UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________
Commission File Number 0-11365
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PHOTOMEDEX, INC.
----------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-2058100
-------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Radnor Corporate Center, Suite 470, Radnor, Pennsylvania 19087
-------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(610) 971-9292
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock as of November 7,
2001, was 24,179,953 shares.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOTOMEDEX, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, December 31,
2001 2000
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ASSETS (unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents $ 829,174 $ 7,561,040
Short-term investments -- 2,000,000
Accounts receivable 3,284,135 287,750
Inventories 2,833,508 1,250,702
Prepaid expenses and other current assets 199,280 256,053
------------- -------------
Total current assets 7,146,097 11,355,545
PROPERTY AND EQUIPMENT, net 3,854,240 1,787,065
GOODWILL, net of accumulated amortization of $458,731 and $141,148 3,775,684 4,093,267
PATENT COSTS, net of accumulated amortization of $55,289 and $49,024 29,509 35,774
LICENSE FEE, net of accumulated amortization of $1,916,667 and
$1,541,667 2,083,333 2,458,333
OTHER ASSETS 116,360 140,773
------------- -------------
$ 17,005,223 $ 19,870,757
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of notes payable $ 117,413 $ 66,098
Accounts payable 2,778,222 963,521
Accrued compensation and related expenses 283,711 449,594
Other accrued liabilities 992,812 489,149
Deferred revenues 168,750 114,000
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Total current liabilities 4,340,908 2,082,362
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NOTES PAYABLE 5,239 20,194
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STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000 shares authorized
19,139,239 and 17,847,676 shares issued and outstanding 191,392 178,477
Additional paid-in capital 62,364,578 56,652,344
Accumulated deficit (49,864,292) (39,009,601)
Deferred compensation (32,602) (53,019)
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Total stockholders' equity 12,659,076 17,768,201
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$ 17,005,223 $ 19,870,757
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
2
PHOTOMEDEX, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES $ 802,636 $ 59,271 $ 4,113,990 $ 629,271
COSTS AND EXPENSES:
Cost of revenues, excluding depreciation 195,160 -- 1,087,320 325,000
Selling, general and administrative 3,136,347 2,588,173 10,685,755 7,103,505
Research and development 469,180 542,934 1,833,064 1,970,564
Depreciation and amortization 620,924 209,820 1,553,365 491,824
------------- ------------- ------------- -------------
Loss from continuing operations before
interest and other (expense) income, net (3,618,975) (3,281,656) (11,045,514) (9,261,622)
INTEREST INCOME, net 9,508 178,668 206,844 445,653
OTHER (EXPENSE) INCOME, net (46,326) 18,104 (16,021) 345,366
------------- ------------- ------------- -------------
Loss from continuing operations (3,655,793) (3,084,884) (10,854,691) (8,470,603)
LOSS FROM DISCONTINUED OPERATIONS -- -- -- (369,141)
LOSS ON SALE OF DISCONTINUED OPERATIONS -- -- -- (277,401)
------------- ------------- ------------- -------------
NET LOSS $ (3,655,793) $ (3,084,884) $(10,854,691) $ (9,117,145)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE:
Continuing operations $ (0.19) $ (0.19) $ (0.58) $ (0.56)
Discontinued operations -- -- -- (0.04)
------------- ------------- ------------- -------------
Basic and diluted net loss per share $ (0.19) $ (0.19) $ (0.58) $ (0.60)
============= ============= ============= =============
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS
PER SHARE 19,138,027 16,527,065 18,728,003 15,178,975
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
PHOTOMEDEX, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
-----------
Nine Months Ended September 30,
--------------------------------
2001 2000
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OPERATING ACTIVITIES:
Net loss $(10,854,691) $ (9,117,145)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization 1,553,365 472,484
Common Stock and Common Stock options issued to
Consultants for services 214,652 554,645
Amortization of deferred compensation 5,535 20,381
Loss on disposition of assets 20,665 -
Acceleration of options issued to employees - 47,500
Acceleration of options issued to consultants - 808,766
Changes in assets and liabilities -
Accounts receivable (2,996,385) 20,898
Inventories (1,582,806) (339,192)
Prepaid expenses and other assets 81,186 (160,908)
Accounts payable 1,814,701 (877,694)
Accrued compensation and related expenses (165,883) (186,286)
Other accrued liabilities 503,663 (428,806)
Deferred revenues 54,750 (70,000)
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Net cash used in operating activities (11,351,248) (9,255,357)
------------- -------------
INVESTING ACTIVITIES:
Sale of short-term investments 2,000,000 -
Purchases of property and equipment (158,357) (206,423)
Proceeds from sale of discontinued operations - 250,500
Lasers in process - (617,828)
Lasers placed into service (2,784,000) (802,280)
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Net cash used in investing activities (942,357) (1,376,031)
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FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 5,506,442 14,259,491
Proceeds from issuance of notes payable 236,320 136,072
Proceeds from exercise of options 18,937 2,333,690
Proceeds from exercise of warrants - 792,336
Payment on notes payable (199,960) (380,484)
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Net cash provided by financing activities 5,561,739 17,141,105
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,731,866) 6,509,717
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,561,040 4,535,557
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 829,174 $ 11,045,274
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Background
PhotoMedex, Inc. and subsidiaries ("the Company") develops,
manufactures and markets therapeutic excimer laser-based instrumentation
designed to treat psoriasis, vitiligo and atopic dermatitis. The Company is also
developing phototherapy technologies for the treatment of other skin disorders,
and other medical and non-medical applications. In January 2000, the Company
received the first Food and Drug Administration ("FDA") approval to market an
excimer laser system, the XTRAC system, for the treatment of psoriasis. The
Company commercially launched the XTRAC system in the United States in August
2000. In March and August 2001, the Company received FDA approval to treat
vitiligo and atopic dermatitis, respectively.
Liquidity
We have historically financed our operations through the use of working
capital provided from loans and equity and debt financing. In 1997, our strategy
changed to focus on our excimer laser technology. We began to develop a broad
base of excimer laser and excimer laser delivery products for both medical and
non-medical applications.
Cash and cash equivalents and short-term investments were $829,174 as
of September 30, 2001. On October 24, 2001, the Company completed a private
offering of 5,040,714 shares of common stock at $1.05 per share and warrants to
purchase 1,260,179 shares of common stock at $1.16 per share. The Company
received gross proceeds of $5,292,750 and net proceeds of $4,945,163. We paid
Investec PMG Capital and Emerging Growth Equities Limited a commission of
approximately $322,000. We intend to use the proceeds of this financing to pay
for working capital and other general corporate purchases.
We believe that our existing cash balance after receipt of the proceeds
from the October 24, 2001 financing together with our existing financial
resources, and any revenues from our sales, distribution, licensing and
manufacturing relationships, will be sufficient to meet our operating and
capital requirements into the first quarter of 2003. However, depending upon our
rate of growth and other operating factors, we may require additional equity or
debt financing to meet our working capital requirements or capital expenditure
needs. There can be no assurance that additional financing, if needed, will be
available when required or, if available, on terms satisfactory to us.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quarterly Financial Information and Results of Operations
The financial statements as of September 30, 2001 and for the three and
nine months ended September 30, 2001 and 2000, are unaudited and, in the opinion
of management, include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 2001, and the results of operations and cash flows for the three and nine
months ended September 30, 2001 and 2000. The results for the three and nine
months ended September 30, 2001 are not necessarily indicative of the results to
be expected for the entire year. While management of the Company believes that
the disclosures presented are adequate to make the information not misleading,
these consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
5
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Management's Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For the purposes of the consolidated statements of cash flows, the
Company considers investment instruments purchased with an original maturity of
three months or less to be cash equivalents. As of September 30, 2001, cash
equivalents are primarily comprised of investments in selected money market
funds.
Short-Term Investments
As of December 31, 2000, short-term investments of $2,000,000 consisted
of time deposits with original maturities greater than three months. The Company
classified all investments as short-term since it had the intent and ability to
redeem them within twelve months.
Inventories
Inventories are stated at the lower of cost, determined by the
first-in, first-out method, or market, and consist of the following:
September 30, December 31,
2001 2000
---- ----
Raw Materials $2,700,871 $ 938,276
Work-in-process 132,637 312,426
----------- -----------
$2,833,508 $1,250,702
=========== ===========
The Company's XTRAC laser system is either (i) placed in a physician's
office and remain the property of the Company or (ii) is sold to distributors or
physicians directly. With respect to the equipment placed in a physician's
office, the Company earns revenue each time the laser is used for a patient
treatment.
Throughout the manufacturing process, the related production costs are
recorded within inventory. Once a laser is completed and placed in a physician's
office, the cost is transferred from inventory to "lasers in service" within
property and equipment. The cost of lasers that will be sold to distributors or
physicians is maintained in inventory until the unit is sold.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the assets, which
range from three to seven years. Improvements and betterments are capitalized,
while maintenance and repair costs are charged to expense as incurred. Upon
retirement or disposition, the applicable property amounts are relieved from the
accounts and any gain or loss is recorded in the consolidated statement of
operations. Property and equipment consists of the following:
6
September 30, December 31,
2001 2000
---- ----
Lasers in service $ 4,414,440 $ 1,630,440
Computer hardware and software 213,618 212,965
Furniture and fixtures 151,637 90,273
Machinery and equipment 58,714 11,584
Leasehold improvements 78,716 78,716
------------ ------------
4,917,125 2,023,978
Accumulated depreciation and amortization (1,062,885) (236,913)
------------ ------------
$ 3,854,240 $ 1,787,065
============ ============
Lasers in service represent phototherapy treatment equipment currently
located in physician offices. Lasers in service are depreciated over an
estimated useful life of three years. The Company began to generate revenues
from these lasers in the fourth quarter of 2000.
The Company evaluates the realizability of property and equipment based
on estimates of undiscounted future cash flows over the remaining useful life of
the asset. If the amount of such estimated undiscounted future cash flows is
less than the net book value of the asset, the asset is written down to the net
realizable value. As of September 30, 2001, no such write-down was required.
Intangible Assets
Intangible assets consist of goodwill, license fees (see Note 5) and
patents, which are carried at cost less accumulated amortization. License fees
and patents are amortized on a straight-line basis over the estimated useful
lives of eight years for license fees and eight to twelve years for patents.
Goodwill relates to the purchase of the minority interest of Acculase, Inc. that
was concluded in August 2000 and is being amortized on a straight-line basis
over 10 years.
The Company evaluates the realizability of intangible assets based on
estimates of undiscounted future cash flows over the remaining useful life of
the asset. If the amount of such estimated undiscounted future cash flows is
less than the net book value of the asset, the asset is written down to the net
realizable value. As of September 30, 2001, no such write-down was required (see
Note 5).
Revenue Recognition
The Company has two distribution channels for its phototherapy
treatment equipment. The Company generates revenue by either (i) selling lasers
through distributors or directly to physicians or (ii) placing lasers in
physician's offices (free of charge to the physician) and charging the physician
a fee each time the laser is used for a patient treatment. When the Company
sells lasers to distributors or directly to physicians, revenue is recognized
upon shipment of the product. The Company does not allow products to be returned
by its distributors. When the Company places a laser in a physician's office,
service revenues are recognized each time the laser is used for a patient
treatment. The physician purchases a treatment card that allows performance of a
specified number of treatments. This amount is included in deferred revenues
until the treatment occurs.
Net Loss Per Share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No.
128 requires dual presentation of basic and diluted net income (loss) per share
for complex capital structures on the face of the statements of operations. In
accordance with SFAS No. 128, basic net income (loss) per share is calculated by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted net income
(loss) per share reflects the potential dilution from the exercise or conversion
of securities into common stock, such as stock options and warrants.
7
Diluted net loss per share is the same as basic net loss per share, as
no additional shares for the potential dilution from the exercise of securities
into common stock are included in the denominator as the result would be
anti-dilutive.
Reclassifications
The financial statements for prior periods have been reclassified to
conform to the current period's presentation.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board approved SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest
method of accounting for business combinations initiated after June 30, 2001.
SFAS No. 142 requires companies to cease amortizing goodwill that existed at
June 30, 2001. The amortization of existing goodwill will cease on December 31,
2001. Any goodwill resulting from acquisitions completed after June 30, 2001
will not be amortized. SFAS No. 142 also establishes a new method of testing
goodwill for impairment on an annual basis or on an interim basis if an event
occurs or circumstances change that would reduce the fair value of a reporting
unit below its carrying value. The adoption of SFAS No. 142 will result in the
Company's discontinuation of amortization of its goodwill; however, the Company
will be required to test its goodwill for impairment under the new standard
beginning in the first quarter of 2002, which could have an adverse effect on
the Company's future results of operations if an impairment occurs.
2. DISCONTINUED OPERATIONS:
In 1997, the Company's business strategy changed and began focusing its
efforts on excimer laser technology and using it to develop products for various
medical applications. To facilitate the Company's focus on excimer laser
technology, as of May 4, 2000, the Company sold its non-excimer laser
businesses, which were located at its Orlando, Florida and Wilmington,
Massachusetts facilities.
The Company completed a transaction with respect to the sale of certain
assets, including certain non-excimer laser patents related to its Florida
business operations, to Lastec, Inc. ("Lastec") for a purchase price of
$375,000. Lastec is unaffiliated with the Company. Lastec paid the Company a
deposit of $37,500, and executed a secured promissory note of $337,500, payable
in three (3) installments, all of which were due prior to December 31, 2000. The
promissory note accrued interest at 8% per year. The promissory note was secured
by the assets assigned by the Company to Lastec in connection with the
transaction, and was personally guaranteed by the principals of Lastec. The
Company has not received the scheduled payments due under the promissory note.
The Company is currently involved in litigation with Lastec, as well as its
principals. Accordingly, the promissory note has been written off and included
in the loss on sale of the discontinued operations. Any gain resulting from
future payments received by the Company will be recognized when received.
The Company completed the sale of certain assets and the grant of an
exclusive license for certain patents related to non-excimer lasers related to
the Company's Massachusetts business operations to Laser Components GmbH for a
purchase price of $213,000. Laser Components GmbH is unaffiliated with the
Company. In addition, Laser Components GmbH assumed the Company's obligations
under the Company's Massachusetts office lease.
These two operations are being accounted for together as discontinued
operations with a measurement date of May 4, 2000. The accompanying consolidated
financial statements reflect the operating results and balance sheet items of
the discontinued operations separately from continuing operations. The Company
recognized a loss of $277,401 on the sale of these discontinued operations in
the quarter ended June 30, 2000.
Revenues from discontinued operations were $188,838 for the nine months
ended September 30, 2000. There were no revenues from discontinued operations
for the three months ended September 30, 2000. Loss from discontinued operations
in the accompanying consolidated statements of operations was $0 and $369,141
for the three and nine months ended September 30, 2000, respectively.
8
3. NOTES PAYABLE:
Notes payable consist of the following:
September 30, December 31,
2001 2000
---- ----
Note payable - unsecured creditor, interest at 7.6%, payable in
monthly principal and interest installments of
$18,000 through November 2001 $ 35,661 $ --
Note payable - unsecured creditor, interest at 6.7%, payable in
monthly principal and interest installments of
$9,065 through April 2002 62,055 --
Note payable - lessor, interest at 10%, payable in monthly
principal and interest installments of $1,775 through
December 31, 2002, unsecured 24,936 38,474
Note payable - unsecured creditor, interest at 8.5%, payable in
monthly principal and interest installments of
$9,563 through 2001 -- 47,818
---------- ----------
122,652 86,292
Less-current maturities (117,413) (66,098)
---------- ----------
$ 5,239 $ 20,194
========== ==========
4. PRIVATE STOCK OFFERING:
On March 27, 2001, the Company completed a private offering of
1,230,000 shares of common stock at $5.00 per share. The Company received gross
proceeds of $6,150,000 and net proceeds of $5,506,442.
On October 24, 2001, the Company completed an additional private
offering of 5,040,714 shares of common stock at $1.05 per share and warrants to
purchase 1,260,179 shares of common stock at $1.16 per share. The Company
received gross proceeds of $5,292,750 and net proceeds of $4,945,163. See Note
1.
5. EDWARDS AGREEMENT:
In 1997, the Company executed a series of agreements with Edwards
Lifesciences Corp. ("Edwards"). Reference is made to the Company's Form 10-K for
the period ended December 31, 2000 for further information on the agreements.
Revenues of $59,271 and $629,271 were recognized under this agreement for the
three and nine months ended September 30, 2000, respectively. There were no
revenues recognized under this agreement for the three or nine months ended
September 30, 2001.
On September 23, 1997, Edwards purchased from a third party rights to
related patents for the use of an excimer laser to oblate tissue in vascular and
cardiovascular applications for $4,000,000. The ablation technology underlying
the patents has been successfully used in other applications for many years. In
December 1997, the Company acquired a license to these patent rights from
Edwards thereby entitling the Company to sell an excimer laser and related
products for use in cardiovascular procedures. A license fee was recorded for
the $4,000,000 cash payment made by the Company to Edwards to acquire the
license.
In January 2001, Edwards stopped performance under the agreement and
began to commercialize a Transmyocardial Revascularization ("TMR") product with
an unrelated third party. The Company believes that Edwards has breached the
aforementioned agreement, and has notified Edwards of its position regarding its
performance or lack thereof. The Company has reserved all of its rights under
the agreement and is evaluating the legal action necessary to protect its
rights. Accordingly, the Company currently does not have a strategic partner
with whom to market its TMR laser and does not currently have sufficient
financial resources to commercialize the TMR laser on its own.
9
Due to the non-performance of Edwards under the Edwards Agreement
described above, the Company is currently evaluating its various alternatives
for exploiting the license obtained. Management of the Company currently
believes that the net book value of the license as of September 30, 2001 of
$2,083,333 is fully realizable.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q (THE "REPORT"), INCLUDING THE DISCLOSURES
BELOW, CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE TERMS "ANTICIPATES," "EXPECTS,"
"ESTIMATES," "BELIEVES" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY
OR ITS MANAGEMENT, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHER
PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION"), REPORTS TO THE STOCKHOLDERS OF PHOTOMEDEX, INC., A DELAWARE
CORPORATION ("WE," "US" OR "OUR") AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED
OR RELEASED BY THE COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE
(FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST
ESTIMATES, BASED UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF
OPERATIONS. THESE RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS SET FORTH
HEREIN AND IN SUCH OTHER DOCUMENTS FILED WITH THE COMMISSION, EACH OF WHICH
COULD ADVERSELY AFFECT OUR BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN. OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS MAY
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.
OVERVIEW OF BUSINESS OPERATIONS
We are engaged in the development, manufacturing and marketing of
proprietary excimer laser and fiber optic equipment and techniques directed at
the treatment of psoriasis, vitiligo, atopic dermatitis and cardiovascular and
vascular disease.
Prior to November 1999, our former business strategy consisted of the
development of a wide range of laser products using different solid-state
lasers. Between 1986 and the date of this Report, we have sold over 1,000
lasers, usually on a private label basis, to other manufacturers. In the opinion
of our current management, although we generated revenues from the sale of our
products, we would never be able to operate profitably in the markets where we
were then doing business. Accordingly, we believe that our current business
strategy and our existing excimer laser technology provide the basis for
reliable cost-effective systems that will increasingly be used in connection
with a variety of applications. Therefore, we have discontinued our business
operations related to our former business strategy and are focused solely on
excimer laser products for various medical applications.
Our excimer laser power source was developed to perform a variety of
material processing applications. Our overall system, known as the pulsed
excimer laser, was approved by the FDA under an investigational device exemption
for use in the treatment of occlusive coronary artery disease, as an adjunct to
coronary artery bypass grant surgery. We chose not to pursue completion of the
exemption due to the lack of funds to pay the costs of, and to recruit patients
into the necessary studies. In connection with the cardiovascular and vascular
uses of the excimer laser technology, on August 19, 1997, we entered into a
strategic alliance with Edwards for the manufacture and marketing of excimer
laser products for an experimental procedure known as transmyocardial
revascularization, or TMR. Our strategic relationship with Edwards has
terminated, and we have no current business plan to commercialize our excimer
laser system for TMR. The Company is currently evaluating its various
alternatives for exploiting the license obtained.
In connection with our current business plan, the initial medical
applications for our excimer laser technology ("the XTRAC system") are the
treatment of psoriasis, vitiligo and atopic dermatitis. In January 2000, we
received approval of our 510(k) submission to the FDA relating to the use of our
XTRAC system for the treatment of psoriasis. The 510(k) establishes that our
technology has been determined to be substantially equivalent to currently
10
marketed devices for purposes of treating psoriasis. In January 2001, the FDA
reviewed another 510(K) submission related to the treatment of vitiligo and
approved the XTRAC system for its treatment. Again, in July 2001, the FDA
reviewed our 510(K) submission for the treatment of atopic dermatitis and, in
August 2001, approved the XTRAC system for the treatment of this disease.
In August 2000, after significant progress toward completing beta
testing of our psoriasis products, we shipped our first four XTRAC systems to
dermatologists for commercial use. As of September 30, 2001, we have generated
$635,990 of revenues from the treatment of psoriasis and vitiligo and $3,817,500
from sales of XTRAC systems.
In February 2001, we received notification from CIGNA, that CIGNA will
reimburse medically necessary claims submitted by patients or their doctors for
payment of treatments for psoriasis utilizing our XTRAC system. During the
quarter ended September 30, 2001, twenty-two other insurance companies began to
reimburse patients or their doctors for procedures performed.
We anticipate that our international marketing plans, while currently
focused on the sale of lasers to distributors throughout the world, will include
a combination of the placement of the XTRAC system in physician's offices in
return for usage fees and direct sales and leasing through unrelated
distributors.
DISCONTINUED OPERATIONS
To facilitate our focus on excimer laser technology, we sold certain of
our non-excimer laser assets, which were related to our business operations in
Orlando, Florida and Wilmington, Massachusetts. As of May 4, 2000, we sold
certain assets, including certain patents related to non-excimer laser products
related to our Florida business operations, to Lastec, Inc. (Lastec), for a
purchase price of $375,000. Lastec is not affiliated with us. We have
discontinued our Florida operations. Lastec paid us a deposit of $37,500, and
executed a secured promissory note in the principal amount of $337,500, payable
in three installments, all of which were due prior to December 31, 2000. Lastec
currently is in default with respect to each of the three scheduled installments
payable under the $337,500 promissory note. The promissory note accrues interest
at the rate of 8% per annum. The promissory note is secured by the assets
assigned by us to Lastec in connection with the transaction, and is guaranteed
by the two principals of Lastec. As of the date of this Report, we have not
received any payments due under the secured promissory note. We filed an action
against Lastec and its principals to collect on the secured promissory note and
for breach of the related asset purchase agreement. Concurrently with the sale
of the Florida operations, we sold certain assets and granted an exclusive
license for certain patents related to non-excimer lasers related to our
Massachusetts business operations to Laser Components GmbH, for a purchase price
of $213,000. Laser Components is not affiliated with us. In addition, Laser
Components assumed our prospective obligations under our Massachusetts office
lease. We have discontinued all of our Massachusetts operations.
The former operations at our Florida and Massachusetts facilities are
being accounted for in our consolidated financial statements included elsewhere
in this Report, as "discontinued operations," using a measurement date of May 4,
2000. The consolidated financial statements reflect the operating results and
balance sheet items of the discontinued operations separately from continuing
operations. We recognized a loss of $277,401 from the sale of these discontinued
operations in the quarter ended June 30, 2000.
Management's decision to suspend these business operations is
consistent with our new business strategy and has resulted in the discontinuance
of business operations. Revenues from discontinued operations during the nine
months ended September 30, 2000 were $188,838. There were no revenues from
discontinued operations during the three months ended September 30, 2000. Losses
from discontinued operations during the three and nine months ended September
30, 2000 were $0 and $369,141, respectively.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND
2000
We generated revenues of $802,636 and $4,113,990 during the three and
nine months ended September 30, 2001, respectively. Of these amounts, $593,000
and $3,517,500 related to the sale of seven and thirty-nine of our excimer
lasers to distributors outside of the United States during the three and nine
11
months ended September 30, 2001, respectively. Additionally, for the three and
nine months ended September 30, 2001 we generated $209,636 and $596,490,
respectively, in revenues from treatments performed with our excimer laser in
the United States. During the three months ended September 30, 2001, we shipped
2 excimer laser systems to dermatologists for commercial use in the United
States. As of September 30, 2001, we have a total of 149 excimer laser systems
at dermatologists offices' for commercial use throughout the United States. We
generated revenues of $59,271 and $629,271 during the three and nine months
ended September 30, 2000, respectively, which were related to the sale and
upgrades of laser equipment in connection with the Edwards Agreement (See Note 5
to financial statements).
Cost of revenues during the three and nine months ended September 30,
2001 was $195,160 and $1,087,320, respectively, due primarily to the
manufacturing costs of the XTRAC laser equipment sold outside of the United
States. Cost of revenues during the nine months ended September 30, 2000 was
$325,000 and was related to the costs of the laser equipment sold in connection
with the Edwards Agreement. There were no significant costs associated with the
upgrades of the laser equipment sold in connection with the Edwards Agreement
during the three months ended September 30, 2000.
Selling, general and administrative expenses for the three and nine
months ended September 30, 2001 and 2000 were $3,136,347 and $10,685,755
compared to $2,588,173 and $7,103,505, respectively. Included in selling,
general and administrative expenses for the nine months ended September 30, 2000
was $808,766 related to a charge associated with the acceleration of vesting of
certain options granted to the Chairman of our Scientific Advisory Board. Also
included in selling, general and administrative expenses during the nine months
ended September 30, 2000 was $279,101 related to charges associated with the
granting of options to certain of our outside consultants, including certain
other members of our Scientific Advisory Board. Excluding these charges, the
increase primarily related to the building of our infrastructure thereby
enabling us to implement our business plan to commercialize the XTRAC system.
Specifically, these increases included expenditures for consulting and
professional fees related to marketing expenses for our XTRAC systems and
increased personnel and overhead expenses with respect to the infrastructure.
Research and development expenses during the three months ended
September 30, 2001 decreased to $469,180 from $542,934 during the three months
ended September 30, 2000. This decrease related primarily to the stabilization
of the technology platform and increased reliability of the XTRAC system. During
the nine months ended September 30, 2001, research and development expenses
decreased to $1,833,064 from $1,970,564 during the nine months ended September
30, 2000. This decrease related primarily to our focus on the sale of the
psoriasis laser product, as well as the stabilization of the technology
platform. Research and development expenses for the three and nine months ended
September 30, 2000 related to the development and subsequent commercialization
of our excimer laser systems for phototherapy treatment.
Depreciation and amortization during the three months ended September
30, 2001 increased to $620,924 from $209,820 during the three months ended
September 30, 2000. Depreciation and amortization during the nine months ended
September 30, 2001 increased to $1,553,365 from $491,824 during the nine months
ended September 30, 2000. This increase related primarily to depreciation on
lasers in service during the three and nine months ended September 30, 2001. In
addition, the increase related to amortization of goodwill associated with our
purchase of the remaining 23.9% of Acculase, Inc., (Acculase), a California
corporation, our wholly-owned subsidiary, which took place on August 31, 2000.
The amortization associated with the Acculase goodwill was $105,861 and $317,583
during the three and nine months ended September 30, 2001, respectively. The
amortization associated with the Acculase goodwill was $35,287 during the three
and nine months ended September 30, 2000 respectively.
Net interest income during the three months ended September 30, 2001
decreased to $9,508, as compared to $178,668 for the three months ended
September 30, 2000. Net interest income during the nine months ended September
30, 2001 decreased to $206,844, as compared to $445,653 for the nine months
ended September 30, 2000. This decrease related primarily to our smaller average
balance of cash and investments during the three and nine months ended September
30, 2001 as significant investments have been made in infrastructure development
and capital investment in lasers deployed in doctors' offices.
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Other income (expense) during the three months ended September 30, 2001
was an expense of $46,326 compared to income of $18,104 during the three months
ended September 30, 2000. Other income (expense) during the nine months ended
September 30, 2001 was an expense of $16,021 compared to income of $345,366 for
the nine months ended September 30, 2000. Other income in 2000 primarily related
to the forgiveness of certain payables by certain of our creditors.
The aforementioned factors resulted in a net loss of $3,655,793 and
$10,854,691 during the three and nine months ended September 30, 2001, as
compared to a net loss of $3,084,884 and $9,117,145 during the three and nine
months ended September 30, 2000. We incurred a loss from continuing operations
of $3,655,793 and $10,854,691 during the three and nine months ended September
30, 2001, as compared to a loss from continuing operations of $3,084,884 and
$8,470,603 during the three and nine months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations through the use of working
capital provided from loans and equity and debt financing.
In 1997, our strategy changed to focus on our excimer laser technology.
We began to develop a broad base of excimer laser and excimer laser delivery
products for both medical and non-medical applications.
As of March 16, 2000, we completed a financing to 10 institutional
investors of an aggregate of 1,409,092 shares of common stock at a purchase
price of $11.00 per share, resulting in aggregate gross proceeds to us of
approximately $15,500,000. The market price of the common stock on the date that
the transaction was negotiated was $13.50 per share and on the closing date of
the transaction was approximately $15.88 per share. We paid ING Barings LLC, or
ING, a commission of 6% of the gross proceeds, or approximately $930,000. We
used the proceeds of this financing to pay for the marketing of our products
(including our psoriasis treatment products), research and development expenses,
and working capital.
On March 27, 2001, we completed a private offering of 1,230,000 shares
of our common stock at $5.00 per share and received gross proceeds of
$6,150,000. We received net proceeds of $5,506,442. The market price of the
common stock on the date that the transaction was negotiated was $5.75 per share
and on the closing date of the transaction the market price was approximately
$4.875 per share. We paid Pacific Growth Equities, Inc. a commission of 6.5% of
the gross proceeds, or approximately $400,000. We intend to use and have used a
portion of the proceeds of this financing to pay for the marketing of our
products (including our psoriasis and vitiligo treatment products), research and
development expenses and working capital.
On October 24, 2001, the Company completed a private offering of
5,040,714 shares of common stock at $1.05 per share and warrants to purchase
1,260,179 shares of common stock at $1.16 per share. The Company received gross
proceeds of $5,292,750 and net proceeds of $4,945,163. We paid Investec PMG
Capital and Emerging Growth Equities Limited a commission of approximately
$322,000. We intend to use the proceeds of this financing to pay for working
capital and other general corporate purchases.
At September 30, 2001, the ratio of current assets to current
liabilities was 1.65 to 1.00 compared to 5.45 to 1.00 at December 31, 2000. As
of September 30, 2001, we had $2,805,189 of working capital.
Cash and cash equivalents and short-term investments were $829,174 as
of September 30, 2001, as compared to $9,561,040 as of December 31, 2000. This
decrease was primarily attributable to operating expenses and capital investment
which was offset by the receipt of $5,506,442 in net cash proceeds from the
March 27, 2001 financing.
We believe that our existing cash balance after receipt of the proceeds
from the October 24, 2001 financing together with our existing financial
resources, and any revenues from our sales, distribution, licensing and
manufacturing relationships, will be sufficient to meet our operating and
capital requirements into the first quarter of 2003. However, depending upon our
rate of growth and other operating factors, we may require additional equity or
debt financing to meet our working capital requirements or capital expenditure
needs. There can be no assurance that additional financing, if needed, will be
available when required or, if available, on terms satisfactory to us.
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As of September 30, 2001, we had borrowings in the aggregate amount of
$122,652. As of December 31, 2000, we had borrowings in the aggregate amount of
$86,292. The increase in long-term borrowings relates to the proceeds from notes
payable associated with financing of insurance premiums.
Net cash used in operating activities was $11,351,248 and $9,255,357
for the nine months ended September 30, 2001 and 2000, respectively. Net cash
used in operating activities during the nine months ended September 30, 2001 and
2000 primarily consisted of net losses, increases in current assets and
decreases in current liabilities (2000 only), offset by depreciation and
amortization, increases in current liabilities (2001 only), the payment in our
securities (including common stock, options and warrants) of fees for services
to consultants and the acceleration of stock options issued to employees and
consultants (2000 only).
Net cash used in investing activities was $942,357 and $1,376,031 for
the nine months ended September 30, 2001 and 2000, respectively. In the nine
months ended September 30, 2001, we utilized $158,357 to acquire equipment for
our excimer laser business operations. We also used $2,784,000 for the
construction of our psoriasis treatment lasers. During the nine months ended
September 30, 2000, we utilized $206,423 to purchase equipment to support our
excimer laser operations. We also used $1,420,108 for the construction of our
psoriasis treatment lasers. We received proceeds of $250,500 from the sale of
certain assets related to our discontinued Florida and Massachusetts operations.
Net cash provided by financing activities was $5,561,739 and
$17,141,105 during the nine months ended September 30, 2001 and 2000,
respectively. In the nine months ended September 30, 2001, we received
$5,506,642 from the net proceeds of the sale of 1,230,000 shares of common stock
in connection with the March 27, 2001 financing, $236,320 of proceeds from the
issuance of notes payable and $18,937 from the exercise of stock options, which
was offset by the utilization of $199,960 for the payment of principal on the
aforementioned notes payable. In the nine months ended September 30, 2000, we
received $14,259,491 from the net proceeds of the sale of 1,409,092 shares of
common stock in connection with the March 16, 2000 financing, $136,072 from the
issuance of notes payable, $2,333,690 from the exercise of stock options and
$792,336 from the exercise of warrants, which was partially offset by the
utilization of $380,484 for the payment of principal on certain debts.
The ability to expand our business operations is currently dependent on
financing from external sources. There can be no assurance that changes in our
manufacturing, marketing, research and development plans or other changes
affecting our operating expenses and business strategy will not result in the
expenditure of such resources before such time or that we will be able to
develop profitable operations prior to such date, or at all, or that we will not
require additional financing at or prior to such time in order to continue
operations. There can be no assurance that additional capital will be available
on terms favorable to us, if at all. To the extent that additional capital is
raised through the sale of additional equity or convertible debt securities, the
issuance of such securities could result in additional dilution to our
stockholders. Moreover, our cash requirements may vary materially from those now
planned because of results of marketing, product testing, changes in the focus
and direction of our marketing programs, competitive and technological advances,
the level of working capital required to sustain our planned growth, litigation,
operating results, including the extent and duration of operating losses, and
other factors. In the event that we experience the need for additional capital,
and are not able to generate capital from financing sources or from future
operations, management may be required to modify, suspend or discontinue our
business plan.
IMPACT OF INFLATION
We have not operated in a highly inflationary period, and our
management does not believe that inflation has had a material effect on sales or
expenses.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest
method of accounting for business combinations initiated after June 30, 2001.
SFAS No. 142 requires companies to cease amortizing goodwill that existed at
June 30, 2001. The amortization of existing goodwill will cease on December 31,
2001. Any goodwill resulting from acquisitions completed after June 30, 2001
will not be amortized. SFAS No. 142 also establishes a new method of testing
goodwill for impairment on an annual basis or on an interim basis if an event
14
occurs or circumstances change that would reduce the fair value of a reporting
unit below its carrying value. The adoption of SFAS No. 142 will result in the
Company's discontinuation of amortization of its goodwill; however, the Company
will be required to test its goodwill for impairment under the new standard
beginning in the first quarter of 2002, which could have an adverse effect on
the Company's future results of operations if an impairment occurs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are not currently exposed to market risks due to changes in interest
rates and foreign currency rates and, therefore, we do not use derivative
financial instruments to address risk management issues in connection with
changes in interest rates and foreign currency rates.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings, in our Annual Report on
Form 10-K for the year ended December 31, 2000 for descriptions of our
legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 24, 2001, the Company completed an additional private
offering of 5,040,714 shares of common stock at $1.05 per share and
warrants to purchase 1,260,179 shares of common stock at $1.16 per
share. The Company received gross proceeds of $5,292,750 and net
proceeds of $4,945,163. We paid Investec PMG Capital and Emerging
Growth Equities Limited a commission of approximately $322,000. We
intend to use the proceeds of this financing to pay for working capital
and other general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
DOCUMENTS INCORPORATED BY REFERENCE
We are currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549; at its New York
Regional Office, Suite 1300, 7 World Trade Center, New York, New York 10048; and
its Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
15
Illinois 60661, and copies of such materials can be obtained from the Public
Reference Section of the Commission at its principal office in Washington, D.C.,
at prescribed rates. In addition, such materials may be accessed electronically
at the Commission's site on the World Wide Web, located at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing audited
financial statements and such other periodic reports as we may determine to be
appropriate or as may be required by law.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHOTOMEDEX, INC.
Date: November 14, 2001 By: /s/ Jeffrey F. O'Donnell
---------------------------------------
Jeffrey F. O'Donnell
President and Chief Executive Officer
Date: November 14, 2001 By: /s/ Dennis M. McGrath
---------------------------------------
Dennis M. McGrath
Chief Financial Officer
16