 | ) | -- | % | 41 | 152 | % | ||||||||||||||
Loss
before income taxes
|
(2,485 | ) | (1 | %) | (2,293 | ) | -16 | % | (192 | ) | -8 | % | ||||||||||||
Provision
for (benefit from) income taxes
|
19 | 0 | % | (879 | ) | -6 | % | 898 | 102 | % | ||||||||||||||
Net
loss
|
$ | (2,504 | ) | -16 | % | $ | (1,414 | ) | -10 | % | $ | (1,090 | ) | -77 | ||||||||||
Product
revenues. In the current quarter our product revenues
increased 14% as compared to the corresponding period in the prior year,
primarily due to increases in revenues from sales of our StarLux Laser and
Pulsed Light Systems, including a base unit and multiple, optional handpieces
and the Aspire body sculpting system.
Service
revenues. Service revenues are primarily comprised of revenue
generated from our service organization to provide ongoing service, sales of
replacement handpieces, sales of consumables and accessories and repair of our
products. Service revenues increased 16% in the current quarter compared to the
corresponding period of the prior year primarily in sales from replacement
handpieces and sales of consumables and accessories.
In the
first three months of fiscal 2010, approximately 56% of product and service
sales were generated in North America, 26% in Europe, 10% in South and Central
America, 4% in Australia and 4% in other international markets. In the first
three months of fiscal 2009, approximately 58% of product sales were generated
in North America, 24% in Europe, 8% in South and Central America, 5% in Asia,
and 5% in other international markets.
Royalty
revenues. Royalty revenues increased 10% in the current
quarter as compared to the corresponding period of the prior
year. This increase is attributed to an increase in on-going royalty
payments from our licensees.
15
Funded product
development revenues. Funded product development revenues
decreased during the current quarter as compared to the same period in 2009.
This decrease in funded product development revenue is directly related to the
termination of our Joint Development and License Agreement with Johnson &
Johnson Consumer Companies, Inc. in the third quarter of 2009.
Other
revenues. For the three months ended March 31, 2010 and for
the same period in 2009, we recognized $1.25 million of other revenues,
consisting of quarterly payments relating to a License Agreement with The
Procter & Gamble Company. As of March 31, 2010 and for the same period in
2009, we deferred $1.25 million, respectively, of advance payments received from
Procter & Gamble for which services were not yet provided. These advance
payments were included in deferred revenue for both periods,
respectively.
Cost of
product revenues. In the current quarter our cost of product revenues as
a percentage of total revenues was 21% as compared to 23% in the corresponding
period in 2009. The decrease as a percentage of total revenue is due
to higher product sales volume which resulted in higher overhead
absorption.
Cost of service
revenues. Service gross margin has improved to 58% in the
current quarter from 45% in the corresponding period in the prior year due in
part to the improved absorption of fixed service costs and the continued growth
of service contract revenue. We have been able to convert a high percentage of
our domestic installed base to service contracts upon the expiration of the
warranty periods. In addition, warranty costs have decreased due to lower
failure rates in certain of our products.
Cost of royalty
revenues. The
cost of royalty revenues increased for the three months ended March 31, 2010 in
comparison to the same periods in 2009. This increase is attributed
to higher on-going royalty payments from our licensees. 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 2009.
Research and
development expense. Research and development expenses increased 12% in
the current quarter as compared to the corresponding period in the prior year.
Research and development expenses relating to our professional business
decreased 3% as compared to the same period in the prior year. Research expenses
relating to our professional business include internal research and development
projects relating to the introduction of new products, enhancements to our
current line of products as well as research and development
overhead. Research and development expense relating to our consumer
business increased by 46% as compared to the same period in 2009. This increase
in research and development expense related to our consumer business include
increases in payroll and payroll related expense, materials, consultants, and
other overhead expenses related directly to our consumer products as compared to
the same period in 2009.
Selling and
marketing expense. Selling and marketing expenses increased 4%
in the current quarter as compared to the corresponding period in the prior
year. Selling and marketing expenses relating to our professional
business decreased 3% as compared to the same period in 2009. This
decrease was primarily due to incurring slightly lower expenses related to trade
shows and workshops and lower expenses from payroll and payroll related
costs. Partially offsetting these decreases were higher distributor
and third-party commissions. Contributing to our over-all increase in
selling and marketing expenses were our expenses related to our consumer
business. We incurred minimal expenses related to our consumer
business in the first three months of 2009.
General and
administrative expense.
General and administrative expenses increased 38% in the current quarter
compared to the corresponding period in the prior year primarily due to
increases in incentive compensation expense, bad debt expense, stock-based
compensation expense, general overhead expenses and rent expense. The rent
increase charge related to the write-off of our remaining lease obligation at
our old facility. Partially offsetting these increases were lower
legal expenses and payroll and payroll related expenses.
Interest
income. Interest income decreased in the current quarter compared to the
corresponding period in the prior year primarily from lower cash, cash
equivalent and short-term investment balances and lower interest
rates. The decline in our cash, cash equivalent and short-term
investment balances is primarily from costs associated with the construction of
our new operational facility.
16
Other
income. Other income for the three months ended March 31, 2010
and 2009, includes the foreign exchange gain (loss) resulting from transactions
in currencies other than the U.S. dollar.
Provision for
(benefit from) income taxes. Our effective tax rate was 0.8% and
(38.3%) in the first quarter of fiscal 2010 and 2009,
respectively. In 2010, our effective tax rate was less than the
combined federal and state statutory rates primarily due to an increase in the
valuation allowance.
Liquidity
and capital resources
The
following table sets forth, for the periods indicated, a year over year
comparison of key components of our liquidity and capital resources (in
thousands):
Three months ended
March
31,
|
Change
|
||||||||||
2010
|
2009
|
$
|
%
|
||||||||
Cash
flows (used in) from operating activities
|
$
|
(3,464
|
) |
$
|
664
|
(4,128
|
) |
(622%)
|
|||
Cash
flows (used in) investing activities
|
(2,315
|
) |
(2,981
|
) |
666
|
22%
|
|||||
Cash
flows from financing activities
|
-
|
1,729
|
(1,729
|
) |
(100%)
|
||||||
Capital
expenditures, including construction in
progress
|
$
|
2,540
|
$
|
2,981
|
(441
|
) |
(15%)
|
Additionally,
our cash and cash equivalents, short-term investments, accounts receivable,
inventories, working capital and marketable securities, at par value are shown
below for the periods indicated (in thousands).
March 31, | December 31, |
Change
|
||||||
2010
|
2009 | $ | % | |||||
Cash
and cash equivalents
|
$
|
76,147
|
$
|
81,948
|
(5,801
|
) |
(7%
|
) |
Short-term
investment
|
25,000
|
25,000
|
-
|
-
|
||||
Accounts
receivable, net
|
5,355
|
4,436
|
919
|
21%
|
||||
Inventories,
net
|
10,854
|
11,126
|
(272
|
) |
(2%
|
) | ||
Working
capital
|
104,242
|
107,812
|
(3,570
|
) |
(3%
|
) | ||
Marketable
securities, at estimated fair value
|
3,584
|
4,024
|
(440
|
) |
(11%
|
) |
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.
At March 31, 2010, we held $3.6 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 March 31, 2010. In the three months ended March
31, 2010, we sold $225,000 of the ARS held at December 31, 2009.
We have determined that the fair value
of our ARS was temporarily impaired as of March 31, 2010. For the
three months ended March 31, 2010, we marked to market our ARS and recorded an
unrealized loss of $136,000, net of taxes in accumulated other comprehensive
(loss) income in stockholder’s 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 March 31, 2010, 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.
17
Cash
flows from operating activities for the three months ended March 31, 2010,
decreased compared to the same period in 2009. This decrease in operating
activity cash flows reflects an increase in working capital requirements, a
decrease in profitability offset by an increase in depreciation and amortization
and an increase in stock-based compensation expense in the first three months of
2010, compared to the same period in 2009. Cash flows used in
investing activities decreased for the three months ended March 31, 2010,
compared to the same period in 2009. The decrease reflects lower purchases of
property and equipment and the sale of marketable securities. Cash
flows from financing activities decreased for the three month period ended March
31, 2010, compared to the same period in 2009. This decrease was primarily
due to a decrease in borrowings.
In
December 2008, we secured access to a revolving note through December 17, 2013.
On February 12, 2010, we cancelled our revolving note. On January 2, 2009,
we repaid the $6 million borrowed as of December 31, 2008. At March
31, 2010 and December 31, 2009, we had no outstanding debt.
We
anticipate that capital expenditures relating to machinery and equipment,
furniture and fixtures, and building improvements for the remainder of 2010 will
total approximately $600,000. We expect to finance these expenditures with cash
on hand.
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 management’s discretion without prior notice.
Off-balance
sheet arrangements
We 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 March 31, 2010, we were not
involved in any unconsolidated transactions.
Contractual
obligations
We 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 months ended March 31,
2010 totaled approximately $786,000.
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.
18
We have
obligations related to the adoption of ASC Topic 740, “Accounting for Income Taxes”
(“ASC 740”). Further information about changes in these obligations can
be found in Note 9.
We are
obligated to make future payments under various contracts, including
non-cancelable inventory purchase commitments and our operating lease relating
to our recently vacated Burlington, Massachusetts manufacturing, research and
development and administrative offices.
On
November 19, 2008, we purchased land for $10.7 million on which we built our new
operational facility. Construction of the building was completed
and
the building was placed in service during the first quarter of
2010. We financed the project by using cash on
hand.
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. We vacated our old facility
during the first quarter of 2010 and incurred a charge of $1.2 million relating
to the write-off of our remaining lease obligation.
The
following table summarizes our estimated contractual cash obligations as of
March 31, 2010, excluding 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
|
$ | 939 | $ | 867 | $ | 72 | $ | - | $ | - | |||||||||||||||
Purchase
commitments
|
6,429 | 6,429 | - | - | - | ||||||||||||||||||||
Total
contractual cash obligations
|
$ | 7,368 | $ | 7,296 | $ | 72 | $ | - | $ | - |
Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as foreign currency exchange rates, interest rates and a decline in
the stock market. The current turbulence in the U.S. and global financial
markets has caused a decline in stock values across all industries. We are
exposed to market risks related to changes in interest rates and foreign
currency exchange rates.
Our
investment portfolio of cash equivalents, corporate preferred securities, and
municipal debt securities is subject to interest rate fluctuations, but we
believe this risk is immaterial because of the historically short-term nature of
these investments. At March 31, 2010, we held $3.6 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 March 31, 2010. In the three months ended March
31, 2010, we sold $225,000 of the ARS held at December 31, 2009. The recovery of
the remaining $3.6 million ARS held is based upon market factors which are not
within our control.
Our
international subsidiaries in The Netherlands and Australia conduct business in
both local and foreign currencies and therefore, we are exposed to foreign
currency exchange risk resulting from fluctuations in foreign currencies. This
risk could adversely impact our results and financial condition. We
have not entered into any foreign currency exchange and option contracts to
reduce our exposure to foreign currency exchange risk and the corresponding
variability in operating results as a result of fluctuations in foreign currency
exchange rates.
19
Under the
direction of the principal executive officer and principal financial officer, we
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2010.
Based on that evaluation, we have concluded that our disclosure controls and
procedures were effective.
The
Company’s management, including the CEO and CFO, does not expect that our
disclosure controls or internal controls over financial reporting will prevent
all errors and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision making can be faulty and that individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part on
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
There
were no significant changes in our internal controls over financial reporting or
in other factors that could significantly affect these controls during the
quarter ended March 31, 2010, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Candela Corporation,
Massachusetts Litigation
On August
9, 2006, we commenced an action for patent infringement against Candela
Corporation (now Syneron, Inc.) in the United States District Court for the
District of Massachusetts seeking both monetary damages and injunctive relief.
The complaint alleges Candela’s GentleYAG and GentleLASE systems, which use
laser technology for hair removal willfully infringe U.S. Patent No. 5,735,844
(the “’844 patent”), which is exclusively licensed to us by
MGH. Candela answered the complaint denying that its products
infringe valid claims of the asserted patent and filing a counterclaim seeking a
declaratory judgment that the asserted patent and U.S. Patent No. 5,595,568 (the
“’568 patent”) are invalid and not infringed. We filed a reply
denying the material allegations of the counterclaims.
We filed
an amended complaint on February 16, 2007 to add MGH as a
plaintiff. In addition, we further alleged that Candela’s GentleMAX
system willfully infringes the ‘844 patent and that Candela’s Light Station
system willfully infringes both the ‘844 and ‘568 patents. On
February 16, 2007, Candela filed an amended answer to our complaint adding
allegations of inequitable conduct, double patenting and violation of
Massachusetts General Laws Chapter 93A. On February 28, 2007, we
filed a response to Candela’s amended complaint pointing out many weaknesses in
Candela’s allegations. A claim construction hearing, sometimes called
a “Markman Hearing”, was held August 2, 2007, and we received what we consider
to be a favorable Markman ruling on November 9, 2007.
On
November 17, 2008, the Judge stayed the lawsuit pending the outcome of
reexamination procedures requested by a third party on both the ‘844 and ‘568
patents in the United States Patent and Trademark Office (the “Patent
Office”). On December 9, 2008, Candela also filed requests for
reexamination of both patents. Generally, a reexamination proceeding
is one which re-opens patent prosecution to ensure that the claims in an issued
patent are valid over prior art references. On January 16, 2009, we
filed a preliminary amendment to the ‘844 patent adding new claims 33-59 which
depend from claim 32 and a preliminary amendment to the ‘568 patent adding new
claims 23 and 24 which depend from claim 1. On June 9, 2009, the Patent Office
issued an office action confirming the validity of all claims of the ‘844 patent
except claims 12-14. Rejecting Candela's and the other company's
arguments to the contrary, the Patent Office confirmed that claims 1-3, 6-8, 11,
17-20, 27, 28, 30, 32 of the '844 patent are valid and patentable. The Patent
Office also confirmed new claims 33-59 as valid and patentable. The
Patent Office rejected only independent claim 12 and related dependent claims
13-14 of the ‘844 patent as unpatentable. We cancelled claims 12-14
from the '844 patent in order to expedite the reexamination proceeding. Claims
4, 5, 9, 10, 15, 16, 21-26, 29 and 31 are not under reexamination. Consequently,
all currently pending claims are valid. On November 18, 2009, the
Patent Office issued a Reexamination Certificate for the ‘844 patent that closed
the reexamination proceeding on the ‘844 patent.
20
On June
19, 2009, we filed a motion to lift the stay and reopen the
lawsuit. Because Candela has discontinued products which infringe the
‘568 patent, we dropped our claims of infringement of the ‘568 patent from the
lawsuit and we agreed to a covenant not to sue Candela for past infringement
under the ‘568 patent. On July 13, 2009, Candela filed their
opposition to our motion to lift the stay, and on July 17, 2009, we filed our
response to their opposition. On January 5, 2010 the Judge lifted the
stay. At a scheduling hearing held on February 10, 2010, the Judge set June 30,
2010 as the close of expert discovery and September 14, 2010 as the date for a
hearing on any dispositive motions. A trial date has not been set.
On August
10, 2006, Candela Corporation (now Syneron, Inc.) commenced an action for patent
infringement against us in the United States District Court for the District of
Massachusetts seeking both monetary damages and injunctive
relief. The complaint alleged that our StarLux System with the LuxV
handpiece willfully infringes U.S. Patent No. 6,743,222 (the “’222 patent”)
which is directed to acne treatment, that our QYAG5 System willfully infringes
U.S. Patent No. 5,312,395 which is directed to treatment of pigmented lesions,
and that our StarLux System with the LuxG handpiece willfully infringes U.S.
Patent No. 6,659,999 which is directed to wrinkle treatment. On
October 25, 2006, Candela filed an amended complaint which did not include U.S.
Patent No. 6,659,999. Consequently, Candela no longer alleges in this
lawsuit that the StarLux System with LuxG handpiece infringes its patents. With
regard to the two remaining patents, Candela is seeking to enjoin us from
selling these products in the United States if we are found to infringe the
patents, and to obtain compensatory and treble damages, reasonable costs and
attorney’s fees, and other relief as the court deems just and proper. On October
30, 2006, we answered the complaint denying that our products infringe the
asserted patents and filing counterclaims seeking declaratory judgments that the
asserted patents are invalid and not infringed. In addition, with
regard to U.S. Patent No. 5,312,395, we filed a counterclaim of inequitable
conduct.
In
February 2008, we filed a request for reexamination and then an amended request
for reexamination of Candela's ‘222 patent with the Patent Office. In
our request, we argued that Candela's ‘222 patent is unpatentable over our own
United States Patent No. 6,605,080 alone or in combination with other prior
art. About the same time, we filed a motion to stay all proceedings
in this action related to the ‘222 patent pending resolution of the amended
request for reexamination of the ‘222 patent. In March 2008, the
Patent Office granted our request for reexamination of the ‘222
patent. On June 11, 2008, the Court ordered the parties to
report back to the Court after the Patent Office made its decision in the
reexamination of the ‘222 patent, after which a claim construction hearing
(i.e., a Markman Hearing) would be scheduled for both the ‘222 and ‘395
patents. On June 12, 2008, the parties informed the Court that the total time
the reexamination will remain pending is not known. On January 19,
2010, the Patent Office issued a Notice of Intent to Issue Ex Parte
Reexamination Certificate for the ‘222 patent which will close the reexamination
proceeding on the ‘222 patent. When this lawsuit is re-started, we will continue
to defend the action vigorously and believe that we have meritorious defenses of
non-infringement, invalidity and inequitable conduct. However, litigation is
unpredictable and we may not prevail in successfully defending or asserting our
position. If we do not prevail, we may be ordered to pay substantial damages for
past sales and an ongoing royalty for future sales of products found to infringe
in the United States. We could also be ordered to stop selling any products in
the United States that are found to infringe.
Alma Lasers, Inc., Delaware
Litigation
On
September 11, 2008, Alma Lasers, Inc. filed a complaint requesting a declaratory
judgment that our fractional patent, U.S. Patent No. 6,997,923, is not infringed
by Alma's products and is invalid over prior art. Alma served this
lawsuit on us on November 6, 2008, and on November 21, 2008, we filed an answer
which denied Alma's allegations that the patent is invalid and not
infringed. We also filed a counterclaim accusing Alma's Pixel C02
Omnifit Fractional C02
Handpiece and Pixel C02
Fractional C02 Skin
Resurfacing System of infringing the patent. On December 16, 2008,
upon the request of both parties, a mediation conference was scheduled for June
30, 2009 before Magistrate Judge Mary Pat Thynge. On December 18,
2008, upon the request of both parties, the Judge presiding over the lawsuit,
stayed the lawsuit and later closed the lawsuit pending the outcome of the
mediation. Due to unforeseen circumstances, the mediation scheduled
for June 30, 2009 was postponed until October 13, 2009. Following our
request, Magistrate Judge Mary Pat Thynge cancelled the mediation on October 6,
2009. By letter dated October 13, 2009, we asked presiding Judge
Farnan to re-open the case. On December 28, 2009, Alma filed a First
Amended Complaint to add a claim that U.S. Patent No. 6,997,923 is unenforceable
due to inequitable conduct. On January 11, 2010, we filed our Amended
Answer and Counterclaim to Alma’s First Amended Complaint denying Alma’s
allegation of inequitable conduct. On March 4, 2010 the parties filed a joint
stipulated order of dismissal requesting that the court dismiss this action,
including all claims and counterclaims, in its entirety without prejudice, with
the parties agreeing that any future litigation between them over U.S. Patent
No. 6,997,923, any patent claiming priority (either directly or indirectly)
thereto, and/or any patents relating to fractional technology, shall be
commenced in this Court.
21
Syneron, Inc., Massachusetts
Litigation
On
November 14, 2008, we commenced an action for patent infringement against
Syneron, Inc. in the United States District Court for the District of
Massachusetts seeking both monetary damages and injunctive relief. The complaint
alleges Syneron's eLight, eMax, eLaser, Aurora DS, Polaris DS, Comet and Galaxy
Systems, which use light-based technology for hair removal, willfully infringe
the ‘568 patent and the ‘844 patent, which are exclusively licensed to us by
MGH. In March 2009, we served Syneron with this suit. On April 30,
2009, the parties filed a stipulation to stay the lawsuit pending the outcome of
the reexaminations of the ‘568 patent and the ‘844 patent.
On June
9, 2009, the Patent Office issued an office action confirming the validity of
all claims of the ‘844 patent except claims 12-14. The Patent Office
confirmed that claims 1-3, 6-8, 11, 17-20, 27, 28, 30, 32 of the '844 patent are
valid and patentable. The Patent Office also confirmed new claims 33-59 as valid
and patentable. The Patent Office rejected only independent claim 12
and related dependent claims 13-14 of the ‘844 patent as
unpatentable. We cancelled claims 12-14 from the '844 patent in order
to expedite the reexamination proceeding. Claims 4, 5, 9, 10, 15, 16, 21-26, 29
and 31 are not under reexamination. Consequently, all currently pending claims
are valid. On November 18, 2009, the Patent Office issued a
Reexamination Certificate for the ‘844 patent which closed the reexamination
proceeding on the ‘844 patent.
On
October 28, 2009, the Patent Office issued a Reexamination Certificate for the
‘568 patent which closed the reexamination proceeding on the ‘568 patent. The
Patent Office confirmed the validity and patentability of all the claims of the
‘568 patent including new claims 23 and 24.
On
September 23, 2009, we filed a motion to lift the stay and reopen the
lawsuit. On October 6, 2009, Syneron filed their opposition to our
motion to lift the stay, and on October 9, 2009, we filed our response to their
opposition. On November 13, 2009, the Judge re-opened the
case and a scheduling hearing took place on January 6, 2010. No trial
date has yet been set. The parties are in discovery.
Tria Beauty, Inc.,
Massachusetts Litigation
On June
24, 2009, we commenced an action for patent infringement against Tria Beauty,
Inc. (previously named Spectragenics, Inc.), in the United States District Court
for the District of Massachusetts seeking both monetary damages and injunctive
relief. The complaint alleged that the Tria System, which uses light-based
technology for hair removal, willfully infringes the ‘844 patent, which is
exclusively licensed to us by MGH. Tria answered the complaint
denying that its products infringe valid claims of the asserted patent and
filing a counterclaim seeking a declaratory judgment that the asserted patent is
not infringed, is invalid and not enforceable. We filed a reply
denying the material allegations of the counterclaims. On September
21, 2009, following successful re-examination of the ‘568 patent, we filed a
motion to amend our complaint to add a claim for willful infringement of the
‘568 patent, which is also exclusively licensed to us by MGH. Our
motion also included adding MGH as a plaintiff in the lawsuit. Tria
did not oppose the motion and the Judge granted the motion on October 8,
2009. No trial date has yet been set. The parties are in
discovery.
22
Investing
in our common stock involves a high degree of risk. You should carefully
consider the risks and uncertainties described in our Annual Report on Form 10-K
for the year ended December 31, 2009 in addition to the other information
included in this quarterly report. If any of the risks actually occurs, our
business, financial condition or results of operations would likely suffer. In
that case, the trading price of our common stock could fall.
As of
March 31, 2010, there have been no material changes to the risk factors
disclosed in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, although we may disclose changes to such risk factors or
disclose additional risk factors from time to time in our future filings with
the SEC.
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
*
|
January
1, 2010 through January 31, 2010
|
-
|
-
|
-
|
324,500
|
February
1, 2010 through February 28, 2010
|
-
|
-
|
-
|
324,500
|
March
1, 2010 through March 31, 2010
|
-
|
-
|
-
|
324,500
|
Total
|
-
|
-
|
-
|
324,500
|
* 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 management’s discretion without prior notice.
None.
Item
4. Removed and Reserved
None.
None.
23
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 Paul S. Weiner, Vice President and Chief Financial 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.
|
24
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Palomar Medical Technologies,
Inc.
(Registrant)
|
|
Date: May
6, 2010
|
/s/ Joseph P.
Caruso
Joseph
P. Caruso
President, Chief Executive
Officer and Director
|
Date: May
6, 2010
|
/s/ Paul S. Weiner
Paul
S. Weiner
Vice President and Chief
Financial Officer
|
25